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Governor’s PERA Plan Unnecessary and Bad for New Mexico

By Joel W. Pafford

President – Board of Directors

Retired Public Employees of New Mexico (RPENM)

Governor Lujan Grisham’s proposal to fully (100%) prefund PERA within 25 years is particularly alarming and galling because it is completely unnecessary. Her proposal means cobbling together over $6 billion in just 25 years. Never mind that only a tiny fraction of government pension funds have ever operated at 100% funding. For context, there are almost 4,000 public pension funds around the country and only a handful of these funds are currently 100% funded. In aggregate, these funds have ALWAYS operated far short of full prefunding. Not only is it not necessary for these funds to achieve 100% funding, there are serious risks in attempting to achieve full prefunding. Funds attempting to reach full prefunding generally take more risks in their investment portfolios. Most importantly, trying to achieve full prefunding, especially over a relatively short period, requires significant sacrifices and financial pain. This includes cuts to retirees’ COLA benefits, increases in contribution rates from current employees and employers and significant subsidies from State government, all elements of the Governor’s proposal.

It has become the mantra among some pension fund administrators, their financial consultants that benefit from such schemes and ideological zealots that government pension funds must be 100% funded ASAP, including among the top administrators at PERA. We believe these individuals are wrong. A recent report, The Sustainability of State and Local Government Pensions: A Public Finance Approach, by experts from the Bank of England, the US Federal Reserve Board of Governors and the highly respected Brookings Institution, exhaustively debunks this false narrative. The authors of this report demonstrate that there is not a crisis for most public pension plans, including PERA.

These experts argue for sustainability and a pay-as-you-go (PAYGO) model, rather than full prefunding. They provide a compelling case not to fully prefund pension funds, especially in today’s low-interest rate environment. They also state that there is almost no advantage to starting the stabilization process now as opposed to years in the future. Most notably, they argue, “unfunded liabilities should be addressed over an extremely long period so as not to overly burden a particular generation of taxpayers.”

The Governor is essentially doing the exact opposite of the analysis by these experts. It is worth noting that PERA has not met their performance benchmarks for the past several years, during a time when the stock market has seen record highs. In fact, RPENM just commissioned a new study that found that PERA is among the worst performing public pension funds in the Southwest over the past decade.

RPENM strongly believes there needs to be a new process to address the sustainability of the PERA fund. We envision a process where completely independent and neutral expert consultants analyze multiple models and seek extensive public input in a very transparent and collaborative manner, all components that did not occur with the Governor’s process. The Legislature should issue an RFP for independent experts to analyze models that run the full gamut of options. At a minimum, the expert(s) must be completely independent from PERA staff and all stakeholders. They should consider scenarios over a very significant period (50 years) and some over a shorter period. The expert(s) should consider significant increases to the employee and employer contribution rates as well as less significant increases. They should consider no adjustment to the current COLA benefit and minor adjustments. The consultants should also consider ideas and options not even discussed by the Governor, such as reducing the annual multiplier. They should also look at the individual funds or divisions contained within the larger PERA system as several divisions are significantly underfunded, while others are fine or even overfunded.

As was noted in the Brookings report, there is plenty of time to complete this work. There is no immediate crisis! In fact, there is a strong case that fully prefunding public pension funds is a bad idea and a waste of money. Tom Sgouros discusses these issues in detail in his 2017 report for the Haas Institute at the University of California, Berkeley. In the private sector, pensions should probably be 100% funded to protect workers in case of bankruptcy. Governments, on the other hand, may encounter periodic difficulties due to economic cycles and fluctuating revenues, but they are generally not going to declare bankruptcy and go away. Current employees help pay the benefits of current retirees and this cycle continues indefinitely, much like social security.

Fully prefunding public pension funds amounts to covering the total future benefits of ALL current retirees and workers, even young workers that have just started their careers and will not retire for several decades. The Hass Institute analysis describes this as a waste of money because it equates to insuring against the disappearance of, in our case, the State of New Mexico, the City of Albuquerque, the City of Las Cruces, etc. According to the report, the real question of a plan’s fiscal viability is whether it can continue to pay its obligations each year, not whether it can cover all future obligations today. We likely only need to reach a funding ratio of 70-80 percent to achieve complete stability and sustainability, which would also satisfy the bond rating agencies if we make a few modifications and show some improvement.

We believe it is much more important to have a plan that attempts to reach sustainability over a long period rather than have a quick fix that may be overly burdensome to one generation or group. The current proposal will create lasting divisions and resentment and embarks New Mexico on a path most commonly advocated by ideological zealots rather than our traditional path of consensus and working together as one community.

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