On Thursday, August 14, 2019, political blogger Joe Monahan on his blog “New Mexico Politics With Joe Monahan” published his take on the findings of the Governor’s Public Employees Retirement Association Solvency Task Force recommendations. Since being release, the Task Force recommendations have been assailed in social media and by PERA retirees. The Monahan blog article is entitled: “Commentary Corner; Parsing PERA: Raise The Retirement Age And Leave Worker Contributions And Cost Of Living Increases Alone.”
Below is the opinion article with the link to Mr. Monahan’s blog. It is followed by the PERA Solvency Task Force Preliminary Recommendations, an excerpt from a study relating to government pension programs and followed by Commentary and Analysis.
MONAHAN POST
The sky is falling again in Santa Fe. The Governor’s Public Employees Retirement Association Solvency Task Force bought into the argument that the PERA fund is destined to go broke and make homeless thousands of retired state workers. But many of those retirees, fighting the more austere proposals to “shore up” the retirement fund, are pushing back, calling the task force recommendations “fake news.” Among them is retired APD sergeant and PERA watchdog Dan Klein:
PERA was only 70% solvent during the 2007 fiscal collapse and we survived it just fine. The proposal to make the fund 100% solvent in 25 years is unnecessary. How do we know this? Because pension experts have studied the issue and told us. This report, The Sustainability of State and Local Government Pensions, by Lenny (bank of England), Lutz (Federal Reserve Board of Governors) and Sheiner (Brookings institute) destroys the PERA argument that the sky is falling and we must be 100% solvent.
PERA has a myriad of funds under one umbrella for a variety of local and state government workers. The funds for state government workers and firefighters need adjusting because the benefits going out don’t match what’s going in. However, 72 percent of PERA’s anticipated needs over the next several decades is currently covered. Not exactly a crisis. There is no current threat to anyone’s retirement check and you are hard-pressed to see a time there would be.
Task force proposals to eliminate or reduce the 2 percent COLA–the annual cost of living adjustment that doesn’t kick in until a retiree is retired for seven years–and raising employee contributions to the funds–already in double digits–would discourage superior candidates from joining the government and are fiscally unnecessary.
THE BEST FIX?
The best fix? Setting a minimum retirement age as they do in other states is prudent but it isn’t an option mentioned by the Governor’s task force.
Currently most new state workers must put in 30 years to get a full retirement check. But there is no age requirement to retire. If the Legislature set a minimum age of 58, it would do much to strengthen PERA. Firefighters, police and corrections officers could have a minimum of 52 before being allowed to collect. That means no more fortysomethings collecting checks for forty years.
In Colorado state workers who began employment after January 1, 2011 can retire at age 58 with 30 years service but not before. They can retire at any age with 35 years of service. NM state employees can retire at any age with 30 years of service. Police and firefighters can exit once they have 25 years on the job. In the age of longer lifespans, that is no longer realistic.
After enacting age reform for new hires, the Legislature could then authorize a cash infusion into PERA from the huge surpluses accumulating from the oil and gas boom. That money will compound over the decades giving the funds even more breathing room.
BAD TIMING
In an era of extreme income inequality and record NM surpluses is it really time to force state employees–most of them modestly paid–to fork over even more of their paychecks to make a fund 100 percent solvent for a generation not even working yet?
The bottom lines: House Speaker Egolf needs to kill ill-advised retirement austerity measures. As for the task force, can they please stop yelling “Boo!”? Save the fake theatrics for Halloween.
E-mail your news and comments to jmonahan@ix.netcom.com
http://joemonahansnewmexico.blogspot.com/
PERA SOLVENCY TASK FORCE PRELIMINARY RECOMMENDATIONS
Following are the PERA Solvency Task Force Preliminary Recommendations as released by the Governor’ s Deputy Chief of Staff Diego Arecon who chairs the Task Force:
“• Fulfill the requirements of Governor Michelle Lujan Grisham’s January Executive Order including placing PERA on a path to pay off its $6 billion unfunded liability by the year 2043.
• Provide for sustainable, “profit sharing” Cost of Living Adjustments for current and future PERA retirees based on investment returns and funded ratio.
• Guarantee a minimum COLA of 0.5% and a maximum COLA of 3% based on investment returns/funded ratio. Once PERA achieves full funding of 100% the maximum COLA increases to 5%.
• Begin to address disparity in funding levels among PERA Divisions by exempting State Police and Adult Correctional Officers from proposed contribution increases.
• Protect lower income employees and retirees by exempting employees making less than $25,000 from proposed contribution increases and providing a 2.5% COLA to retirees with pensions of less than $25,000 and 25 years of service to include disability retirees.
• Result in an immediate $700 million reduction in PERA’s unfunded liability.
• Replace prior PERA proposals to freeze COLAs for 3 years with a 2%, simple COLA, pausing only the compounding factor, to be paid annually for the next 3 fiscal years. Simple COLAs will be paid for by a one-time appropriation of $76 million. PERA will administer a 13th check to retirees annually for 3 consecutive years.
• Provide incentives for employees to continue working by removing the cap on earning service credit.
• Eliminate the current 7 year wait to receive a COLA upon retirement and restore it with the 2-year calendar period.”
UNDERFUNDED PERA PENSION PLANS IDENTIFIED
On April 27, 2017 a presentation was made to the PERA governing board on the current status of asset valuations and projected liabilities. The report includes 23 pie charts and graphs that effectively reveals the current and projected status of all the pension plans PERA administers and pending shortfalls.
The pie charts disclose what will be paid into the pension programs by government employers and employees, income from investments and what will be paid out in benefits from 2016 to 2046 with one chart projecting to 2066.
The link to the April 27, 2017 PERA presentation with all the graphs and pie charts is here:
http://www.nmpera.org/assets/uploads/home-banner/april-2017-board-meeting-public-packet.pdf
A few of the pie charts and graphs in the presentation are worth highlighting:
The pie chart on page 7 reflects that on June 30, 2016 Actuarial Accrued Liability for PERA is $19,474,241,000.
The pie chart on page 12 reflects the present Value of Benefits as $21,951,183,972 managed by PERA and invested with a funding ratio of Assets to Accrued Liability of 75.3%. The goal is to have a 100% funded liability by 2046.
The graph on page 19 reflects the assets to pay expected benefits and Market Value of PERA Market Value with no contributions to have a Zero return in 2026.
The graph on page 18 provides projections PERA expected total benefit payments including current employees, future members and retirees.
Significant funding shortfalls are reported on page 24 as being 7.99% of State General pensions and 13.87% for Municipal Fire Pension programs. The graph on page 25 reflects contribution shortfalls of State General and Municipal Fire up and until 2066.
According to the report the municipal fire department pension plans have the most serious problem of under-funding of almost twice that of the State General Pensions.
The number of fire department retirees and law enforcement retirees combined is only a small fraction of the largest majority of State General pension retirees.
NEED FOR 100% SOLVENCY QUESTIONED
A very common and major point of criticism of the Task Force recommendations and PERA management is the fact that it is only recently that the PERA pension fixes of 2013 have not worked and that PERA must be 100% funded as to future projected liabilities. As was pointed out by Dan Klein in the Monahan article:
PERA was only 70% solvent during the 2007 fiscal collapse and we survived it just fine. The proposal to make the fund 100% solvent in 25 years is unnecessary. How do we know this? Because pension experts have studied the issue and told us. This report, The Sustainability of State and Local Government Pensions, by Lenny (bank of England), Lutz (Federal Reserve Board of Governors) and Sheiner (Brookings institute) destroys the PERA argument that the sky is falling and we must be 100% solvent.
The link to the full 70-page July 14, 2019 white paper analysis entitled “The Sustainability of State and Local Government Pensions: A Public Finance Approach” written by Jamie Lenney, Bank of England, Byron Lutz is here:
https://www.brookings.edu/wp-content/uploads/2019/07/lenney_lutz_sheiner_MFC_Final.pdf
The study explored the fiscal sustainability of U.S. state and local government pensions plans. The study examined if under current benefit and funding policies state and local pension plans will ever become insolvent, and, if so, when. The results of the study suggest that, under low or moderate asset return assumptions, pension debt can be stabilized as a share of the economy with relatively moderate fiscal adjustments. The study concluded there is no imminent crisis.
Portions of the introduction of “The Sustainability of State and Local Government Pensions” are worth noting in that that it summarize the very technical economic analysis:
State and local government pension plans are immensely important economic institutions in the United States. They hold nearly $4 trillion in assets; their annual benefit payments to retirees are equal to a bit more than 1½ percent of national GDP; over 10 million beneficiaries rely on these payments to sustain themselves in retirement.
In recent years, attention has focused on the plans’ large unfunded liabilities; one academic recently estimated that obligations of public pension funds exceed their assets by nearly $4 trillion. … The magnitude of these unfunded liabilities has generated widespread concern; indeed, public pensions are often viewed as being in a state of crisis, with the threat of default looming.
But it has been understood [for the last 60 years] the existence of unfunded liabilities does not necessarily imply that a plan is unsustainable, in the sense that it will require outside funding to avoid default. Fully unfunded, pay-as-you-go (PAYGO) pension systems can be fiscally sustainable. Moreover, unfunded pension liabilities are a form of (implicit) debt and in today’s low-interest rate environment, public debt may have no fiscal cost – i.e. rolling over public debt indefinitely may require no adjustments to taxes or expenditures.
We ask if, under current policies and funding levels, state and local pension plans are fiscally sustainable over the medium and longer run and if not, what changes are needed? To answer this question, we calculated the annual cash flows of state and local pensions. We find that pension benefit payments in the US, as a share of the economy, are currently roughly at their peak level and will remain there for the next two decades. …
Using a variety of sustainability measures, we find that, under low or moderate asset return assumptions and in aggregate for the U.S. as a whole, pension debt can be stabilized with relatively moderate fiscal adjustments. Notably, there appear to be only modest returns to starting this stabilization process now versus a decade in the future: Neither the level at which debt stabilizes as a share of the economy nor the contribution change needed to achieve stabilization increase much when the start of the stabilization process is pushed ten years out.
Overall, our results suggest there is no imminent “crisis” for most pension plans.”
After the introduction, the study goes on to discuss in very great detail the varying mythologies and mathematical formulas to analyze long tern sustainability of government pension programs.
DINELLI COMMENTARY AND ANALYSIS
After drinking 40 cups of coffee to stay awake to read the “The Sustainability of State and Local Government Pensions”, the biggest take away is that there is no imminent “crisis” for most pension plans and they have operated in the red for decades and are sustained by the constant cash flow of employer and employee contributions, investment returns and cash infusions. “Unfunded liability” which is what all the fuss is about, represents the difference between assets on hand and future retirement benefits owed. The operative word is “future” and 23 and 40 year economic projections are always highly speculative when dealing with the volatility of the markets and returns on investments.
PERA’S goal is to reach 100% funding of liabilities by 2043. The New Mexico PERA pension program has 75.3% of funded liability in current funding assets to future liability making it one of the strongest pension programs in the country. The two major pension funds that are currently problematic are shortfalls of 7.99% of State General pensions and 13.87% for Municipal Fire Pension programs. Contribution shortfalls of State General and Municipal Fire are up and until 2066. PERA management has failed to articulate in clear terms all the options available to insure PERA will reach a 100% funding ratio by 2043.
Notwithstanding, PERA Pension reform must again be undertaken. The difference is the New Mexico Legislature has time to address the PERA pension system and the sky is not falling as Joe Monahan puts it. The legislature can make adjustments like increasing age of retirements, change the formula to calculate retirement, make increases in contributions and infuse state funding into the pension funds, but only those that are underfunded which currently the municipal fire fighters fund and the general worker fund. Better management of the pension funds and increasing returns on investment are always relied upon to pay for benefits. At a minimum, the PERA Pension plans are solvent for at least 23, if not more years.
The financial problems PERA is experiencing can be directly related to the type of pensions offered to government employees as well as what many PERA retirees feel has been mismanagement of the pension funds. Governor Michelle Lujan Grisham no doubt knows that the Task Force recommendations antagonize upwards of 90,000 government employees.
Each time PERA reform includes the elimination of Cost of Living Adjustments (COLA) as a way of making the PERA fund 100% solvent, the entire city, county and state government workforce becomes alienated. Advocating the elimination of COLA adjustments will have serious political consequences simply because retirees vote. Hitting people in the pocket books who live on fixed income is one way to guarantee hostility at election time.
Last year, candidate for Governor Michelle Lujan Grisham said she would oppose cuts to benefits, including any reduction in the annual inflation-related pension adjustments that retired state workers and teachers receive. According to a campaign spokesperson at the time:
“She does not believe that New Mexico needs to eliminate our defined benefit system for current or future educators and state employees and opposes any reduction in cost-of-living adjustments.”
The PERA Task Force Recommendations are in total opposition and conflict sharply with the Governor’s position when she was running for Governor. This fact is surprising seeing as she appointed the Task Force. The Chair of the Task Force is her Deputy Chief of Staff who should have known better than to release the recommendations without more thought, more detailed analysis with findings and justifications on each one of the recommendations. What is very troubling is the Task Force itself was top heavy with public safety stake holders and union officials who have absolutely no background or experience in economics, finance and pension plans.
Joe Monhan’s suggested fixes need to be taken seriously. Revenues from the oil and gas boom could in all likely reduce the $6.1 unfunded liability within a 5 to 10-year span. Such infusions of funding would no doubt benefit no less than 90,000 PERA workers not to mention their family’s over many more years. While the State is experiencing a windfall in increased revenues, the New Mexico Legislature should use a portion, not all, of the surplus revenues to increase funding to the PERA funds that are currently underfunded, currently the municipal fire and general worker funds to the tune of $4.1 Billion.
Another option that should be seriously considered is restructuring pensions along the lines of increasing the age of retirement and increasing the number of mandatory years of work before retirement. The PERA pensions plan and age of retirement could be designed to coincide with the Federal Social Security program and take into account a person age befor being able to retire and a 35-year government service history of a person’s pay. Pensions can be based on the full employment history average as opposed to paying a pension on a person’s high 3 years of pay.
The New Mexico Legislature needs to consider pension reform during a special session where a solution can be hammered out without the distractions of a general session. The New Mexico legislature should consider pension reform in the form of including “defined contribution plans” in one form or another to be offered to future government employees, increasing employer and employee contribution plans under the defined benefit plans and modifying the multipliers and increasing years of service or age before retirement.
The first thing that should be done is for the legislature to set aside the recommendations of the PERA Pension Fund Task Force. What are needed are outside experts in finance and pension funds to make recommendations to the legislature on what can and should be done to save PERA, presuming it really does need saving. The Governor should form a working group of actual experts and go from there to find real solutions.
For related www.petedinelli.com blog articles on PERA see:
Governor’s PERA Solvency Task Force “Pokes The Bear”; Dissolve Task Force And Form Working Group