January 23, 2020

Long-term fixes for PERA could be tough sell

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A Senate Democrat stood outside a Roundhouse committee room Thursday with the head of New Mexico’s retirement system, expressing her concerns about a proposal to reform it.

Wayne Propst, head of the Public Employees Retirement Association, tried to alleviate her worries.

But Sen. Antoinette Sedillo Lopez isn’t alone. Several members of her caucus, as well as retirees, are expressing unease about the bill, aimed at putting the pension system on a path to solvency.

“It is a concern that I’ve been raising,” Sedillo Lopez of Albuquerque said in an interview later, adding she’s getting questions from worried constituents. “Having this goal of 100 percent funded liability in 25 years seems very aggressive and could cause harm to our current retirees.”

Senate Bill 72, backed by Gov. Michelle Lujan Grisham, aims to erase the pension system’s current $6.6 billion unfunded liability. 

It would do that, in part, by temporarily reducing the annual cost-of-living adjustments retirees receive and would then move them to a profit-sharing model instead of the 2 percent annual raises that retirees currently receive in their pensions. Employers and active employees also would have increased contributions.

Propst says if legislators don’t approve a major overhaul, the next economic recession could have a dire impact on New Mexico’s ability to pay for teachers, firefighters and other public employees’ retirement plans. The system is currently only 69 percent funded, and is projected to stay at virtually the same level if nothing is done.

“That leaves us no cushion for any kind of economic recession or market downturn,” Propst said in an interview. “We simply do not have the cushion right now.”

The Governor’s Office agrees. Lujan Grisham created a task force last year to study potential changes, and many of its recommendations were included in SB 72, introduced in the first week of the 2020 legislative session.

“The longer we wait, the more painful the changes will have to be,” said Tripp Stelnicki, a spokesman for the governor. “The system, as currently constituted, demands attention immediately.”

As much as the bill likely would be a wise long-term financial move for the state, pension reform can be hard to sell in the short term. It’s hard to explain technically, it’s sensitive politically, and retirees can easily become afraid of receiving smaller checks in the future.

For instance, there’s Anthony Pollock, a 66-year-old retired dispatcher for the Albuquerque airport police. He now receives an annual pension of around $24,000 and does extra freelance work for about $3,000 more per year. He’s concerned the proposed changes to the annual cost-of-living increase could make it hard for him to pay for rising medical costs as he grows older.

“My main concern is if my PERA isn’t keeping up with inflation, it’s going to be a matter of time before I’m broke,” Pollock said, referring to his pension from the Public Employees Retirement Association.

And there’s Angela Lobato, who is worried about herself but more concerned about family members and friends.

Lobato, a 58-year-old retiree from the state Department of Health, has aunts, uncles and former co-workers who are also retired state workers. She’s worried they’ll be less able to make ends meet under the proposed pension reform.

“They’re barely making it now,” said Lobato, a Santa Fe resident who worked in human resources for the state. “They’ll have to choose between, ‘Do I buy food or medication?’ These are the decisions they’re making.”

Elaine Benavidez is a 64-year-old state retiree who lives in Pojoaque. She’s concerned that reduced payouts in the future could make it harder for her and her husband to afford assisted living when they grow older, which she said is very costly. 

“Day to day, OK, maybe we have to cut back on cable. That’s not life-altering,” said Benavidez, who worked in the Behavioral Health Services Division. “But giving up long-term aging? That’s a big deal,” she said.

Such concerns voiced by the electorate might make reform especially tough this year, given that legislators are up for reelection in November.

“Politicians like to give desserts,” said Sen. John Arthur Smith, chairman of the powerful Senate Finance Committee. “SB 72 isn’t really classified as a dessert.”

To be clear, Smith, D-Deming, didn’t say he was against the proposal. But his comment appears to reflect that legislators do have concerns.

Sen. Liz Stefanics, for example, didn’t give a glowing review Thursday. She told a conference room full of hundreds of people that more money shouldn’t be taken out of employees’ paychecks when health care costs are going up.

“My concern is I don’t want the changes to pit the current working employees against the retirees,” Stefanics, D-Cerrillos, said at a New Mexico Counties legislative breakfast. “We need to balance. I think we need to look at that bill carefully. And I don’t think it’s a slam dunk.”

Senate Democrats are a particularly important group for the governor and other proponents to win over. The caucus includes a number of more conservative members who blocked key legislation backed by Lujan Grisham last year. 

In response to some of the concerns, Propst said the worries about keeping up with inflation are unfounded. The cost-of-living adjustment his system has been paying out has exceeded inflation by more than 20 percent over the past two decades, he said. 

Significantly, Propst and the Governor’s Office also point out that older retirees need not worry about the reform, because it actually proposes to increase the cost-of-living adjustment by 0.5 percent for those over 75 years of age, which is 30 percent of the current 41,000 recipients. 

Stelnicki also pointed out that the system’s average benefit is $31,000, which when added to Social Security payouts of about $18,000 per year would give PERA retirees more than the average active state employee.

Under the bill, cost-of-living adjustments over the next three years would be paid for through a one-time appropriation of $76 million that would need legislative approval. The compounding factor currently applied to the cost-of-living adjustments would be paused during that period of three years.

A profit-sharing model would then be established instead of the 2 percent annual raises that retirees currently receive in their pensions. Under that model, the adjustment would range between 0.5 percent and 3 percent.

“This comes as close to fixing the problem as anything I’ve seen in my years as executive director,” Propst said at a Senate Finance Committee hearing Wednesday.

Under PERA’s current assumption of 7.25 percent investment returns, he said, the average cost-of-living adjustment would be between 1.61 percent and 1.65 percent. 

That is lower than the current 2 percent, but Propst says the reduction would be necessary.

“Will there be a little sacrifice from everybody? Sure,” he said in an interview. “But the sacrifice we make now will pale in comparison if we wait.”

The task force’s recommendations did get the blessing of the majority of groups who participated.

“In meeting with our membership, we can support the concept of a risk-based cost of living,” Bill Fulginiti, executive director of the New Mexico Municipal League, wrote in an August letter to Lujan Grisham. “This will provide long-term sustainability of the public employee’s retirement fund.”

Yet one group, the Retired Public Employees of New Mexico, opposes the proposal, saying it’s “attacking the COLA,” or cost-of-living adjustment.

“It’s not necessary for this fund to be 100 percent funded,” said Miguel Gomez, executive director of the group. “We think there should be no pension reform right now at all.”

There’s also criticism from a former top PERA official. 

“Additional reduction in PERA retirees’ annual cost-of-living adjustment in [the] Senate Bill is unfair and has not been adequately studied,” said Kurt Weber, former deputy director of PERA.

Asked about the debate, the bill’s sponsor, Sen. George Muñoz, a Gallup Democrat, said any “small pain” endured in the short term was needed to avoid a “drastic” result in the future. Still, he acknowledged the difficulty of the task at hand.

“It’s always a challenge when you’re trying to change someone’s retirement,” Muñoz said.