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F I S C A L I M P A C T R E P O R T

SPONSOR Lujan, B

DATE TYPED 3/08/05

HB 812/aHFl#1/aHFl#2

SHORT TITLE Retiree Health Care Accountability

SB

ANALYST Geisler

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

See narrative

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

Retiree Health Care Authority (RHCA)

Department of Finance and Administration (DFA)

SUMMARY

Synopsis of House Floor Amendment #2

House Floor Amendment 2 to House Bill 812 clarifies that “the fund shall be maintained in actu-

arially sound condition as evidenced by the annual written certification of a qualified actuary us-

ing nationally recognized actuarial standards of practice.”

Synopsis of House Floor Amendment #1

House Floor Amendment 1 to House Bill 812 exempts RHCA administration related activities

from a list of disbursements which shall be made only upon warrant drawn by the Secretary of

Finance and Administration.

Synopsis of Original Bill

House Bill 812 amends Section 10-7C-8 of the Retiree Health Care Act to:

1)

Requires that disbursements from the fund other than benefit and related payments shall

be made only upon warrant drawn by DFA pursuant to vouchers signed by the director of

the authority;

House Bill 812/aHFl#1/aHFl#2 -- Page 2

2)

Requires the board to obtain investment advice from the state treasurer, the state invest-

ment council/state investment officer, and the board of finance.

3)

Requires that the fund be maintained in actuarially sound condition and be independently

certified as such annually by a qualified actuary.

Significant Issues

The bill is intended to ensure that RHCA is managed in a fiscally-sound manner. Specific com-

ments on bill provisions by DFA and RHCA follow:

1) Vouchering through DFA.

RHCA already vouchers payments for all its budgeted programs through DFA. The bill would

codify in statute that the agency is required to voucher for payments for administrative costs

(program support) but not necessarily for those related to the processing of insurance claims

(benefits program). The language proposed in the bill is similar to, but not the same as, language

in the Public School Insurance Authority's (PSIA) enabling statute regarding vouchering pay-

ments through DFA (Section 22-29-6(F) NMSA 1978).

2) Requirement for RHCA to seek investment advice.

DFA notes that the provision requiring RHCA to receive advice from other state agencies on

designation of its long-term reserves should ensure increased oversight and lead to long-term

stability of the Fund. RHCA believes that the bill adds layers of oversight that may not be nec-

essary or prudent, and in some cases are duplicative. RHCA does not believe additional over-

sight is necessary, since the current status in these areas is the best it has ever been and exceeds

comparable funds in performance, and no valid performance deficiencies have been identified or

documented. Investments are currently valued at $151 million and actuarial solvency is pro-

jected at over 20 years, which is a 5-year cushion beyond the legislatively established perform-

ance measure of 15 years (careful monitoring by the board will be necessary over the next 5

years to avoid falling below that measure).

RHCA supports accountability, but already believes adequate and effective oversight already ex-

ists: RHCA’s independent actuary for benefits and solvency, and that State Investment Council

and their consultant for investments, with LFC and DFA overseeing all, and independent public

accountant and State Auditor Office reviews. The State Treasurer already holds a statutorily ap-

pointed position on the RHCA’s board of directors and currently serves on the board’s invest-

ment committee, so this proposal would in effect give that position three votes on RHCA in-

vestments and reserves. When a State Treasurer promotes policies contrary to advice from the

majority of the board, SIC and its consultant, and the independent actuary, this proposal would

give a minority opinion undue weight.

Currently, long-term reserves are considered to be all monies not needed for current year expen-

diture. They are invested through SIC. Only funds needed for current operations and expenses

are held in the “overnights” at the State Treasurer’s Office, and earn less than 1% interest.

RHCA continues: of the other entities named to give investment advice, RHCA already obtains

House Bill 812/aHFl#1/aHFl#2 -- Page 3

advice from SIC and the state investment officer, but it is not clear for what reason the state

board of finance is included, except that nearly all positions are related to the executive. RHCA

notes the language of section 1 (D) is problematic: “Before deciding which money in the fund

constitutes the long-term reserves…, the board shall obtain investment advice from state agen-

cies with investment expertise….” RHCA does not believe that advice on what constitutes re-

serves from agencies whose expertise is not on health care issues would be credible.

3) Annual Independent Certification of Retiree Health Care Fund Actuarial Position.

DFA notes that requiring an annual actuarial study to ensure that the Fund is actuarially sound in

statute would help ensure the long-term stability of the Fund. RHCA currently contracts for an-

nual actuarial studies. However, because RHCA's record in meeting its solvency targets has

been uneven, it may be prudent to also include a requirement that an independent review of the

actuarial studies be performed every few years in order to gauge the difference between the per-

formance predicted by recent actuarial analyses and actual performance at the time of the inde-

pendent review (see proposed amendment). RHCA notes that they are already in compliance

with the language regarding actuarial soundness and certification, although the intent of the bill

amendment is unclear without a definition of “actuarially sound condition.” (See proposed

amendment below).

FISCAL IMPLICATIONS

DFA notes that the increased oversight requirements and statutory requirement for actuarial

soundness should improve the long-term stability of the Retiree Health Care Fund. RHCA states

that HB 812 could negatively affect the growth of the fund.

ADMINISTRATIVE IMPLICATIONS

RHCA notes that additional layers of bureaucracy would slow the work of the RHCA.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

Per RHCA, status quo. Per DFA The agency would not be required by statute to voucher pay-

ments, seek the advice of agencies with investment expertise regarding long-term reserves, and

to conduct an an-nual actuarial study to ensure actuarial soundness of the Retiree Health Care

Fund.

AMENDMENTS

DFA suggests amending Subsection E of Section 1 of the bill to require that an independent re-

view of RHCA's actuarial studies be conducted every 3-4 years. This independent review should

be paid for by RHCA but contracted through another agency to ensure that the review is truly

independent.

RHCA suggests deleting the amendments proposed in Section 10-7C-8(D) relating to RHCA

seeking independent investment advice and defining “actuarially sound condition” in Section 10-

7C-8(E).

GGG/yr:lg:njw