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F I S C A L I M P A C T R E P O R T
SPONSOR Smith
ORIGINAL DATE
LAST UPDATED
01/31/06
02/02/06 HB
SHORT TITLE Adjust Educational Retirement Eligibility
SB 206/aSEC
ANALYST Geisler
APPROPRIATION (dollars in thousands)
Appropriation
Recurring
or Non-Rec
Fund
Affected
FY06
FY07
None*
(Parenthesis ( ) Indicate Expenditure Decreases) *See Narrative
Relates to: HB 100, SB 300, SB 541
SOURCES OF INFORMATION
LFC Files
Responses Received From
Educational Retirement Board (ERB)
SUMMARY
Synopsis of SEC Amendment
The Senate Education Committee technical amendment to SB 206 clarifies that ERA members
that join on or after July 1, 2006 will be eligible to retire under a rule of 80 (combination of age
and service). Existing ERA members or members that join before July 1, 2006 will be eligible to
retire under a rule of 75.
Synopsis of Original Bill
Senate Bill 206, introduced for the State Permanent Fund Task Force, changes the eligibility for
retirement under the Educational Retirement Act (ERA) from a combination of age and service
equaling 75 to equaling 80. This increased retirement eligibility will apply to employees who
become members of ERA after July 1, 2006. This change will impact the retirement eligibility
rules of ERA but not New Mexico PERA.
pg_0002
Senate Bill 206/aSEC – Page
2
FISCAL IMPLICATIONS
This bill will improve the actuarial position of the ERB. ERB’s actuaries have determined that
the Governmental Accounting Standards Board (GASB) actuarially required contribution (ARC)
would decrease from 12.5% to 12.28%. The ARC represents the required employer contribution
to pay benefits for current employees and to amortize the unfunded actuarial liability (UAAL)
within 30 years.
Note that because the bill provisions would only apply to new hires the majority of the positive
impact on ERB’s solvency would be in the outyears.
SIGNIFICANT ISSUES
Impact on ERA Retirement
The rule of 80 is used for the majority of state teacher retirement plans. By changing from a rule
of 75 to a rule of 80, this bill will effectively raise the retirement age approximately 2.5 years for
many members of ERB (2.5 years of age, plus 2.5 years of service make the five extra years to
equal 80). Members will still be able to retire with twenty five years of service regardless of age.
The chart below provides scenarios for how this change will impact a typical ERA member.
Age that educa-
tional employee
starts career.
Earliest Eligibility to
Retire Under Current
Rules Without Reduction
in Benefit
Earliest Eligibility
to Retire Under SB
206 Without Re-
duction in Benefit
Notes
Hired at age 25 At age 50 with 25 years
service
No change
Eligible to retire
under “25 and out
rule”
Hired at age 35 At age 55 with 20 years
service (“rule of 75”)
At age 57.5 with 22.5
years service
Rule of 80 would
require 2.5 more
years of service
Hired at age 40 At age 57.5 with 17.5 years
of service (“rule of 75’)
At age 60 with 20 years
service
Rule of 80 would
require 2.5 more
years of service
Hired at age 45 At age 60 with 15 years
service (“rule of 75”)
At age 62.5 with 17.5
years service
Rule of 80 would
require 2.5 more
years of service
Hired at age 50 At age 65 with 15 years No change
Eligible to retire
under age 65 plus 5
years service rule.
Hired at age 55 At age 65 with 10 years No change
Eligible to retire
under age 65 plus 5
years service rule.
Note: the above chart deals with retirement eligibility only—actual pension calculation is based
on final average salary X years of service credit X .0235.
pg_0003
Senate Bill 206/aSEC – Page
3
ERB Solvency
SB 181 passed during the 2005 session seeks to improve ERB solvency by increasing employer
contributions to ERB over seven years at a cost of approximately $150 million. The employer
contribution rate will increase .75 per year, which will take the contribution rate from 8.65% in
FY05 to 13.90% in FY12. Employee contributions will increase .075 per year, which will take
the contribution rate from 7.6% in FY05 to 7.90% in FY09. With these contribution increases it
is anticipated that ERB will meet the 80% funded ratio actuarial benchmark by FY19 and will
meet the 30 year GASB standard for amortization of the UAAL by FY11. However, it is impor-
tant to note that these actuarial projections are dependent on important assumptions on teacher
pay growth, rate of retirements, and 8% investment return holding firm.
ADMINISTRATIVE IMPLICATIONS
ERB notes that the changes made by this bill will require software changes at an unknown cost.
In addition, the Board would have to issue rules and procedures to make sure the law was admin-
istered correctly and fairly.
RELATIONSHIP
SB 541 relates as it seeks to improve ERB actuarial solvency by increasing employee contribu-
tions to the fund. SB 300 and SB 100 seek to improve ERB actuarial solvency by changing the
rules of the retiree return to work program.
TECHNICAL ISSUES
ERB has identified a potential bill language problem in that Section 2B conflicts with Section
1A. Section 2B provides that unless a member retires before July 1, 2006, they cannot use the
rule of 75, while the prior sections determines the change to be effective for members who be-
come members after July 1, 2006. The law as stated in section 2 B would most likely fail to pass
a Constitutionality test under Article 20 Section 22.
AMENDMENTS
To fix the issue identified above, ERB suggests:
1.
On page 3, line 10, after "if" delete until “the contributions” in line 13.
2.
On page 3, line 10 after “seventy-five” insert “or the sum of eighty if the member first be
come a member after July 1, 2006”
GG/mt