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F I S C A L I M P A C T R E P O R T
SPONSOR Varela
ORIGINAL DATE
LAST UPDATED
1-29-07
HB 221
SHORT TITLE Payment Obligations of State Pension Systems
SB
ANALYST Aubel
ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)
FY07 FY08
FY09 3 Year
Total Cost
Recurring or
Non-Rec
Fund
Affected
Computer
Change
$25.0
$25.0 Non-Recurring PERA
(Parenthesis ( ) Indicate Expenditure Decreases)
ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)
FY07 FY08
FY09 3 Year
Total Cost
Recurring or
Non-Rec
Fund
Affected
Computer
Change
$50.0
$50.0 Non-Recurring
ERB
(Parenthesis ( ) Indicate Expenditure Decreases)
SOURCES OF INFORMATION
LFC Files
Responses Received From
Educational Retirement Board (ERB)
Public Employee Retirement Association (PERA)
Administrative Office of the Courts (AOC)
SUMMARY
Synopsis of Bill
The Reciprocity Retirement Act, NMSA 1978, Section 10-13A-1 et seq., allows public
employees who earn service credit under the two or more state systems to combine service credit
in order to determine retirement eligibility and calculate pension benefits.
House Bill 221 would require each state pension system to pay its portion directly to a member
who has service credit in both state retirement systems. Currently, one system pays the entire
monthly pension and is reimbursed by the other system.
pg_0002
House Bill 221 – Page
2
FISCAL IMPLICATIONS
PERA stated House Bill 221 will have a positive fiscal impact by eliminating the reimbursement
procedure required under the current reciprocity payment system and detailed the annual savings
that could be redirected (totaling approximately $10 thousand to $13 thousand), as follows:
In calculating Cost-of-Living Adjustments (COLAs), PERA’s retiree payroll entered 427
COLAs for reciprocity retirements in FY07. This is a manual procedure because the
computer programs for ERB/PERA are incompatible. Annually, 2 FTEs commit a total of
32 hours to this process at a combined hourly rate of $40.77.
In preparing a monthly Reconciliation Report, one FTE reports experiencing 1 or 2
reconciliation problem accounts per month from the Reciprocity Report internally. These
individual retiree accounts are time-consuming and can take anywhere from 30 minutes to
two hours, or longer, depending on the complexity of the problem, at an hourly rate of
$28.66.
Researching reciprocity issues is very time consuming and requires manual audits of
retirement files. One FTE works 3 to 5 days each month on reciprocity files at an hourly
rate of $21.94.
Both PERA and ERB would incur a short-term budget impact to reconfigure their respective
computer pensions systems. ERB estimated this impact at $50 thousand, while PERA’s estimate
is about half that amount. In both cases, the recurring operating FTE savings could be redirected
toward other activities.
SIGNIFICANT ISSUES
Under current law, the state system from which a member retires pays the entire monthly pension
benefit. In practice this means that either PERA or ERB is the “payor" system for the entire
pension benefit. The other system subsequently reimburses the “payor" system for the portion of
the pension attributable to service credit accrued under the “non-payor" system. This system
requires a monthly reconciliation between the two pension systems to verify and correct
payments made between the two systems.
PERA indicated that House Bill 221 would provide a more efficient and cost-effective process
for paying pension benefits to reciprocity retirees by allowing each system to pay their retirees
directly. The current burdensome process was developed at a time when retirees received a
monthly pension check in the mail. Although the process placed a burden on the two systems,
the process was convenient for retirees by providing a single, combined monthly check rather
than two separate checks which might even be received on different days. However, paper
checks are no longer common. The vast majority of current retirees receive their monthly benefit
payments via direct deposit on the last banking day of each month.
If House Bill 221 is enacted, reciprocity retirees would simply receive two electronic direct
deposits on the same day, instead of one combined direct deposit. As a result, House Bill 221
would have no detrimental effect on retirees, but it would remove the significant problems
associated with combined payments from the retirement systems. Retirees will be better able to
track pension amounts from both PERA and ERA since the amounts would be direct deposited
pg_0003
House Bill 221 – Page
3
separately. Two separate direct deposits will also simplify retirees’ ability to track COLA
increases on each component of their pension benefit and ease tax preparation, because taxable
and non-taxable amounts on 1099R Internal Revenue Service forms would be clearly defined.
ERB concluded that with approximately 1,600 retirees who are receiving reciprocity payments,
this change would eliminate some accounting reconciliation issues that occur between the two
systems. The total pension payment made to each retiree would be the same,
PERFORMANCE IMPLICATIONS
Neither PERA or ERB noted any performance impact, although both suggested that House Bill
221 would produce a more efficient system for processing reciprocity. By freeing up the FTEs
that currently process the reimbursement system, additional resources could be redirected to
improving member request response times, particularly for PERA.
WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL
Under the current law, the state system from which a member retires pays the retirement while
the other fund(s) reimburse the payer fund. This causes frequent administrative difficulties for
both PERA and ERB.
MA/csd