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

SPONSOR Gutierrez

ORIGINAL DATE

LAST UPDATED

2-08-07

HB 893

SHORT TITLE Public Retirement for Military Service

SB

ANALYST Aubel

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

.01 See Fiscal Impact

General Fund

(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

Total

$50.0

$50.0 Non-Recurring PERA

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Public Employees Retirement Association (PERA)

Veteran’s Services Department (VSD)

SUMMARY

Synopsis of Bill

House Bill 893 amends the PERA Act to provide up to five years of free service credit to a

PERA member who leaves the employ of a PERA-affiliated employer, enters the uniformed

services of the United States and is subsequently employed by the United States or a uniformed

service of the United States rather than a PERA-affiliated employer.

FISCAL IMPLICATIONS

PERA states that HB 893 will negatively affect the PERA fund by increasing the unfunded

liability of providing this enhanced benefit. Article XX, Section 22 of the Constitution of the

State of New Mexico requires that an increase in benefits of a plan under PERA must be

House Bill 893 – Page

2

adequately funded to preserve the actuarial soundness of the fund. The funding may be pre-

funded by a total appropriation to cover the present value of the actuarial unfunded liability, or

the statutory contribution rates need to be increased to amortize the new unfunded liability over

30 years. HB 893 does not contain an appropriation or an increase in contribution rates to fund

the full actuarial cost of the service credit it proposes to provide certain PERA members who do

not return to PERA-affiliated employment after active uniformed services active duty. The

unfunded liability of this enhanced benefit is unknown because no actuarial study was

performed.

PERA notes that any change to benefits requires a change in the computerized retirement system.

Such changes have cost up to $50 thousand.

SIGNIFICANT ISSUES

VSD maintains that HB 893 would grant those PERA members to become vested in PERA by

allowing them to apply for credit of up to five years if they leave the uniformed service and

apply for this credit within 30 days, if they are subsequently employed by the federal government

or other uniformed service.

Employees that are called into active duty are covered by the federal Uniform Services

Employment and Reemployment Rights Act (USERRA). One of the key components of the Act

is to establish reemployment rights for those persons whose absence from an employment

position is necessitated by service in the uniformed services.

With respect to pension plan benefits, PERA notes that a person reemployed under USERRA

shall be treated as not having incurred a break in service with the employer by reason of periods

of service in the uniformed services. Federal law requires that periods served by a person in the

uniformed services shall, upon reemployment

, be deemed to constitute service with the employer

for vesting and benefit accrual purposes under the pension plan. The employer is liable for

funding employer contributions and the reemployed person is entitled to accrued benefits only to

the extent that the reemployed person makes the required employee contributions.

Currently, the PERA Act already provides for more generous benefits following reemployment

with a PERA-affiliated employer than is required by federal law outlined above. Section 10-11-

6 of the PERA Act, authorizing free

intervening service credit for PERA members who are

called to military service and then return to their PERA-affiliated employment became effective

in 1987. Since then, the cost of free intervening military service credit is substantially subsidized

by the retirement system.

In 1998, the state constitution was amended to require funding in connection with benefit

enhancements. Accordingly, Article 22, Section XX of the Constitution of New Mexico

prohibits any expansion of eligibility for free service credit without accompanying funding. Any

future expansion of the category of persons eligible to receive free intervening military service

credit must provide a funding source for the full actuarial present value of the amount of the

increase in the member’s pension as a consequence of the intervening service credit.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

HB 893 conflicts with Article XX, Section 22 of the Constitution of New Mexico, as noted.

House Bill 893 – Page

3

OTHER SUBSTANTIVE ISSUES

According to PERA, because those members affected by HB 893 do not return to PERA-

affiliated employment, the service credit granted does not meet the Internal Revenue Code

definition of “intervening service." Rather, the service credit HB 893 proposes falls within the

Internal Revenue Code Section 415(n) definition of “permissive service credit." Permissive

service credit is subject to an aggregate total of 5 years. If the member has already purchased

permissive credit under the PERA Act, any service granted under HB 893 must be reduced by

that amount.

ALTERNATIVES

A vested employee with military time may purchase up to five years of that military time at a

reduced rate than is normally charged for purchasing service credit.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL

PERA members who are called to active military duty while employed by a PERA-affiliated

employer are eligible to receive free service credit for the period of their active duty/deployment

if they return to their PERA-affiliated employment within 30 days of being discharged from

uniformed service and if they comply with the administrative requirements of NMSA 10-11-6

and PERA’s rules. Any service of less than five years with a PERA affiliate would be lost if the

member is called up for active duty and decides not to return to a PERA-affiliated employer.

Employee contributions are returned upon request.

POSSIBLE QUESTIONS

1.

What is the unfunded liability that would require funding under the New Mexico

Constitution.

MA/csd