Fiscal impact reports (FIRs) are prepared by the Legislative Finance Committee (LFC) for standing finance
committees of the NM Legislature. The LFC does not assume responsibility for the accuracy of these reports
if they are used for other purposes.
Current FIRs (in HTML & Adobe PDF formats) are a vailable on the NM Legislative Website (legis.state.nm.us).
Adobe PDF versions include all attachments, whereas HTML versions may not. Previously issued FIRs and
attachments may be obtained from the LFC in Suite 101 of the State Capitol Building North.
F I S C A L I M P A C T R E P O R T
SPONSOR Stewart
ORIGINAL DATE
LAST UPDATED
3-13-07
3-14-07 HM 92
SHORT TITLE Combine Educational & Public Retirement
SB
ANALYST Aubel
ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)
FY07
FY08
FY09 3 Year
Total Cost
Recurring
or Non-Rec
Fund
Affected
Total
$25.0 - $50.0
Non-
Recurring
See Fiscal
Impact
(Parenthesis ( ) Indicate Expenditure Decreases)
SOURCES OF INFORMATION
LFC Files
Response Received From
Educational Retirement Board (ERB)
Department of Higher Education (HED)
No Responses Received From
Public Employees Retirement Association (PERA)
Public Education Department (PED)
Legislative Education Study Committee (LESC)
SUMMARY
Synopsis of Bill
House Memorial 92 proposes the Legislative Education Study Committee and the appropriate
interim committee investigate the feasibility of combing the two separate retirement systems for
public employees and employees in the educational system. The memorial requests that the
study be submitted to the Governor and to the Legislature on or before December 1, 2007.
FISCAL IMPLICATIONS
To the extent the study can be incorporated into the normal work load for the LESC, PERA and
ERB, the HM 92 will not initiate a fiscal impact. However, an actuarial report would be required
to analyze the combined fund components, such as unfunded liability, funding ratio and funding
period, as well as the new contributions required to bring the plans into parity. Given the scope
of the study, such an actuarial report is estimated at $25 thousand, although this amount is
subject to verification by PERA or ERB. Legal expertise would also be required. No
appropriation is contained in the bill, nor is the cost of such actuarial or legal expertise allocated
pg_0002
House Memorial 92 – Page
2
to a particular entity or entities.
SIGNIFICANT ISSUES
New Mexico has maintained separate retirement systems for public employees, one for its
educational employees and one for other employees. Over the years the systems have developed
different eligibility requirements, retirement benefits and contributions, as the chart below
demonstrates.
ERB
PERA – State Plan 3
Pension Factor
2.35%
Pension Factor
3.0%
Contributions
Employee and employer contributions
increasing 2 and 5 more years
Employee Employer
FY 2005 7.6% 8.65%
FY 2006 7.675% 9.4%
FY 2007 7.75% 10.15%
FY 2008 7.825% 10.9%
FY 2009 7.9% 11.65%
FY 2010 7.9% 12.4%
FY 2011 7.9% 13.15%
FY 2012 7.9% 13.9%
Contributions
7.42% Employee
16.59% Employer
Note: PERA has 29 other plans with employee
contributions ranging from 7% to 16.65% and
employer contributions ranging from 7% to
25.72%.
Membership Eligibility
All public school and university employees
working more than .25 of Full Time Equivalent
are eligible for membership in ERB.
Certain 2 and 4 year community college and
university employees may choose, within the
first 90 days of employment, a defined
contribution option.
Educationally certified employees in certain
state agencies with an educational component
may choose only the ERB plan.
Retirees from PERA may not participate in the
ERB retirement plan.
Membership Eligibility
All State employees must be members of
PERA excluding
the following:
•
Seasonal and temporary employees
•
Part-time employees who work less
than 20 hours in a 40-hour pay period
•
Student employees
•
Retired members from ERB, the
Judicial Retirement System or the
Magistrate Retirement System
•
Retired legislative workers
pg_0003
House Memorial 92 – Page
3
ERB
PERA –State Plan 3
Retirement Qualifications
25 years of service
Age + service = 75
Age 65 + 5 years of service
Retirement Qualifications
25 years of service at any age, or
Age 60 + 20 or more years of service
Age 61 + 17 or more years of service
Age 62 + 14 or more years of service
Age 63 + 11 or more years of service
Age 64 + 8 or more years of service
Age 65 + 5 years of service
Benefit Calculation
Final Average Salary of highest 5 consecutive
years of service
X
Years of service
X
.0235
No maximum benefit. 80% benefit is reached
after 34 years of service.
Benefit Calculation
Final Average Salary of highest 3 consecutive
years of service
X
Years of service
X
.03
Benefit maximizes at 80% with 26 yrs. and 8
months of service.
Disability Retirement
Members with at least 10 years of earned
service may apply for a disability retirement.
The retirement is approximately 33% of the
final average salary and a COLA (see below)
begins in the third year of disability retirement.
Disability Retirement
•
Duty disability – members are eligible
for duty disability from the first day of
employment.
•
Non-duty disability – members are
eligible for non-duty disability after
being vested with 5 years of service
credit.
•
Cost-of- Living Adjustment (COLA)
Annual, starting at age 65
½ of CPI with minimum of 2% (but 100% of
CPI if lower than 2%), maximum of 4%
Average COLA increases over the last 20 years
have been 2%.
There have been 3 Ad Hoc COLA’s in the last
20 years.
Cost-of-Living Adjustment (COLA)
3% each year after members have been retired
2 full calendar years (January 1 through
December 31) effective July 1 of the following
year. Disability retirees and retirees who are at
least age 65 prior to their first COLA eligibility
date have a reduced waiting period of 1 full
calendar year.
pg_0004
House Memorial 92 – Page
4
ERB points out several challenges pertaining to any ERB-PERA consolidation, as follows:
•
The memorial correctly states that there are differences in eligibility and benefits between the
PERA and ERB plans. However it is not clear whether the memorial assumes that combining
the systems would automatically make the benefits equal. In reality, each fund as described
by Section 22 of the New Mexico Constitution states that each fund can only be used for the
benefit of the beneficiaries of that fund. This means that no contributions made for one
system could be used to pay benefits to anyone who is a member of the other system.
•
The other issue is the possibility of saving money by having one system as opposed to two.
Both PERA and ERB currently own their own buildings (PERA will be building in a new
location). If both were combined, a new facility would have to be secured and this would
probably not translate to any significant savings. Similarly, combining the two systems with
very different plans would not save personnel because administration of all of the plans would
require similar number of FTE’s to provide the service to plan participants.
•
Finally, both systems recently purchased significantly different customized information
systems that are not compatible.
As of June 30, 2006, ERB has an infinite funding period and a funding ratio of 68.3 percent.
Usually a funding ratio of 80 percent and a funding period 30 years or less are considered
satisfactory. As of the same date, PERA has a combined plan funding ratio of 92 percent and a
funding period of 16 years. How the unfunded liabilities and assets of each plan would be
affected by a consolidation would be a significant issue.
ADMINISTRATIVE IMPLICATIONS
HM 92 requests that the LESC and the interim Pensions and Investments Oversight Committee,
or other such committee designated by the Legislative Council Service, study the feasibility of
combining the two systems. Most likely ERB and PERA would also need to be involved; the
administrative impact to their financial and legal departments is unknown.
No provision is made in the memorial for an actuarial report, which would be necessary to
determine the combined fund valuation and fund solvency indicators. It is not known whether
the LESC has the legal and financial expertise to adequately assess the plans as requested, or
whether additional outside council would be required.
OTHER SUBSTANTIVE ISSUES
HM 92 mandates that the study include legal, practical and monetary consequences of combining
the retirement systems. ERB specifies legal issues exist with regard to changing plan benefits to
those already vested in each system.
The memorial suggests that there is no rational basis for maintaining two separate systems,
although testimony has been provided during the interim that indicates having the state’s
permanent funds spread among the State Investment Council, PERA and ERB does provide
greater diversification because the funds are separately managed and invested. Diversification
reduces volatility and improves long term returns. This implication would also need to be part of
the study.
pg_0005
House Memorial 92 – Page
5
ALTERNATIVES
ERB suggests one option is to create new plans going forward that are more similar to each
other.
WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL
A study investigating the feasibility of combing the two retirement plans will not be undertaken
and the likelihood of such a combination will be diminished.
.
MA/nt:mt