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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

2-10-07

HB

SHORT TITLE Benefit Enhancement Bill Moratorium

SB SJM 6

ANALYST Aubel

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

See narrative Recurring

General Fund

See narrative

Recurring

Fire Protection Fund

See narrative Recurring

PERA, ERA

(Parenthesis ( ) Indicate Expenditure Decreases

)

Relates to HB 222, HB 224, and HB 243

Conflicts with SB 213, HB 280, HB 411, HB 595, SB 576 (Duplicate of HB 595), HB 765, HB

800, HB 893, HB 1091, SB 680, and SB 830

SOURCES OF INFORMATION

LFC Files

Responses Received From

Public Employees Retirement Association (PERA)

Educational Retirement Board (ERB) (ERA)

New Mexico Corrections Department (NMCD)

Department of Public Safety (DPS)

Adult Parole Board (APB)

Administrative Office of the District Attorneys (AODA)

SUMMARY

Synopsis of Bill

Senate Joint Memorial 6 will impose a two-year moratorium on proposed benefit enhancement

legislation to the public employees retirement system and the educational retirement system

through December 31, 2008.

FISCAL IMPLICATIONS

By itself, SJM 6 would have no immediate fiscal impact for PERA or ERA. The long-term fiscal

Senate Joint Memorial 6 – Page

2

impact of a two-year moratorium on plan enhancement for the PERA and ERA funds is

unknown, although any reduction in enacting legislation that adds liabilities would most likely

have a positive long-term effect on both plans.

However, if SJM 6 suspends any of the plan enhancements proposed by several groups during

the 2007 session for an additional two years, general fund appropriations and operating budgets

would be correspondingly reduced for that period of time. Article 20, Section 22 of the

Constitution of the State of New Mexico requires that the PERA Board and its independent

actuary must establish funding periods for benefit enhancements that reflect sound actuarial

principles and cover the cost of new benefits. The consensus of the PERA Board is that the

Unfunded Accrued Liability for each benefit enhancement should be pre-funded through special

appropriations.

The table below provides a summary of the potential fiscal impact of implementing HJM 6 if the

2007 proposed legislation to enhanced benefits is put on hold. “Actuarial Pre-funding" refers to

the amount that was estimated by actuarial study to pre-fund the liability, whereas the “Actuarial

Amortization" refers to the estimated annual employer-portion contribution rate required to

amortize the liability over a period of 30 years. (Note that unless otherwise specified, the current

employer contribution rate for PERA General Plan 1 is 16.59 percent.) Where no amount is

indicated, no actuary study was requested to determine the liability impact of the proposed

enhancement. NFI is used where either PERA or ERB has noted no fiscal impact.

House

Bill

Senate

Bill

Title

Actuarial

Pre-funding

Actuarial

Amortization

213 Volunteer Firefighter Retirement Benefits $2 - $4

million*

222

Judicial Retirement Service Credit

Purchases

NFI

NFI

224

Magistrate Retirement Service Credit

Purchase

NFI

NFI

243

Volunteer Firefighter Retirement Benefits NFI

NFI

280

E-911 Telecommunicator Public

Retirement – 20 year enhanced plan

$11.4 million From 9.63%

to 18.5%

411

Law Enforcement Academy Retirement

Plan – 20 year enhanced plan

595 576 District Attorney & Staff Retirement Plan $6.5 million 22.68%

765

Probation Officer Alternative Retirement

Plan

$7.3 million No change

for employer.

800

Motor Transportation Officer Retirement $3.0 million

893

Public Retirement for Military Service

1091**

Educational Retirement Benefits &

Calculation

680 Revise Legislative Retirement

830 Congressional Employee Service Credits

*Estimated annual contribution from FPF. Current contribution is $750.0 thousand.

**No agency analysis available as of February 10, 2007.

Senate Joint Memorial 6 – Page

3

SIGNIFICANT ISSUES

Several proposals have been presented in the 2007 session to increase benefits as well as salaries.

The cumulative effect of multiple benefit enhancements to the PERA retirement system is

unknown. However, the combination of enhancing members’ prior service credit, proposing new

members be admitted to an enhanced plan, and providing salary increases in excess of PERA’s

assumed rate of 4.5% per year for existing members, inevitably will increase the liability risk to

the fund. Even if the enhancements are funded according to actuarial estimates, the liability is

still subject to the investment performance of the PERA portfolio that could possibly cause a

decrease in the funded status of the overall PERA system. In addition, actuarial estimates of

retirements may be understated, adding another level of uncertainty to fund solvency.

PERA notes that a primary issue is whether a 2-year moratorium on proposed benefit

enhancement legislation pertaining to the public employees retirement system and the

educational retirement system will contribute to the actuarial soundness of the funds PERA and

ERB administer.

ERB’s funded ratio, the actuarial value of assets as a percentage of actuarial accrued liabilities,

declined from 81 percent to 70 percent from 2004. The funding period for their unfunded

actuarial liability, which the Governmental Accounting Standards Board (GASB) states should

be less than 30 years, is infinity.

PERA’s actuarial position is still strong, but it has also declined in recent years. For example, at

June 30, 2006 their funded ratio was 92 percent, but it has declined 11 percent from the FY 02

funded ratio of 103 percent. Given actuary assumptions hold, the current funding period is 16

years.

A recent survey compiled by the Indiana Legislative Service Agency confirmed PERA’s position

as the number one national public employee pension plan in terms of benefits. ERA places

among the top plans for educational retirement plans.

PERFORMANCE IMPLICATIONS

Agencies with proposed legislation for enhanced benefits all suggest that delaying their

legislation will impair agency performance.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Relates to HB 222 and HB 224, which allow magistrates and judges to purchase up to one year

of “air time" to bring parity to other PERA-affiliated employees.

Potentially conflicts with HB 243, which allows a longer period for volunteer firefighters to post

past service credit.

Conflicts with all other legislation that propose plan enhancements: HB 280, HB411, HB 595,

HB 765, HB 800, HB 893, HB 1091, SB 576, SB 680 and SB 830.

Senate Joint Memorial 6 – Page

4

OTHER SUBSTANTIVE ISSUES

During the past decade, the Legislature has increased the benefit structure available to certain

public employee groups by reducing eligibility requirements for normal retirement to an

“enhanced" 20-year plan. For example, legislative proposals providing benefit enhancements for

adult correctional officers and municipal detention officers have been recently enacted.

Responding agencies assert that these enhanced plans have created inequity within their

departments and seek parity for the members that are still under PERA’s general plan. HB 800

and HB 765 are examples. The Corrections Department points out that SJM 6 would delay this

objective until the 2009 session at the earliest. PERA reports that the New Mexico Conservation

Officers Association is considering a similar enhancement for its commissioned officers.

DPS also details a benefit-equity issue within commissioned officers of the agency and suggests

that morale may suffer, leading to higher turnover, if its proposal to improve benefits under HB

800 is not enacted.

ALTERNATIVES

One option regarding PERA is to bring parity to plans for hazardous duty only, where service

includes a potential loss of life. Using this “hazardous duty" as the qualifying factor would create

a standard that is easily definable and more defensible, and end additional requests to enhance

plans due to anything less stringent through an indefinite moratorium or legislation.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL

PERA will continue to receive a proliferation of legislative proposals to enact benefit

enhancements from different employee groups and special interests. PERA will continue to

provide the legislature with actuarial information to determine the cost of benefit enhancements

requested by agencies.

POSSIBLE QUESTIONS

1.

Would certain legislation that has no fiscal impact, such as allowing the magistrates and

judges to purchase up to one year of service credit as all other PERA-affiliated employees

are able to do, be exempted.

MA/mt