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F I S C A L I M P A C T R E P O R T
SPONSOR Beffort
ORIGINAL DATE
LAST UPDATED
01/31/06
2/9/06 HB
SHORT TITLE Increase Educational Retirement Contributions
SB 541
ANALYST Geisler
REVENUE (dollars in thousands)
Estimated Revenue
Recurring
or Non-Rec
Fund
Affected
FY06
FY07
FY08
1,239.5
9,772.5 Recurring Educational Re-
tirement Fund
(Parenthesis ( ) Indicate Expenditure Decreases)
Relates to: SB 206, SB 300 and HB 100
SOURCES OF INFORMATION
LFC Files
Responses Received From
Educational Retirement Board (ERB)
SUMMARY
Synopsis of Bill
Senate 541 seeks to improve the actuarial solvency of the Educational Retirement Fund by in-
creasing member contributions to the fund as follows: FY 2007, from 7.75 percent to 7.8 per-
cent; FY 2008, from 7.825 percent to 8.2 percent; on or after July 1, 2008, from 7.9 percent to
8.6 percent.
FISCAL IMPLICATIONS
This bill will improve the actuarial position of the ERB by providing for increased contributions
from current employees. The chart below shows how the contribution rates will change and the
additional revenue:
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Senate Bill 541-- Page
2
Fiscal Year
Member Contribution
Rate under Current
Law (SB 181)
Member Contribu-
tion Rate under SB
541
Additional Revenue
from SB 541 (000ís)
FY 2007
7.750%
7.8%
$1,239.5
FY 2008
7.825%
8.2%
$9,772.5
FY 2009 and thereafter
7.90%
8.6%
$18,991.0
When the contribution rate increase is fully phased-in during FY 09, it will bring in $18.9 million
more in recurring revenue.
ERBís actuaries project that employee contribution rate increases in SB 541 will improve ERBís
solvency as follows:
ē
ERB will reach the 80% funded ratio at the end of FY17, two years earlier than currently pro-
jected.
ē
ERB will have a funding period of 25.2 years to amortize its unfunded actuarial liability at
the end of FY11, an improvement over the current projection of 29.2 years at the end of
FY11.
ē
The actuarially required contribution (ARC) would decrease from 12.86% to 12.20% of pay-
roll in FY12. The ARC represents the required employer contribution to pay benefits for cur-
rent employees and to amortize the unfunded actuarial liability (UAAL) within 30 years.
SIGNIFICANT ISSUES
The higher employee contributions implemented by SB 541 will improve ERBís solvency but
will lead to a reduction in teacher take home pay. The ERB annual payroll deduction for a
teacher earning $40,000 would be $3,440 under SB 541, an increase of $220 over the current rate
for FY09 in statute.
According to ERBís actuary, ERB in FY05 had one of the highest employee contribution rates of
any teacher pension plan before the increases in SB 181 and additional increases proposed by SB
541. ERBís actuary also notes that the existing contribution rate for ERB employees correlates
to a better benefit structure than many other teacher pension plans. However, ERBís benefit
structure is less generous that the state employees retirement plan in NM (PERA). Educational
employees currently contribute 7.675% in FY06, compared to the state employee contribution
rate of 7.42% of pay.
ADMINISTRATIVE IMPLICATIONS
ERB notes that there may be some administrative issues with carrying out other aspects of this
bill due to ERBís current retirement information systems. There would be some cost to repro-
gram the system.
OTHER SUBSTANTIVE ISSUES
SB 181 passed during the 2005 session will increase employer contributions to ERB over seven
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Senate Bill 541-- Page
3
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 important to note that these ac-
tuarial projections are dependent on important assumptions on teacher pay growth, rate of re-
tirements, and 8% investment return holding firm.
RELATIONSHIP
SB 206 relates as it seeks to improve ERB actuarial solvency by changing the retirement eligibil-
ity rule for new hires starting in FY07 by moving to a rule of 80 (years of service + member age)
from the current rule of 75. SB 300 and SB 100 seek to improve ERB actuarial solvency by
changing the rules of the retiree return to work program.
WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.
Current contribution levels would remain in place. The employer & employee contribution in-
creases implemented in SB 181 during the 2005 session will fix ERBís underfunding issue, as-
suming actuarial assumptions on demographics, teacher pay, and investment return hold.
GG/mt