New Mexico Governor Backs Linking Pension COLAs to Investment Performance

Plan aims to eliminate the state retirement system’s $6.6 billion unfunded liability.

A proposal seeking to reform the way the New Mexico public pension system provides benefits to its retirees has received a key endorsement from Gov. Michelle Lujan Grisham. The goal: clear the state pension system’s $6.6 billion unfunded liability within 25 years and make it solvent.

To do this, the New Mexico Public Employees’ Retirement Association plans to adopt a new “profit-sharing” model that would align adjustments with the pension portfolio’s investment performance, with the potential to raise cost of living adjustments (COLAs) as high as 3%.

It would also mandate that beneficiaries see a static 2.5% COLA, an increase from the current 2%, and eliminate the seven-year wait period to qualify for COLAs, decreasing it to about two years.

Additionally, the plan intends to incentivize employees to remain in the labor force and retire at an older age by eliminating the current earnings cap of 90%.

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A draft of the legislation mandates employers and active employees to pay a 0.5% annual increase in their retirement contributions each year for four years, while delaying contribution increases to municipal and county workers for two years.

“This is a great thing,” New Mexico PERA Chief Investment Officer Dominic Garcia told CIO. “I appreciate being part of the task force and I think it will come up with a good solution.”

Moody’s identified the state’s pension liability as a cause for concern in its June 2019 analysis of the state’s credit rating. If enacted, the reform is expected to immediately reduce the unfunded PERA liability by $700 million.

“We must be proactive,” Grisham said in a statement. “A kick-the-can-down-the-road approach when we have a multi-billion-dollar unfunded liability hanging over employees’ and retirees’ heads is unacceptable. Left unattended, that shortfall will, sooner than later, obligate painful cuts and wreak havoc on future generations of retirees—if we do not come together and act now.”

Wayne Propst, executive director of the PERA, said he believes the next economic downturn could leave the state with no feasible avenue to pay down its unfunded liabilities if integral changes to the system are not completed beforehand.

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