New Mexico passes bipartisan pension reform
As Illinois elected leaders continue to delay action on pension reform, a broad and bipartisan coalition has succeeded in pushing for reforms to public employee benefits in New Mexico.
New Mexico just became the latest state to help show Illinois the path out of its worst in the nation, $241-billion pension crisis.
On March 2, New Mexico Gov. Michelle Lujan Grisham signed a bill to reform state employee pensions. Grisham said the pension system “was on a path to eventual bankruptcy” without reform and heralded the measure as a way for the state to “keep its promises to current and future retirees.” According to experts writing for the Santa Fe New Mexican, the successful legislative effort was made possible by “an all too rare alignment” of the governor, labor representatives and taxpayers that led to bipartisan support among lawmakers.
Interest groups in support of the plan included firefighter and police unions, the American Federation of State, County and Municipal Employees – which is the largest public sector union in both Illinois and New Mexico – and civic groups representing local governments in the state.
The reforms are intended to address $6.6 billion in unfunded pension debt owed the Public Employees Retirement Association of New Mexico, or PERA, which provides benefits for most state and local employees other than teachers. PERA has about 70% of the money on hand needed to cover past and future promises. That’s significantly better than the roughly 40% funding ratio in Illinois state pension systems.
New Mexico lawmakers took proactive action to keep the funding ratio from declining further, which could threaten employees’ retirement security with insolvency. The reforms passed include a partial freeze to cost of living adjustments, or COLAs, for three years. Future COLAs after the freeze will be variable and pegged to investment returns, a feature that improves sustainability by aligning the growth in pension benefits with the ability to pay them.
In Illinois, all participants in state retirement systems along with some local retirement systems receive a 3% guaranteed post-retirement raise regardless of actual inflation or investment returns. If investments in the pension funds perform poorly or pension costs grow faster than expected, all of the cost is borne by taxpayers.
The New Mexico measure would also gradually increase both employee and taxpayer contributions to the pension funds on a temporary basis, then reduce them when the funds regained health. Pension reform should be sensitive to specific facts and local context. The cure needs to be based in the diagnosis. Illinois state and local governments already spend the most in the nation on pensions as a percentage of their revenue. One of the outcomes of successful pension reform for the Prairie State must be to decrease, rather than increase, the cost of pensions to taxpayers.
Illinois lawmakers have not taken meaningful action to address the pension debt since the state Supreme Court blocked an earlier reform effort in 2015. The Court relied on a restrictive interpretation of the pension clause in the state constitution, ruling that public employees have a contractual right to the entire pension benefit formula starting the day an individual is hired. This ruling currently prevents lawmakers from changing any aspect of pension benefits for current workers and retirees, including for unearned future benefits.
As a result of the court’s ruling, the only way for Illinois to solve its pension crisis is with a constitutional amendment. Only two other states, Alaska and New York, legally guarantee future pension benefits in the state constitution.
The Illinois Policy Institute has proposed a plan that would still protect earned benefits but allow for adjustments in future benefit growth to keep pensions affordable and sustainable for taxpayers. Among other changes, the plan would replace the 3% compounding increases with a true COLA tied to inflation and freeze COLAs based on the length of retirement to allow inflation to catch up to past increases. New workers would be placed in 401(k)-style defined contribution retirement plans.
An actuarial analysis shows the institute’s constitutional pension reform can save an average of $2 billion annually and more than $50 billion over 25 years. These significant taxpayer savings are achievable while actually increasing the funding target to 100% from the state’s current goal of 90%, fully eliminating the debt. A fully funded pension fund is the only pension promise that retirees can truly count on.
While Illinoisans wait for Springfield, the consequences of pension inaction continue to pile up for taxpayers, the state economy, and poor and disadvantaged residents who rely on public services. New Mexico’s example shows pension reform can benefit all state residents, including public pensioners themselves.
Without reform, the Illinois constitution’s pension clause is an empty promise. State retirement systems could run out of money in as little as 19 years, potentially leaving public servants without a financially secure retirement.
Pritzker should heed the words of his fellow Democrat, Grisham: “These changes will protect what is one of the best pension plans in the country and an essential tool in recruiting and retaining our excellent state workforce.”
Pension reform doesn’t mean breaking promises to retirees: It’s the only way to keep them.