In the waning days of the 2010 legislative session, the need to reform the state’s unfunded retiree system remains. The Rio Grande Foundation has produced studies that outlined New Mexico’s state and local government over-employment and pension problems.
In the latest installment of our ongoing effort to bring attention to this problem, we have released a four-point proposal designed to solve the $25.8 billion unfunded government pension problem. That study, “Fixing New Mexico’s $25.8 billion Unfunded Retiree System” is available at: http://www.riograndefoundation.org/downloads/rgf_nm_unfunded_retiree_system.pdf
New Mexico’s defined benefit retirement system is massively underfunded. The pension system officially reports an unfunded liability of $4.6 billion; however, new analysis by two academic economists finds that the pension system is underfunded by at least $7.5 billion and may be as high as $22.9 billion—or three times greater than the state’s general obligation bond debt. The state Other Post Employment Benefits (OPEB) system, mostly health insurance, is underfunded by at least $2.9 billion.
If the unfunded retiree liabilities are not dealt with soon, the annual required contributions to the retiree system will crowd-out other state spending such as roads and higher education. Fortunately, there are solutions which can be summarized by this straight-forward four-step process:
Step 1—Fix the Public Sector Over-Employment Problem
In 2008, New Mexico’s state and local governments employed 25.3 people for every 100 people employed in the private sector versus the national average ratio of 16.72. If New Mexico’s state and local government ratio was reduced to the national average, then the workforce would be reduced by 56,970 people.
Step 2—Transform Defined Benefit System into a Defined Contribution System
Step 3—Continue to Increase Employee/Retiree Contributions to the Retiree Healthcare System
During the 2009 Legislative Session, the Legislature enacted HB 351 which increased the employer and employee contributions to the retiree healthcare system to 3 percent from 1.95 percent phased-in over 4 years. This is an important first step in correcting the unsustainable retiree healthcare system without resorting to tax increases or budgetary gimmicks. However, more reforms of this nature are needed since there are virtually no assets to offset the $3.1 billion unfunded retiree healthcare liability.
Step 4—Expand the Private Sector
States with larger private sectors will grow faster over time than states with smaller private sectors. Finding ways to help New Mexico’s private sector grow is a win-win for both the public and private sector. One low-cost, high impact way to help the private sector is to perform a thorough review and culling of out-dated regulations. In the end, a larger private sector will generate higher tax revenues which could be used to tackle New Mexico’s unfunded retiree system.