Patricia “Patty” French, the board chair of the Public Employees Retirement Association, had an … interesting piece in New Mexico Political Report this week. Thanks to reforms adopted in 2013, the official beamed, PERA is “projected to meet our goal of being 100% funded by 2043.”
Feeling better about the Land of Enchantment’s long-term fiscal solvency now? Probably not. But there’s reason for more worry. As the Pew Charitable Trusts recently documented, New Mexico’s total unfunded liabilities — pensions and healthcare for government workers, as well as bonded debt — are quite disturbing. When ranked according to share of state personal income, New Mexico is sixth from the bottom:
Give French her due. There’s no question that 2013’s pension-reform reform package was a decent first step. Among other things, it reduced cost-of-living (COLA) adjustments from 3 percent to 2 percent for most beneficiaries, delayed COLA eligibility, increased employee contributions, and lengthened the vesting period.
But the ultimate answer to New Mexico’s mammoth pension liability remains a full transfer of all new employees to a defined-contribution system. A flexible, modern approach to retirement income would be good for workers and taxpayers alike. Rest assured, recognizing the power of state-employee unions, legislators’ desire to shift to a 401(k) system is low.
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Here is a telling quote from the French article:”We recently adopted a new strategy for investing PERA’s $14 billion Fund that prioritizes lessening risk in the portfolio. The Board will also look at reducing our investment return projection from the current 7.75% to what we believe is a more realistic future rate.”
As has been stated many times before on this blog, assuming an investment return of 7.75%, these retirement funds are only 60 to 70% currently funded. If a more realistic expected rate of return of 3 to 4% is used, the funds are only 25 to 30% currently funded.
A 3.18% return would be required just to accommodate CPI average increases for the past 100 years
But the CPI is AT LEAST 30% overstated compared to a true market basket
My portfolio always has been based on a 3.5% return to me, allows for the CPI, and is spread among index funds and other vehicles and not allowed to be in the hot little fingers of fund “managers”, which is where great numbers of public investment dollars reside; they do not do well overall.
Sensible investment has resulted in returns of 9-14%, including since 2007.
Based on realistic expectations, PERA is broke, and the New Mexico economy based on union government workers (Who produce no product, and must rely on poorly-paid private sector workers to finance them) is not in a survivable situation. Defined contribution is the only answer which I know that can work, but you can rely on government to limit the investment opportunities available through their crony capitalist buds.