Not Sure That Is Enough

On March 2nd, New Mexico Gov. Michelle Lujan Grisham signed a bill to reform state employee pensions (all, but teachers). The reforms adjust contributions from both employees and taxpayers, partially freeze COLAs for three years, and eliminates automatic COLAs after the 3-year period is over, which will now be based on performance of the fund. The goal was to secure the funded ratio from declining further. Nice goal, but how do the measure above secure anything? They increase funding and reduce benefits, which on the margin will help, but they did nothing to secure the benefits and reduce the volatility of the current asset allocation.

As we’ve witnessed in the last 2-3 weeks, traditional public plan asset allocations are too risky, and New Mexico’s 7.25% ROA is certainly not conservative. If New Mexico’s goal was to actually stabilize and then improve the funded ratio (now 70% on a GASB basis) they should insist that a portion of the assets, perhaps their current fixed income allocation, be used to cash flow match their Retired Lives (RL) liability out 10-years, if possible. This would place the fund on a glide path toward full funding. Allowing the remaining assets to be focused on future liabilities and any residual RL liabilities.

Permitting the fund’s assets to be entirely at the mercy of the markets is a losing game. We’ve witnessed what markets can do to the funded ratios/status of pension plans on so many occasions that one must wonder what it will finally take to once again manage pension plans as lottery systems, where the future liability is discounted to present value terms and secured with the appropriate level of funding. Plan participants shouldn’t have to worry about the promised benefit, but they do because of so many notable failures and legislation that allows for poorly funded plans to seek relief from their obligations. These situations wouldn’t exist if plans were managed versus their liabilities and not some made up ROA.

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