Danny Joe Lyle
The Clovis News Journal recently reported the state of New Mexico Educational Retirement Board (ERB) fund is $2.3 billion short of what actuarial studies projected it would grow to over the past three years. That number is closer to $1.7 billion.
The ERB portfolio has for many years held a strong commitment to the equity market. As one might expect, the fund did experience significant losses during the 2000-2002 market downturn. The stock market has strengthened recently, and public pension funds and investment companies are reporting new inflows for the first time in several months.
However, this will not provide full recovery for the ERA. Possible solutions must be considered in order for the retirement plan to become compliant by the Governmental Accounting Standards Board (GASB) and service the needs of its members.
From the peak in early 2000 to its lowest point, the Dow Jones Industrial Index and the S&P 500 Index decreased 50 percent in market value. This decrease has left the ERA fund in a difficult position for long-term funding.
The ERA fund is currently at $6.5 billion and the fund needs $1.7 billion to become fully funded. The ERA actuaries have calculated the time period for full funding is 78 years. The GASB has set a standard for the funding period of 30 years or less.
Obviously the ERA does not comply with the standard since it has a 78-year funding period. Full funding happens when the pension system’s fund is equal to all the money it will need in the future to pay the accrued, or earned, pension benefits of its members. The ERA system has never been fully funded in its 47-year history. This is not unusual for a public pension fund.
The stock market, however, is not the only culprit for declining pension fund values.
When salary increases exceed assumptions, there is an increase in the liabilities of the system above the levels that the contributions were intended to fund. As a result, the ERA is experiencing an increase in its liabilities.
The effect goes beyond the current school year, as increases are compounded through time. This compounding puts an additional burden on the system, causing the current contribution levels to be inadequate for the future.
While a number of strategies exist, the best short-term strategy is to increase the employer contribution. Any solutions, however, will require the support from all members, retirees, educational institutions and the legislature, which contributes to the fund.
Danny Joe Lyle is executive director of New Mexico’s Educational Retirement Board. Contact him at 701 Camino De Los Marquez, Santa Fe 87502. His phone number is 827-8030.