Moody’s Considers New Mexico Pension Reform Credit Positive
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Commentary

Moody’s Considers New Mexico Pension Reform Credit Positive

Pension reforms "will reduce state and participating local governments’ unfunded pension liabilities and susceptibility to investment return volatility.”

In a recent report, the rating agency Moody’s Investors Service tagged New Mexico’s recently enacted, bipartisan pension reform legislation as credit positive, acknowledging its effectiveness in reducing the Public Employees Retirement Association’s (PERA) unfunded pension liabilities and improving the system’s cash flow going forward.

Per Moody’s, the recent reforms to PERA “will reduce state and participating local governments’ unfunded pension liabilities and susceptibility to investment return volatility.”

Indeed, per the Pension Integrity Project’s actuarial projections of SB 72, the legislation will significantly reduce—or even eliminate—PERA’s unfunded status over the next 30 years. This will certainly alleviate stress on New Mexico’s future public budgeting priorities, state taxpayers, and PERA cash flows.

Credit ratings, such as those provided by agencies like Moody’s, are important because they typically influence costs borne by the government, and ultimately taxpayers. When credit ratings improve, states and their taxpayers typically pay lower interest rates on the funds borrowed from bond buyers to finance various public priorities, like road construction and other public infrastructure projects.

As noted in Moody’s commentary, the legislation will also improve PERA cash flows by increasing employer and employee contributions, making cash flows less sensitive to capital market risks, and PERA, which primarily serves New Mexico’s state, municipal, county and public safety workers, less dependent on investment returns in general.

Moody’s stamp of approval is more evidence that Senate Bill 72 was a meaningful first step toward improving the financial health of both PERA and the state of New Mexico. With the recent development of the COVID-19 pandemic and a significant nosedive in financial markets, the people of New Mexico should appreciate the fact that state policymakers effectively improved the state’s pension fund, making it more resilient to capital market volatility and fiscal pressures.

More work needs to be done to match the scale of the current financial challenges pension funds face. And the Pension Integrity Project will continue to engage state leaders and pension stakeholders in New Mexico to find opportunities to further strengthen the state’s retirement systems in the years to come.

Anil Niraula

Anil Niraula is a quantitative policy analyst with Reason Foundation’s Pension Integrity Project.