Before 2020, New Mexico’s retirees received a guaranteed 2 percent annual cost-of-living adjustment (COLA). Public employees have long relied on the Public Employees Retirement Association (PERA) for retirement security, a security that has been undermined by the fund’s increasing unfunded liability. In 2020, the state addressed the pension solvency crisis by passing Senate Bill 72 (SB 72), which replaced the guaranteed cost-of-living adjustment with a variable, profit-sharing model tied to investment returns and pension fund health. Now, efforts to reverse that reform are resurfacing.
Recently, the New Mexico Senate voted 42-0 to pass Senate Memorial 31, sponsored by Sen. Liz Stefanics and four colleagues, directing a nine-member working group to “consider improvements to restore compounding annual adjustments” and “consider options to restore cost-of-living adjustments [COLA] for retirees that are tied more closely to actual cost-of-living changes.” The memorial is non-binding and calls for no expenditure, but the movement behind it is real, and the debate over what the working group should recommend is just beginning.
The mandate reflects organized political pressure. NM Public Retirees, an advocacy group representing the state’s public-sector retirees, argues that state law prior to 2020 “promised us 2% COLAs,” and that the legislature must restore these adjustments. Acting on either push would be a mistake. By treating COLA restoration as a simple fix, New Mexico would set itself on a path to repeat the failures that made the 2020 reform necessary in the first place. The promise worth keeping to retirees isn’t a specific number on a formula, but the promise of a solvent pension fund.
When SB 72 replaced the guarantee of a specific COLA figure with a variable profit-sharing model, retirees felt the difference. Inflation and rising living costs have eaten away at pension benefits, prompting retirees to pressure lawmakers to bring back expensive guaranteed COLA benefits. Since 2020, pension benefits have grown roughly 1.6 percent, while the cost of living has risen by 26 percent. There is clearly cause for frustration, but the policy response under discussion would make the underlying problem worse, not better.
PERA carries an unfunded liability standing at over $9 billion. The fund holds $17.3 billion in assets against $26.5 billion in promised benefits, leaving it only 65.4 percent funded. This ranks 42nd in the nation, according to Reason Foundation’s annual pension solvency rankings. PERA’s executive director, Greg Trujillo, has put the cost of restoring the pre-SB 72 COLA structures at approximately $2 billion. No one has yet specified where that money comes from without weakening a major state trust fund that retirees depend on and taxpayers are legally committed to backing.
PERA already has a COLA
Rather than eliminating the COLA entirely, SB 72 tied it to investment returns and the fund’s overall health. The fund’s actuaries determined this was necessary because the old, guaranteed structure was unsustainable. As the reformed benefit now stands, low COLAs are the signal that the fund is not healthy enough to sustain higher payouts.
The fund currently pays approximately $1.5 billion in retirement benefits each year while taking in just over $1 billion in contributions. That gap is covered entirely by investment returns. As demonstrated by net pension fund declines in 2020 and 2022, by $800 million and $1.4 billion, respectively, these returns cannot be counted on in any given year. This is why the years that produced 0.5 and 0.63 percent COLAs were not anomalies to be corrected. The fund has little margin for errors when markets underperform, and the profit-sharing model protects the fund’s asset base during periods of below-target returns.
Campaign promises make bad pension policy
A guaranteed COLA adds a permanent compounding liability. Every retiree who receives a guaranteed 2 or 3 percent annual increase carries that increment forward permanently, and that higher base earns another increase the following year. On a fund already $9.2 billion short on its promises, with $26 billion in total obligations, even a 1 percent difference in the annual COLA rate compounds into billions in additional unfunded liabilities. Layering a permanent obligation onto PERA is the same actuarial optimism trap that drove the fund to decades of underfunding in the first place.
Because of the looming risk of insolvency, the 2020 reforms were met with broad support. AFSCME Council 18, the Communications Workers of America, the New Mexico Professional Firefighters Association, the Fraternal Order of Police, and the National Association of Police Officers all endorsed the bill. These representatives of the interests of retirees signed off on a profit-sharing model because they understood the math and saw that their retirees were reliant on a fund racing towards insolvency.
SB 72 passed 25 to 15 in a Democratic-controlled Senate, championed by Gov. Michelle Lujan Grisham, who called the reforms necessary to ensure “New Mexico can keep its promises to current and future retirees” and the fund remains solvent. NM Public Retirees’ framing of SB 72 as a broken promise rewrites the history of a bill that was based on a broad consensus on how best to protect the fund that so many New Mexicans rely on.
Pressure to restore the COLA has also reached the gubernatorial race. Republican candidate Gregg Hull has said he wants to make long-term solvency a priority and has advocated for being honest with current workers and retirees about the full picture. That instinct is right, and he should hold on to it. Democrat Deb Haaland has pledged “to ensure we adjust for the reality that the cost of living across every sector has risen” and promised to “work with the Legislature and our unions” on the issue. That statement is non-specific, and on a question with a $2 billion price tag, a pledge to “adjust” without identifying a funding source or actuarial cost isn’t a plan.
The same test should apply to any proposal. Any efforts to increase retiree benefits should identify the actuarial cost, the funding source, and the effect on the fund’s health. Whatever form that takes, any change must not negatively impact the fund’s solvency.
The profit-sharing model already grants higher COLAs as the funded ratio improves. The path to improving COLAs already exists through improving the funding of PERA. New Mexico’s retirees deserve retirement stability and a legislature that will finish the job rather than walk back meaningful reforms under pressure. The promise worth keeping to retirees is a solvent fund to protect future retirees and taxpayers.