Pension Sustainability: New Mexico

Retaining Effective Teachers Policy

Goal

The state should ensure that excessive resources are not committed to funding teachers' pension systems.

Does not meet
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Sustainability: New Mexico results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/NM-Pension-Sustainability-9

Analysis of New Mexico's policies

As of June 30, 2010, the most recent date for which an actuarial valuation is available, New Mexico's pension system for teachers is 65.7 percent funded and has a 62.5-year amortization period. This means that if the plan earns its assumed rate of return and maintains current contribution rates, it would take the state over 60 years to pay off its unfunded liabilities. Neither the state's funding ratio nor its amortization period meets conventional standards, and the state's system is not financially sustainable according to actuarial benchmarks.

In addition, New Mexico commits excessive resources toward its teachers' retirement system. For employees that make greater than $20,000 a year, the current employer contribution rate of 9.915 percent and employee contribution rate of 11.15 percent are too high, in light of the fact that local districts must also contribute 6.2 percent to Social Security. For those that make less income, the rates are 12.4 percent for employers and 7.9 percent for employees. These rates are set by statute that gradually increased both employer and employee contributions. The statute originally set increases to be fully implemented by 2012, but that was postponed in 2011. While the total contribution rate will remain the same, the burden will continue to be shifted to employees that make greater than $20,000. 

When fully implemented, the total combined contribution rate will be 21.8 percent. While this rate and its future increases are designed to enable the state to pay off liabilities, it does so at great cost, precluding New Mexico from spending those funds on other, more immediate means to retain talented teachers.

Citation

Recommendations for New Mexico

Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded and had an amortization period of 30 years or less to allow more protection during financial downturns. However, New Mexico should consider ways to improve its funding level without raising the contributions of school districts and teachers. In fact, the state should work to decrease employer contributions. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention. Improving funding levels necessitates, in part, systemic changes in the state's pension system. Goals 4-G and 4-I  provide suggestions for pension system structures that are both sustainable and fair.

State response to our analysis

New Mexico explained that beginning July 1, 2009, in order to reduce the state's General Fund expenses, there has been a "swap" of contributions from the employer to the employee. For FY 10 and FY 11, the swap rate was 1.5 percent.  For FY 12, the swap rate is 3.25 percent. 

Last word

New Mexico has not been meeting its actuarially determined annual required contributions for the previous six years (all the years included in the most recent actuarial report).  If previous payments had been made, then a "swap" resulting in increased employee contribution rates may not have been necessary.

Research rationale

NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.

For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Robert Costrell and Michael Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute (2011).

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see Joshua Furgeson, Robert P. Strauss, and William B. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy (Summer, 2006).

For examples of how teacher pension systems inhibit teacher mobility, see Robert Costrell and Michael Podgursky, "Golden Handcuffs," Education Next, (Winter, 2010).

For additional information on state pension systems, see Susanna Loeb, and Luke Miller. "State Teacher Policies: What Are They, What Are Their Effects, and What Are Their Implications for School Finance?" Stanford University: Institute for Research on Education Policy and Practice (2006); and Janet Hansen, "Teacher Pensions: A Background Paper", published through the Committee for Economic Development (May, 2008).

For further evidence supporting NCTQ's teacher pension standards, see "Public Employees' Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit and Defined Contribution Retirement Plans." The Segal Group (2010).