New Mexico Governor Backs Linking Pension COLAs to Investment Performance

A proposal seeking to reform the way the New Mexico public pension system provides benefits to its retirees has received a key endorsement from Gov. Michelle Lujan Grisham. The goal: clear the state pension system’s $6.6 billion unfunded liability within 25 years and make it solvent.

To do this, the New Mexico Public Employees’ Retirement Association plans to adopt a new “profit-sharing” model that would align adjustments with the pension portfolio’s investment performance, with the potential to raise cost of living adjustments (COLAs) as high as 3%.

It would also mandate that beneficiaries see a static 2.5% COLA, an increase from the current 2%, and eliminate the seven-year wait period to qualify for COLAs, decreasing it to about two years.

Additionally, the plan intends to incentivize employees to remain in the labor force and retire at an older age by eliminating the current earnings cap of 90%.

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A draft of the legislation mandates employers and active employees to pay a 0.5% annual increase in their retirement contributions each year for four years, while delaying contribution increases to municipal and county workers for two years.

“This is a great thing,” New Mexico PERA Chief Investment Officer Dominic Garcia told CIO. “I appreciate being part of the task force and I think it will come up with a good solution.”

Moody’s identified the state’s pension liability as a cause for concern in its June 2019 analysis of the state’s credit rating. If enacted, the reform is expected to immediately reduce the unfunded PERA liability by $700 million.

“We must be proactive,” Grisham said in a statement. “A kick-the-can-down-the-road approach when we have a multi-billion-dollar unfunded liability hanging over employees’ and retirees’ heads is unacceptable. Left unattended, that shortfall will, sooner than later, obligate painful cuts and wreak havoc on future generations of retirees—if we do not come together and act now.”

Wayne Propst, executive director of the PERA, said he believes the next economic downturn could leave the state with no feasible avenue to pay down its unfunded liabilities if integral changes to the system are not completed beforehand.

New Mexico ERB Beats Peers, Logging a 7.29% Return

Tags: COLA, Legislation, New Mexico, New Mexico Public Employees Retirement Association (PERA), Pension Plans, Reform, solvency

Perhaps the only thing certain about the expected performance of the global economy in 2020 is that a lot of uncertainty abounds. There is always some elusiveness in economic outlooks because no forecaster has a crystal ball, but uncertainty seems to the prevailing theme this holiday season.

The 2020 US election, Brexit, and ongoing trade tensions are expected to provide the greatest source of uncertainty, according to economic forecasters.

Zehrid Osmani of equity specialists Martin Currie said the US elections and Brexit are the “wild cards” in 2020 and “have the potential to impact markets against a backdrop of low inflation and muted growth.”

Osmani said that because the US presidential could be close it will bring some focus on economic policies of the various candidates. That will have implications for share price volatility of cyclical sectors such as financials and healthcare.

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“Clearly no one has any insights, but there are other considerations to be taken into account,” wrote Osmani in his 2020 economic outlook. “Such as the potential for the current administration to push for supportive economic measures and/or trade policies to engineer more economic support in the run up to the election, in order to win more of the electorate.”

Osmani also said “Brexit uncertainty remains high” against the backdrop of the UK general election.

“It is uncertain whether the Conservatives will manage to achieve a majority in parliament, which would permit them to have more support for enacting the latest Brexit deal,” said Osmani. “The stakes are high, with alternative parties campaigning either with the prospect of a second referendum (Labour party), or an outright reversal of Brexit (Liberal Democrats). This will be an important focal point in the run up to the end of the year, with implications for the UK and EU economic outlook.”

Financial services firm ING said in its most recent monthly economic update that “election uncertainty continues” as polling suggests the US election in 2020 will be close. ING said polls indicate a centrist democrat is more likely to defeat Trump than a progressive.

“If this is the case we will likely see more emphasis on infrastructure spending versus tax cuts from Trump as the key policy thrust, with more regulatory oversight of tech industries and a focus on greener energy to boot,” said ING. But it said “another four years under Donald Trump would likely to result in broader use of tariffs as a tool for generating trade ‘wins.’”

ING said that if a centrist democrat wins the election it expects the US would be prepared to work more closely with Europe to get a re-orientated global trade policy with less emphasis on tariffs as the starting point.

The firm also said that 2020 is “set to be another choppy year” for Brexit and the UK economy.

“Whatever the outcome, we think the uncertain political climate will continue to weigh on economic activity as we head into 2020,” said ING. “For instance, even if the Brexit deal is ratified early next year, concerns about the length of the standstill transition period will quickly resurface.”

A Bank of Canada official reflected the same measure of uncertainty. Carolyn Wilkins, the bank’s senior deputy governor, said that “in a world that seems more and more uncertain” trade wars and financial vulnerabilities such as ballooning worldwide debt are key sources of economic uncertainty and financial stress. Wilkins was speaking at the International Finance Club of Montreal in November.

“Uncertainty about trade policy remains high. This uncertainty has caused a global slowdown and even fears of a global recession,” said Wilkins, adding that the trade war isn’t the only source of uncertainty. “There’s Brexit, tensions in the Middle East and social unrest in Hong Kong and some countries in Latin America. Risk managers here today know how difficult it is to design business strategies in this environment.”

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