Members of the Senate Finance Committee who thought New Mexico’s two state-sponsored pension plans are doing pretty well and just need some tweaking to stay financially secure received a splash of ice-cold water on Monday (Jan. 23) when two financial analysts said just the opposite.

“The numbers are actually worse than they appear,” said Sean McShea, a fixed-income portfolio manager for Ryan Labs Asset Management out of New York City.

And Brad Day, a retired Albuquerque business owner who specialized in retirement pension plans, urged committee members to “get off the road we’re on now, which is a road to nowhere.”

The Educational Retirement Board (ERB) and the Public Employees Retirement Assocation (PERA) comprise two state-supported pensions. In recent committee meeting hearings in the Roundhouse, leaders from the ERB and PERA acknowledged to lawmakers that adjustments need to be made to keep their plans solvent into the future as more and more baby boomers retire and say their respective boards and members are willing to refine their plans.

But McShea and Day painted a much bleaker picture Monday, saying changes on the margins are not enough.

“We all know there’s going to be a retirement crisis in 2020,” McShea said adding, “I think one day we’ll look at municipal debt and everything is fine but the next day we’ll have an epiphany and everything has changed for the worse.”

Both McShea and Day also called into question the expected return on investments for the state pension plans, posted at 7.75 percent per year — a number they say is way too high.

Day — who is actually a trustee at the ERB – said unless fundamental changes are made, “It’s going to raise unfunded liabilities to a level that is catastrophic.”

Day told the committee he recommends eliminating the cost of living adjustment to the ERB plan and raising the minimum retirement age at the ERB to 62. Day said he’s made these recommendations to the ERB but “I’m the only private sector person on the ERB … I get out-voted virtually every time … The recommendation of the ERB [board] in my opinion was like spitting in the ocean … it will have practically no effect.”

In an interview with Capitol Report New Mexico, Day said, “The taxpayers are being soaked on these plans and they don’t even know it.” Day also expressed alarm over the Retiree Health Plan, which is governed by the New Mexico Retiree Health Care Authority.

McShea told committee members the pension plans rely too heavily on amortization (paying off debts in regular installments) and what financial people call “smoothing” of financial figures and told Capitol Report New Mexico, “the accounting for this stuff is intellectually dishonest.” McShea handed out some financial data for New Mexico to the committee members.

Here are some of those numbers (click on the chart to see it unobstructed):

Committee members looked stunned after listening to Day and McShea.

“We recognize the impending doom,” Sen. Carlos Cisneros (D-Questa) said while Sen. Sue Wilson Beffort (R-Sandia Park) said, “We hear you, you’re telling us we haven’t been agressive enough.”

Committee chairman John Arthur Smith (D-Deming), who has warned of the pension issue for years and scolded some PERA representatives on Monday for being overly rosy in previous estimates, told Capitol Report after the hearing: “I’ve been tracking the pension issue and try to something to stabilize the funds for probably 12-14 years and obviously there’s been a ton of pushback from different advocacy groups that were in opposition to that. I guess the only thing positive that’s happening now is we’re getting more people to start paying attention to the fact that, in their mind, we may have a problem. Well, it’s not a question of we may have a problem, we do have a problem — a massive problem.”

Smith says he thinks there’s a middle path between the comments made by McShea/Day and the more modest reforms the ERB and PERA boards have advocated, with Smith saying the boards “probably don’t have the intestinal fortitude to make those decisions.”

Rhode Island has drawn national attention in regards to its state pension plans. Rhode Island lawmakers established one of the most generous retirement benefits packages in the US but the ensuing $7 billion unfunded liability forced Gov. Lincoln Chaffee and a majority of Democrats in both chambers of the statehouse to agree to a major overhaul of the pension system that included raising retirement ages and suspending cost of living adjustments.

“The first wave on the east coast is probably going to be Rhode Island,” Sen. Smith said, “and I think you’re going to see that move west.”

But what about those who say that people like Smith and McShea are sounding too much like Wisconsin Gov. Scott Walker? We asked each of them about the likely political reaction to what they’re saying:

 

 

Unlike a lot of financial types who make the sometimes dull talk of fiscal issues even more dull, McShea is refreshingly plain-spoken. Here’s the entire interview Capitol Report New Mexico conducted with him right after the committee meeting hearing. It runs just under five minutes:

 

And here’s the complete interview with Sen. Smith:

 

We’ll post same financial data that McShea provided the committee ASAP.

 
Update: Here are the data:

(Thanks to Beverly Kellam for getting the links to work for us. By the way, she is the proud mother of Reed Kellam, who won the Santa Fe County Spelling Bee on Tuesday. Capitol Report New Mexico runs with some pretty smart company.)