DALLAS — Moody's Investors Service calls the New Mexico Supreme Court's ruling in favor of the state's new pension reform law a positive credit factor.
The court rejected a challenge to the new law by state retirees on Dec. 19.
"The court's decision is credit positive for New Mexico (Aaa stable) and local governments in the state because it upholds measures that reduced the adjusted net pension liabilities of the state's two cost-sharing pension plans by $2 billion, or 8%," analysts said in the Jan. 10 report. "The reform measures also curb the rate of growth of pension costs for participating governments.
The New Mexico legislature passed two bills in July to reform the Public Employees Retirement Association (PERA) and Educational Retirement Board (ERB). The reforms reduced cost-of-living adjustments and increased employee contribution rates.
As reported by the pension plans, fiscal 2013 unfunded accrued actuarial liability declined by an estimated $1.7 billion for PERA over the prior year, but ERB's liability only declined by $6.7 million because its COLA was not reduced as much. By increasing employee contributions, the reforms also enabled a reduction in the rate of growth of employer contributions.
The unfunded liability declined by $4.4 billion in fiscal 2013, reversing 68% of the increase from the prior year, according to analysts. About $2 billion of the liability reduction was due to reforms, they said.
"The remaining reduction was fueled by strong investment performance over the year and the higher interest rates used to calculate the present value of the liabilities," they said.
Despite the recent improvement, analysts said the average unfunded liability of a contributing local governmental entity of PERA and ERB is approximately three times its operating revenues, significantly higher than the national median of one time.
"Going forward, even with the reforms, the unfunded liabilities will remain elevated, which will be a continued source of risk to local governments participating in the plans," the report said. "Mending the large liabilities would likely require deeper cuts to benefits, more substantial increases in employer and employee contributions, or having a sustained multi-year trend of making contributions at full actuarial required levels."
New Mexico is one of several of states that have enacted cost of living adjustment changes affecting retirees and existing employees. Legal challenges to COLA reductions are currently in progress in a number of states, such as Illinois and Montana.
