There’s nothing ‘short-term’ about New Mexico’s proposed pension cost-of-living adjustment

New Mexico’s public pension system has only 65% of the funding needed to pay promised benefits, and its contributions fall about $160 million short each year. New Mexico ranks among the 10 states with the worst-funded pension systems in the country.

Yet, the agency’s leadership is asking lawmakers for an additional $250 million, not to pay this debt, but to expand benefits. Adding a benefit increase on top of that existing shortfall would undercut the state’s 2020 pension reforms and push the bill onto future taxpayers for generations.

In an Oct. 13 meeting of New Mexico’s Investments and Pensions Oversight Committee, Public Employees Retirement Association (PERA) Executive Director Greg Trujillo discussed a proposal for a one-time $250 million general fund appropriation to guarantee retirees a minimum 1.5% compounding cost-of-living adjustment (COLA) for the next seven years. PERA says the request responds to inflation: since a profit-sharing COLA created by a 2020 reform, Senate Bill 72, took effect, most retirees have received between 0.5% and 0.63% a year, while consumer prices rose 3.7% year over year ending in September. Retirees’ frustrations are based in fact. But the cost-of-living adjustment proposal’s design shows why it’s the wrong fix.

Passing the debt to future generations

The proposal has been billed as “short-term” relief, but the consequences would likely be long-lasting. PERA would pay each retiree’s statutory cost-of-living adjustment, then draw on this new appropriation to top it up to 1.5 percent. But these increases are explicitly compounding, and they will not expire even when the money does. PERA’s own materials acknowledge that once a compounding COLA is paid, it becomes part of a retiree’s base benefit. Most importantly, it is constitutionally protected, meaning the state is obligated to fund a benefit even if revenue becomes tight. Every addition granted in the next seven years becomes a lifelong obligation of the pension fund.

Seven years is not likely to be the end of the discussion either. The proposal explicitly invites the legislature to keep funding supplemental COLAs year by year once the appropriation runs out. Retirees who receive 1.5% increases for seven straight years would seem likely to treat any future attempt to stray from this as a cut to benefits. 

This new expenditure would cut into the core of the fiscal prudence SB 72 was attempting to promote. Before 2020, Public Employees Retirement Association retirees would receive a guaranteed 2% COLA no matter how the fund performed. The 2020 reform replaced that guarantee with a profit-sharing arrangement, where retirees get at least 0.5%, and even more when smoothed investment returns beat the fund’s 7.25% assumption, scaled by the plan’s funded ratio. This mechanism ensures retirees share the upside when the plan is on track to fully fund promised benefits and holds down costs when it is not. 

To the credit of PERA, the cost-of-living adjustment proposal is prefunded, meaning that the requested $250 million is expected to cover the cost if PERA earns its assumed 7.25% return, higher than the national average assumption of 6.9%. According to Reason Foundation’s 2025 Pension Solvency and Performance Report, the system’s 24-year average returns were 5.7%. PERA’s own modeling gives the fund just a 37% chance of reaching full funding over the next 30 years. If returns fall short, these permanent increases add to the unfunded liability and eventually fall on taxpayers and public employers.

The bigger problem is what the $250 million requested for this proposal would not do. PERA’s unfunded liability stands at $9.7 billion. The state’s pension system is only 65.2% funded. It also maintains a 50-year amortization period, which is well outside of established standards for paying pension debt. PERA reports that it collects about $160 million less each year than it needs to pay off its debt on a 25-year schedule. 

PERA’s largest plan, the State General Division, covers state government employees. It is 54% funded, and PERA lists its amortization period as N/A. That means at current contribution rates, it never pays off its unfunded liability. That division’s annual contribution shortfall, about $145 million, exceeds the entire $113 million the COLA proposal would send to state divisions.

A better path forward for PERA retirees

The best COLA policy for PERA retirees is a well-funded PERA. Under SB 72’s formula, the COLA rises with the plan’s funded ratio, and once the fund reaches 100%, the cap on annual COLAs rises from 3% to 5%. PERA’s own legislative priorities say exactly this, noting that reaching full funding would “have a positive effect on retiree COLAs.” Every dollar that pays the unfunded liability raises future COLAs through the formula without creating a new guaranteed obligation. PERA estimated in 2024 that a one-time $500 million deposit would cut its funding period by 16 years. Half that deposit would still take years off that timeline.

For the average retiree, the payoff is modest. The average pension of $32,125 moving from a 0.5% to a 1.5% COLA is worth about $320 in the first year, or roughly $27 a month. The question legislators must answer is whether that modest relief is worth creating a liability that would last decades and risk pushing the burden to future generations.

The legislative work group created by Senate Memorial 31 to review the PERA fund is due to deliver its COLA recommendations by Dec. 31. Lawmakers should see PERA’s proposal as a dangerous step away from the framework put in place by SB 72 to protect the system from insolvency. If there is $250 million for PERA, it should go toward paying off the debt that holds COLAs down, not adding a liability that will only deepen it.

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