The New Mexico Senate recently voted 42-0 to pass Senate Memorial 31, directing a working group to consider restoring guaranteed annual cost-of-living adjustments for public retirees that were replaced in 2020 with a variable model. A new commentary from Reason Foundation argues that reversing the 2020 reform would threaten the pension fund's solvency and repeat the failures that made that reform necessary. The report warns that restoring pre-2020 benefits could cost approximately $2 billion and push an already struggling pension system toward insolvency.
The Public Employees Retirement Association (PERA) currently carries an unfunded liability of over $9 billion, holding $17.3 billion in assets against $26.5 billion in promised benefits, leaving it only 65.4 percent funded. This ranks 42nd in the nation, according to Reason Foundation's annual pension solvency rankings. Since 2020, pension benefits have grown roughly 1.6 percent, while the cost of living has risen by 26 percent. The fund currently pays approximately $1.5 billion in retirement benefits each year while taking in just over $1 billion in contributions, with that gap covered entirely by investment returns. The fund experienced net declines of $800 million in 2020 and $1.4 billion in 2022 when markets underperformed.
According to PERA's executive director Greg Trujillo, restoring the pre-2020 COLA structures would cost approximately $2 billion, though no funding source has been identified. The report notes that when the 2020 reforms passed, they had broad support from AFSCME Council 18, the Communications Workers of America, the New Mexico Professional Firefighters Association, the Fraternal Order of Police, and the National Association of Police Officers. Governor Michelle Lujan Grisham championed the reforms as necessary to ensure "New Mexico can keep its promises to current and future retirees" and maintain fund solvency. Senate Bill 72 passed 25 to 15 in a Democratic-controlled Senate, replacing the guaranteed 2 percent annual adjustment with a variable profit-sharing model tied to investment returns and pension fund health.
The report explains that a guaranteed COLA creates a permanent compounding liability, with every retiree's increase carrying forward permanently and earning another increase the following year. On a fund already $9.2 billion short on its promises, even a 1 percent difference in the annual COLA rate compounds into billions in additional unfunded liabilities. The current profit-sharing model was designed specifically because actuaries determined the old guaranteed structure was unsustainable. Low COLAs under the current system signal that the fund isn't healthy enough to sustain higher payouts, and the model protects the fund's asset base during periods of below-target returns. The report argues that because PERA has little margin for error when markets underperform, the years that produced 0.5 and 0.63 percent COLAs weren't anomalies to be corrected but necessary signals of the fund's actual health.
The report concludes that any effort to increase retiree benefits should identify the actuarial cost, the funding source, and the effect on the fund's health, and must not negatively impact solvency. It notes that the profit-sharing model already grants higher COLAs as the funded ratio improves, meaning the path to improving COLAs already exists through improving PERA's funding. Restoring guaranteed benefits would layer permanent obligations onto a fund that nearly became insolvent, repeating the same actuarial optimism that drove decades of underfunding. The promise worth keeping to retirees isn't a specific formula, but a solvent fund that can actually deliver on its commitments.