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State leads in public payroll: Huge pension increase looms

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By Harold Morgan

To fully fund New Mexico’s public sector pension obligations, both state and local, within 30 years will require an immediate tax increase of $1,756 per household per year.
That puts us ninth nationally in what might be called the ranking of how well states have ignored their pension obligations. That statement is a little overly nasty.
The Legislative Finance Committee and others have a fair record of raising the issue over the past few years. But the accomplishment is little.
Five states will have to cough up more than $2,000 per household per year. They are, in order, New Jersey, the champ at $2,475; New York; Oregon; Wyoming; and Ohio.
The problem is accounting, not cash, for the moment. As with any investment, one picks a rate of return, an annual percentage expected to be earned on the cash invested. If the idea is to have, say, $1,000, in the future, an amount of money is set aside and invested.
If it happens, the rate of return assumed will turn the original amount into $1,000. The flaw is that the assumed rate of return has to make sense, if there is to be a reasonable chance of it happening.
The usual rate of return used in public pension accounting is eight percent. That doesn’t make sense, probably never has. It certainly doesn’t today.
The eight percent has nothing to do with the risk of investing the money set aside from employee paychecks and government matches.
Using a lower assumed rate means more upfront cash. This news comes from a new paper, “The Revenue Demands of Public Employee Pension Promises.” The authors are Robert Novy-Marx of the University of Rochester and Joshua D. Rauh of the Kellogg School of Management at Northwestern University. Find the report at  www.kellogg.northwestern.edu/faculty/rauh/research/RDPEPP.pdf.
For those interested, Novy-Marx and Rauh do the math. They ask a basic question: “If states and local governments are going to pay pensions under current policies, how much more revenue will need to be devoted to these systems?”
Besides coming up with the money, New Mexico may face an additional hit because people may decide to avoid the additional taxes and move elsewhere. This would worsen our problem of getting a small portion of our population growth from tax-paying grownups.
New Mexico spends 6.2 percent of the gross state product on state and local government payroll. That’s the highest in the nation, and a number offering ample fodder for people arguing we depend too much on government. “Depend,” though, doesn’t seem quite the right word.
Certainly there seems lost the connection between the spending of tax revenue and the fact people providing that revenue work in the public and private sectors or have investments.
Our state and local employees lead in contributions to pension plans as a percentage of payroll, tax revenue and gross state product. Under one assumption about growth of gross state product, New Mexico must contribute 19.2 percent of its own revenue to pensions, the highest portion of any state.  
In addition to unveiling the financial blow to all of us required to pay state and local government pension bills, the analysis should end the debate about the relative size of government in New Mexico.
The debate has revolved around state employees per capita. I’ve never quite accepted that measure because of the apples and oranges and the Los Alamos National Laboratory employees formerly in the number.
By using gross state product, a measure similar to gross national product and amounting to the total value of everything produced in each state, Novy-Marx and Rauh have provided a number applicable across states, all apples in this one. Again, we’re the number one bad apple.

Harold Morgan
© New Mexico News Services 2011