Report from Santa Fe; Alice Herter

music Report from Santa Fe is made possible in part by grants from the members of the National Education Association of New Mexico, an organization of professionals who believe that investing in public education is an investment in our state's economic future. The art of communicating science, Los Alamos National Laboratory reaching out and working to make a better New Mexico. I'm already mail us this is report from Santa Fe, our guest today is Alice Herter, who is the executive director of the New Mexico Public Employees Retirement Association. Alex, good talking to you again, it's marvelous, really. Alice, this is a bit of good time because this is the year that marks the 50th anniversary

of PERA. I'm sure historically, you can't serve in your position over there, you're an attorney, of course, an attorney, but nice, but to go back to a little history on this, because we were the last, I guess the last state and the continental United States to provide for retirement for the public employees. Tell us a little bit about that period, then we'll bring it up to date, okay? Okay, you're correct, we were the last state in the continental United States to adopt a public pension plan for public employees. The first state was Massachusetts in 1886. We adopted our program in 1947, so we're, in some respects, a baby program compared to lots of other programs around the country. At that time, after the first decade, in 1955, we had 217 retirees from the program. 217.

The first 10 years, the average pension that we paid was $93 a month, and we had about a total of 8,000 members. That two-thirds of those were from state employment, about one-third from municipal employment. The way that we set up at the time, a certain portion was about 3% of the salary was contributed to PERA, and then the employer would be the employee agency. Contributed a like amount. A like amount, too. To bring it up to date, though, now the educators have their own system, correct? That's correct, the teachers have their own system, right? And that includes all educators and non-coming under PERA. That's correct. Unless there's an educator who happens to be employed with a state agency, occasionally that won't happen. Okay. But if you went in from one job to another, if you started out as a school teacher and then decided you wanted to work for the state, you can't be under both, can you? You can't be under both, but we have what's called reciprocity.

The years of service that you were a teacher will count towards your years of service to be eligible for retirement. So you can combine the years of service, your teacher's portion of the pension will still be paid from the educational retirement system. Your public employment, say with a state agency, will be paid from PERA. You get one pension, it's combined, but you can add the years of service, which has been a very nice feature and provided some portability for people who say, start out teaching, decide they don't want to remain in teaching, or start out in state government and decide they want to teach. Now, I go back to 1957 in New Mexico and PERA then was rather new. It was only 10 years old, and I can remember people saying, well, it's not enough really to retire upon, but prices were not as high either. But it's interesting today, if I'm correct, I guess the average retirement is up around $21,000 a year, in fact, the $12,000, maybe $137,000, but that's almost as much in the little hundred figures they got for a total a month in the early days, and trying to keep up with

the times. Of course, I guess there are two major problems you always have. First is the security of the fund itself, and the second is to take advantage of investments and how the money is invested, but before going into that, can you describe the physical makeup of PERA itself, the staff, and everyone, and what you do to make sure you are abreast of what's happening? Actually, we have a relatively small agency considering the responsibilities that we have. We've grown from one retirement plan back in the days when PERA started 50 years ago to 26 different retirement plans that we administer, and lots of times people don't realize it, but we cover not only state employees, we cover municipal employees, we cover county employees, we cover policemen, firefighters, judges, magistrates, and also legislators. So we have a very diverse retirement program.

Our responsibility is to make sure that we take the monies that come in in the form of contributions from employees and employers, and make certain that we earn enough money on those contributions to be able to pay a retirement pension to our members when they retire. And we've come a long way in the 50 years, Ernie. We've come a long way in terms of our investment capabilities. At one time, all the investing was done by a staff internally, but the investment market is far more sophisticated than the average employee can handle. And we have moved, particularly over the last decade, to having most of our investments managed by professional money managers. We have a competitive process, they compete for these contracts, and we have some of the most outstanding investment managers in the country who now manage the Para Investment Fund.

Do they deal primarily with funds like this where people are not really in it for speculative efforts. They're in it. They want to protect their future, and you still want to take advantage of money growth. But for example, the state in the Mexico has, we have an investment counselor, you know, a investment officer for the state, and you work closely with him, right? We do. They have separate responsibility under the statutes. The State Investment Council is really responsible for the Sevens Tax Permanent Fund and the Land Grant Permanent Fund. Those funds have different statutory purposes than the Para Fund. Our purpose is, we're a sole purpose fund. Our purpose is to provide pensions for people in the future. And that's the way we manage those funds. And the formula that we sort of use, we talk about risk in return. We want to be able to maximize the return, excuse me, maximize the return, and also maintain what we call an acceptable level of risk.

And to give you just some idea, Ernie, of how well we have done with our investment strategy over the last decade. We're just slightly more than a decade. We have grown from about $700 million in the fund to, as of the end of July, $5.7 billion. To billion. We've added $5 billion in a little, a little over a decade. Now, it's still what you would consider to be minimum risk. Right. In investment terms, they talk about acceptable risk and definitely the funds are very safe and secure. In a speculative investing, we don't do venture capital, for instance. We do very, you know, standard investment in standard stocks. You might call S&P 500 stocks as we talk about them and government bonds and that sort of thing. You know, when I go back over the years, you know, people say to me, you know, I'm a sort of, say, yes, and I'm, you know, and I've sort of left you alone. And I had something happen recently, though, and I must ask you about it because, again,

whenever you're handling money, you have to have a degree of vigilance. That's correct. And I got a call from your office and you said, we have caught something where money said gone out and people, and again, you never stop to think of it, but, you know, when someone is in that golden, oldie period where they may even want that money and they're in a retirement home. Right. And then suddenly something happens to them and no one stops to inform your office and say, cut off those monies, well, that's almost the same as we see with retirement, you know, with the social security checks and such. And so it's illegal to do that. The information I had, though, came from your office. Correct. And you had been looking into that, I think, going back to the beginning of this year. Correct. And suddenly I saw someone saying, well, we got a great scandal brewing here. There was nothing new in the scandal, but give us a background, though, so we can know what happened.

Right. And I imagine a lot of this, people wouldn't even notice until they realize the checks are coming. Right. I think, jeez. No one, you know, it's sort of like discovering, you know, candy in the, in the sugar bowl. That's true. What happened, Ernie, actually, is that my staff came to me. Really, it was in the fall, October, November of this year. They had a number of files, there were number of files where people had continued to cash checks after the date that the member had died. And we actually, I, what I did was I had my internal auditor. I called her in and I said, I want you to audit the situation. I want to know how widespread it is and what the problem is. She did that audit, completed it in January. We looked at it, we had, we identified about 120 people, a man into about 180,000 dollars in overpayments where people had died and family members or others had continued to cash the checks.

Because what we had at that point was a kind of voluntary system when someone died and this does often happen, a family member will call P-E-R-A and say, so and so has died. And we will at that time either then change the check so that the beneficiary is paid whoever has been designated or will stop payment if there is no name beneficiary. Once I saw the breadth of the problem, I realized that we really had no system in place to catch this except for the voluntary reporting of many people who did that. And the problem really went back in the audit back as far as 1983. So what we did then in the spring is I talked to other states, talked to them about how they handled the problem. They also had that same problem. Some still hadn't figured out what they were going to do about it. Others had and what we now do is we employ to company that they have a national database. They get most of their information from social security and from vital statistics offices

in various states. And so what we do is every quarter now, we send them our database of retirees with social security numbers. And they do a match with their system and they will identify for us all of those members that they report in their database as having been deceased. And then that gives us data that we go back and check against our records. And the first report they did for us and we received that in May. They identified about 160 people for a total of almost $700,000 in other payments. That's a total going back there like 1989. Oh yeah, this goes all the way back to 1983. But the good thing is that we are now going back and seeking repayment of that. We have had, in some cases, people have been very cooperative. The money may have gone on direct deposit into a bank and no one had really tried to use

that money. In other cases, clearly, there has been some activity where people knowingly have used monies that came into the account or cash checks. And we've actually, the state police has been very helpful. They sent an investigator over who has been reviewing these files, determining which ones may constitute criminal activity. And those files are then being turned over to the attorney general. Each time you take a step to simplify something in government today, it seems that you raise other complexities. We've noticed, for example, you're dealing with the same type of people. When you move into social security, there's talk now that, right now it's voluntary to say I would like the money deposited to a bank, and they say, well, in about a year, they'll be mandatory. Well, I've talked to a lot of people who will say that they know their banker, and they trust them, and it's going to be fun.

I've got other people who say, how can I be sure that the bank will turn around and charge me for that? And if I'm making a small, you know, just a small social security return, that that money will be dissipated. The other hand, I would look at what you're doing when you look and check a list with people. It's suddenly you're going to get telemarketers on the phone, and telemarketing is really becoming very disgraceful in the way they push, especially the elderly around. But you're opening up that door for someone to say, well, we now have the list of thousands of New Mexico recipients of the retirement monies, and you know, this should be great to be on your mailing, the protections in there where they can't do that. Right, we do. And the company that we contracted with to do this match for us on the death payments contractually, they cannot use our data for any other purpose except this. And we feel strongly about that too, yeah. Because every check, the governor has a computer personally overseas, a lot of these things.

And recently, I don't know how they did it, but they put out information that they're not supposed to put out on a, I think they call it a not-internet, it's an intranet, but it was a form of economic development type program. And there was material going out there, they're not supposed to have what sex, age, and such, things of that nature, color, creed, and we haven't learned yet the disposition of that, but it is illegal. And you just can't go in, you can't assume that someone knows these things, you've got to be able to stop it at the front. Last year, Ernie, in fact, we feel so strongly about trying to protect the privacy of our members that we actually sought clarification in legislation about what documents in a member file can be disclosed and what remain private. And for instance, in the course of a member's work history and in calculating their retirement, we receive all sorts of documents, which we have to have, for instance, divorce degrees,

property settlements, that sort of thing. And many times, people have made an effort to obtain that information from our files. Some of that information may be public records, some may not. We this year, in the statute's clarified, what is public information, I mean, the amount of a person's salary is public information, they are public employees, but certain documents like birth certificates, sometimes there are paternity questions that come up divorce degrees. That now, by statute, remains private, so we were concerned about the same kind of issues you're talking about. Did you took care of that through the legislative, without it becoming an administrative type move? Right, right. You're a student of government, you know, stranger to government. And you've been a very dear friend of my former colleague and Robert J. Barth. And again, he was a student of government.

He went beyond, you know, just, he wasn't looking, just the icing on the cake. He knew how to dig down into what was in that cake. You've got to be concerned, as citizens are all over the state, about a possible assault on the monies you have, you know, the forefathers in this state many, many years ago, they put together a severance tax, and it was almost brilliant and the way they handled it. But what it meant, you know, people today, we had a good friend on a Van Van the Graff, not too long ago. And Darwin said, you know, we look at most kids and we can say to them, you wouldn't be going to school if they weren't for the extractive industries, you know, to the extent you are in the Mexico. That was far reaching. But it seems every time something works like that, there are those who say, let's assault that money because we can use it for something that's not working. And I know that they've made some, how do we refer to little glitches, little changes

in the law as to the investment of severance tax monies and such, and they say they can get a better return on it in this day and age, looking at the same problems you would. But I would imagine there was legislation introduced the last time, which would change the manner in which the monies were handled from Europe, from the P.E.R.A., correct? Correct. Right. The legislation was a successful thing, and it's, but we are very concerned about what we call them raids on the pension funds. And that's happened in other states, I mean, in California, there were a number of attempts to raid the pension funds. In fact, probably 20 or 30 of the states have experienced that. And we have, too, there was a lot of discussion last time, for instance, when there was talk about building prisons. And those may be legitimate state needs, but ours is a trust fund to pay pensions. And there was talk of using para funds to build prisons, and that's not an appropriate

purpose for the pension funds to be used. And that caused us great concern. We have heard, in fact, that in the coming session of, I've heard of at least two proposals that are going to be made to use para monies for other than pension payments. One is to build infrastructure on that, it's a very broad word, I'm not sure exactly what that means. Big pressure, big pressure, and the other is to use it for venture capital within the state of New Mexico. Now, from our perspective, neither of those are appropriate uses of the para fund. They're to be used to invest in investments, which will increase the return. For example, let's take the issue of prisons, although that issue is no longer an issue so far as I know. But if you're going to finance prisons from the state, you're going to be looking to get the lowest interest rate that you can get on that money. That's a legitimate way to approach it.

It's a prudent way for the state to approach it. On the other hand, when we go out to invest para monies, we're trying to make the maximum return. So a low interest rate loan is not a particular interest to us. We want something that will bring in a greater return. For example, this year, the return on the para fund was 19.7%. Most people are unwilling to pay 19.7% to borrow money, but that was our composite earning on the entire fund. Last year, we had an equally good year. We had a 13.9% return on our fund. In 1995, the calendar year 1995, the return on the fund was 29%. We have been well positioned in this particular era in the start market. We've taken advantage of that, we've done it without a lot of risk. Some risk. You can't do anything these days or that, some risk, but what we call an acceptable level of risk. Risk. And so we've been able to really, really increase the earnings into our fund, which that

is the ultimate security for our members, that there is money there, and we want to keep that money there. The money will be there. For them, and there are beneficiaries in the future. No. We do allow that. When you have the retirement money, we are able to designate, so I'm going to say this is my beneficiary, so that money will continue. And I imagine that's one of the reasons you had some problems with money still continuing to be deposited. I have another concern. You have got to be a student now, because before you took this present job, you've had how many years now? Well, I was General Counsel for about six years before I became director at Para. That's a total of how many years? Well, that's a total of almost nine years with Para. So you become a student of what happens, for example, when people take a close look at social security, they say it's dead, it's going under, terrifies the elderly. They don't know what's happening, but am I right or wrong or sort of right or sort

of wrong? That what has happened with that money, it's social security, is that it was used for other purposes. That's correct. And that's why we are concerned about these rates. That's why we want to protect the paraffins. People are detractors, for instance, or any will sometimes say, Para is just like social security, it's going to go bankrupt. Para is not like social security. The legislators that created this program created it very wisely. They set it up as a trust fund to be used solely to pay pensions. Like social security, which did not remain a trust fund, they began to use social security dollars for other governmental purposes. And that's why social security is in the situation that it is today. We were not set up that way, and we have not administered Para that way. And we want to put in place, we're hopeful in the next year or so, to put some protections in place constitutionally to make sure that we do not become a subject to the same problems

that social security had. Hold it there now. If I read you right, you're saying that you're going to be working in this next legislative session to try to get a constitutional amendment on the ballot, which would preclude them dipping in to the present monies that are invested for PERA. You're correct. The PERA board has been discussing this, and they recently gave approval for us to go forward to seek a constitutional amendment, which would protect pensions. And we will be seeking the legislation in this coming session with the hope of putting it on the general election ballot in the fall of 1998. And that constitutional protection would do two things. It would prevent a raid on our pension funds, in other words, allow them to be used for things other than paying pensions. And it would also prevent a reduction in the benefits that current employees receive.

You'll remember last year, during this session, there was a lot of controversy about a piece of legislation that was introduced, which proposed to reduce retirement benefits to public employees. And you can well imagine how our membership fell about that, and our retirees felt about that. Because by the time someone retires, their income is set. They're not going to be earning any more dollars. Their retirement pension is set. And so anything that appears to threaten the security of that benefit in the future is a primary concern to them and should be. How you're going to have to get a message on. And I imagine it's a little difficult. You've got to pop your list, how many members do you have right now? We have about 50,000 members, 30,000 members. How many retirees? We have over 15,000 retirees throughout the state. It's about 65,000 people in a state this size. You almost have to alert them and families. This is what you're trying to do.

That's right. And these are the reasons for it, because they've got to be people looking at this with big eyes. Right. And we intend to do that. And you should know, they have also been talking to us. A lot of people, after last session, there was a lot of concern, because I think for some time there was a certain contentment level that nothing could happen to our pensions. And I think what we saw in the last session, that that contentment is misplaced, things, you know, statutes create us and statutes can take away from us as well. And I think our membership and our retirees was a very, it was a real educational process. And so we've had calls constantly, really, since this session. And every time I go out to talk to a group of people, the same concerns comes up. What can we do to protect our funds? And I think that this we can. Now because this is a proposal for a constitutional amendment, we really don't need it to be on the message. That legislation can be introduced. And so that's our plan. Right.

And I remember once, because I put something on today, this is critical, and I was amazed at the number of phone calls, you know, people do, you hit them right, smack them right in the nose with that two by four. It's a great anniversary. I know the lawmakers had asked, they said we want to put together, there was a memorial, to memorialize and observe the 50th year. You've got to be pretty proud of the group you work with over there. I am proud. I'm proud of our members and I'm proud of my staff. As I said, we have a small staff. We service a lot of people. You remember last year, we had an unusually high number of retirees and we handled those more smoothly than we have in the past. We made some changes that allowed that to happen, but I'm extremely, extremely proud of my staff. And also, Ernie, I really have to say that we owe a debt of gratitude to our legislators. We've had a lot of really good support from our legislators on public pension issues. And that's been a great benefit to us as well. Well, there's more money involved here than there were on a number of the items that

they consider priority for this upcoming legislative session. Our guest today, Alice Herder, who is the executive director of the New Mexico Public Employees Retirement Association, I'm Ernie Mills and we're here on your behalf. Thanks for being with us on report from Santa Fe. Report from Santa Fe is made possible in part by grants from the members of the National Education Association of New Mexico, an organization of professionals who believe that investing in public education is an investment in our state's economic future. The art of communicating science, Los Alamos National Laboratory reaching out and working to make a better New Mexico.