The New Hampshire Retirement System's Day of Reckoning

By NH Senator Jeb Bradley

 

As we move beyond the November election several large problems must be dealt with immediately. These include: erosion of our business friendly climate; education funding; structural deficits and large spending increases; and dangerous unfunded liabilities in our public employee retirement plan. 

Later this week, several senators and I will unveil legislation that stabilizes New Hampshire’s Retirement System (NHRS) which presently has a total unfunded liability in the pension and medical subsidy account of nearly $4.75 billion. We will be joined by representatives of employer groups including select board members, school board members, and county officials who all are forced to pass sky rocketing retirement costs onto besieged PROPERTY TAXPAYERS.

The NHRS should provide reasonable pensions for teachers, fire fighters, police officers, and other public employees while not overburdening taxpayers.

Experts believe that in order for a state’s retirement system to maintain actuarial stability, an 80% funding level is necessary. Ten years ago New Hampshire’s pension plan funding was a healthy 89.9%, but has nose dived steadily, bottoming out at 58.3% in 2009.

According to the independent Pew Center Report “The Trillion $ Gap”, New Hampshire received the lowest of three rankings  -- “serious concerns.”  The fact that 18 other states received the same grade is grim solace for New Hampshire’s property taxpayers who will foot the bill. This alarming trend will at some point impact NH’s bond rating according to the State Treasurer, potentially driving up the cost of borrowing.

Noteworthy facts about the NHRS contained in their 2010 report: the unfunded liability of the system has grown from about $2.75 billion in 2007 to the previously mentioned $4.75 billion presently.  Employer contributions –  more appropriately termed property taxpayer contributions --- to the system have climbed from about $70 million is 2000 to $302 million in 2010. Since 2009 employer / taxpayer contributions have grown by 15% from $261 million to $302 million.   At the same time, employee contributions have increased over the last year– but by a significantly smaller amount (4.9%) from $142 million to $149 million.

In the last year the benefits paid out by the System have increased by 7.8% or $40 million from $510 million to $550 million. This increase according to the NHRS is “primarily due to an increase in the number of retirees, increased average benefit levels for those new retirees, and temporary supplemental allowances granted to retirees through legislative action.”

How did New Hampshire get into this predicament?  In the early 1990’s during another difficult recession, an actuarial accounting methodology was put into place to save employer costs.  Its intent was temporary.  Unfortunately this methodology remained in place until 2006 and when changed, the true picture of a $2.75 billion unfunded liability was revealed. During that period employers significantly underpaid retirement costs, though the rates were set by the NHRS and Legislative policy.

The second reason for the predicament involves what is known as gain-sharing or the practice of paying higher benefits when NHRS’s investment income exceeded targets. The problem with gain-sharing was that good investment years did not overcome other years of under-performing investment returns. Nevertheless, a total of $900 million was diverted from the NHRS fund to pay higher benefits until gain-sharing was curtailed in 2006.

Huge investment losses when markets crashed also significantly contributed to the shortfall.  In 2008, losses were 4.6% and in 2009 losses were 18.1% or a staggering $995 million. 2010 saw a much improved investment climate and gains for the NHRS were an impressive $568 million. Despite those solid gains, the total unfunded liability scarcely improved from 58.3% in 2009 to the current 58.5%.

As bleak as this picture is --- it gets worse. Recent stock market losses have yet to be fully factored into employer contributions and combined with expected benefit growth will drive property taxpayer costs to unimaginable levels – the very horn of a dilemma.

This is why we must make changes to the System now. On Thursday, we will propose a restructuring of benefits -- primarily for “non-vested” NHRS members with less than 10 years of service or future new hires. Included in the proposed reforms will be increased years of service for public safety workers – 20 to 25 – as well as increasing the retirement age from 45 to 50 for those same employees.

Inclusion of unused sick time, vacation time, or end of career buyouts, all of which drive up retirement benefits, will no longer be permitted in the calculation for anyone with less than 10 years of service. Special detail overtime will be curtailed immediately as it is simply not appropriate to include that kind of spiking in retirement calculations.  Nobody will be able to retire and receive retirement benefits greater than their final salary.

$90 million earmarked for higher benefits will be transferred back into the primary retirement fund to reduce the unfunded liability. A 4% growth in medical subsidies will be eliminated. Any new NHRS members hired will have increased contribution rates:  5% to 7% for most employees and 9.3% to 11% for public safety employees.

A study will determine if New Hampshire should move from the current defined benefit system to the defined contribution or 401k systems of the private sector.  Lastly, the composition of the NHRS board which currently includes 8 employee members and 1 employer member will be reformed to parity:  4 employee and 4 employer members.

These reforms are reasonable and pending an actuarial review should dramatically improve the unfunded liability of the system. As noted, most reforms will not apply to employees who are “vested” with 10 or more years in the system nor will they impact current retirees.

New Hampshire courts have held that once an employee is vested there is an expectation akin to a contract of receiving pension benefits upon reaching retirement age.  However, the NH Supreme Court has never ruled the same obligations apply to those employees who have less than 10 years of service and are not vested.

Given the enormity of the funding shortfall and the pending impact on property taxpayers, it is certainly appropriate to ask beneficiaries with less than 10 years of service to share in the potential solution.  Not doing so accelerates the Day of Reckoning for the NHRS and property taxpayers.