By Jeb Bradley
Several weeks ago I wrote a blog: “The New Hampshire Retirement System’s (NHRS) Day of Reckoning" which has elicited a lot of response. Opinions run the gamut. Virtually everyone agrees promises made to present retirees must be kept. Many believe reform is long overdue and that avoiding today’s tough choices increases future problems. Unions contend retirement benefits are locked in the instant someone completes their probationary period and no changes can be made. Lastly, some feel this legislation is “alarmist”.
Regardless of one’s views, what no one can escape are the implications of the numbers and what they mean. Consider the following facts:
1. The current unfunded pension liability is $3.72 billion.
2. The current unfunded medical subsidy liability (a pension adjunct) is $976 million -- leaving a total unfunded liability of $4.69 billion.
3. Only 58.5% of the assets needed to fund future pension commitments are available. 80% funding is considered healthy.
4. According to a September 2010 Bloomberg survey, NHRS’s 58.5% funding ranks fourth worst in the nation.
Furthermore, pension systems rely heavily on investment earnings to pay benefits. The NHRS assumes an 8.5% return, but the NHRS average for the last 20 years has been 7.8% and, more alarmingly, only 2.3% for the past 10 years. Under-performing investments didn’t overcome two terribly shortsighted public policy choices made by previous Legislatures that went unchallenged for years by the NHRS Board. An accounting methodology understated employer costs for over a decade and $900 million was skimmed from the pension plan to pay higher employee benefits than required.
These shortsighted choices, combined with recent stock market losses, have dropped the NHRS funding level from 90% in 2000 to today’s precarious 58.5%. If the NHRS board accepts actuary recommendations on investment assumptions, the unfunded liability would grow -- dropping NH’s rank to second worst in the nation.
While those claiming the NHRS is solvent are correct, what they ignore is that taxpayers, primarily property taxpayers, are getting walloped with the bills.
Here’s how the unfunded liability will clobber taxpayers. Employees such as teachers and municipal workers pay 5% of their salary to the NHRS. Police and firefighters pay 9.3%. Employers / taxpayers -- making up for past mistakes – now pay 10.7% of salary for teachers, 19.51% for police and 24.69% for firefighters. In 2014 those costs are projected to escalate to 13.61% for teachers, 29.20% for police, and 33.90% for firefighters. When investment assumptions are lowered to reflect reality, the costs to property taxpayers will explode again and stay high for a long time.
Meanwhile, retirement benefits paid are growing by $40 million in 2010 alone. Much is made of the average pension for every retiree in the system being $18,650. That’s accurate but doesn’t portend the future. For teachers who retired in 2010 their pensions averaged $29,800, for police $49,200 and firefighters $59,100.
Teachers must work 30 years, police and firefighters 20 years. Just using 2010 snapshots for the average salary, employee pension contributions and pension benefits; a teacher should recoup their 8% compounded contribution in about 10 years and police officers and firefighters in about 5 years.
Perhaps that’s why the two sides are at loggerheads with taxpayers demanding reform and employees threatening to go to court to prevent any reform. That’s why I filed SB-3: to equitably share this $4.69 billion unfunded liability.
Under SB-3, public safety employees with less than 10 years of service would be expected to work 25 years rather than 20, be eligible to retire at 50 not 45, have pensions determined by the highest 5 years of pay rather than 3, and could not count unused sick time, vacation, or career buyouts to increase their pension. For employees like teachers, 30 years of service would remain but the other provisions would apply. No one would be able to supplement pensions through special details outside the scope of their jobs. Newly hired employees would contribute more to the NHRS. The Legislature will study implementing a defined contribution plan for new employees and the NHRS board would be balanced between employers and employees. SB-3 reforms will not impact current retirees!
These changes are equitable to employees and taxpayers and are long overdue. These reforms will reduce the unfunded liability and the crushing property tax burdens, and for employees ensure a viable retirement system.
Only with compromise and each side walking in the other’s shoes will this result be possible. Postponing the day of reckoning only makes the medicine much worse.
Taxpayers are on the hook for the entire unfunded liability right now and those costs are unsustainable. Employees can claim unfairness and threaten litigation all the way to the court house door – but they miss the bigger point --- they will have priced themselves out of jobs.