By NH Senator Jeb Bradley
Many folks have written me, attended forums I have held or called with more questions on retirement reform. In particular people always ask what has caused the New Hampshire Retirement System’s (NHRS) $4.7 billion unfunded liability and how significant is this under-funding.
In a previous column I answered how the NHRS got into the current predicament. But it bears repeating, as some folks maintain the fault is exclusively employers (cities, towns, counties, and the state) for underpaying retirement costs. Here's what I previously wrote:
“In the early 1990s during another difficult recession, an actuarial accounting methodology was put in 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.”
Please note that the $2.75 billion unfunded liability of several years ago has grown to today’s $4.7 billion.
There is no question that public employers – who after all consist of taxpayers --- underpaid retirement costs for a lengthy period due to an accounting methodology adopted by the Legislature years ago in my first term. No one denies it’s a major cause of today’s problems and that accounting methodology has subsequently been changed by the Legislature.
Many people simply want to blame employers for the current ills of the NHRS --hoping that alone will kill retirement reform. But they ignore two other major factors that produced the $4.7 billion unfunded liability. As Paul Harvey used to say --- And Now The Rest of the Story.
First, according to the most recent Summary Annual Financial Report of 2010, approximately $900 million was transferred from the main pension account to “support extra benefits for members.” The report continues “those transfers totaled approximately $900 million substantially reducing the ability of the NHRS to cushion significant market declines such as those in 2000 and 2009.” www.nhrs.org/documents/summaryreportfinal.pdf (page 8)
The effect of these transfers cannot be underestimated. Given the compounding nature of $900 million, these dollars transferred from the main pension account represent much more than $900 million. Thankfully Governor Lynch signed legislation several years ago that curtailed further transfers. However, labor officials have sued to allow continued transfer of funds --turning a blind eye to the damage done to the pension system upon which retirees depend.
Secondly, while money was being diverted to support extra benefits, the investment return assumptions of the NHRS did not match expectations. Investment assumptions set by the NHRS Board have been 8.5%. However the 20 year actual returns have been 7.8%. More alarmingly, the returns of the last 10 years have been a paltry 2.3%. While the investment assumptions have recently and correctly been lowered, the long term under performance of investments in the NHRS has also had a major impact on NHRS’s current predicament.
These two factors cannot be glossed over or wished away by those who are primarily blaming the cities, towns, counties and the state. Furthermore, blame is not going to solve the reality of the $4.7 billion under-funding confronting the NHRS.
How big are the problems of a $4.7 billion unfunded liability? Some people claim that the unfunded liability is significantly lower than $4.7 billion. This is just not true.
The $4.7 billion figure comes from the most recent 2010 Actuarial Valuation Report of the NHRS actuaries Gabriel Roeder and Smith: www.nhrs.org/documents/2010_actuarial_valuation_final.pdf (Page 1 & 2 of the Executive Summary). The current pension liability is $3.72 billion and the medical subsidy liability is $976 million for the total NHRS unfunded liability of $4.7 billion. The NHRS unfunded liability in the previous year was $4.03 billion, consisting of a pension shortfall of $3.54 billion and medical subsidy shortfall of $496 million. The pension liability alone is projected to grow next year by $164 million and projected to continue to grow for another 12 years. (page 17)
Most importantly, this unfunded liability is having a profound impact on cities, towns, counties and the state. How? Just as retirement costs for employers were artificially low for years they are now spiking and will continue to further spike. In two years employers, and that means taxpayers who are primarily property taxpayers, will pay retirement costs that are 13.61% of salary for teachers, 29.2% for police officers, and 33.9% for firefighters. When lower investment assumptions are accounted for, rates will climb another 10% to 16% depending upon employment category.
These spiking rates along with higher health care costs have dramatically driven up the cost of public employment. Cities and towns have been forced to make painful decisions. In my area, Governor Wentworth Regional School District teachers and administrators agreed to salary reductions of five less paid days to prevent job losses. They should be commended!
Nashua has cut its budget by $1.7 million and sent layoff notices to 20 teachers. Manchester has proposed eliminating 200 paraprofessionals from classrooms, 17 firefighters, and has 20 vacant positions in the police department. While retirement costs are not the only factor driving up budgets, they are a major factor.
Lastly, how bad are NH’s problems relative to other states? According to an April 29th article titled “10 States Where Pensions Are Running Out of Money” published by 24/7 Wall Street, New Hampshire’s Retirement System ranked third worst in the nation.
This retirement debate is occurring against the backdrop of beleaguered taxpayers and continued economic anxiety. I always ask opponents of retirement reform what is their answer to the steep and long term increases looming for property taxpayers and the impact these higher costs will have on job growth and possibly the state’s bond rating. Thus far I have not heard any answers.
Complaining is easy, but it’s still not a solution.