A local look at NH’s retirement system and reform

By Jessie Levine / New London town administrator

Those of us in town and school government who are charged with budget preparation are faced with the perennial challenge of trying to provide the same (or better) service at the same (or lower) cost. It goes without saying that our task is made harder by decisions made at other levels of government that affect our budget.  For the last few years – and undoubtedly for at least the next few – local governments have seen large increases in their contributions to the New Hampshire Retirement System (NHRS), the State’s defined benefit plan for public employees.

The NHRS, which was established by state statute (RSA 100-A) in 1967, provides annual benefits to over 20,000 retired public employees, teachers, police and firefighters from the State and from 475 cities, towns, counties and schools.  About 50,000 active employees currently pay into the system and are separated into two groups: Group I comprises teachers and most public employees and Group II comprises public safety employees.

The same state law that established the NHRS created a Board of Trustees to oversee the pension plan.  According to that law, eight of the 14 trustees – the majority of the board – must represent employee groups.

NHRS receives its income from three sources: returns on investments, employee contributions, and employer contributions.  Returns on investments are determined by market performance, and employee contributions are set by the State Legislature and have not been changed in decades (Group I members pay 5% of their wages and Group II pays 9.3%).  But state statute gives only the Board of Trustees the authority to establish employer contribution rates.

A report issued in January 2008 by the “Commission to Study the Long Term Viability of the NH Retirement System” concluded that NHRS pensions were only 63.4% funded as of June 30, 2007, which amounted to $2.7 billion of unfunded liability.  The huge unfunded liability resulted from inadequate investment returns, flawed funding methodologies, and ill-advised gains sharing. (In 1990, NHRS Trustees voted to contribute gains in excess of 9% per year to a special account to be used for retiree medical subsidies and cost-of-living adjustments. Therefore, since the investment returns in the good years were used for other purposes, they could not make up for the low returns in the bad years.)

The Commission reported that due to the Trustees’ choice of accounting methodology going back to the 1990s, employers had not contributed enough into the system over the years.  Following the Commission’s report, the Trustees increased employer rates in an attempt to begin to close the $2.7 billion gap. Employer contribution rates have more than tripled since 2000, and by 2015 will constitute at least one-third of every dollar paid to public safety employees (see various charts on-line at www.nhlgc.org/nhma/nhretirement.asp).  The Town of New London’s employer contributions to NHRS have more than doubled from 2006 to 2011, and the Kearsarge Regional School District’s employer contributions have doubled in four years, from $800,000 in FY 2008 to a budgeted $1.6 million in FY 2012.

One would think that with what have been called “the sins of the past” addressed, the NHRS was on the road to improvement.  But this year we found out that despite increased employer rates, and despite NHRS’s impressive 12.9% rate of investment returns in FY 2010, its unfunded liability had dropped to 58.5% as of June 30, 2010 and now approaches $4.8 billion.  Clearly, more has to be done to prevent employers from picking up the tab for the additional $2+ billion of unfunded liability.

Enter a new Legislature. Two weeks ago, State Senator Jeb Bradley proposed legislation that would reform the retirement system by making a number of critical changes to state law, such as: 1) changing the minimum retirement age for Group II employees from 45 to 50 and changes the minimum years of service from 20 to 25; 2) changing earnable compensation from an average of the highest three years to the highest five years; 3) eliminating unused sick and vacation time and career buyouts from earnable compensation, which eliminates the “spiking” of pay; 4) excluding special detail pay from earnable compensation; 5) eliminating future gain sharing an eliminate the 4% increase in medical subsidies given to some current retirees; 6) increasing employee contribution rates to 7% (Group I) and 11% (Group II); 7) capping pension annuity at 100% of the highest year’s base pay; and 8) changing the composition of the NHRS Board of Trustees to require an equal number of employee and employer members.  And for the many who have asked this question, Senator Bradley’s bill would establish a committee to study moving to a defined contribution pension plan.

The actuarial impact of these proposals has not yet been calculated, but should be known sometime this month. Most of these changes would apply to employees who are not vested (vested employees have been in the NHRS system for at least ten years).  This is because of NH case law that suggests that vested employees have, as Senator Bradley puts it, “an expectation akin to a contract.”  The increase in employee contribution rates would apply only to new hires, and the exclusion of special detail pay would apply to all employees.

Many of these changes seem like obvious fixes, but the legislative climate in the past has not been conducive to pension reform.  Senator Bradley’s proposal is widely supported by employer groups and even the NH Business and Industry Association, but has received mixed support from employee groups (rather, employee groups support some components of the legislation but not others).

The current method of solving NHRS problems by passing costs onto the employers – also known as property taxpayers – needs to end. We will be monitoring this legislation closely, and I encourage you to talk to your legislators about their positions on pension reform.

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