The recent national debate regarding worker's unions and public employee benefits-sparked by Wisconsin Gov. Scott Walker's budget proposals-is also occurring in NH, though at a much lower decibel level. This struggle between public employees and employers/taxpayers is in part a function of significant declines in state tax revenues, which exposed the enormous liabilities and costs associated with public employee retirement benefits.
In NH, the question before policy makers is not if they will attempt to bend the pension cost curve, but how. This policy conversation is clearly about budgets and savings, and whether the benefits (wages, pensions, and health care) received by public workers is consistent with current compensation. The budgetary savings from these proposals come at the cost of benefits for future-and sometimes current-state and municipal employees. It is also likely the beginning of a broader conversation about the degree to which pensions and other entitlement programs, like Medicaid, crowd out investments in other public goods, such as education and infrastructure.
The Problem
The NH Retirement System remains among the least funded nationally at 58.5 percent. That means current assets represent only 58.5 percent of the benefits owed now and in the future. The Government Account Office recommends a funding ratio of 80 percent.
While not insolvent, the retirement system's low funding ratio and the exposure NH faces in the future has policy makers in fits. In a recent state budget analysis, the NH Center for Public Policy Studies found the state's contribution to the NH Retirement System was the third fastest-growing portion of the budget, outpacing education and corrections.
The reasons? First, decisions made two decades ago limited state and local employers' contributions to well below the system's costs, thus requiring the system to financially catch up. Second, recessions in 2001 and 2008-2009 significantly lowered the rate of return on investments. Third, in periods of high returns, assets in the pension fund were diverted to funding other state obligations. Also, similar to social security at the national level, the pool of individual contributions relative to the size of the population retiring is declining.
As an employer itself, the state pays part of each employee's retirement costs. The state also pays a percentage of the costs of the system to local communities, a practice started to encourage municipalities and school districts to participate. Therefore the state, and the state's general fund, has much at stake.
The Current System
The NH Retirement System provides a pension to retired local firefighters, police, teachers and other public employees as well as retired state employees. As with most retirement benefits, it is funded by contributions from employers and employees, and returns on the investment of those contributions. Current state and local employees, the state, school districts and municipalities all contribute to the system.
The benefits vary depending on the type of employee. Public safety retirees contribute 9.3 percent of their pay to the system, can retire at age 45 after 20 years of service, and their final benefit is calculated based on the average salary during their last three years of service. Other state and local employees in the system contribute 5 percent of their salary, can retire at age 60, and their final benefit is also calculated based on the average salary of the last three years. Public safety employees are not part of the social security system, so they pay a higher rate.
Bending the Cost Curve
Proposals to address the state's pension issue all touch on a similar set of policy changes. Each would increase the retirement age, cap or limit the degree to which pension benefits can be inflated by end-of-career changes or overtime, and increase the individual contribution levels. These new requirements would affect employees not yet vested-usually meaning under 10 years of service-or new employees.
But the proposals differ in important ways. The bills by Gov. John Lynch and the NH House affect public safety and other employees. The Senate version affects only public safety employees. Each bill takes a different approach to limiting end-of-career payments that serve to increase pensions.
It is important to note that these proposals will not solve the current budget crisis, nor would they affect the budget situation currently being discussed. The 2012 and 2013 contributions (the next biennium's budget) are already fixed. Any savings from these proposals would be in the future.
However, the proposals would have a long-term positive effect on state and local coffers and the degree to which the NH
Retirement System is underfunded.
Estimates of savings to the state government for the 2014-2015 budget range from $14 million (Gov. Lynch) to $68.8 million (the Senate) relative to what would be spent without those changes. During the next 10 years, the state's actuaries estimate savings to employers (state and local) would be substantial, with all of those employers saving from between $400 million and $1.2 billion.
Steve Norton is executive director of the NH Center for Public Policy Studies, an independent, nonprofit, non-partisan organization that pursues data-driven research on public policy. Its work includes research on the state budget, public school funding and health care finance. Norton may be reached at snorton@nhpolicy.org.
Current Issue - May 2024