Lawmakers made same mistake twice

Last modified: 7/7/2011 12:00:00 AM
Many of the public employee pension reforms recently enacted by the Legislature were necessary. But lawmakers also managed to repeat the same self-serving errors that got the retirement system in trouble in the first place. They passed a law that's likely to be found unconstitutional.

To meet its long-term responsibilities, the state retirement system should be funded at an 80 percent level. It's currently only 58.5 percent funded. The vicissitudes of the stock market aside, there are two basic reasons for the system's financial situation.

First, its board used a flawed funding methodology and assumed an overly optimistic rate of return on its investments. Operating on that assumption, it used money that it should have banked to give cost-of-living increases to retirees and subsidize medical care. Second, as ordered by the Legislature, it charged employers significantly less than they should have been paying to guarantee the system's long-term solvency for decades.

Senate Bill 3, whose driving force was Sen. Jeb Bradley, makes the same mistakes. Though an outside actuary hired to comply with state law told the retirement board that it should reduce the fund's expected rate of return from 8.5 percent to 7.75 percent, doing that meant that someone would have to pay more. To prevent that, lawmakers ordered the board to keep the higher rate in place for two years. That command usurps the authority of the retirement system's board and, by pushing the problem into the future, makes it worse.

The Legislature, with Gov. John Lynch's support, reduced the state's 35 percent share of the cost of funding local employee pensions to 30 percent, then to 25 percent and now to zero. To keep the system sound without charging employers more, lawmakers stuck public employees with the bill. Effective last week, their required contribution to the fund increased by about 2 percent. But that change may not remain in effect for long.

A coalition of unions representing public employees has challenged some elements of the pension reform bill. Their case will be heard in Merrimack County Superior Court on July 14 and, no matter what they outcome, will presumably be appealed to the state Supreme Court.

Bradley objects to the criticism that the reforms are essentially a tax on state employees. "What they are is an investment by our current 55,000 public employees toward their retirement," he says. In an Orwellian Newspeak sort of way, he's right. It is an investment by employees in the health of their retirement fund. But it's an investment the state long made, and one public employees rightly argue was not part of the bargain they signed up for.

The unions, citing past court cases, argue that public employees can't be charged more simply so employers can pay less unless they get some benefit in exchange. Doing that, they claim, violates constitutional contract protections.

Lawmakers say those protections apply only to vested state employees, and they define "vested" as having contributed to the pension system for at least 10 years. The unions count as vested any public employee whose tenure has exceeded the one-year probationary period, and they have the stronger argument.

It is unfair to hold a public employee with 10 years' service harmless while raising the contribution rate for an employee with 9.9 years' service, thus shrinking his or her paycheck and breaking an implied promise.

Major changes in contribution rates or benefits should apply only to new hires and probationary employees. The unions' case is strong and they should prevail.




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