New Hampshire pension fund liability balloons in two years, with brunt of cost on taxpayers


Monitor staff
Published: 3/17/2021 5:03:49 PM

Last year, Concord boosted the salaries of its police department by nearly $1 million above and beyond contractual raises.

Those pay increases carried a hidden cost through rising contribution rates to the New Hampshire Retirement System, which will compound city spending even higher.

In 2019, the city paid its officers and other police employees about $8 million in salary, overtime and other payouts. On top of that amount, Concord paid more than $2 million on behalf of police employees into the retirement system.

This July, those contributions – based on higher wages in the city’s police force and rising retirement rates – will increase by another $750,000, maybe more.

The reason for the rising costs is tied to the amount of debt taken on by New Hampshire’s retirement system, which continues to grow by about 20% in just three years.

It’s taxpayers who are paying the price.

In the last decade, contributions to the retirement system by municipal employers have ballooned, going up 66% for teachers and 45% for police. Starting in Fiscal Year 2022 – July 1 –the contributions are going up again by another 20%.

Paying back the debt

Back in 2018, the state passed a law requiring the retirement system to fully pay off its unfunded liability in 20 years, with an end date of 2039. At that point, the debt was just over $5 billion.

But three years later, despite more money being paid into the system by municipalities, the debt has already increased by another billion dollars. As of the close of state Fiscal Year 2020 last June, New Hampshire’s unfunded liability rested at $6.04 billion, the last year for which the exact debt number has been released.

The upshot: The state is now following a new plan to pay down the extra billion dollars, and a new 20-year amortization deadline for that debt. It’s a cycle that will continue for as long as new debt is added. “Everything’s on a two-year cycle because of the state budget, basically,” said Marty Karlon, public information officer at the New Hampshire Retirement System.

For towns, cities and school districts, it means passing on those cost in the form of increased property taxes.

“It’s just getting more and more expensive,” Boscawen Town Administrator Alan Hardy said after the town budget was passed by voters last week.

“Those are big issues that we need to solve at the state level,” Hardy said. “They just tell us and we have to pay it. The towns can’t continue to be where the expenses get passed down to.”

The newly increased rates are intended to help bring both of those debt payment plans under control on time, Karlon said. 

“It will ultimately get paid down,” Karlon said. “But it’s one of those ‘pay me now or pay me later.’ The less money that comes in now, the more it’s going to cost down the line. The cost compounds, and interest goes up.”

Karlon said the goal of the Retirement System’s Board of Trustees is to keep the rates level for the next 18 to 20 years, not continue to raise them year after year.

“We’re sensitive to employer pressures but the board needs to do its fiduciary (duties) to make sure the plan is properly funded,” Karlon said. “To ignore that to try to pretend that we can make more than we think we can, it would end up costing more in the long run.”

While employee contributions have remained flat for the last decade, contributions from towns, cities and school districts have steadily increased.

“All of the unfunded payments are coming through employer contributions,” Karlon said. “It’s the way the plan was designed… What doesn’t come in from the investment side is put into the employer contribution.”

He continued: “It’s like trying to fill a swimming pool with three different hoses. The member contributions is one stream of water going in there, and that’s just constant. The other two hoses, to the extent that the investment hose is flowing slower or faster, that’s going to impact how much is coming from the employers.”

Much of the retirement system’s growing debt comes from a miscalculation in just how much the retirement system fund was going to earn.

An audit commissioned by the Retirement System in 2019 found that the board had overestimated the rate of investment return in the coming years. Rather than a 7.25% rate of return, the return is now expected to be between 6.25% to 7.0%. For planning purposes, the system has now settled on 6.75% as a target assumption.

“We expect to make less money in investments over the next 20 to 30 years than we did previously,” Karlon said. Those lowered expectations and missed targets are the primary driver of the extra billion dollars in liability, he added.

Another factor driving up municipal contribution rates is rising life expectancy, which necessitates increasing the balance available in the fund to cover the extra years, Karlon said.

Nowhere is that more evident that Type 2 employees, namely police officers and firefighters.

These employees are eligible to retire with a full pension after as little as 20 years of service, meaning they collect pensions decades longer than other government employees. Newer employees hired in the last 10 years must work a minimum of 25 years and be at least 52 years old before collecting a full pension.

In addition, police and fire are paid large amounts of overtime, which gets factored into their retirement calculations, leading to higher pensions compared to teachers, who must work more years before collecting a full pension and have little to no ability to earn overtime.

For example, an analysis of the highest payouts to retired workers shows that 93 percent of the retirees who collected a pension greater than $100,000 in 2020 were police officers and firefighters. In raw numbers, of the 119 retirees who were paid a pension above $100,000, 66 were former police officers, 45 were firefighters, while town, state and school employees totaled eight.

In other words, the highest pension amounts are paid to employees who will collect those benefits for years longer than other employees.

No more state contributions

But there’s another hose in the swimming pool that has been dormant for years: The state of New Hampshire. Since its creation in 1967, New Hampshire’s retirement system had been buoyed by significant state contributions for decades – beginning at 40% and later decreasing to 35%.

But the economic recession and subsequent decisions by lawmakers changed that. In 2009, lawmakers began a plan to gradually decrease the state’s share; in 2011 they eliminated it altogether.

Now, the state contributes nothing to the retirement system beyond the contributions it owes for its own state employees.

“There hasn’t been any support in the Legislature to pick up extra costs,” Karlon noted.

Instead, all contributors – towns, cities, and the state alike – are bridging the gap on their own.

For towns, the situation creates unsavory budget options. Without control over the amount they must contribute or the benefit levels for their employees – an amount dictated by the system – they only have two options: increase their budgets to account for the increased costs, or balance their budgets by reducing programs and positions to account for the growing amount they must pay in.

The latter option is much less palatable. “If (towns are) shedding positions or freezing salaries, they’re going to pay less in retirement as a result of that, but that results in recruitment and retention issues that they have to balance,” Karlon said.

Through the years, there have been attempts to change that. This year, the House took up a bill that would require the state to pick up the cost of 5% of contributions for teachers, firefighters and police officers. But that bill, House Bill 274, was killed on the House floor by House Republicans in late February, 189-168, with 18 Republicans siding with Democrats.

A similar bill still progressing through the Senate, Senate Bill 72, would be even more generous, dedicating 15% from the state for the same employee categories. That bill is awaiting a committee vote after a hearing, but opposition on the Republican side could be insurmountable.

Proponents of restoring the state’s share, like Nashua Mayor Jim Donchess, a Democrat, argue that the state’s original 40% contribution was a key reason the retirement system was able to get off the ground initially.

“Probably you wouldn’t have the cities and towns in the state pension system had that promise not been made,” he said during a Senate hearing Jan. 28. “Now that promise has been broken, and cities and towns are the victim of that broken promise.”

But opponents argue that restoring all or even some of the state’s contribution would remove accountability from cities and towns, and incentivize towns to unwisely expand employee pay and benefits.

“The intention of this of course is to reduce local employers’ costs to participate in the retirement system,” said Neal Kurk, a former House representative and former chairman of the House Finance Committee at a Senate hearing. “However, whether the reduced costs to municipalities would transfer into lower property taxes or larger local budgets, is unknowable.”

The move was not right for the current reality, Kurk added.

“Today I think it’s imprudent to add a very expensive new program in tight financial times,” he said.

 View a search  able database below of the top pensioners from 2020 in the New Hampshire Retirement System.

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