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The New Hampshire Municipal Association (NHMA) is a nonprofit, non-partisan membership organization of all New Hampshire municipalities.

A Fair Way To RestoreThe NH Retirement System

Balanced. Accountable. Certain.

22

The retirement system for New Hampshire public employees and teachers is in trouble.

Everyone with an interest in the financial health of the system needs to share the responsibility for fixing the problems.

33

NEW HAMPSHIRE RETIREMENT SYSTEM (NHRS) HISTORY

• Established 40 years ago • 50,000 contributing public employee members

– State employees– Municipal employees– Teachers– Police and Firefighters

• Contributing public employer members– State of New Hampshire– Municipal governments– County governments– School districts

44

MONEY IN PENSION FUND

• $98 million initial investment in 1967

• $6 billion today, and growing

• 2/3 of plan assets in past 40 years came from investment gains

• Fund now pays out pensions to more than 20,000 retirees and beneficiaries

55

NHRS SOURCES OF INCOME 1987-2007

Employee19%

Employer17%

Investments64%

Employer Employee Investments

66

FUND MANAGEMENTDivided Responsibility

• Board of Trustees– Manages the investments– Administers the benefits– Sets the employer contribution rates

• NH Legislature– Adopts public policies governing operation of

NHRS– Sets employee contribution rates– Sets level of benefits

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CONTRIBUTION RATES

• Group I, employees and teachers = 5% of pay– Ability to build a pension equivalent to half their

salary after 30 years

• Group II, police and firefighters = 9.3% of pay– Ability to build a half-salary pension in 20 years

• Employer contribution rates – set biennially by NHRS Board of Trustees– Based on financial needs to keep system

solvent

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NHRS Employer Rates: 40-Year Trend

0

2

4

6

8

10

12

14

16

18

20

22

24

261

96

9

19

70

19

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Co

ntr

ibu

tio

n %

Employees

Teachers

Police

Fire

Employee Rate GI

Employee Rate GII

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PENSION FUND IN TROUBLE

Over the last 17 years, the pension fund has been under-funded due to:

• Inadequate funding• Poor investment results• Gain-sharing – a flawed strategy used to

distribute pension fund earnings

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INADEQUATE FUNDING

• 1991 Change in actuarial assumption:

• Open Group Aggregate (OGA) Methodology

• 1991 Increased projected rate of return on investments

• Results:• Fund appeared to be fully-funded • Decreased employer contribution rates

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POOR INVESTMENT RESULTS

• 1999: The fund had 110% of what was needed for pension benefits

• 2001-03: NHRS investment returns fall well

short of target rate– 2001 – The fund lost 6.7%– 2002 – The fund lost 6.4%– 2003 – The fund gained only 2.5%

• 2005: The fund had 66.4% of what was needed for pension benefits

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NHRS INCOME 1982-2007

-$600,000,000

-$400,000,000

-$200,000,000

$0

$200,000,000

$400,000,000

$600,000,000

$800,000,000

$1,000,000,000

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Member Contributions

Employer Contributions

Investment Income

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WHAT IS GAIN-SHARING?

• NHRS Board of Trustees sets a projected rate of return on investments

• Gain-Sharing – A diversion from the pension fund of investment income earned ABOVE the projected rate of return. Diverted into the Special Account to fund COLAs and other special benefits approved by the Legislature

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WHAT IS GAIN-SHARING? (CONTINUED)

• Double-digit investment earnings in late 1990s masked problem

• $900 million transferred to Special Account for COLAs and “other” benefits

• Impact – No protection in pension fund for periods of low investment returns

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THE PERFECT STORM• From 1991 to 2007, the funding methodology

overstated the relative health of the pension fund and lowered employer contributions

• The funding ratio was further reduced when more than $900 million in “excess earnings” was transferred into the Special Account

• The pension fund needs an infusion of $2.7 BILLION to make the system whole and secure for current and future retirees – that’s $2.7 BILLION on top of normal contributions paid by employers.

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Rates for the amortization of the Unfunded Actuarial Accrued Liability (UAAL) over a 30-year period exceed the current normal cost of the pension plan to employers. The 2007 actuarial valuation calculated the two components of the projected employer contribution rates for 7/1/09-6/30/11, as indicated below:

Employees Teachers* Police* Fire*

Normal Cost 4.80% 3.78% 8.75% 11.56%

UAAL 4.86% 6.32% 10.76% 13.57%

Total Rate 9.66% 10.10% 19.51% 25.13%

* State contributes 35%

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EMPLOYERS’ ROLE• Employers did not create the funding

problems.

• Employers didn’t have a member on the Board of Trustees until 2007.

• Despite this, employers recognize that a solvent retirement system is a shared responsibility. They are meeting their obligation to help make the system healthy again.

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MAKING THE FUND HEALTHY AGAIN

• Passage of HB 653 (Chapter 268 of 2007 Laws)• Entry Age Normal (EAN) Methodology replaces OGA• Gain-sharing modified• $204 million in investment earnings not transferred to

the Special Account• Employer rate equal to or greater than employee rates• Local government management representative added

to NHRS Board• Employers meet their obligation to pay $2.7 billion in

additional funds over next 30 years

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Medical Subsidy Problem

Current Law:– 25% of Employers’ Contribution Rate earmarked for medical subsidy– Pension fund is reimbursed for that 25% – Current law includes an annual 8% escalator for those receiving the subsidy – Less than half of current eligible retirees

receive the medical subsidy

2020

FLOW OFPENSIONFUNDSBEFORE7/1/07

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FLOW OF PENSION FUNDS AFTER 7/1/07

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Article 28-a in State Constitution

“The state shall not mandate or assign any new, expanded or modified programs or responsibilities to any political subdivision in such a way as to necessitate additional local expenditures by the political subdivision unless such programs or responsibilities are fully funded by the state or unless such programs or responsibilities are approved for funding by a vote of the local legislative body of the political subdivision.”

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Is There An Unfunded Mandate?

• 25% of Employer contributions earmarked for medical subsidy

• NHRS Board of Trustees voted to discontinue reimbursement of that 25% as of July 1, 2007

• July 1, 2009 employer rates will be “grossed up” to cover the cost of the medical subsidy

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EMPLOYER CONTRIBUTION RATES

Employees Teachers* Police* Fire*

Projected rates for pension and medical subsidy if no action is taken

Pension rates for 7/1/09 - 6/30/11 9.66% 10.10% 19.51% 25.13%

Medical subsidy rate 3.22% 3.37% 6.5% 8.38%

Total rate for 7/1/09 - 6/30/11 12.88% 13.47% 26.01% 33.51%

Projected rates for pension plus medical subsidy with the Commission’s recommendations

Pension rates with $250 million transferred to the corpus

9.27% 9.56% 17.95% 22.70%

Medical subsidy rates without the 8% annual subsidy increase

.54% .83% 2.37% 1.92%

Total rate for 7/1/09 - 6/30/11 9.81% 10.39% 20.32% 24.62%

* State contributes 35%

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47.4%

10.5%

4.0%

50.8%

13.1%

20.0%

42.8%

7.1%3.5%

36.8%

2.6%

-1.9%

-10%

0%

10%

20%

30%

40%

50%

60%

Employees Teachers Police Fire

PERCENTAGE INCREASE (DECREASE) IN RETIREMENT COSTS: 2009-2011

If No Action Is Taken

Actuary's Projection w/ UAAL

HB 1645 as Amended

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WHAT’S FAIR FOR ALL? Our retirement system is a

SHARED RESPONSIBILITY

Solving the present challenges means DOING THE RIGHT THING for retirees, employees and taxpayers

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• BALANCED: There is a shared responsibility to balance concerns for current benefits with protecting future earnings. The system must be fair to all parties.

• ACCOUNTABLE: The system is transparent, responsive, sustainable and actuarially sound.

• CERTAIN: The system gives current employees and retirees pension benefits based on certainty that retirement funds will always be there for them.

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HOW DO WE RESTORE THE SYSTEM?

The Omnibus Reform bill,HB 1645, with adjustments proposed by NHMA, meets this challenge.

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NHMA RECOMMENDEDADJUSTMENTS

• Transfer sufficient funds from Special Account to pension fund to: – mitigate increased costs to public employers

for medical subsidy, – protect most vulnerable retirees, and– eliminate unfunded mandate.

• Make benefit changes to protect the long-term health of pension fund

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A Win-Win Strategy• Protect current and future retirees with an

accountable and accurate system

• Ensure public employers pay their fair share

• Keep current employees from early retirement by giving them certainty

• Provide balance and shared responsibility without an unconstitutional, unfunded mandate

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The NHMA, NHSBA and NHAC,* representing public employers,

support a BALANCED, ACCOUNTABLE

and CERTAIN retirement system for public

employees.*New Hampshire Municipal Association, New Hampshire School Boards Association and New Hampshire Association of Counties