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Sunday, March 13, 2011

Battle brews over paying for burgeoning costs of system

CONCORD – The recovering stock market helped translate to nearly $600 million of investment profits for the New Hampshire Retirement System in 2009.

But the high cost of benefits paid out and the historic low-balling of the actual expense meant the system was only 58.5 percent financed for the future.

That cash windfall led to an improvement of just two-tenths of 1 percent.

Senate Majority Leader Jeb Bradley, R-Wolfeboro, said that was the clarion call that real systemic reform had to occur.

“We had a great year, and the funding needle barely moved. What does that tell you? We have a program going forward that is not sustainable,” said Bradley, the chief architect of a reform plan (SB 3) that has made early gains through the 2011 legislative maze.

In the House of Representatives, former Finance Committee Chairman Neal Kurk, R-Weare, is moving even more aggressively to cut back or cap the state’s obligation to pay health care benefits for certain retirees (HB 231).

But many organized labor leaders protest that the solutions sought in Concord would make existing employees pay heavily for a network that let public employers and their taxpaying clients off the hook for too long.

Professional Fire Fighters Association President David Lang said zealots for reform over-hype the financial challenges facing the system to try to ram through changes that would break the contract of government with its workers.

“In the last 10 years, the system has taken in $5.5 billion and has paid out $4.5 billion,” Lang said. “That’s not insolvency. That’s not bankruptcy.”

There are many illustrations that makes the New Hampshire Retirement System stand out.

For instance, Bloomberg News Service ranked it the third-worst in the country.

The Pew Research Center for the States listed New Hampshire among 18 states with “serious concerns.”

The report found New Hampshire’s pension obligations total $7.7 billion, while its unfunded ledger is $2.5 billion.

The total contributions from employers and employees in 2009 were $189 million. If the system was fully paid for, the revenue should have been $252 million, according to the Pew report titled “Trillion Dollar Gap.”

The state’s so-called medical subsidy, which provides coverage for some retirees, is similarly under water by more than $1 billion.

Put together, Senate President Peter Bragdon, R-Milford, and other critics say the unfunded price tag is $4.7 billion.

“There is no question that our existing system is in need of an overhaul,” Bragdon said. “To be clear, the status quo is no longer acceptable. Inaction is no longer an option.”

Historically, there were two practices that made a bad problem worse in a system that was 89 percent funded a decade ago.

The first occurred in 1991, when, in the midst of the closing of the state’s largest banks, a bankrupt electric utility and real-estate depression, policymakers were looking for ways to lighten the retirement cost load on taxpayers.

With Judd Gregg as governor, the retirement board moved to a new accounting method known as open group aggregate. This dramatically reduced what actuaries said the state needed from taxpayer/employers to support pensions.

At the time, the assumption was this method would remain in place through the recession and be replaced in two or three years.

Instead, it stayed on the ledger for 15 years.

The second cost driver was the practice of gain sharing, which paid out more lucrative benefits to retirees when investment income didn’t meet targets.

This was made worse because New Hampshire has an assumed rate of return of 8.5 percent, the highest one in the country for state retirement plans along with Connecticut and four other states.

The problem is that gain sharing sets benefit levels that can’t be sustained when investment returns plummet, like they did by 18 percent in 2008.

Lawmakers curtailed that practice in 2006, but are still living with the financial hangover from it.

Barbara Reid, with the New Hampshire Municipal Association, said it’s too one-dimensional to say underpayments by employers have put the system in such dire financial shape.

“The unfunded liability has grown by more than $1 billion in a little over a year,” Reid said. “The obligation is just not sustainable.”

Jim Roche, president of the Business & Industry Association of New Hampshire, said his members pay the most property taxes in the state and are looking for relief.

“Make no mistake: This is a multibillion-dollar bill that hangs over the head of every taxpayer, most notably every business owner in New Hampshire,” Roche said.

After years of giving less, accounting and state law changes have employers kicking in larger amounts. Their contributions have risen from $70 million a year in 2000 to $302 million in 2010.

At the same time, Bradley and other reformers point out that even since 2009, employer donations are up 15 percent, while employees are giving 4.9 percent more over the same period.

Those advocating going slowly on reform point out there have been significant changes in recent years.

Lawmakers shored up the account three years ago, taking $250 million from a special account designed to pay cost-of-living increases for retirees.

The current state budget made retirees younger than 65 with subsidized health coverage contribute $65 per person per month toward that care.

And it raised what new state employees must donate to pensions from their salaries from 5 percent to 7 percent.

There’s no argument that employees will pay more to preserve the financial insolvency of the system going forward.

The fight at the Statehouse is over which employees will do so.

In his budget address last month, Gov. John Lynch proposed making all newly hired public employees work longer and contribute more from each paycheck to support a pension.

During these austere economic times, however, those clamoring for more dramatic change in the system’s finances, such as Bradley, insist that the rules have to change for younger workers.

Reformers compare it to those pushing for reform of Social Security, which would either change the age of retirement or broaden the federal tax for workers younger than 45, who are still in their earning years.

The Senate proposal would raise the retirement age for public safety workers with fewer than 10 years on the payroll who aren’t vested into the system.

“It is illogical to assume from the day you were hired that no changes can be made to a retirement package,” Bradley said.

It would also raise the pension donation rate for teachers and municipal employees by 40 percent and for firefighters and police officers by 22 percent.

State Employees Association President Diana Lacey charges that’s breaking a covenant with employees and would likely not withstand a court challenge.

“It’s not about the numbers; it’s about the honor of fulfilling promises,” Lacey said.

Legislative leaders are already bracing for the court fight, and Bradley wants to raise the employee paycheck takeout if the state were to lose it.

State Sen. Raymond White, R-Bedford, who also represents Merrimack, said preparing for the unexpected makes sense.

“I took that as we’ll see you in court no matter what we do,” White said. “I felt boxed in and threatened at that point.”

Arthur Beaudry, president of the Permanent Retired Fire Fighters of New Hampshire, said it would be the height of sore loser revenue if lawmakers followed through on this proposal.

“Both groups are going to take it on the chin,” Beaudry said of Bradley’s plan. “He is basically hedging his bets that if he loses in court, he gets to take it from the employees on the back end.”

Nashua Mayor Donnalee Lozeau is one of many municipal leaders calling for taking non-salary wages such as unused vacation and sick time out of the pension base, since it can cause pension payouts to balloon.

“The public supports a reasonable pension for dedicated public employees, but we’ve gotten away with that with all these extras – special-duty pay, sick leave, vacation leave – that all get rolled into the calculation of someone’s retirement,” Lozeau said.

Among 19 pending bills, some would scale back the definition of earnable compensation. For new employees, Lynch would cap it at no more than 150 percent of the base salary plus overtime in the last 12 months of service.

Starting in 2016, the Senate plan would cap any pension at 100 percent of an employee’s highest base salary.

Bradley also wants to limit special-duty pay counting toward the pension to whatever is earned on average during the final seven years of work.

Another significant shift in the power base would come on the Retirement System Board of Trustees, where Bradley and supporters want to cut the number of public employees in half and end a union majority on the board.

Finally, there’s a desire by GOP leaders such as House Speaker William O’Brien, R-Mont Vernon, to study converting from a defined or guaranteed benefit plan to a defined compensation program that grants the pension based on the fund’s performance.

“In the short term, we need to stabilize funding,” O’Brien said. “Then we have to look at fundamental changes that address how we get there.”

Kevin Landrigan can be reached at 321-7040 or