Policy Assessment of New Hampshire House Finance Committee’s Proposal

Posted April 2, 2009

The budget prepared by the House Finance Committee includes a temporary member rate increase of 2% for the purpose of reducing employer rates. 

The proposal is inappropriate under the structure of the defined benefit plan.  The employees’ contributions are set by statute; the employer rates are adjusted based on actuarial projections. As the guarantor of the plan, the public employers’ contributions are reduced when investment earnings do well and increased when the markets do poorly. The proposal by House Finance shifts the burden of poor markets on to the employees, following years of low contribution rates by the employers when the markets were doing well. 

Given the history of the NH Retirement System, the proposal is particularly troubling. During the recession of 1991, the legislature adopted an alternate funding methodology which artificially reduced employer rates.  The under-funding persisted over a 16 year period. By 2007, when the legislature reformed the funding methodology, the taxpayers (state, county, municipal and school district) owed a back debt of $2.7 billion. The legislature authorized an amortization period of 30 years for repayment.

The budget prepared by the House Finance Committee inappropriately shifts a portion of that debt to the employees. Since the State reduced its contributions during the 1991 recession, and did not reform the System until 2007, the State bears the responsibility to make it right. Below is an excerpt from testimony by Rep. Richard Campbell, who had served as a House Trustee on the NHRS Board.  He described the potential consequences of HB 51 to the Joint Senate Finance & Insurance Committees on February13, 1991.

I believe that the rates that would come out of the bill as it is written, the amended bill are too low…I don’t believe they are sound… Part I, Article 36a of the constitution says that an employer contribution shall be determined by sound actuarial practice and shall be appropriated as certified….I think it would be helpful to put in a provision there that says in effect while we believe that the rates that we’re specifying are sound, that if, after the biennium is over, we look at it in retrospect and it turns out that they were too low, then the state should take the responsibility for that and make up the funding rather than throwing it back at the municipalities.

Policy Recommendation: Amend the House Finance proposal to direct the rate increase to member accounts and member benefits. The member rates should be increased for the purpose of pre-funding a Cost of Living Adjustment (COLA).  The HB 876 Commission recommended that members contribute toward the funding of COLAs.  Members should not be paying the employers’ share.  However, members’ retirement security would be strengthened if their contributions are increased for the purpose of adding a guaranteed COLA to the pension plan. The member-funded COLA was one of the priority recommendations of the HB 876 Commission.

Click here for the Commission’s report.