A Fair Way To Restore The NH Retirement System Balanced. Accountable. Certain.

1. A Fair Way To Restore The NH Retirement System Balanced. Accountable. Certain. The New Hampshire Municipal Association (NHMA) is a nonprofit, non-partisan membership organization of all New Hampshire municipalities. 1

2. 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. 2

3. 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 NEW HAMPSHIRE RETIREMENT SYSTEM (NHRS) HISTORY 3

4. $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 MONEY IN PENSION FUND 4

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6. Divided 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 FUND MANAGEMENT 6

7. 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 CONTRIBUTION RATES 7

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9. 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 PENSION FUND IN TROUBLE 9

10. 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 INADEQUATE FUNDING 10

11. 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 POOR INVESTMENT RESULTS 11

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13. 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 WHAT IS GAIN-SHARING? 13

14. 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

15. 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. THE PERFECT STORM 15

16. 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: * State contributes 35% 16

17. 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. EMPLOYERS’ ROLE 17

18. 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 MAKING THE FUND HEALTHY AGAIN 18

19. 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 19

20. FLOW OF PENSION FUNDS BEFORE 7/1/07 20

21. FLOW OF PENSION FUNDS AFTER 7/1/07 21

22. “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.” Article 28-a in State Constitution 22

23. 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 Is There An Unfunded Mandate? 23

24. EMPLOYER CONTRIBUTION RATES * State contributes 35% 24

26. Our retirement system is a SHARED RESPONSIBILITY Solving the present challenges meansDOING THE RIGHT THING for retirees, employees and taxpayers WHAT’S FAIR FOR ALL? 26

27. 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. 27

28. HOW DO WE RESTORE THE SYSTEM? The Omnibus Reform bill, HB 1645, with adjustments proposed by NHMA, meets this challenge. 28

29. 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 NHMA RECOMMENDEDADJUSTMENTS 29

30. 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 A Win-Win Strategy 30

31. The NHMA, NHSBA and NHAC,* representing public employers, support a BALANCED, ACCOUNTABLEand CERTAIN retirement system for public employees. *New Hampshire Municipal Association, New Hampshire School Boards Association and New Hampshire Association of Counties 31