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Retirement Issues Update

Retirement Issues Update. Briefing for the NH School Administrators Association By Kate McGovern New Hampshire Bureau of Education & Training September 25, 2008. NH Bureau of Education & Training. Courses for public employees Supervision Management Computer skills Health & Safety

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Retirement Issues Update

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  1. Retirement Issues Update Briefing for the NH School Administrators Association By Kate McGovern New Hampshire Bureau of Education & Training September 25, 2008

  2. NH Bureau of Education & Training Courses for public employees • Supervision • Management • Computer skills • Health & Safety www.nh.gov/hr

  3. BET Programs Certificate Programs • Human Resource • Front Line Support • Public Supervisor Certified Public Manager Program Accredited by the National Consortium of Certified Public Managers.

  4. Agenda • Overview • Accomplishments • 2007: HB 653 • 2008: HB 1643 & HB 1645 • Remaining Issues • COLAs • Health insurance

  5. Contributory Plan Funding is like a mortgage The NHRS trust fund grows during the careers of its members, to build lifetime benefits. Employees have a fixed rate • 5% for Group I • 9.3% for Group II Employers have an adjustable rate • Decreases when investments are good. • Increases when investments fall.

  6. NHRS Active & Retired MembersCAFR 2007

  7. Group I ExampleGroup I members contribute 5%of pay Sally’s AFC* is $30,000 She is retiring at age 60, with 30 years of service $30,000 divided by 60 = $500 $500 x 30 years = $15,000 annual pension At age 65, her pension is reduced: AFC divided by 66 = 454.54 x 30 years = $13,636 *AFC = Average Final Compensation

  8. Group I Pensions The average pension for employees = $10,874 The average pension for teachers = $19,376 Commission Report page 62

  9. 15 Years of Under-funding the Trust From 1991-2006 the Open Group Aggregate methodology (OGA), combined with aggressive earnings assumptions, generated artificially low employer contribution rates. OGA made the fund appear healthier than it actually was.

  10. Re-cap In 2006, the NHRS Trust fund was at 61.35% The average funding level of public pension trusts was 85%. Of the 125 plans in the Public Fund Survey, 114 were better off than NHRS.

  11. Labor/Management Working Group NHSAA, NEA, AFT, School Boards & others • Reform of the funding methodology • Stop the flow of funds into the Special Account until the trust is 85% funded. • Change the method of funding COLAs, including a member rate increase.

  12. Projected Employer Rates 7/1/09-6/30/11 *UAAL = Unfunded Actuarial Accrued Liability

  13. HB 653 June 30, 2007 2 out of 3 goals were accomplished • The accounting method was changed. • More than $200 million was kept in the trust fund, rather than transferring to the Special Account. The funding level improved to 63.4% • Created a Commission to Study the Long-Term Viability of the System, including the establishment of a sustainable COLA

  14. HB 653 Restricted the Flow of Funds to the Special Account • When the trust fund reaches an 85% funding level, earnings in excess of 10.5% may be transferred, using an actuarial formula. • The trust is expected to reach 85% in 22 years. With no new money going into the Special Account for 22 years, how can COLAs be provided?

  15. The Special Account was the source of funding for COLAs

  16. HB 653 got NHRS on a stable path • The Entry Age Normal methodology increased employer rates so the trust fund will be fully funded in 30 years. • The system is not in crisis. • The COLA & the Health subsidy would be addressed by the Commission

  17. Granting compounded 2% COLAs will deplete the Special Account in less than 5 years

  18. 2.25% Compounded COLAs provide small amounts to the lowest paid workers Average pension for female employee Age 90-94 = $5,854 The 2 ¼% COLA in 2007 = $146

  19. Commission’s Priority Recommendations • Establish a committee structure in the NHRS Board, including investment experts • Freeze the amount of the medical subsidy, subject to review • Establish a new health care plan by 7/1/09 • Transfer $250 Million from the Special Account to the trust fund • Establish an employee funded COLA • Allow non-vested members to leave $ in the system

  20. Recommendations for COLAs The Commission recommends moving away from the Special Account as the primary source funding for COLAs, with transitional provisions to protect current retirees.

  21. Recommendation to the Fiscal Committee: COLAs for current retirees Provide a “13th” check of a minimum of $500, up to the median pension of each group. Increase the 13th check at CPI-U each year. Example: $25,000 median pension would be a $625 annual check, increased annually. With 3% CPI-U adjustment, the next year’s 13th check would be $644. Report pages 13, 74

  22. Impact Downside: The 13th check is not compounded in the base pension. Upside: The method targets the remaining funds to the lowest income retirees and there is more than enough money to provide the benefit for 22 years. Cost: $12-14 million/year.

  23. Recommendation: Institute an Employee-funded COLA Employees fund their own future COLAs, with an increase employee contribution rate of 2%. • Employees & Teachers increase from 5% to 7% • Police & Firefighters increase from 9.3% to 11.3% Effective dates of the rate increases and the commencement of the new benefit will require actuarial assistance.

  24. Recommendation: Adopt a new retiree health care model, effective 7/1/09 Only a portion of active members are eligible for the NHRS Medical subsidy Create a transition plan to the new model

  25. What HB 1645 Accomplished Implemented 5 of the 6 priority recommendations of the HB 876 Commission. Most significant achievement: Guaranteed the continuation of the medical subsidy for eligible retirees.

  26. HB 1645

  27. HB 1645

  28. HB 1645

  29. COLAs in HB 1645 • 1.5% on the first $30,000 = a maximum of $450 • Retirees with at least 15 years of service whose pensions were < $20,000 get a one-time payment of $1,000. • Those who retired by January 1, 1993 get a one-time payment of $500.

  30. Medical Subsidy HB 1645 guaranteed the medical subsidy for the “closed group” including Group I teachers and subdivision employees who qualify. HB 1643 extended the date to July 1, 2009. To qualify, Group I members with at least 20 years of eligible, creditable service must retire by 7/1/09.

  31. Pension Trust Fund Employer Contributions Medical sub-trust Subsidy payments to employers on behalf of eligible retirees, toward the cost of group health coverage.

  32. Actual Employer Rates 7/1/09-6/30/11

  33. Medical Subsidy Rates until 2012 HB 1645 established a 4-year freeze of the rates at the 2007. Beginning 7/1/2012, the rates will increase by 4% each July 1. Amounts 7/1/07-6/30/12

  34. Supplemental Payments to Subsidy Recipients 2008-2011* *Not to exceed the premium

  35. Teachers & Subdivision Employees HB 1643 extended subsidy eligibility to those who retire by 7/1/09 with at least 20 years of service. Problems: Group I members who don’t retire are not eligible. • There is an incentive for those with 20 years of service to retire prematurely.

  36. Will the study committee find a solution in time…? Retirement applications must be filed with NHRS 30-90 days in advance of your retirement date. To retire 7/1/09, the filing period is 4/2/09-6/1/09. Monday June 1st is the last day to file…it’s not recommended to cut it that close… When do your districts require notice?

  37. Obstacles for COLA 1. Structural • How to structure a transition for those close to retirement? • How to credit the accounts? 2. Financial • Can members afford it? • Can employers provide raises to offset it? 3. Political • It won’t be popular!

  38. 67% Funded Net assets actuarial value = $4.86 billion Actuarial present value of future benefits = $7.26 billion 6/30/07

  39. Earnings Assumption 8.5% per year 2007, the fund earned 16% 2008, two quarters earnings were -6.7%

  40. Investment Highlights

  41. Pension funds for workers take a hit The value of the state's public pension fund has declined by roughly $500 million during the last three months of market turmoil, and stood at $5.1 billion yesterday… Wall Street upheaval has taken its toll, despite the effort NHRS makes to diversify its assets across a range of bonds, stocks, real estate and other investments. NHRS reported its pension fund was at $5.9 billion on July 1, 2007, when a new fiscal year started, according to Sen. Harold Janeway, D-Webster, an investment professional the Senate appointed to the NHRS board. The total loss over the last 14 months came to $800 million by yesterday morning. By TOM FAHEY, State House Bureau Chief Union Leader, 9/19/08

  42. HR 676Expanded Medicare for All No more health insurance premiums. Every American would be covered for health care, including long-term care, prescriptions, mental health care. Funded primarily by increasing the current Medicare tax 1.45% to 4.75%. Both employees and employers would pay 4.75%

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