Questions and answers. SB-3

By Jeb Bradley April 15, 2011

Over the last few weeks, many people, especially public employees, have called, emailed or spoken with me at the State House about the pension reform bill, SB-3, which recently passed the Senate. Many of these people have received misinformation about what the bill actually does and how it affects them. Reforming the pension system to ensure its long term viability has been an emotional discussion for some folks, and that’s why I believe it is so important for everybody to have accurate information on the exact changes that are called for in SB-3. It is my hope that this column will help provide clarification. As always, I remain open and available to discuss concerns or share thoughts on this issue.



Background

As of June 30, 2010 the unfunded liability of the New Hampshire Retirement System (NHRS) was $4.7 billion – approximately $3500 per person in NH. On July 1, employers -- meaning taxpayers -- will pay 13.95% of salary for teacher’s retirement, 25.57% for police officers, and 30.9% for firefighters. In two years those rates will escalate to 29.2% for police and 33.9% for firefighters – rates that are unsustainable in my view. Without SB-3, the entire unfunded burden will be borne exclusively by taxpayers. This will price employees out of jobs, drive up property taxes, make growing and attracting businesses to NH more difficult, and may lead to a downgrading of the state’s bond rating.

Impact of SB-3 on retired public employees -- There will be no changes in the pensions of people already retired.

Medical subsidy eligibility -- The medical subsidy is a payment to a retired teacher or municipal employee that allows them to stay on their former employer’s health plan. Legislation several years ago froze the 8% growth rate in the medical subsidy. SB-3 continues that freeze, but if a retired employee is eligible for the subsidy payment he or she will continue to receive it without a growth factor. The medical subsidy is now funded by employers.

Impact of SB-3 on COLA’s – SB-3 does not change COLA status. Legislation several years ago established a 1.5% COLA in 2010 on the first $30,000 of pensions. SB-3 does not alter that but it also does not authorize additional COLAs.

Gainsharing—“gainsharing” is the practice of diverting revenue from the main pension fund into the Special Account to pay for COLAs and the Medical Subsidy. Gainsharing is one of the primary reasons the NHRS has an unfunded liability of $4.7 billion. Pension systems rely on good earning years to balance poor earnings. Gainsharing diverted $900 million from good earning years leaving the NHRS with no cushion for poor years. No pension system is viable when diversions occur. Legislation enacted several years ago eliminated gainsharing for the foreseeable future and SB-3 ensures gainsharing does not return. COLAs in the future will have to be funded from a different source.

Impact of SB-3 on employees who have worked for 10 or more years and are vested into the NHRS -- Contribution rates will increase from 5 to 7% for employees and teachers; public safety employees will increase from 9.3% to 11.3%. Overtime, unused sick and vacation time, end of career payments will still count toward retirement calculations, and current multipliers will be used. Special detail pay will still be included in retirement calculations provided it is not higher than the average of the previous 7 years. Also, effective in July of 2016, no one will be able to retire at a level higher than 100% of their base pay.

Impact of SB-3 on employees who have worked less than 10 years and are not vested -- Contribution rates will also increase similarly. Employees will not be able to count unused sick or vacation time or end or career payments toward retirement -- though overtime will count. Retirement will be calculated over 5 rather than 3 years. Public safety employees will have to work somewhat longer depending upon years of service. Currently these employees can retire at age 45 with 20 years of service. Under SB-3 an employee with 8 or 9 years of service can retire at 46 with 21 total years. For someone with 6 or 7 years they will be able to retire at 47 with 22 years. Someone with 4 or 5 years of service could retire at 48 with 23 years. Someone with 1-3 years could retire at 49 with 24 years. For newly hired public safety employees, they will be able to retire at age 50 with 25 years of service with a pension multiplier designed to achieve 50% of base salary after 25 years.

For more information about SB-3 and the NHRS – SB-3 can be found at www.nh.gov and the NHRS at www.nhrs.org