NHRS: Past, Present, and Future
Transcript of video:
Cover: To fully understand where NHRS stands today and where it is headed, it’s important to understand how we got here. In this presentation, we will walk through some significant events in the history of NHRS and explain how many decisions made long ago continue to resonate.
Slide 2: In 1967, RSA 100-A was enacted, establishing the New Hampshire Retirement System as a contributory, public employee defined benefit plan. Prior to the creation of NHRS, there were separate retirement systems for firefighters, police, teachers, and employees. NHRS was set up with two member groups – Group I employees and teachers, and Group II police and fire – with separate benefit provisions for each group. The state paid 40% of the employer contribution for teacher members, which was a carryover from the previous Teachers Retirement System.
Slide 3: RSA 100-A was amended in 1977 to require the State to pay 35% of the local employer contributions for teacher, police, and fire members employed by political subdivisions. This change coincided with the an increase in employer contributions for police and fire stemming from significant improvements to Group II benefits that were enacted in 1974. These subsidies remained in place until they were reduced beginning in 2009 and ultimately eliminated in 2011.
Slide 4: The Special Account was created to pay for cost-of-living-adjustments (aka COLAs) and other post-employment benefits (aka OPEB), from “excess earnings” above the retirement system’s assumed rate of return. In subsequent years, the definition of “excess” was modified by the Legislature periodically. Previously, COLAs were typically funded through General Fund appropriations. Dedicating investment income over a certain level to pay for additional benefits – known as “gain-sharing” – left NHRS vulnerable in down markets, as investment income in strong years was essentially capped. The investment income diverted into the Special Account was unavailable to offset years in which the retirement system did not achieve its assumed rate of return, contributing to a structural unfunded liability.
Slide 5: In 1984, the NH Constitution was amended by referendum. Part I, Article 36-a, established that trust fund assets are for the exclusive benefit of providing benefits, not to be diverted for any other purpose. The amendment also mandated the NHRS Board of Trustees to certify actuarially sound employer contribution rates, and required employers to pay those rates as certified. This amendment distinguishes NHRS from many retirement systems where the annual funding level is at the discretion of the Legislature.
Slide 6: The retirement system’s autonomy from the executive branch was confirmed by the NH Supreme Court in NHRS v. Sununu. This case, which dealt with whether or not NHRS contracts had to be approved by the Governor & Executive Council, recognized the importance of maintaining independence for the retirement system so that it could operate for the exclusive benefit of its members and beneficiaries, and, if necessary, take action to protect the trust fund.
Slide 7: Following strong investment performance in previous years, benefit improvements for all groups were enacted in the late 1980s. These changes increased the retirement system’s unfunded liability, which is the difference between the value of assets on hand and the present value of future benefit obligations. The changes resulted in a large projected increase in employer contribution rates beginning in the 1992-93 biennium. By 1991, however, the state was feeling the impact of a national recession. In response, the Legislature passed House Bill 51, adopting new actuarial methodology and setting the assumed rate of return at 9.75% for the fiscal year ending June 30, 1992, resulting in substantially lower employer contributions than previously projected. Originally promoted as a “short-term” adjustment, HB 51 resulted in artificially depressed employer contribution rates from 1992 to 2009.
Slide 8: Structural funding issues became more apparent following the recession of 2001-02 and policymakers began looking at ways to shore up the retirement system. In 2007, House Bill 653 changed the actuarial funding methodology to a more widely accepted method that is still in use, and created a closed, 30-year amortization of the retirement system’s unfunded liability beginning in fiscal year 2010. The same year, HB 876 created a commission to study the long term viability of the retirement system. The commission made a number of material recommendations, many of which were subsequently enacted into law. One of these recommendations led to the creation of a decennial retirement commission to convene every 10 years.
Slide 9: The following year, in this midst of the largest economic crisis since the Great Depression, the Legislature enacted HB 1645, which established an Independent Investment Committee, transferred $250 million from Special Account to stabilize the Pension Trust, and made several other changes. Several provision of this bill were challenged by member organizations in AFT v. State of NH.
Slide 10: RSA 100-A was amended in 2009 to reduce the 35% state subsidy toward local employer contribution rates for teachers, police, and firefighters to 30% in Fiscal Year (FY) 2010 and 25% in FY 2011, resuming to 35% in FY 2012. However, in 2011 the Legislature modified changed the 2012 appropriation to a lump sum of $3.5 million and eliminated the state contribution entirely for subsequent years. The elimination of the subsidy essentially increased local taxpayer contributions toward teacher, police and fire retirement costs by more than 50%. Several employers challenged this action in City of Concord v. State of NH.
Slide 11: While the 2007-08 changes to the pension statute primarily dealt with funding and administration, the Legislature on 2011 focused on the benefit side of the equation. House Bill 2 was enacted, increasing contribution rates for all members and changing benefit provisions for some current members and all future hires. These changes essentially created a three-tier benefit structure based on a member’s “vested by” or “hired by” date. HB 2 also created a statutory definition of “part-time” for retirees working for participating employers; permanently froze Medical Subsidy payment amounts; and changed the composition of the NHRS Board by eliminating legislator members, reducing public employee members, and increasing employer and public members. Several provision of this bill were challenged by member organizations in two cases, PFFNH v. State of NH (1&2). The first case challenged the contribution increase and the second case challenged other benefit adjustments.
Slide 12: In the ensuing years, the NH Supreme Court decided in favor of the State of NH in four separate pension cases:
-Against the City of Concord in its claim that eliminating the employer contribution subsidy was effectively the imposition of an unconstitutional unfunded mandate.
-Against members and retirees in the other cases, which argued that changes such as increasing member contributions, revising the definition of earnable compensation, and eliminating or reducing benefits represented an unconstitutional breach of contract rights.
In deciding the three member cases, the Court adopted the ‘unmistakability doctrine,’ which states that laws can be changed prospectively unless there was an unmistakable legislative intent to establish a contractual right that cannot be modified.
Slide 13: In the fall of 2017, the Decennial Commission to study the long-term viability of the retirement system met for several months and heard from representatives of member, retiree, and employer organizations, NHRS staff, and outside experts on public pension policy and funding. Several recommendations from the commission became the basis for subsequent legislation, including revisions to the working after retirement laws, the adoption of layered amortization – a mechanism to reduce volatility by amortizing future asset gains or losses over closed, 20-year periods; a one-time $500 retiree payment; and increasing terms of NHRS Trustees from 2 to 3 years.
Slide 14: The commission also hired an independent third party – the Center for Retirement Research (CRR) at Boston College – to review NHRS’ past and future funding progress and provide recommendations. The Boston College-CRR report found that despite its below-average funded status, NHRS costs were low in comparison to the national average and its current actuarial assumptions were more conservative than most public plans.
Slide 15: Here are some of NHRS’ key demographic, funding and actuarial metrics at the close of the most recent fiscal year. The funded ratio, which is the ratio of the actuarial value of assets to the benefits our members have earned, has continued to improve over the past decade, despite paying out billions in pension benefits over the same time period. Most of those payments stay in New Hampshire, where nearly 80% of our retirees and beneficiaries still live, and provide a significant economic impact.
Slide 16: This chart shows the changes in trust fund assets over the past decade.
Slide 17: This chart, which is the most recent national data available, shows how NHRS’ funded ratio has increased over time. In contrast, the average funded ratio for all US public pension plans has decreased. The three triangles on the chart indicate years in which NHRS reduced its assumed rate of investment return, which has decreased from 8.5% to 6.75%. NHRS has gone from having one of the highest assumed rates of return in the 1990s to one of the most conservative assumed rates of return today.
Slide 18: Fiscal year investment returns reflect year-over-year volatility in financial markets. This chart also illustrates why actuaries use five-year smoothing when calculating the actuarial return. Without this smoothing, employer contributions rates could experience significant swings every two years.
Slide 19: As previously mentioned, steps have been taken to ensure the errors of the past would not be repeated today or in the future. Because of its strong constitutional and statutory foundation, NHRS is on the path to full funding.
Slide 20: The retirement system is making good progress on paying down its unfunded liability. A slow, steady decrease in the liability is projected in the coming decades, with a corresponding increase in the funded ratio.
Slide 21: Of course, a lot of plans can look good in theory, but how can we be certain that NHRS’ funding plan will be successful in reality? The experience in Maine paints an encouraging picture. As demonstrated in this chart, the changes made in Maine bear a striking resemblance to the statutory and governance decisions made in New Hampshire. However, Maine made its changes a dozen years before we did and is therefore further along its path to full funding.
Slide 22: Although NHRS is moving in the right direction, there are still factors largely beyond our control. These include future legislative changes, as well as unforeseen economic and demographic changes.
Regardless of what lies ahead, our mission is straightforward, “To provide secure retirement benefits and superior service.” The NHRS Board and staff are committed to promoting the sustainability and stability of the retirement system for the benefit of all members and beneficiaries.
Slide 23: If you would like to learn more about some of the topics covered in this presentation, the retirement system’s “Now You Know” series of issue briefs provide additional information and context on funding, benefits, investments, and plan governance. These briefs can be found at www-dot-nhrs-dot-org/now-you-know
Slide 24: (Disclaimer-no audio).