Recession and the State Pension System

Given current economic conditions, state and local appropriations may have to increase by as much as $80 million per year in the next biennium to prop up the state retirement system.  While analysts can argue about the relative magnitude of the issue, the fact that the New Hampshire Pension Plan will again be a topic of considerable debate in the next legislative session is hard to dispute.  How will the legislature respond?

The New Hampshire Retirement System is a defined benefit plan – the employer bears the risk: benefiting from low contribution rates in good years and paying increased rates when required by actuarial analysis.  This means that state and local governments, and ultimately the state and local taxpayers, are responsible when the pension fund loses money in the financial markets, and the pension fund balance declines.

Reportedly the NH Retirement System lost an estimated 20 percent on its investments in the year that ended June 30, 2009 based on preliminary figures.

  This follows a loss of 4.6 in the fiscal year ending June 20, 2008.  The target investment return for the fund is 8.5 percent

Total assets of the fund, which at one point topped $6 billion, are now $4.7 billion.  The loss worsened NHRS's unfunded liabilities problem. What was a $2.7 billion gap on long-term benefits in fiscal 2008 widened to $3.4 billion. The NHRS is funded at 59 percent of its obligations now, compared to 68 percent in June 2008. The funded ratio is the lowest level seen in the past 10 years.

The net impact on employer contribution rates, based on the GRS valuation study impact of a 15% loss in 2009, would mean a 25 to 35 percent increase over the current employer contribution rates (July 2009 to June 30, 2011) for the upcoming biennium (July 2012 to June 2013).  The GRS valuation study can be found here (page 6)

In dollar terms the employer (taxpayer) contribution to the retirement fund would have to increase from the approximately $330 million needed in 2010 to $413 million in 2012.  Policy makers will have three options:  reform the retirement system, reduce spending in other spending areas to offset the increased in demand for general fund appropriations by the retirement system, or increase revenues. 

Comments

[Defined Benefit Plan]

this is an eye opening article. thanks