Benefits guaranteed, not employee contribution
Recently the N.H. Supreme Court heard oral arguments on the constitutionality of legislation that increased member contribution rates to the N.H. Retirement System. In July 2011, as a result of retirement reform legislation, contribution rates for members increased: teacher and public employee contribution rates increased from 5 percent to 7 percent; police and fire rates increased from 9.3 percent to 11.55 percent and 11.80 percent respectively. A coalition representing public employees sued the state arguing that the increase was an unconstitutional impairment of vested contract rights to change retirement plan provisions for members already in the retirement system.
The state’s position, with which we agree, is that the pension benefits are guaranteed, but not the employee contribution amounts. Last fall, Merrimack County Superior Court ruled that the increase to member contributions was unconstitutional for members who were vested with 10 or more years of service prior to July 1, 2011. The case was appealed to the N.H. Supreme Court.
The poorly funded status of the N.H. Retirement System is well known, funded at less than 60 percent of its pension obligations. Many reasons account for this situation, including lower return on investments dating back a decade, changing demographics, health care subsidies and funding for a special account, as well as a legislatively required actuarial methodology. The 2011 reform legislation addressed this problem and put us on track to recover. Unfortunately, that recovery includes significantly higher employer contribution rates to not only fund the current system, but also recoup losses previously incurred. Employee contribution rates are defined in statute, with employer rates set to make up any balance needed. The unions believe they have no responsibility for this recovery, and contend that the increase in their rates violates a contractual relationship that began the day they were hired. Conversely, the state, along with municipalities and school districts, believe that the contract with employees guarantees the promised benefit, a pension payment made upon retirement. It does not guarantee that over the course of a 30-year employment, the price an employee pays to receive that benefit may never change. Nowhere in the statute does it say that a contract exists for employees from day one: Employees are guaranteed the pension benefits they have earned to date, not their contribution towards that benefit. The employees argue that their benefits can always be increased but never decreased, nor can they pay more for those increased benefits.
There is no specific timeframe for when the Supreme Court will issue a decision, but the timing could be important. Next fall, by Oct. 1, 2014, the NHRS Board of Trustees will certify new employer contribution rates to take effect July 1, 2015, for fiscal years 2016 and 2017. A Supreme Court ruling on employee contributions could potentially impact those rates. For example, if the Supreme Court affirms the Superior Court’s decision, future contributions for those members who had 10 years of service would be lowered to the contribution rates in place prior to July 1, 2011. This would result in an estimated loss of about $25 million in annual contributions to the retirement system. If the court agrees with the union position that a contract exists upon hiring, the decrease in employee contributions would double to $50 million.
In these scenarios, contributions from municipalities and school districts would likely have to increase to offset the loss of revenue to the system. The financial impact on political subdivisions would be even more profound if union members were found to be entitled to a refund of the “extra” payments made since 2011, potentially close to $150 million. Municipalities and school districts have experienced double-digit increases in their rates, and find themselves stretched to cover this benefit as well as other obligations, such as health insurance benefits, social security, disability, etc. Defined benefit pensions such as that provided by New Hampshire have disappeared from the private sector. Maintaining this benefit for our state’s public employees will require commitments from all involved to create more financially palatable solutions for taxpayers.
Dr. Theodore E. Comstock is the executive director of the N.H. School Boards Association.