Supreme Court to rule on pensions
Contributions to retirement at issue
As a lawsuit challenging the mandatory increases in pension contributions by public employees, which went into effect three years ago, make their way through the court system, local towns and school districts could be forced to pay more if the rates for workers are rolled back. The N.H. Retirement System could lose as much as $25 million a year in member contributions, an amount that would most likely have to be made up by the employers that contribute to the system.
In 2011, the N.H. Legislature increased contributions for teachers and many other public employees from 5 percent of wages to 7 percent. Police officers saw their retirement contributions rise from 9.3 percent to 11.5 percent and firefighters contributions jumped from 9.3 percent to 11.8 percent. Police and firefighters pay more because they are ineligible for Social Security benefits and do not contribute to the Social Security fund.
“I don’t think it’s fair to change midstream,” said Diane Gradenour, library director at Rindge’s Ingalls Memorial Library. “I just feel, that like other librarians across the state, we are underpaid and so our pensions really help, but now they are taking more of it.”
In the wake of the changes, four unions — the Professional Fire Fighters of New Hampshire, the New Hampshire Police Association and National Education Association and the State Employees Association of New Hampshire — filed suit against the state of New Hampshire, arguing that contribution increases for employees who were already in the N.H. Retirement System were unconstitutional.
In 2013, Merrimack County Superior Court Judge Richard McNamara ruled that the increase to member contributions effective July 1, 2011, was an impairment of vested contract rights for those who had been in the system for 10 years. Attorneys on both sides of the case disagree on when employees should be considered vested, and McNamara’s decision was appealed to the N.H. Supreme Court by both sides. The state’s lawyers argue that contributions could be changed for all active members, while the unions have said that contributions cannot be changed for anyone who was in service prior to the date when House Bill 2, which raised the rates, took effect in 2011.
“We say you get vested rights the minute you become a permanent employee,” said Andru Volinsky, the attorney representing the four unions.
The Supreme Court recently heard oral arguments in the case. Volinsky anticipates a ruling by late summer or early fall. Meanwhile, both those who have paid into the retirement system and those managing the finances of towns and school districts, who in some cases are one and the same, are waiting to see what will happen.
Two sides to the case
“The claim by the plaintiffs is that the legislative change violates contract law,” said Associate Attorney General Richard Head, who represented the state in the case, in a recent phone interview. “We take the position that the statute was not applied retroactively. In order for a statute to create a contract, the legislature has to use unmistakable language that binds all future legislatures.”
Head said the state will be seeking a reversal of the lower court ruling.
Head said it is unclear what would happen if the ruling is not reversed.
“There are a range of options as to what the court could do,” he said. “It’s a complicated process. To date, [the unions] have not sought reimbursement, and it’s hard to say what the legislature would do in response.”
Volinsky said last week that he believes the 2011 increases to employees’ pension contributions represent an “illegal break in promises made to employees.”
He acknowledges that the state retirement system might be underfunded, but he believes the answer to dealing with the underfunding is not to force workers to pay more.
Volinsky said public employees are underpaid in comparison to those in the private workforce, and that pensions represent a way to make up for this.
“We talk a good talk when it comes to honoring public service but we seem to forget that when it comes to honoring their retirement,” he said.
If the lower court decision is upheld, the N.H. Retirement System could see a significant drop in funding, which would have to be made up by the various municipalities — cities and towns, school districts and the state itself — which employ the workers who contribute.
“The Superior Court found that the vesting date to have no rate change was 10 years,” said Marty Karlon, a spokesperson for the N.H. Retirement System, last week. “If that were to be upheld, we’d lose about $25 million a year in member contributions.”
If the decision was made retroactive and additional contributions made since 2011 needed to be refunded, Volinsky anticipates that employees who paid the increased contribution rates will need to be refunded. Karlon said, the Retirement System could lose between $75 million and $100 million. Employer contributions would have to be increased to make up the difference, Karlon said. Karlon said the N.H. Retirement System is funded through three sources: employee contributions, employer contributions and investment income. Employee rates are determined by state statute, he said, and the employer contribution rate is set every two years by the N.H. Retirement System board.
“If the member rates or investment return go down, the employer rate will go up,” Karlon said. “There isn’t a lot of flexibility. It’s all driven by actuarial tables.”
For decades, Karlon said, the state of New Hampshire picked up 35 percent of the cost of employers’ contributions to the retirement system. That funding was phased back and then eliminated completely in 2011. While the employee contribution rates went up, so municipalities were still hit hard by the loss of state assistance.
Both individual contributors to the retirement system and their local employers have had to adjust to the changes since 2011, and now they are facing more uncertainty.
Greenfield Police Chief Brian Giammarino said, “It’s our retirement, if I have to kick in more so be it, but I feel bad for my town.”
Giammarino said he feels “lucky” because the town of Greenfield has always been supportive of the police. “But when we ask towns to contribute more — and it’s a significant amount more — that’s really unfair,” he said.
Karen Gray, business administrator for the Jaffrey-Rindge School District, said the eventual Supreme Court ruling could have a significant financial impact on the district.
The total contribution to the plan for teachers is 21.16 percent of all wages paid. Teachers pay 7 percent, and the school district pays 14.16 percent. For other employees, the total contribution is 17.77 percent, with the district paying 10.77 percent and the worker 7 percent.
“Those rates were set in September 2012 for a two-year cycle,” Gray said on Tuesday. “They will go through June 30, 2015, and we’ve budgeted based on that.”
She said there’s not much else the district can do.
“We don’t have any sense of what it would mean until a decision comes down,” she said about the court case. “There’s been talk of raising rates, but it’s all up in the air at the moment.”
Peterborough Town Administrator Pam Brenner said the N.H. Retirement System has made it clear that if the Superior Court ruling is upheld, employer contributions will have to increase.
“What that means is that the taxpayers will have to pay more,” Brenner said last week.
Right now, Brenner said, for most employees the town pays the equivalent of 10.77 percent of their wages into the retirement system. But it pays 27.74 percent of the wages for its two full-time Fire Department employees and 25.3 percent of wages for its 10 police officers.
“What it means is that if you put someone on, you immediately need to tack on another 30 percent. It makes it very difficult to control our tax rates,” Brenner said.
Brenner noted that while the state has eliminated its assistance to towns and school districts, the majority of those in the retirement system are actually state employees.
While Brenner’s concerned about the cost of retirement benefits to employers, she’s also wants to make sure the program is viable in the long run for town workers. As a public employee herself, Brenner has been contributing to the system for about 30 years.
“I’m certainly a beneficiary of the system and I’m very grateful,” Brenner said. “In the private sector, most people don’t have a defined benefit plan. Speaking personally, I think [the employee contribution increases] were a small price to pay. I’m worried about the long-term sustainability of this program.”