Retirement Issues Update

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Retirement Issues Update

• Briefing for the
• NH School Administrators Association
• By Kate McGovern
• New Hampshire Bureau of Education Training
• September 25, 2008

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NH Bureau of Education Training

• Courses for public employees
• Supervision
• Management
• Computer skills
• Health Safety
• www.nh.gov/hr

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BET Programs

• Certificate Programs
• Human Resource
• Front Line Support
• Public Supervisor
• Certified Public Manager Program Accredited by
  the National Consortium of Certified Public
  Managers.

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Agenda

• Overview
• Accomplishments
• 2007 HB 653
• 2008 HB 1643 HB 1645
• Remaining Issues
• COLAs
• Health insurance

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Contributory Plan

• Funding is like a mortgage
• The NHRS trust fund grows during the careers of
  its members, to build lifetime benefits.
• Employees have a fixed rate
• 5 for Group I
• 9.3 for Group II
• Employers have an adjustable rate
• Decreases when investments are good.
• Increases when investments fall.

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NHRS Active Retired MembersCAFR 2007
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Group I ExampleGroup I members contribute 5of
pay

• Sallys AFC is 30,000
• She is retiring at age 60,
  with 30 years of service
• 30,000 divided by 60 500
• 500 x 30 years 15,000 annual pension
• At age 65, her pension is reduced AFC divided by
  66 454.54 x 30 years 13,636
• AFC Average Final Compensation

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Group I Pensions

• The average pension for employees
• 10,874
• The average pension for teachers
• 19,376
• Commission Report page 62

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15 Years of Under-funding the Trust

• From 1991-2006 the Open Group Aggregate
  methodology (OGA), combined with aggressive
  earnings assumptions, generated artificially low
  employer contribution rates.
• OGA made the fund appear healthier than it
  actually was.

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Re-cap

• In 2006, the NHRS Trust fund was at 61.35
• The average funding level of public pension
  trusts was 85.
• Of the 125 plans in the Public Fund Survey, 114
  were better off than NHRS.

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Labor/Management Working Group NHSAA, NEA, AFT,
School Boards others

• Reform of the funding methodology
• Stop the flow of funds into the Special Account
  until the trust is 85 funded.
• Change the method of funding COLAs, including a
  member rate increase.

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Projected Employer Rates 7/1/09-6/30/11
UAAL Unfunded Actuarial Accrued Liability
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HB 653 June 30, 2007

• 2 out of 3 goals were accomplished
• The accounting method was changed.
• More than 200 million was kept in the trust
  fund, rather than transferring to the Special
  Account. The funding level improved to 63.4
• Created a Commission to Study the Long-Term
  Viability of the System, including the
  establishment of a sustainable COLA

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HB 653 Restricted the Flow of Funds to the
Special Account
When the trust fund reaches an 85 funding level,
earnings in excess of 10.5 may be transferred,
using an actuarial formula. The trust is expected
to reach 85 in 22 years. With no new money going
into the Special Account for 22 years, how can
COLAs be provided?
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The Special Account was the source of funding for
COLAs
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HB 653 got NHRS on a stable path

• The Entry Age Normal methodology increased
  employer rates so the trust fund will be fully
  funded in 30 years.
• The system is not in crisis.
• The COLA the Health subsidy would be addressed
  by the Commission

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Granting compounded 2 COLAs will deplete the
Special Account in less than 5 years
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2.25 Compounded COLAs provide small amounts to
the lowest paid workers

• Average pension for female employee
  Age 90-94 5,854
• The 2 ¼ COLA in 2007 146

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Commissions Priority Recommendations

• Establish a committee structure in the NHRS
  Board, including investment experts
• Freeze the amount of the medical subsidy, subject
  to review
• Establish a new health care plan by 7/1/09
• Transfer 250 Million from the Special Account to
  the trust fund
• Establish an employee funded COLA
• Allow non-vested members to leave in the system

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Recommendations for COLAs

• The Commission recommends moving away from the
  Special Account as the primary source funding for
  COLAs, with transitional provisions to protect
  current retirees.

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Recommendation to the Fiscal Committee COLAs for
current retirees

• Provide a 13th check of a minimum of 500, up
  to the median pension of each group.
• Increase the 13th check at CPI-U each year.
• Example
• 25,000 median pension would be a 625 annual
  check, increased annually.
• With 3 CPI-U adjustment, the next years 13th
  check would be 644.
• Report pages 13, 74

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Impact

• Downside The 13th check is not compounded in the
  base pension.
• Upside The method targets the remaining funds to
  the lowest income retirees and there is more than
  enough money to provide the benefit for 22 years.
• Cost 12-14 million/year.

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Recommendation Institute an Employee-funded COLA

• Employees fund their own future COLAs, with an
  increase employee contribution rate of 2.
• Employees Teachers increase from 5 to 7
• Police Firefighters increase from 9.3 to 11.3
• Effective dates of the rate increases and the
  commencement of the new benefit will require
  actuarial assistance.

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Recommendation Adopt a new retiree

health care model, effective
7/1/09

• Only a portion of active members are eligible for
  the NHRS Medical subsidy
• Create a transition plan
• to the new model

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What HB 1645 Accomplished

• Implemented 5 of the 6 priority recommendations
  of the HB 876 Commission. Most significant
  achievement
• Guaranteed the continuation of the medical
  subsidy for eligible retirees.

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HB 1645
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HB 1645
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HB 1645
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COLAs in HB 1645

• 1.5 on the first 30,000 a maximum of 450
• Retirees with at least 15 years of service whose
  pensions were lt 20,000 get a one-time payment of
  1,000.
• Those who retired by January 1, 1993 get a
  one-time payment of 500.

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Medical Subsidy

• HB 1645 guaranteed the medical subsidy for the
  closed group including Group I teachers and
  subdivision employees who qualify.
• HB 1643 extended the date to July 1, 2009.
• To qualify, Group I members with at least 20
  years of eligible, creditable service must retire
  by 7/1/09.

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Pension Trust Fund
Employer Contributions
Medical sub-trust
Subsidy payments to employers on behalf of
eligible retirees, toward the cost of group
health coverage.
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Actual Employer Rates 7/1/09-6/30/11
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Medical Subsidy Rates until 2012

• HB 1645 established a 4-year freeze of the rates
  at the 2007. Beginning 7/1/2012, the rates will
  increase by 4 each July 1.
• Amounts 7/1/07-6/30/12

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Supplemental Payments to Subsidy Recipients
2008-2011

Not to exceed the premium
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Teachers Subdivision Employees

• HB 1643 extended subsidy eligibility to those
  who retire by 7/1/09 with at least 20 years of
  service.
• Problems Group I members who dont retire are
  not eligible.
• There is an incentive for those with 20 years of
  service to retire prematurely.

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Will the study committee find a solution in time?

• Retirement applications must be filed with NHRS
  30-90 days in advance of your retirement date.
  To retire 7/1/09, the filing period is
  4/2/09-6/1/09.
• Monday June 1st is the last day to fileits
  not recommended to cut it that close
• When do your districts require notice?

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Obstacles for COLA

• 1. Structural
• How to structure a transition for those close to
  retirement?
• How to credit the accounts?
• 2. Financial
• Can members afford it?
• Can employers provide raises to offset it?
• 3. Political
• It wont be popular!

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67 Funded

• Net assets actuarial value 4.86 billion
• Actuarial present value of future benefits
  7.26 billion
• 6/30/07

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Earnings Assumption

• 8.5 per year
• 2007, the fund earned 16
• 2008, two quarters earnings were -6.7

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Investment Highlights
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Pension funds for workers take a hit

• The value of the state's public pension fund has
  declined by roughly 500 million during the last
  three months of market turmoil, and stood at 5.1
  billion yesterday
• Wall Street upheaval has taken its toll, despite
  the effort NHRS makes to diversify its assets
  across a range of bonds, stocks, real estate and
  other investments.
• NHRS reported its pension fund was at 5.9
  billion on July 1, 2007, when a new fiscal year
  started, according to Sen. Harold Janeway,
  D-Webster, an investment professional the Senate
  appointed to the NHRS board. The total loss over
  the last 14 months came to 800 million by
  yesterday morning.
• By TOM FAHEY, State House Bureau Chief Union
  Leader, 9/19/08

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HR 676Expanded Medicare for All

• No more health insurance premiums.
• Every American would be covered for health care,
  including long-term care, prescriptions, mental
  health care.
• Funded primarily by increasing the current
  Medicare tax 1.45 to 4.75.
• Both employees and employers would pay 4.75