Solutions to New Hampshire’s Public Pension Crisis

The New Hampshire Center for Economic Policy (NHCEP) follows up February’s report on the alarming scope of New Hampshire’s Retiree Funding Crisis with realistic solutions based on reforms that are already working in other states across America.

“Last month, we showed that New Hampshire has an unfunded liability to current and future state retirees of some $13.3 billion, and that this figure will keep growing unless some significant changes are made now,” noted NHCEP president J. Scott Moody.  “The first step we recommend is an Amendment to the State Constitution to guarantee that state employees will have a fully-funded retirement system, and that politicians can no longer manipulate the management of these funds for short-term reasons.  This Amendment, similar to one passed in Maine more than a decade ago, also mandates that state retiree pension funds can never be diverted for other purposes.”

“Another key part of this Constitutional Amendment is that it specifies that the present unfunded liability must be paid down within a fixed 30-year period,” adds Chief Economist Wendy Warcholik.  “This Amendment, plus the other five steps we recommend in today’s report, will bring a professional, business-like approach to state employment, and will create a retirement system that is fair and dependable for state employees, and also transparent to the taxpayers.”

“The solutions we’re recommending today are already working in other states to avoid mass state worker layoffs, employee pension defaults or radical tax increases,” Mr. Moody continued.  “These six steps will correct current problems in New Hampshire’s state employment and retirement systems, avoid new unfunded liabilities and pay down the existing debts.”

Mr. Moody concluded: “Now that we know the problem, see the real danger to the state’s long-term economic prospects, and have workable solutions to correct decades of mismanagement and unfunded promises – we will have no excuses for our children and grandchildren if we don’t act now.”

Read this new report, with specific recommended solutions, here: http://nheconomics.org/wp-content/uploads/2010/08/NHCEP-Liberty-in-Economics-Volume-1-Issue-2-New-Hampshire-Pension-Solutions-031511.pdf

To read the February 17 NHCEP report detailing the state’s growing unfunded liability for retiree pensions and benefits, please click this link:   http://nheconomics.org/wp-content/uploads/2010/08/NHCEP-Liberty-in-Economics-Volume-1-Issue-1-New-Hampshire-Pension-Crisis-021711.pdf

Mr. J. Scott Moody and Dr. Wendy Warcholik are available for press interviews, on-air appearances and in-person presentations of this research.  If you have any questions or would like to arrange a meeting, please contact Martin Sheehan, the Director of Communications via e-mail at martinsheehan@nheconomics.org or by calling 207-650-7335.

New Hampshire’s Pension Burden

According to a recent report by the Pew Center on the States, in 2008, New Hampshire’s unfunded pension liability was $2.5 billion. Put simply, this means that the pension obligations owed ($7.8 billion) exceed the assets set aside ($5.3 billion) to pay them by $2.5 billion.  To pay for these obligations, New Hampshire’s state government was required to pay $252 million but only managed to contribute $189 million.  Not meeting these minimum payments only worsens the situation.

However, economists Robert Novy-Marx and Joshua Rauh have found that official pension and liabilities are being dramatically underestimated based on current actuarial methods. The problem revolves around the “discount rate” or “interest rate” used.  For example, a 5 percent interest rate means that a $100 today grows to $105 a year from now ($100 time 5 percent) while a 5 percent discount rate means that $105 a year from now is worth $100 today.  In effect, the discount rate is the opposite of the interest rate.

As shown in the table below, they found that New Hampshire’s $7.8billion unfunded pension liability increases to somewhere in the range of $9 billion to $14.2 billion.   More disturbingly, the maximum pension liability ($14.2 billion) is 24.6 percent of Gross Domestic Product ($57.8 billion).  Not that this offers much comfort, but at least that level of liability is only the 46th highest percentage in the country.  In number 1 ranked Ohio, pension liabilities exceed 71 percent of GDP!

As bad as that news is to policy-makers, new information paints an even more disturbing picture.  Since the reported pension liabilities are being dramatically understated, the current payments to the pension system are insufficient to fully-fund the pension system.  Not paying their full contribution (as the state did in 2008) only compounds that problem.  As a result, the pension system will at some have to start cashing-in the pension’s assets in order to pay benefits.

According to their calculations (pdf), New Hampshire’s pension system will run out of money in 2022—only twelve years from today. This is the 8th earliest (tied with Colorado, Kansas and Kentucky) date for insolvency in the country.  The earliest date is held by Illinois when they are projected to run out of money by 2018.

As we near the end of campaigning for this election cycle, the next Legislature and Governor will have to spend time reforming New Hampshire’s pension system.  If they do not, New Hampshire’s credit rating will begin to suffer and the cost of all debt will rise–and taxes along with it.