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The Report of the HB 876 Commission

The Report of the HB 876 Commission. Briefing for the NH School Administrators Association March 20, 2008. NH Bureau of Education & Training. Courses for public employees Supervision Management Computer skills Health & Safety www.nh.gov/hr. BET Programs. Certificate Programs

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The Report of the HB 876 Commission

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  1. The Report of the HB 876 Commission Briefing for the NH School Administrators Association March 20, 2008

  2. NH Bureau of Education & Training Courses for public employees • Supervision • Management • Computer skills • Health & Safety www.nh.gov/hr

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

  4. Agenda • Overview & HB 653 • The HB 876 Commission’s priority recommendations • HB 1643 & HB 1645 The Commission’s final Report is on the Legislative Home page, www.gencourt.state.nh.us and www.katemcgovernassociates.com

  5. NHRS Active & Retired MembersCAFR 2007

  6. Group I ExampleGroup I members contribute 5%of pay Sally’s 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

  7. Group I Pensions The average pension for employees = $10,874 The average pension for teachers = $19,376 Report page 62

  8. 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.

  9. 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. Report pp. 29-44

  10. 63.4% Funded Balance = $5.96 billion Actuarial present value of future benefits = $9.25 billion Unfunded Actuarial Accrued Liability (UAAL) = $2.66 billion 6/30/07

  11. HB 653 got NHRS on a stable path • The Entry Age Normal methodology will increase employer rates so the trust fund will be fully funded in 30 years. • The defined benefit pension is protected. The system is not in crisis.

  12. Employer Rates Projected for 7/1/09 *UAAL = Unfunded Actuarial Accrued Liability Current employer rates are on page 84

  13. The Special Account was the source of funding for COLAs

  14. 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? • Report, p. 31, p. 44

  15. 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? Report, p. 31, p. 44

  16. Granting compounded 2% COLAs will deplete the Special Account in less than 5 years Balances in the Special Account Prior assume recommended transfer of $250M

  17. Depletion of $300M with 2% compounded COLAs Balances in the Special Account Prior to implementation of the Ice Miller Report

  18. HB 876 established a Commission to make recommendations to ensure the Long-term Viability of NHRS The Commission’s charges included a requirement to design “a sustainable & affordable cost of living increase for plan participants.” The Commission’s 9 charges are listed on pg. 4 of the Report

  19. 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.

  20. 2% Compounded COLAs provide small amounts to the lowest paid workers The average pension for male employees = $13,194 2% of $13,194 = $263 Average pension for female employee Age 90-94 = $5,854 The 2 ¼% COLA in 2007 = $146

  21. 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 year’s 13th check would be $644. Report pages 13, 74

  22. 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.

  23. The Special Account funds for some groups may be sufficient to provide more than the minimum 13th check. • The Commission recommended that the new method be subject to biennial review. • HB 1645 establishes a Commission for the review, requiring a report back by 12/1/09. HB 1645 Section 25-29

  24. 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. Note: HB 1645, as amended by Committee, does not implement this program – the matter will be sent to the new Commission looking at COLAs.

  25. 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 HB 1645 section 14 Report pages 10-12, 92-93

  26. What is the Medical Subsidy? An amount paid to the former employer, on behalf of eligible retirees, toward the cost of remaining on the group health plan. It is increased by 8% each July 1. Amounts 7/1/07-6/30/08

  27. Teachers & Subdivision Employees Subsidies were approved in 1999-2001, and extended to include those who retire by 7/1/08 with at least 20 years of service. Problems: Group I members who don’t retire this year are not eligible. • There is an incentive for those with 20 years of service to retire prematurely. • HB 1643 extends the deadline to retire to 2009

  28. Special Account Special Medical Account NHRS Trust Corpus 75% Employer Contributions 25% 401(h) Medical sub-trust Medical subsidy payments on behalf of eligible retirees, toward the cost of group health coverage.

  29. Medical Subsidy Funding Funds from the SMA were sent to the corpus, replacing the employer contributions going to the medical trust. Following legal advice from the Ice Miller Report, effective 7/1/07, NHRS stopped the reimbursement of the employer contributions. Report pages 86-91

  30. Special Account Special Medical Account SMA returned to SA 7/1/07 Replenishment stopped 7/1/07 NHRS Trust Corpus 75% Employer Contributions 25% 401(h) Medical sub-trust Subsidy payments: Monthly amounts to employers on behalf of eligible retirees, toward the cost of group health coverage.

  31. Special Account Recommendation: Move $250 Million From Special Account to corpus NHRS Trust Corpus 75% Employer Contributions 25% Recommendation: continue Employer finding, but only at the solvency level, with 25% as a maximum 401(h) Medical sub-trust Recommendation: Freeze the subsidy amount, subject to biennial review.

  32. Medical Subsidy Funding LevelsJuly 1, 2007 These figures assume the continued 8% annual growth in the subsidy amount.

  33. Recommendations • Transfer $250 million from the Special Account into the corpus of the trust, bringing the funding level up to 66.8% and mitigating the impact of employer rate increases for the medical subsidy. • Freeze the medical subsidy amount at the 2010 level, subject to biennial review. • Limit the employer contributions to the minimum required to maintain solvency of the subsidy, capped at 25%. Report pages 10, 86-91

  34. The Report • Executive Summary contains the priority recommendations. • Details for the Legislature, pages 10-14 • Details for the Board of Trustees, pages 15-17 • Minority reports, pages 19-26 • Findings from each of the Commission’s charges under HB 876 begin on page 27 • Complete text of the subcommittee reports, pages 106-116 • Executive Summary of the GRS Valuation, p.165

  35. Summary of Priority Recommendations for the Legislature • Freeze the medical subsidy amount at the 2010 level, subject to biennial review. • Establish a new health care subsidy plan, separate from the pension plan, by 7/1/09. • Transfer $250 million from the Special Account into the corpus of the trust, which will bring the fund up to 66.8% and lessen the impact of medical contributions on employer rates.

  36. Summary of Priority Recommendations for the Legislaturecontinued 3. Establish an employee-funded COLA plan. 4. Allow non-vested employees to leave money in the system, credited at a rate 2% below the assumed rate. 5. Other recommendations in the Report

  37. HB 1645

  38. HB 1645

  39. HB 1645

  40. Recommendations for Long-Term Viability • Establish a joint legislative committee to maintain a liaison relationship with the System. • The Governor and Legislative leaders should meet at least twice a year with the NHRS Board. • A Commission should be established every 10 years to assess the funding progress. Report p. 7

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