Pension Reform Resources

With growing funding shortfalls, exacerbated by the recent economic turmoil, many states are taking a hard look at reforming their state pension systems. We here at the Josiah Bartlett Center have been following this trend here in New Hampshire as well as in other states across the country. Below is some of our work done on pensions so far as well other informational resources.

New Hampshire Specific:

A JBC study that explains what an Unfunded Liability is and why it is important

Another JBC report on the current state of the New Hampshire Retirement System and why reform is desperately needed

The current legislation in the New Hampshire Senate, SB229, which would create a defined contribution plan for state employees

The most recent analysis of SB229 done by the NHRS actuary

 

National:

A JBC study on defined contribution (401(k)) models that other states currently have in place

Research done by NCSL on the types of retirement systems used by various states across the US

Further research on the growing problem with unfunded liabilities in state pension systems

A recent US Senate report on the current pension funding crisis as well as a piece from Real Clear Markets on the issue

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An Updated Look at the New Hampshire Retirement System, the Unfunded Liability and Troubling Trends

Joshua Elliott-Traficante

February 2012

 

Earlier this month, the New Hampshire Retirement System (NHRS or ‘the System’) released its Comprehensive Annual Financial Report (CAFR) revealing the current state of the System at the close of the last fiscal year. Fiscal Year 2011 saw assets grow by nearly $1 Billion, however the funding ratio dropped more than a percentage point to an unhealthy 57.4%. Though this seems counter intuitive, this shows the folly of judging the financial soundness of the System by looking at a single data point. Instead the following paper seeks to take apart the complex CAFR and explain the financial status of the pension portion of the System in layman’s terms, as well as look at the troubling historical trends.

 

Asset Growth

 

It is critical for any retirement system is to see solid returns on investments, and 2011 was certainly a stellar year for the NHRS. The System saw a 23% return on its investments; over $1 Billion, which added nearly $993 million in assets to the system. Under 5 year smoothing, the first 8.5% is recognized immediately, with all growth over that amount phased in over the following five years. However, it is important to recognize that for all the gains made in the past year, the system is still absorbing the losses of 2008 and 2009.

 

An Apples to Apple Comparison: Liabilities, Reforms and the Rate of Return:

 

While undoubtedly an investment return of nearly $1 Billion is excellent news for the financial health of the NHRS, it only tells half of the story. It is the liabilities that tell the crucial other half of the story. Put simply, the liabilities of any pension system is the sum of money needed today, given certain assumptions about payroll growth, the rate of return on investment and retirement age, among a litany of other metrics, to pay for future retirement benefits.

 

As is the nature of actuarial assumptions, these are regularly tweaked to fit a changing workforce as the need arises. For the most part, apart from a major unforeseen demographic change in the state, they are usually small adjustments. However, when it comes to the assumptions regarding the assumed rate of return on investments and how benefits are calculated, this can cause major changes in the value of the liabilities for the System.

 

The revision of the anticipated rate of return from 8.5% to 7.75%, on the advice of the Gabriel, Roeder and Smith (GRS) and approved by the Board of Trustees, increased the liabilities of the system by roughly $757 million. With the reforms in the calculations of benefits, which passed last year, decreased the unfunded liability by roughly $430 million for a net result of a $327 million increase in the unfunded liability due to these reforms.

 

In order to do an apples to apples comparison of the growth of liabilities over past years, these reforms must be taken into account. Doing so, by backing out these two changes, the liabilities of the System increased $717.3 million.

 

Net investment income, allowing for 5-year smoothing, was $993 million, leaving in a theoretical net gain $275.7 million under this scenario.

 

Current Liabilities

 $9,998,251

Revision of rate of return

–

 $757,000

Revision of payout calculations

+

 $430,000

Adjusted Liabilities

=

 $9,671,251

 

Even taking into account this reforms, liabilities still grew by 8.19%. This is where, in part, the problem lies with the pension system: the growth of liabilities.

 

Fiscal Year

Liability Increase

2011 (Adjusted)

8.19%

 

Though this increase is below the old rate of return of assumed rate of return of 8.5%, it is now above the new rate of return of 7.75%. Taking a longer view of the system, we see this troubling trend more clearly:

 

 

 

Over the past 22 fiscal years, the compounded annual growth rate in the liabilities of the system was 8.93%, outstripping most of the projected rates of return for that time frame, as well as the 7.19% compounded growth rate in assets, leading to the growing unfunded liability.

Compounded Annual Growth Rate

Assets

7.19%

Liabilities

8.93%

 

Granted, this time frame covers two revisions in the rate of return (1992 from 9.5% to 9% and in 2005 from 9% to 8.5%. Figures for 2011 have adjusted to account for the recent change) as well as two changes in accounting methods in 1992 and 2007. While the CAFRs from the respective years do not detail the extent to which the changes affected the growth or decline in liabilities, below details the average yearly growth in liabilities for all of the 22 years analyzed as well as a the average yearly growth with the atypical years removed. The results are essentially the same.

 

Average Yearly Growth Rate of the Liabilities

All 22 Years

9.51%

Atypical Years Removed

9.54%

 

As mentioned in earlier works, one cannot judge the soundness of a financial institution by looking at one side of the ledger sheet. Below is the same liabilities data alongside the actuarial value of assets.

 

 

 

It should be stressed that the asset figures are not investment rate of return figures, rather they are the actuarial value of assets figures, which are used in calculating the unfunded liability of the system. Again however, we see the same trends: the rate of increase in the liabilities is outstripping the rate of growth of assets. As always there are years which are anomalous, in the case of assets, 2007, where due to legislative reforms, previously siphoned off funds were returned to the pension Trust Fund.

 

Average Yearly Growth Rate

Liabilities

9.51%

Assets

7.88%

 

So what does this all mean? Simply put, the retirement system is on less than stable long term financial footing. This is not to say that the system is going to collapse, but the trends over the past 22 years are not good ones and point to issues greater than just short term market cycles.

 

These trends stand for themselves. Years of record investment returns of the 1990s, which averaged nearly 14.5% a year from 1990 to 2000, played a role in masking the problem with the growth in liabilities. In those years the growth in liabilities were overshadowed by the investment returns, so there was no problem; as long as the investment returns were consistently in the double digits, year over year.

 

But this highlights the issues facing the current system, which without consistent double digit investment returns, it cannot keep up with the growth in liabilities. Again, this is not a problem with investment returns; this is a liability growth issue.

 

While the current amortization schedule will fix this problem over a 30 year period, we cannot keep in place a system that only works well for everyone when it realizes double digit return on investments.

 

Looking Towards the Future: A Defined Contribution Plan

 

One policy decision that could be made to prevent this from happening again is to switch all new employees to a defined contribution plan. Currently under consideration is SB229, which proposes to do just that.

 

Under such a plan, the state’s liabilities end once the employer contributions are deposited into the employee’s accounts. Thus, there can be no unfunded liability to the system. This gives the state, counties, cities and towns budget certainty because there is a set amount that goes into the employee’s accounts and that figure does not change based on what happens in the market. Such certainty is critical for local and state government to be able to hire more teachers, police officers and firefighters.

 

Such a system also protects the employees. Once those funds are deposited into their accounts, that money is theirs and only theirs, no legislative actions can change that.

 

An added benefit of a defined contribution system is that since the employees own the accounts, it travels with them when they change jobs. We live in an era where people typically do not work in the same industry for 30 years and a pension model does not fit the needs of these people as well as a defined contribution plan would.

 

Defined contribution plans have been adopted in several other states across the country, Michigan has had one in place since 1996. What this shows is that not only is it possible to create and implement a defined contribution plan for government employees, but that it works, and it can be done well.

 

Joshua Elliott-Traficante is a Policy Analyst at the Josiah Bartlett Center for Public Policy, a free-market think tank based in Concord, NH. He can be reached at [email protected]

 

 

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Scholarship Tax Credit

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In recognition of School Choice Week, we are releasing the study below on Scholarship Tax Credit programs across the country and how they might work here in New Hampshire. The study is authored by Center Research Fellow Jason Bedrick.

 

Scholarship Tax Credit Programs Analysis

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State Pensions: The Unfunded Liability and What it Means

 By Josh Elliott-Traficante

July 2011

The oft cited and growing unfunded liability of the pension portion of the New Hampshire Retirement System (NHRS), pegged at the end of last fiscal year at $3.7 billion, has been the driving force behind pension reform in Concord. This shortfall is not just a result of poor investment returns from the recent recession, rather it is systemic. Every year, for the past ten years, the dollar value of the unfunded liability has increased. Even in years with double digit investment returns, liabilities continued to out pace the growth of assets.

To understand what the unfunded liability is, we need to take a basic look at how the System functions on a financial basis.

According to the 2010 Comprehensive Annual Report (CAFR) of the NHRS, the pension component of the System took in just over $1 billion in contributions and investment income and paid out roughly $530 million in benefits and refunds. If the System operated on a pay as you go basis, it would be in great shape.

However, the NHRS does not function on pay as you go basis; rather it has assets, made up of employee contributions, employer contributions and investment income. Contributions are made to this pool by employees as a percentage of their salary at a rate set in state law. Employers then add a percentage of their employees’ salaries, as determined by the actuaries of the System These funds are then invested, which are now projected by the System to earn 7.75% a year.

Once employees retire, this pool is drawn on to pay their pensions. Money contributed to the pool today does not directly pay for current retirees; rather, the money for current retires was added while they were working. The System functions in this regard as a 401(k) does. Unlike a 401(k) however, the state guarantees retirees a pension amount based on their length of service and their average final compensation, not on the dollar amount of the assets. As of the end of fiscal year 2010 these assets totaled $5.23 billion dollars.

 

All values in millions of dollars[i]

FY 2001

FY 2002

FY 2003

FY 2004

FY 2005
Pension Assets

$3,265

$3,443

$3,500

$3,576

$3,611
Pension Liability

$3,843

$4,196

$4,669

$5,030

$5,991
Unfunded Liability

$578

$753

$1,169

$1,454

$2,011

FY 2006

FY 2007

FY 2008

FY 2009

FY 2010
Pension Assets

$3,928

$4,862

$5,302

$4,937

$5,234
Pension Liability

$6,402

$7,260

$7,821

$8,475

$8,954
Unfunded Liability

$2,049

$2,397

$2,519

$3,538

$3,720

 

Operating on the basis of guaranteeing a payout, the System also carries liabilities in addition to assets. Liabilities for the System are not the same as the commonly held notion of the term. Instead liabilities are the value of assets needed today for with assumptions being made for, among other things, inflation, wage growth, future contributions, the rate of return on investments and the value of future benefits of members in the System.

Today’s Liabilities + Assumptions of Future Revenue and Payouts

= Total Funds Needed to Pay Future Benefits

At the end of fiscal year 2010, the liabilities of the System totaled $8.95 billion dollars. The difference between these two numbers is how the value of the unfunded liability is calculated. Currently the System has $3.7 billion unfunded liability, and with the reduction in the expected rate of return from 8.5% to 7.75%, this number will likely increase.

Even without the recent economic downturn, the increases in the assets of the System have historically been far outweighed by the increases in the liabilities. Over the past 10 years assets have grown by just over 60% while liabilities have increased by 133%. This is not just as a result of the recession. Over the past 20 years assets have increased 288% and liabilities nearly 435%. In fact, every year, for the past 10 years, the unfunded liability has grown.

The Breakout by Group:

The New Hampshire Retirement System sorts employees into four categories: Employees, which includes local, county and state employees, Teachers, Police, which includes local, county, state as well as corrections and Fire. Teachers and Employees operate under one set of Pension guidelines as Group I and Police and Fire operate under another set of guidelines as Group II.

The NHRS also breaks out the unfunded liability by into the constituent categories of the System:

Employees (Group I)

Teachers (Group I)

Police (Group II)

Fire (Group II)

Group I Average

Group II Average
Percentage of the UL Responsibility by Category 33.88% 40.41% 17.15% 8.55% 74.29% 25.70%
Membership of the NHRS by Category 50.91% 36.35% 8.99% 3.74% 87.27% 12.73%
Unfunded Liability Portion per Member $31,813 $53,143 $91,150 $109,220 $40,698 $96,462

 

As shown in the chart above, there is not a correlation between the percentage of the unfunded liability by group and weighted membership for some of the categories. If the unfunded liability were equitably distributed among the groups, the “Membership of the NHRS by Category” field should be the same as the “Unfunded Liability by Category” field. They do not match however, with exception of Teachers, which is only four percentage points off. Group I Employees as a category account for 33.88% of the unfunded liability, yet in terms of their total membership in the System, they make up roughly half of those in the retirement system. Group II Fire on the other hand is responsible for 8.55% of the unfunded liability, yet in terms of their numbers in the System; they only make up 3.74%.

Thus, Group II Police and Fire account for a disproportionate share of the unfunded liability relative to their membership numbers in the System. Group II members are weighing more heavily on the System by a factor of well over 2 to 1 over their Group I counterparts. Going a step further, one Fire Fighter in the System has the same financial impact on the System of three Employees. This is not to say that Group II members alone are causing the issues facing the NHRS, but the data shows that they have a deeper financial impact on the System than Group I members.

Changes to the System: Rate of Return and Legislative Reforms:[iii]

When the retirement system changed their assumption on the rate of return on investments from 8.5% to 7.75% and the rate of wage growth from 4.5% to 3.75% in May, the liabilities will grow with the next valuation of the System. Part of that expected future revenue (investment income) is can no longer be counted on, so the needed present day value of the assets needs to be higher in order to payout the future benefits. Therefore, in order to keep the equation on page two of this paper balanced, the shortfall in future anticipated investment revenue must be offset by a corresponding increase in the liabilities. The unfunded liability will likely grow with the change; however this is highly dependent on the returns of the System over the past fiscal year and the extent of the normal increase in liabilities. Even though assumptions made by the System such as future pension amounts, contributions and total cost change slightly under the pension reforms, they are dwarfed by the financial impact of changing the rate of return.

Among other changes made by the legislature to the System this past session, Group I employees (Employees and Teachers) will now contribute 7% of their salary up from 5% and retire at 65 rather than 60. For Police members contributions rates go up to 11.55% of their salary and Fire 11.80%, up from 9.3% for both and retire at 50 rather than 45.

Contribution rates will take effect as of July 1, 2011 and the retirement ages will be phased in for Group II and for new hires of Group I only.

Group II has higher contribution rates because of their younger retirement age, shorter service and the fact that they don’t pay into, nor receive Social Security benefits.

While it will take some time to see these reforms take effect, it is a step in the right direction. With the changes in contribution rates taking effect next month, the funding of the System should improve, but the extent of which it is working will not be known for sure until the release of the CAFR for Fiscal 2012.

[i] NHRS Comprehensive Annual Reports, 2001-2010

[iii] SB3, the original pension reform bill was vetoed by Gov. Lynch on June 15th. In response, the House rolled the language of SB3 into HB2, the budget companion bill that contains enabling legislation.

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The Least Efficient State in the Nation

By Charlie Arlinghaus
December 14, 2011
As originally published in the New Hampshire Union Leader

You would think that the most significant budget cut in modern history would have squeezed any potential waste and inefficiency from state government. You would be wrong. Despite a roughly 11% actual cut to the state budget, New Hampshire’s government remains a model of inefficiency. Personal use of state vehicles is the poster child our homegrown inefficiency.

Three years ago, The Pew Center for the States ranked New Hampshire dead last in the country in their triennial ranking of the states in government management. This wasn’t a complete shock. Just three years earlier, while there were worse states (California, for example), we were in the bottom five.

This wasn’t based on hostility toward frugal government. After all, in both surveys the State of Utah, a state with spending similar to ours, ranked number one.

Certainly the budget pressure has forced some departments of state government to eliminate inefficiency where they can. But the report on the state’s fleet management suggests a culture that could use some work.

My colleague Grant Bosse is in the middle of a detailed “fleet week” of stories on the personal use of state vehicles. The preliminary findings are difficult to believe.

State agencies must report vehicles with more than 15% of their mileage used for personal reasons (“non-business usage”). On those few hundred vehicles alone, state officials drove more than 1.5 million miles for personal use on the taxpayer dime.

There are some theories for the odd case or two of say a a bridge inspector taking a car home at night because his first inspection the next morning would make it inefficient to drive back to Concord and then pass his house again on his way to Bridge Number One.

That’s very sensible and very rare. According to official state records, some cars are driven as much as 70% of the time for personal use and the records suggest it is largely the case of a commissioner using a state vehicle issued to him and driving home every night. Does your boss give you a car to drive back and forth to work or do you have a job like the rest of us where they expect that going home at night is your responsibility?

In one relatively bizarre case, the car is driven 60% of the time for personal use and is garaged at night in Bethel, Maine. Why Bethel? That’s where the guy lives. He manages a ski area for us so maybe someone can explain to me how it makes any kind of sense for him to take a taxpayer-supported state vehicle home every night. I’m sorry he lives in Maine but why am I taxed so he can drive a state-owned Chevy Impala home every night instead of buying a car like the rest of us?

By the way, not every commissioner gets a car as a perk of the job. While the most egregious offenders tend to be commissioners or other managers, quite a few commissioners don’t appear on the list.

Oddly, the outrage over this practice does not seem to extend to the supposedly frugal legislature. Personal usage over 15% has to be reported to the legislative fiscal committee but at a meeting where at least some of these outrages were reported, legislators voted to make it easier to take your car home at night. The reporting threshold was raised to 20%. That seems to me the wrong response.

I don’t understand why any state vehicle is ever used for personal reasons — particularly for some commissioner to drive himself to and from work at our expense. That’s insane.

But I suspect it isn’t the only example of odd practices in state government that lead to our being ranked as having the least efficient state government in the country. Does anyone honestly think we’re less efficient than a state like New York? Of course not. But when a respectable organization ranks us last, we ought to at least take a look at some of the stupidest things we’re doing.

I’ve suggested in the past a new government efficiency commission. Have people from outside state government take a look inside state government. They’re less likely to say things like “but we always do that and it used to be worse.”

Some state lawmakers believe there is little inefficiency to be rooted out – this is New Hampshire after all. But that was before they knew we were paying some guy to drive a state car home to Maine every night.

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Presentation on the New Hampshire Economy

Below is the presentation given by Charlie Arlinghaus to the Joint House and Senate Fiscal and Weighs and Means Committees on December 16, 2011

[powerpoint http://www.jbartlett.org/wp-content/uploads/2011/12/JointLegislativeDec2011.ppt]

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Defined Contribution Models in Other States

By Josh Elliott-Traficante

October 2011

With mounting unfunded liabilities in their pension systems, made worse by the recent economic turmoil, many states have begun looking at other retirement benefit options. In recent years, policy makers in a number of states have turned away from the pure pension model, instead opting for plans that are not only fair to the employees but also free the taxpayers from being left with the bill for huge deficits. Given the scale of the pension funding crisis, several reform minded states have instituted a variety of systems to replace their pension systems, which are outlined in the following paper.

Defined contribution systems however, come in a number of varieties and the basics of plans currently used by other states are laid out below:

Pure Defined Contribution System:

A pure defined contribution system functions in the same way as a private sector 401(k) functions. Money is contributed by the employee and generally matched by the employer, up to a certain percentage of the employee’s salary. Under this setup, as the employee gets closer to and passes the age of retirement, the ratio between stocks and bonds in the portfolio declines, reducing risk in exchange for greater stability. Under this set up, all of the risks and rewards of the fund is placed on the employee. There is no governmental liability once the contributions have been added.

States with mandatory defined contribution systems:

Alaska, The District of Columbia, Michigan (state employees), Utah (must choose between defined contribution plan or Hybrid plan)

States with open optional defined contribution systems:

Florida, Montana, Colorado, Ohio (all but Police &Fire), South Carolina (all but Police &Fire), North Dakota (non-classified employees)

Benefits:

–          Potential for employees to realize greater returns

–          No liabilities for the taxpayers

–          Greater portability

Disadvantages:

–          All of the investment risk falls on employees

Member Direction:

In all of the states offering defined contribution plans, the employees have a say in the investment direction. While employees do not get to pick what particular stocks or bonds to buy as they would with a brokerage account, they do pick the fund. Alaska, for example, offers a selection of funds for their employees to choose from ranging from Target Date Funds to Treasury Bond funds and everything in between.[i] Among states that offer DC plans, this is a standard practice.

Variations: In House vs. Contracted Out

When discussing the possible implementation of a defined contribution system the question arises of whether to manage the assets of these plans in house, or let an investment company such as Charles Schwab or ING manage the funds. Both options are currently being exercised in other states. In Alaska’s plan for example, assets are managed by number of firms including Black Rock and T. Rowe Price, while in Utah the assets are managed in house.

Implementations and Important Considerations:

No two states are exactly alike, so what simply taking what one state has done and doing it here in New Hampshire without modification would be unwise. For New Hampshire to switch over to a defined contribution system, changes would be need to be made to Group II (Police and Fire) to ensure equity between the two groups. Currently Group I employees pay into Social Security while working and receive benefits when they retire. It functions similarly to a pension plan in that it provides a regular and guaranteed payment. Group II however, neither pays into, nor receives Social Security (in part this is why they pay higher contribution rates currently.) In order to give Group II retirees the same assurances their Group I counter parts have, there are two potential options, either require Group II members to enroll in Social Security or create a version of a Hybrid Plan, which combines a pension and a 401k scheme that is only open to Group II.

The Hybrid System:

Hybrid System, combines a reduced pension and with a supplemental 401(k) for retirement benefits. The idea, similar to that of social security, is to give retired state employees some sense of stability in their retirement income, while not also burdening the tax payers with large pension liabilities. In the example of a hypothetical Hybrid System, the employee’s and employer’s contribution total 10% of the salary of the employee. This 10% contribution is then divided between a pension fund and a 401(k) fund. Each year the contribution rate for the pension portion is assessed, so as an example for Utah the 2011-2012 year the rate was calculated by actuaries to be 7.59%. The remaining 2.41% was contributed to the 401(k) portion.[ii]

The above model is only one way for a hybrid model to function. For example, under Georgia’s plan, the employee pays 1.25% towards the pension portion and the state contributes a portion set by actuaries (7.42% for 2011-2012 year). The employee contributes mandatory 1% to the 401(k) plan, with the state matching 100% for the first 1% and 50% for the next 4%. In simpler terms, the state’s maximum contribution to the 401(k) portion is 3%[iii]

States with mandatory Hybrid systems: Washington State (Teachers), Georgia

States with open optional Hybrid systems: Ohio, Oregon, Indiana, Washington State (All but Teachers), Michigan (Teachers), Utah (must choose between defined contribution plan or Hybrid plan

Benefits:

–          Investment risk spread between tax payers and employees

–          Combination of potential greater return and stability

–          Portability of 401(k) portion

Disadvantages:

–          Taxpayers still liable for short falls, albeit smaller than normal pension plan

Variations: COLAs

It is important to note that the contribution rates for Utah take into account cost of living increases (COLA) to the pension portions that are based on the Consumer Price Index. COLAs are capped at 2.5% per year. COLAs in the Georgia plan are at the discretion of the retirement board but not specifically built into the plan.

Variations: Institutional vs. Member Direction:

For the 401(k) portion of the hybrid plans, there is states have taken different routes in terms of who dictates the direction of the investments. In states such as Utah, Oregon and Georgia, for example, all of the investment direction is done in house by the respective retirement systems. In contrast, Ohio’s system allows for employees to choose between different in house managed funds.[iv]

Variations: Parallel Hybrid vs. Stacked Hybrid[v]

Parallel Hybrid:

This is the type of hybrid plan now in effect for the all of the states mentioned above. The employee receives a split DC/DB plan at all income levels. Though pensions would be smaller in comparison to a pure defined benefit plan, there is no cap.

Stacked Hybrid:[vi]

This type of plan, proposed by the Center for Retirement Research at Boston College, flips the parallel hybrid plan on its side. Rather than a split plan at all income levels, an employee is given a pension, based on a capped salary, for the sake of argument, $45,000. For those who make less than this amount, they and the employer only make contributions for a pension. For those who make more, say $60,000, the employees and employers would make contributions to the pension portion on the first $45,000, while any contributions made on salary over that amount would be placed into a 401(k).

Implementations and Important Considerations:

In the case of the stacked hybrid plan, suggested as an alternative to the parallel plan, what the cap is on the pension can vary. The proponents of the plan at the Center for Retirement Studies at Boston College proposed having the cap set at the average salary for the resident of the state, which is then indexed to inflation going forward.[vii] This cap could be set at any level, average state salary, median state salary, or just a round number, like 45,000, which is then indexed in some way to the growth of inflation so as to retain its intended value.

The contribution rates and ratios between the 401(k) and pension portion of the hybrid plans expounded on in this paper should not be taken as specific policy suggestions; they have been merely used to illustrate how other states administer similar systems. I am not, nor do I purport myself to be an actuary so I do not know, nor would I venture a guess as to what contribution rates would work for New Hampshire for the system to remain solvent.

Ohio Option:

Offering the greatest variety of choices to their public employees is Ohio. Under the Ohio Public Employee Retirement System (OPERS) employees are given the option of joining a traditional defined benefit plan, a hybrid plan, or a defined contribution plan.

Plan details:

Pension

Multiplier: 2.2% x Final Three Years Average Salary x Years of Service

If the years of service is 30 or over, the multiplier is 2.5%

Employee Rate: 10-11.1%

Hybrid

Multiplier: 1.1% x Final Three Years Average Salary x Years of Service

If the years of service is 30 or over, the multiplier is 1.25%

Employee Rate: 10-11.1%

Member Directed

Rates: Employee 10%, Employer 14%: Normal Cost 8.73%, Health 4.5%, Mitigation, .77%

Note: Plan stipulates that if Pension System needs financial shoring up, employer assessments on Member Directed Plan employees may be required. This mitigation rate is set at .77%

Conclusion:

There has been a slow, but gradual shift in the past twenty years to move state retirement benefits plans from pensions to 401(k)s or hybrid plans in an effort to either eliminate the future liabilities of the state or to at least share the financial risk between the state and the employees.

While there will be no silver bullet to fix the current short falls of the system, establishing a plan that does not leave the taxpayers on the hook will ensure the future fiscal health of the state.

[i] http://doa.alaska.gov/drb/dcrp/financial/dcrp-investment-options.html

[ii] https://www.urs.org/pdf/AnnualReport/2010/annualReport.pdf

[iii] http://www.ers.ga.gov/plans/ers/formspubs/GA%20ERS%206-30-2009%20Valuation%20Report%20Final.pdf

[iv] https://www.opers.org/members/combined/index.shtml

[v] Image taken from “A Role for Defined Contribution Plans in the Public Sector” released by the Center for Retirement Research at Boston College.

[vi] http://crr.bc.edu/briefs/a_role_for_defined_contribution_plans_in_the_public_sector.html

[vii] http://crr.bc.edu/briefs/a_role_for_defined_contribution_plans_in_the_public_sector.html

 

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On Highways, The One Good Idea in Washington

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By Charlie Arlinghaus

Originally Published in the New Hampshire Union Leader

Odd as it may sound, in the next big budget battle the state government could learn a lesson from Washington in how to balance our books. In transportation spending, the state government regularly plans on spending much more than it has available. The state should reverse this practice and turn the highway plan from a wish list back into a plan.

The federal government may make significant cutbacks to the gas taxes it sends back to New Hampshire but who can blame them? Last year, like most years, the Highway Trust Fund took in $35 billion of revenue but authorized spending of $50 billion. That tells you just about all you need to know about how Washington works.

Transportation Committee Chairman John Mica has broken with tradition by planning on spending only what the fund collects in user fees (largely gas taxes) to balance this one corner of the federal budget. It’s a novel idea in Washington but one that we ought to import into New Hampshire.

New Hampshire currently plans its transportation spending under the old Washington model. Every two years, we authorize a new “Ten-Year Transportation Plan.” In this process, we have a long term plan for the infrastructure projects we can fund.

The difficulty with the so-called plan is that it is and has generally been a fiction. Over the years, the Ten Year Plan has morphed from an actual plan into a public relations document that bears little or no relation to reality. We know going into the plan that under current scenarios we have only so-much capacity. Yet project after project is added to the list to make people feel better even without any hope of paying for it.

It’s a game politicians play. They run around the state holding meetings and making people feel good. They pat selectmen and chambers of commerce on the back and say “we’ve added this important project to the Ten Year Plan.” Everybody feels good. We’re in the plan. He’s looking out for us. But back in Concord they snicker because it’s all a game.

There’s no money. The plan isn’t a real plan. Just a few years ago, the projects had swelled so much that it would have taken 30 years to fund the ten year plan. A former commissioner, Charles O’Leary, was brought in as interim commissioner to dish out the pain. He ruthlessly pared down the list so there were “only” 17 years of projects in the Ten Year Plan.

The Orwellian doublespeak part of the whole process is when people who want to raise user fees talk of a deficit in the plan as if simply planning on spending money you don’t have is a deficit. Because of the way the plan is developed, all we really know is that the wish list costs more than we have.

The problem is the process itself. The starting point should be available revenue under current budget scenarios (which includes the federal government sending $50 million less if they actually stop spending money they don’t have in this one tiny area of federal spending).

Highway spending in New Hampshire is not funded by general taxation. Our highway spending is supported entirely by user fees like the gas tax and turnpike tolls. So, if we’re developing a real plan, let’s start by figuring out how much money those fees will raise over the next ten years.

The second step is to figure out what those specific revenues will support and what they won’t support. The advantage is that we can figure out what gets left out and whether or not we can live with that. It helps put any proposal for new projects or new revenues in context.

As part of that process, we’ll have to make distinctions between new features and maintaining the current features we have. Our current roads require regular repaving so they don’t disintegrate. We have a red list of bridges in need of repair. Setting aside the money for prevention and maintenance should probably take priority over some of the more glamorous projects.

I love open road tolling where I can fly through with an EZ Pass and not be bothered to stop. However, the very large expense of such a new feature comes at the expense of fixing a lot of decrepit bridges. Is my convenience more important than maintaining our current infrastructure?

When the plan matches the revenue, we can evaluate proposals to raise or cut revenues more clearly. This is what we can fund with current revenue. He wants a toll increase to do these four things. That is a much more strategic evaluation than saying we just need some extra so I can tell everyone yes and put them on the wish list.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free market think tank based in Concord, New Hampshire.

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Understanding and Explaining the New Hampshire State Budget

These slides are from Charlie Arlinghaus’s seminar for policymakers on the basics of the state budget, how its organized, where to find information and how to become your own state budget expert.

[powerpoint http://www.jbartlett.org/wp-content/uploads/2011/07/BudgetBasics2010.ppt]

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It is Time to Discipline The Politicians in Washington

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By Charlie Arlinghaus

July 2011

Originally Published in the New Hampshire Union Leader

Politicians are incapable of doing the right thing on their own. Without some sort of artificially imposed rules, they will continue along in their hapless way on the road to destroying the country. The federal budget is a problem that can only be solved by going back to the 1980s.

The broad outlines of the country’s fiscal policy are well known. Federal politicians almost never balance the budget. Instead they borrow money from our children (and, at this point, grandchildren) to pay for the things they want to spend money on today. There is not a realistic hope of ever paying off all the debt they are accumulating.

The federal budget has been balanced in only four of the last 50 years and then only nominally (actually they used the excess of social security contributions over payments to improve cashflow). The last four Clinton budgets achieved a nominal balance but none of the budgets since then have.

Under the president’s proposed budget, debt held by the public would double to 87% of the gross domestic product. Total debt is already about 100% of the size of the economy.

Since World War I, the country has had a statutory limit on the amount of debt allowed. In a debate over raising that limit for the eleventh time in the last ten years, politicians have been able to posture about the need for so-called spending cuts.

Like almost every other debate in Washington, the debate and cuts are fake. No one in Washington on either side of the aisle has actually proposed a spending cut. What they propose is spending a lot more money but not quite as much more as they were planning.

In New Hampshire, we use normal math. The state just cut spending by more than 10%. We passed a budget that is 10% lower than the prior two-years.

The federal government develops a “baseline” for official spending. They plan on increasing spending by 4.6% in each of the next ten years and spending a total of $46 trillion over those ten years. If they reduce the rate of increase to 4.1%, they will have, by their definition, cut spending by $2 trillion. By New Hampshire’s definition, what they call draconian cuts are an increase of 50% over ten years.

The problem is cultural. They don’t actually have to balance the budget so they don’t. The four years of quasi-balance in the 1990s came as a result of divided government (I hate your spending and you hate mine) and mild restraint during an economic boom.

The solution championed by our Sen. Kelly Ayotte is a balanced budget amendment to the constitution. I am generally reluctant to amend the constitution but this may be a case where the structure of government has failed us and has to be corrected. Regardless, an amendment will take years to go through the process and be ratified by the states.

More immediate action can and should be taken. The model for this action comes from the 1980s and former Sen. Warren Rudman. In the 1980s the annual budget deficit had grown to what was seen then as an obscene level. The annual budget deficit in 1983 was 6% of gross domestic product (in 2010, it was 9%).

Sen. Rudman along with Phil Gramm and Ernest Hollings recognized that the Congress needed to be prodded. They set up a path of lower deficit targets each year until the budget would be balanced in ten years. If Congress didn’t meet the target, an automatic sequester would cut every area of government by an equal amount to meet the target. The threat forced politicians of the 1980s to act and cut spending themselves.

From 1983-1989, the Gramm-Rudman bill lowered the annual deficit from 6% of GDP to 2.8%. Spending went up each year but grew slower than the economy as a whole. But Congress repealed the restraint in 1990.

A new Gramm-Rudman could be enacted by people who both support a constitutional amendment and those who don’t as part of a debt ceiling compromise. The advantage is it would go into effect immediately and force Congress to act. In addition, enforced deficit targets are policy neutral. The target must be met and the deficit gradually erased. The policy decisions to get there are still a matter for debate. Those who want to raise taxes can make that argument. Those who want to cut spending can make that argument.

An agreement over the debt ceiling issue will only be serious if it includes an enforcement mechanism not just feel good rhetoric. The model for action comes from right here in the Granite State. It worked when Sen. Rudman proposed it and will work again.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free market think tank based in Concord, New Hampshire

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