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July 30, 2007

Early retirement plan costs local taxpayers in N.H.

Gordon Fraser

Like Massachusetts, New Hampshire is struggling to rein in rising pension costs.

State Rep. Ken Hawkins, R-Bedford, sponsored four pension reform bills in the last legislative session, though he believes "Overall, the health of the system is probably fine."

Hawkins won a fight to end an experimental early retirement program that let state and town workers buy an early exit from the work force and entry into retirement.

The program, which ended in June, allowed workers to buy credit for up to five extra years of service.

The move played havoc on the budgets of many towns. Salem taxpayers, for instance, will pay more than $600,000 this year for the unused sick leave, vacation time and other benefits of retirees. Twenty employees opted for early retirement, according to Salem Finance Director Jane Savastano. That was twice as many as retire in a typical year.

Stephen Ciccone, a professor at the University of New Hampshire, is another critic of the state pension system.

"I'm not crazy about what, basically, are these defined-benefit pensions," Ciccone said.

In those systems, the government takes on all the risk by guaranteeing a pension amount.

As in Massachusetts, New Hampshire's pensions are calculated by averaging a retiree's three highest salary years, according to Kim France, spokeswoman for the retirement program.

The state then guarantees a particular payout from its pension fund, based on the averaged salary and the employee's years of service. If the stock market goes south and the pension loses money or earns less than expected, the state still has to pay the promised benefits.

Ciccone said governments would be better served by copying the pension systems of more financially savvy private companies | systems that simply invest workers' money. The more aggressively a worker invests, the higher the potential return, as well as the risk.

New Hampshire has a $5 billion pension trust fund, which pays $318 million annually in benefits to 20,000 retirees. Some 51,000 workers, including police officers, firefighters, teachers and others rely on the program.

Retirement spokeswoman France said the trust fund is basically healthy, although it is only able to cover 67 percent of its estimated liabilities for the next 30 years.

Within 15 years, as interest accumulates, the system is expected to be 85 to 95 percent funded.

Ciccone said changing the system would likely be too difficult and expensive.

Some $100 million pours into the pension system each year, deducted from workers' salaries. The money, in part, is used to cover the benefits of retired workers, according to the system's 2006 annual report.

If New Hampshire switched to a direct investment system | one in which each worker's payments were invested for his or her own retirement | the state would have to tap the trust fund to pay benefits to those who've already retired, Ciccone said.

Hawkins, who wants to undertake what he considers small reforms, says it would be unwise to undertake a massive overhaul of a system that essentially works.

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