New Hampshire Retirement System Executive Director Jan Goodwin (left) and Director of Communications and Legislative Affairs Marty Karlon address members of the House Executive Departments and Administration Committee on Jan. 9, 2023. (Ethan DeWitt | New Hampshire Bulletin)
When New Hampshire lawmakers consolidated the state’s public retirement systems in 1967, they offered cities and towns a deal: Add municipal employees to the system, and the state would pick up 35 percent of the cost.
At the time, the offer was deemed necessary. The state had four separate pension fund systems, one each for teachers, firefighters, police, and state employees. Bringing them together would help the state better centralize and grow investments – and sweetening the pot for municipalities would spread costs and ensure a smooth transition.
Forty-three years later, amid the Great Recession, the state backtracked. The Legislature lowered the state’s share to 30 percent in 2010, then to 25 percent in 2011, then to zero in 2013. Until last year – when legislators passed a one-time, one-year 7.5 percent state contribution rate – the state has not contributed at all.
This year, lawmakers in both parties are attempting to make that one-time payment permanent.
House Bill 50 would require the state to continue contributing 7.5 percent for teachers and “Group II” public employees – those not already working for the state – into perpetuity. Sponsored by Rep. Michael Edgar, a Hampton Democrat, the bill itself is styled as a return to the state’s commitments.
“This act renews a promise made by (the) state to municipalities and restores the state’s contribution of a portion of the retirement costs of teachers, firefighters, and local police,” the bill’s preamble reads.
The bill’s title – the Property Tax Relief Act of 2023 – reflects a key aim of its supporters: to reduce the financial burden on towns and cities and possibly allow for lower local taxes.
The effort had bipartisan support and passed the Republican-led House last year before being reduced to a one-time payment in the Senate. But not all lawmakers are on board.
“I don’t think that we should burden the state by subsidizing local payrolls,” said Rep. Carol McGuire, an Epsom Republican and the chairwoman of the House Executive Departments and Administration Committee.
To McGuire, the phaseout in 2011 should be permanent.
“Rep. O’Brien keeps talking about promises made 50 years ago which are not being met,” she added, referring to Rep. Michael O’Brien, a Nashua Democrat. “Well, fine, that was 50 years ago.”
Rep. Dianne Schuett, a Pembroke Democrat, disagrees.
“That was the promise that the state made to the municipalities when they said ‘Y’all come and get into our system,’” Schuett said in an interview. “Then they gradually took it back and just eliminated it all together. That’s the main significance.”
The debate comes as New Hampshire cities and towns have found themselves contributing more and more to the state’s retirement system. In 2002, municipalities paid about $5 into the retirement system for every $100 they paid police officers, according to numbers from the New Hampshire Municipal Association. Today, they pay about $30 for every $100 in compensation. The rate for firefighters has increased by a similar amount.
New Hampshire’s retirement system is funded by three sources: employee contributions, employer contributions, and the investment returns from the funds managed by the state. Until 2010, the state picked up 35 percent of the employers’ contributions.
Now, the Municipal Association argues that the increase in the required contribution rates for towns and cities has forced hard choices in the past decades.
“There’s going to only be two possible scenarios: cut the budget (and) cut spending, or increase taxes, or a combination of both,” said Katherine Heck, the government finance adviser for the association. “There’s really not any wiggle room when you’re relying on the revenue.”
Many communities had to take both approaches, Heck said.
“The importance of this is the impact on taxpayers,” Shuett agreed. “We hear constantly in this committee from municipalities: The amount that they have to pay since the state took back their contribution is killing them.”
The temporary 7.5 percent contribution that passed last year – which is set to expire in July – delivered hundreds of thousands of dollars in relief to certain cities, advocates note.
Portsmouth, for instance, received about a $265,000 boost from the state, Claremont received around $60,000, and Laconia $154,000. In total, the state distributed $21.6 million this fiscal year to cities and towns to pay for that 7.5 percent contribution rate.
Still, the package is a fraction of the state’s previous contribution rate. And some lawmakers, like McGuire, are opposed on principle to any state contribution.
“The municipalities have full authority on how many people to hire and what to pay,” McGuire said. “So why the state should be obliged to contribute a percentage of that payroll makes me uncomfortable. I don’t know why we should.”
Heck says the association is hopeful that the Senate will be receptive to a longer-term replacement.
“Our cities and towns were very excited to receive that one-time payment toward the retirement system,” she said. “And if it’s reinstated, that’s direct tax savings to both the taxpayer as well as the municipal budget.”
The push this year comes after a slew of legislation and budget items in the past two years intended to reduce property taxes.
In 2021, lawmakers changed the meals and rooms tax distribution formula to guarantee that the state gives cities a bigger percentage of the revenues from the tax, a change that resulted in a 45 percent increase to cities and towns in fiscal year 2022, or $101 million overall, according to the Municipal Association. This fiscal year, cities and towns are getting even more – $121 million overall – a 19 percent increase from last year’s jump.
Lawmakers are also wrestling this year with whether to speed up the payment of New Hampshire’s $5.7 billion in pension liability. That budgetary hole came as a result of accounting decisions made by the Legislature in the 1990s that were exacerbated by the 2009 recession.
Retirement system rates were skyrocketing after the 1991 recession, and state lawmakers decided to alleviate the burden on cities by creating a mechanism to lower employer contributions, explained Marty Karlon, communications director for the New Hampshire Retirement System, during a presentation to House lawmakers this month. Lawmakers also set an overly ambitious 9.75 percent assumed rate of return for the investments – a move that also lowered employer contribution rates, Karlon added. But while the moves were intended to be temporary, the Legislature did not reverse the changes for almost two decades. Without sufficient funding coming in, the budget hole continued to grow until 2009, when the state took measures to pay off the growing debt.
New Hampshire now has a plan to steadily pay down the state’s liability by 2039. But in the meantime, towns and cities are affected by it. About 70 percent of the current payments from municipalities are going to pay off the unfunded liability, according to the Municipal Association.
Liberals and conservatives have found rare common ground on the topic. Last May, the fiscally conservative Josiah Bartlett Center for Public Policy published a post advocating for the amortization of the state’s liability as a way to clean the slate economically and reduce property taxes. And Democrats have increasingly agreed.
One bill this year, a bipartisan push to legalize and tax cannabis, would devote nearly three quarters of the revenue from the taxation to paying off the unfunded liability every year. That bill has the support of House Republican Majority Leader Jason Osborne of Auburn and House Democratic Leader Matt Wilhelm of Manchester.
Another, House Bill 555, would require the state to commit surplus money in its general fund toward the payment of that liability.
“Paying that down faster, it’s like paying down the mortgage of your house faster,” Heck said. “So we’re very excited that the Legislature is talking about long-term strategies to pay down the unfunded accrued actuarial liability, because that will save (public) employers significant dollars in the future.”
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