States and localities across the country are wrestling with large, unfunded pension liabilities. This is a problem that has been building for quite a while. The "problem" with defined benefit pension plans is that the temptation to make the promise and not fund it is too great for plan sponsors to ignore. In yet another realm, there is going to be a reckoning, when state taxpayers now balk at the size of the pension promises they will be asked to honor. It wouldn't surprise me to see some of the worst offending states clamor for federal assistance -- that would be a bailout -- when the bills come due.
So it was encouraging to read this article in my local newspaper this week. New Hampshire is, at the very least, removing some of the worst incentives embedded in the design of its public pension formula:
State Rep. Ken Hawkins, R-Bedford, who has sponsored bills that would reform the retirement system, currently serves on the Legislature's excess benefits committee and supports the idea of a surcharge. Hawkins pointed out that each community pays the same percentage for each employee, whether they offer these special benefits or not.
"The town that does not offer these benefits at retirement is helping to pay for the employees in the towns that do. We don't think that's fair," said Hawkins. "If people want to offer these benefits, they should be paying for them. ... I don't like it in my property taxes any more than anybody else."
The New Hampshire Retirement System bases retiree pension payments on the highest three years of salary paid to an employee, usually the last three years. Overtime, unused sick time and vacation payouts count as part of the calculated salary. Employees can boost their salaries, and their pension payouts, by working more or cashing in benefits.
This new law was meant to curb the practice by requiring local agencies to pay a surcharge of up to $600,000 per retiree if his final salary exceeds 125 percent of his base pay. Spear said that if all the city employees eligible to retire did so this year, Portsmouth would have to pay $10 million in surcharges.
Score one, albeit a small one, for the prudent against the profligate.