Post on 07-Feb-2016
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Liberty in economics
J. SCOTT MOODYPRESIDENT
NEW HAMPSHIRE CENTER FOR ECONOMIC POLICY
New Hampshire’s Growing Public Pension Funding
Crisis
On the web at: http://nheconomics.org/On Facebook at: http://www.facebook.com/pages/New-Hampshire-Center-for-
Economic-Policy/167461656611296On Freedom Connector at: http://connect.freedomworks.org/groups/new-
hampshire-center-for-economic-policy
Liberty in economics
What is the New Hampshire Center for Economic Policy?
Founded in 2010A 501(c)3 non-profit, non-partisan organization.Dedicated to pursuing public policies that are focused
on “Liberty in Economics.”Constitutional Government—setting limits to
government activismFiscal Federalism—clearly defining the roles between
state and local governmentsBalanced Budgeting—debt should be used only as a
last resortIntroduce Martin Sheehan, Director of
Communications
Unfunded Pension Liability is $3.4 billion
$4
$5
$6
$7
$8
$9
$10
2007 2008 2009 2010
Bill
ions
of D
olla
rs
Fiscal Year
Chart 2Unfunded Pension Liability is the Gap Between Assets and Liabilities
Fiscal Years 2007 to 2010
Assets LiabilitiesSource: New Hampshire Retirement System andNew Hampshire Center for Economic Policy.
Liberty in economics
Unfunded OPEB Liability is $1 Billion
$0
$200
$400
$600
$800
$1,000
$1,200
2007 2008 2009 2010
Mill
ions
of D
olla
rs
Fiscal Year
Chart 3Unfunded OPEB Liability is the Gap Between Assets and Liabilities
Fiscal Years 2007 to 2010
Assets LiabilitiesSource: New Hampshire Retirement System andNew Hampshire Center for Economic Policy.
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Growth in NH’s Pension Payment
$0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
2011 2015 2019 2023 2027 2031 2035 2039
Bill
ions
of D
olla
rs
Fiscal Year
Chart 4Unfunded Actuarial Liability Pension Payoff Projection
Fiscal Years 2011to 2040
UAAL PaymentEmployer Normal Cost
Source: New Hampshire Retirement System andNew Hampshire Center for Economic Policy.
Liberty in economics
BUT, Pension Liability is Understated ! !
Economist Robert Novy-Marx (University of Chicago) and Joshua Rauh (Northwestern University) dispute the “discount rate”
According to the Government Accounting Standards Board, the discount rate is based on the long-term return of a 60 percent mix in stocks and 40 percent in bonds which is around 8 percent.
Novy-Marx and Rauh argue it should be the default-free rate of return—proxied by the 10 year yield on Treasuries or currently about 3.43 percent.
New Hampshire uses an 8.5 percent discount rate.Liberty in economics
NH’s Pension Liability Could Nearly Double
NH’s total pension liability, in 2008, was $7.8 billion.
Novy-Marx and Rauh estimate that the pension liability is at least $9 billion and could be as high as $14.2 billion.
This means the annual pension payment should be much larger.
Rauh estimates that the pension payment should be at least 75 percent higher.
In 2011, that means a payment of $486 million versus the actual payment of $277 million.
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NH’s Pension Burden in Perspective
Table 4Pension Burdens by State and Rank
as of FY 2008Billions of Dollars
StateReported Pension
Liabilities
Minimum Estimated Pension
Liabilities
Maximum Estimated Pension
Liabilities
2007 GDPMaximum Estimated Pension Liabilities as
a Percent of GDPRank
Year Run Out
Rank (a)
Connecticut $42.8 $50.4 $80.7 $212.3 38.0% 25 2019 2Maine $13.7 $14.9 $24.0 $48.0 50.0% 8 2026 21Massachusetts $55.4 $63.3 $96.7 $352.2 27.5% 41 2026 21New Hampshire $7.8 $9.0 $14.2 $57.8 24.6% 46 2022 8Rhode Island $12.4 $14.8 $27.1 $46.7 58.0% 5 2027 24Vermont $3.8 $4.3 $6.7 $24.6 27.2% 43 2028 26Total $2,975.1 $3,250.5 $5,167.1 $13,623.2 37.9% -- -- --(a) States with the same date are ranked the same.
Source: Novy-Marx and Rauh, New Hampshire Center for Economic Policy.
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Conclusion
Only serious reforms of the pension system will bring down the pension liabilities to sustainable levels.
Another study will examine reforms in more detail . . . complicated by court-mandated pension property rights.
But . . . the one obvious solution is to move from a defined-benefit system to a defined-contribution system for all new employees.
The OPEB liability is a lost cause and should be eliminated as WV recently did.
Liberty in economics