When the New Hampshire legislature consolidated the state’s public pension systems in 1967, they offered cities and counties a deal: Add municipal employees to the system and the state would pay 35 percent of the cost.
At the time, the offer was considered necessary. The state had four separate pension schemes, one each for teachers, firefighters, police officers, and government employees. Bringing them together would help the state better centralize and increase investment – and sweetening the pot for local governments would spread costs and ensure a smooth transition.
Forty-three years later, in the midst of the Great Recession, the state backed down. Lawmakers lowered the state’s share to 30 percent in 2010, then to 25 percent in 2011, and to zero in 2013. Until last year — when lawmakers passed a one-time, year-long state contribution rate of 7.5 percent — the state didn’t contribute at all.
This year, lawmakers from both parties are trying to make that one-time payment permanent.
House Bill 50 would require the state to continue contributing 7.5 percent to “Group II” teachers and public employees – those not already working for the state – on a permanent basis. The bill itself, sponsored by Rep. Michael Edgar, a Democrat from Hampton, is framed as a return to state obligations.
“This law renews a promise that (the) state made to local governments and restores the state’s contribution to a portion of the pension costs of teachers, firefighters and local police,” reads the bill’s preamble.
The bill’s title – Property Tax Relief Act 2023 – reflects a key goal of its proponents: to ease the financial burden on cities and communities, and potentially allow for lower local taxes.
The effort had bipartisan support and passed the Republican-led House of Representatives last year before being reduced to a one-off payment in the Senate. But not all lawmakers are on board.
“I don’t think we should burden the state by subsidizing local payrolls,” said Rep. Carol McGuire, an Epsom Republican and chair of the House of Representatives and the Executive Committee.
For McGuire, the 2011 exit was meant to be permanent.
“Rep. O’Brien keeps talking about promises made 50 years ago that aren’t being kept,” she added, referring to Rep. Michael O’Brien, a Democrat from Nashua. “Well, 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: ‘Everybody come in and come into our system,'” said Schütt in an interview. “Then they gradually took it back and just eliminated everything together. That is the main meaning.”
The debate comes as New Hampshire’s cities and towns contribute more and more to the state’s pension system. In 2002, municipalities paid about $5 into the pension system for every $100 they paid to police officers, according to figures 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.
The New Hampshire pension system is funded from three sources: employee contributions, employer contributions, and the investment returns from state administered funds. By 2010, the state assumed 35 percent of employer contributions.
The association of municipalities now argues that the increase in the mandatory contribution rates for cities and municipalities in recent decades has forced tough decisions.
“There will only be two possible scenarios: cut the budget (and) cut spending, or increase taxes, or a combination of both,” said Katherine Heck, the association’s state finance adviser. “There’s really no wiggle room when you’re relying on revenue.”
Many municipalities would have to pursue both approaches, Heck said.
“The significance of that is the impact on taxpayers,” agreed Shuett. “In this body, we constantly hear from municipalities: The amount they have to pay since the state withdrew their contribution is killing them.”
The temporary 7.5 percent contribution, passed last year and expiring in July, has brought hundreds of thousands of dollars in relief to certain cities, supporters note.
Portsmouth, for example, received a grant of approximately $265,000 from the state, Claremont approximately $60,000 and Laconia $154,000. Overall, the state distributed $21.6 million to cities and towns this fiscal year to pay that 7.5 percent contribution rate.
Nevertheless, the package is only a fraction of the previous state contribution rate. And some lawmakers, like McGuire, are fundamentally opposed to any government contribution.
“Municipalities have full authority over how many people to hire and what to pay,” McGuire said. “I’m uncomfortable with why the state should be required to contribute a percentage of that payroll. I don’t know why we should.”
Heck says the association hopes the Senate will be receptive to a longer-term replacement.
“Our cities and towns were very excited to receive this one-time payment for the pension system,” she said. “And when it’s reintroduced, that’s a direct tax saving for both the taxpayer and the local government budget.”
This year’s push comes after a series of laws and budget items over the past two years aimed at cutting property taxes.
In 2021, lawmakers changed the distribution formula for the meals and lodging tax to ensure the state allocates a larger percentage of total tax revenue to cities, according to the association of municipalities. This fiscal year, cities and towns will get even more—a total of $121 million—a 19 percent increase over last year’s jump.
Lawmakers are also wrestling this year over whether to accelerate the payment of New Hampshire’s $5.7 billion pension debt. This budget hole was the result of accounting decisions by the legislature in the 1990s, exacerbated by the 2009 recession.
After the 1991 recession, interest rates on retirement systems skyrocketed, and state legislatures decided to ease the burden on cities by introducing a mechanism to reduce employer contributions, said Marty Karlon, communications director for the New Hampshire Retirement System, during a presentation before House legislators this month . Lawmakers also set an over-ambitious assumed rate of return of 9.75 percent on the investments – a move that also lowered employer contribution rates, Karlon added. But while the moves were meant to be temporary, lawmakers haven’t reversed the changes for nearly two decades. Without adequate funding, the budget deficit continued to grow until 2009, when the government took action to pay off the growing debt.
New Hampshire now has a plan to steadily pay off the national debt through 2039. But in the meantime, cities and communities are affected. According to the association of municipalities, around 70 percent of the current payments by the municipalities will repay the uncovered liability.
Liberals and conservatives have found a rare common ground on this issue. Last May, the fiscally conservative Josiah Bartlett Center for Public Policy published an article advocating writing off the national debt as a means of economic cleansing and lowering property taxes. And Democrats have increasingly agreed.
A bill this year, a bipartisan push to legalize and tax cannabis, would use nearly three-quarters of tax revenue to pay off its unfunded liabilities each year. This bill has the support of Republican Majority Leader Jason Osborne of Auburn and House Democratic Leader Matt Wilhelm of Manchester.
Another, House Bill 555, would require the state to set aside excess money in its general fund to pay that liability.
“If you pay that off faster, it’s like paying off the mortgage on your home faster,” Heck said. “As such, we are very pleased that lawmakers are talking about long-term strategies to pay off the unfunded accrued actuarial liabilities, which will save significant dollars for (public) employers in the future.”