Liberty in economics J. SCOTT MOODY PRESIDENT NEW HAMPSHIRE CENTER FOR ECONOMIC POLICY New Hampshire’s Growing Public Pension Funding Crisis On the web at: On Facebook at: Policy/ On Freedom Connector at: center-for-economic-policy

Liberty in economics What is the New Hampshire Center for Economic Policy? Founded in 2010 A 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 activism Fiscal Federalism—clearly defining the roles between state and local governments Balanced Budgeting—debt should be used only as a last resort Introduce Martin Sheehan, Director of Communications

Unfunded Pension Liability is $3.4 billion Liberty in economics

Unfunded OPEB Liability is $1 Billion Liberty in economics

Growth in NH’s Pension Payment 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. Liberty in economics

NH’s Pension Burden in Perspective Table 4 Pension Burdens by State and Rank as of FY 2008 Billions of Dollars State Reported Pension Liabilities Minimum Estimated Pension Liabilities Maximum Estimated Pension Liabilities 2007 GDP Maximum Estimated Pension Liabilities as a Percent of GDP Rank Year Run Out Rank (a) Connecticut$42.8$50.4$80.7 $ % Maine$13.7$14.9$24.0 $ % Massachusetts$55.4$63.3$96.7 $ % New Hampshire$7.8$9.0$14.2 $ % Rhode Island$12.4$14.8$27.1 $ % Vermont$3.8$4.3$6.7 $ % Total$2,975.1$3,250.5$5,167.1 $13, %-- (a) States with the same date are ranked the same. Source: Novy-Marx and Rauh, New Hampshire Center for Economic Policy. Liberty in economics

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