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Is the statutory funding formula (percent of payroll) appropriate?

Under current assumptions, including the statutory formula for paying down the unfunded liabilities that backloads principal payments, the funded ratio for KERS-NH is estimated by the actuary to continue to decline, before gradually rising beginning in FY2023 – but only if all actuarial assumptions are met.  In fact, even if the current assumptions of 6.75% annual investment returns and 4% annual payroll growth are achieved and the payment schedule is met in full, KERS-NH is still not estimated to reach 20% funded until FY2030, as can be seen in the table below.

A more adequate funding schedule for paying down unfunded liabilities - a level dollar amortization that is similar to a standard home mortgage - would cost significantly more in the short term but would

  • make an immediate improvement in funding levels,
  • make faster progress in reducing the unfunded liability,
  • eliminate reliance on changes in payroll as a variable, and
  • not backload principal payments as does the current funding schedule.

Source: Cavanaugh MacDonald2 as cited in the PFM Consulting Group report, May 22, 2017.

Note: Actuarial assumptions include 6.75% earnings assumption, 4% payroll growth, and 26-year remaining amortization period.3

Source: PFM Group Consulting report, May 22, 2017.  For more information about this topic, click here to see relevant portions of that report.

Comparison of Pension Amortization Schedules

KERS-NH June 30, 2016 Valuation and Actuarial Assumptions

Level % of Payroll (Current Baseline Amortization Method as Defined in 2013SB2 vs. Level $ Amortization

($ in Millions)

Year Employer Contribution Unfunded Liability Funded Ratio
Level % Level $ Level % Level $ Level % Level $

2 Certain actuarial data and calculations have been developed by Cavanaugh Macdonald Consulting LLC, plan actuaries for the KERS and TRS systems, under a subcontract with PFM in order to help ensure the accuracy of the estimates and projections herein.

3 The level dollar amortization schedule is estimated to fluctuate somewhat due to the Commonwealth's biennial budget structure, and conversion of the amortization estimate to a payroll basis by the actuary's model.