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Should the ARC be funded every year?

Yes.

KERS-NH funding

Plan solvency4 requires full funding.  If the Commonwealth reverts to the pattern of underfunding the system that it followed from FY2004-FY2014, PFM Consulting Group projects that the KERS-NH fund will be depleted by FY2022, just five years away.  That is, KERS-NH will have used all of its assets and future pension payments will have come entirely from annual appropriations in the state’s budget.

PFM further projects that KERS-NH will also become insolvent, even if more elevated recent patterns of budgetary contributions are maintained and a reduced payroll growth is assumed.

On a positive note, following years of budgetary underfunding, the General Assembly and the Governor agreed on FY2017 and FY2018 budgets that funded KERS-NH with more than the Actuarially Determined Contribution (ADC).5

Based on other funding assumptions, the following might happen:


  • If the FY2016 or the average of the FY2016-2018 budgeted contributions are maintained going forward, KERS-NH is still projected to become insolvent, assuming either the Revised Asset Allocation of 5.1%/6.0% or the Corporate Bond Index return assumption of 3.87%.
  • If the enhanced overfunding of the FY2017-2018 budgets were maintained for future contributions, the plan is projected to remain solvent, even with 0% payroll growth and the Revised Asset Allocation or Corporate Bond Index investment returns.


Source: PRM Consulting Group  Note: 0% Payroll Growth. Ultimate contribution of FY2016 budget ($672 Million) annually

TRS funding

Similarly, while the TRS currently has a higher funded level and more assets than the KERS-NH plan, PFM also projects that the TRS could become insolvent in the decades ahead if the FY2018 employer contribution amount is not increased and plan assets do not earn well above the private sector pension discount rate of 3.87%. (TRS is currently targeting a 7.5% average annual return that it has not achieved in over 10 years.)

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

4 For purposes of this analysis, “insolvent” means that a plan runs out of money.  In other situations, “insolvent” means either (1) an organization cannot pay its current obligations or (2) liabilities exceed assets.  Under that second definition, all of the plans are currently insolvent.

5 (Professional organizations have changed the term Actuarially Required Contribution to ARC to Actuarially Determined Contribution (ADC).