Union concessions help town deal with liability
Published Nov. 22, 2011
By James A. Johnson/Daily News staff
Facing an unfunded pension liability of more than $21 million, Portsmouth has begun taking steps to control that liability.
In the latest round of contract negotiations, the unions representing police officers and employees in public works agreed that all new hires would go into a 401(k)-type retirement system instead of the town's pension system. The 401(k)-type system is known as a defined contribution plan, as opposed to the traditional defined benefit system in use throughout the state.
"We are the first police department in the state to have new hires go into a defined contribution plan," said Portsmouth Finance Director David P. Faucher. Those changes will benefit the town when new employees are hired for the Police and Public Works departments, he said.
Under the firefighters contract adopted in 2010, active members will contribute 10 percent of their gross annual earnings to the pension fund, Faucher said. That is an increase from 9 percent a year ago and 8 percent two years ago.
When those contract concessions were made, then-Town Administrator Robert G. Driscoll praised the unions for recognizing the difficulty the town is facing with its pension liabilities.
"They realized that the money in the operating budget devoted to pension expenses was strangling the budget in terms of being able to direct resources into departments that are undermanned and have vacancies that we haven't filled," said Driscoll, who retired in August.
Howard F. Tighe, president of the Portsmouth Local 1949 of the International Association of Fire Fighters, said the union saw the problems that were on the horizon and worked with the town to ensure the long-term sustainability of the town's pension system. Under the contract that went into effect July 1, 2010, firefighters agreed to contribute 10 percent of their gross pay, including overtime, holiday pay, longevity and clothing allowance. Their pension benefits, however, are calculated solely on their base salary and longevity.
"If the overtime for a year amounts to $300,000, then $30,000 is going into the pension system out of what we earned," Tighe said. "That has a pretty dramatic effect on the funding mechanism. We are the only fire department in the state that does that."
Tighe said the town and firefighters worked with an actuarial firm to review the numbers with the goal of protecting the pension plan.
"The long-term sustainability of the pension plan was our No. 1 goal," he said. "This worked out well for everyone: the taxpayers, the employees and the community."
The union also made concessions on health coverage, Tighe said. Combining those concessions with the pension contribution will save the town about $640,000 over the life of the contract, he said.
The concessions the police union made also will ease the burden on the town, said Detective Michael Arnold, president of Local 302 of the International Brotherhood of Police Officers.
The changes the police union agreed to will keep the pension system for those on the force today, but will put all new hires on the 401(k)-type plan, he said.
"Essentially, the town of Portsmouth has a cut-off date when the town will be out of the pension business for the police," he said.
Arnold said he thought that would be hard to sell to the union members, but they also saw the problems facing pension systems across the state and realized this was a good way to go.
"Looking at what happened, I think everyone is in agreement that we did the right thing," Arnold said, referring to the pension-reform package the General Assembly approved and the governor signed last week.
"Everyone is trying to give up a little to make it more affordable for everybody," Arnold said. "Everyone is trying to do their part."

Other benefits
The unions also have made concessions that will affect the town's liability for other post-employment benefits, or OPEB. The town's liability for OPEB, mainly health insurance for retirees, stood at more than $13 million as of June 30.
The police, fire and public works unions all are making contributions to OPEB. The contribution to OPEB is 1 percent of wages for police, 1.5 percent for firefighters and 0.25 percent for public works employees.
The pension reform package approved by the General Assembly last week only dealt with the state pension plan, so it will have a limited effect on the town's liability. In Portsmouth, only teachers are part of the state's pension plan; all other unions are covered under the town's plan.
The Town Council and School Committee have formed a Joint Pension Review Commission to look into ways to fund local pensions. The commission has hired an actuarial firm to recommend ways to eliminate the unfunded liability. A report is expected early in December.
Despite those recent concessions, the town has a long way to go to meet the financial obligations of 86 retirees collecting pensions and those who will become eligible for pensions in the next 30 years.
The town's total liability for pensions is $54 million, with about 60 percent of that already in the pension fund. That leaves an unfunded liability of $21 million, according to figures supplied by the finance director.
Breaking the total unfunded liability down by department shows $3.8 million for schools, $6.4 million for fire, $6.4 million for police, $1.2 million for public works and $3.5 million for Town Hall employees.
Of the 86 town retirees, the breakdown by department is schools, 28; police, 24; firefighters, 20; public works, 7; and Town Hall, 7.
Faucher said people are focused on the unfunded liability as if it were something that would have to be paid all at once.
"In reality, it is something that will be spread over a long period of time, up to 30 years for us," he said. "We have made the annual required contribution for each of the last four years. We are funding the plan. Yes, the unfunded liability is a big number, but you don't have to fund it all at once."
If the town were forced to meet that liability all at once, the current tax rate of $13.93 per $1,000 of valuation would jump to $20.68, Faucher said. Raising the $13 million needed to fund OPEB would bring the tax rate to $18.08.
"It is not realistic that we would do that," he said. "There is no way we would have to come up with the total unfunded liability in one year."
The annual required contribution for OPEB is set at $1.3 million, but Faucher said the town is not legally obligated to meet that. The Government Accounting Standards Board only requires the figure to be shown in the town's finances.
The board recognizes that each community has the liability, but many are unable to fund it, Faucher said.
"Some towns are able to fund it," he said. "Eventually, there will be pressure put on the town by the rating agencies to pay this, but for the last three years, it has been very tough to come up with the money to fund it."
The $13 million OPEB liability represents $6.8 million for police, $5.5 million for firefighters and $771,000 for all others.
Mark V. Dunham, finance director for the School Department, said the teachers are in the state system and it is difficult to determine the local costs.
He said 57 certified retirees and 17 noncertified retirees are receiving health insurance.
"The retirees are required to pay any premium increases after their first year of retirement," Dunham said. "Many of the folks are paying something toward their coverage."
On the town side, 36 retirees are collecting those benefits, including 18 from police, 16 firefighters and two others, Faucher said.

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