Under the compromise, firefighters, police, and state and municipal workers would pay more into the system starting July 1. Their increased share of the pension costs and other proposed changes are intended to spare property taxpayers from paying the rising costs of funding the pension system while also relieving the state of a longtime obligation of paying a share of local pension costs.

Lawmakers believe that by raising employees' contribution rates the state can stop paying its share of local public employee pension costs without causing municipal contribution rates to spike. The compromise calls for the New Hampshire Retirement System to recalculate employer rates to be sure that happens.

The state had been paying 35 percent of local pension costs, a longstanding practice meant to encourage municipalities to participate in the system. The state reduced its share to 25 percent in the current budget. The budget for the upcoming two years passed by the Senate last week eliminates the state's share. At the 35 percent rate, the state's share would be about $87 million in each of the next two years.

In its purpose statement, the compromise says that increasing employer contributions would harm the state's economy by raising property taxes to pay the municipal share. It says that would discourage business from expanding or relocating to New Hampshire.

The compromise notes that legislation was enacted in 2007 to deal with the system's unfunded liability — $2.7 billion at the time — but changes since make the reforms in the bill necessary. The system's current unfunded pension liability is $3.7 billion plus an estimated unfunded medical insurance liability of nearly $1 billion.

"Over time, this is going to stabilize the system and keep employer rates from skyrocketing," Senate Republican Leader Jeb Bradley, the prime sponsor of the legislation and chair of the negotiating committee, said of the agreement.

Bradley said it is becoming increasingly difficult for government to afford pension costs, especially when combined with health care costs.

The compromise defines an employee with vested benefits as one with 10 years in the system. Some employee groups argue an employee with less than 10 years should have the same protections.

Concern over losing benefits has led to hundreds of employees filing for retirement this year. The compromise attempts to allay some of their fears by giving employees until Jan. 1 to become vested and escape many of the changes that would affect new hires and workers with less time on the job.

Vested workers would pay higher pension contributions beginning July 1, but most changes would only apply to those hired after that date.

Starting July 1, teachers, state and municipal workers would pay 7 percent instead of 5 percent. Firefighters' contribution would rise from 9.3 percent to 11.8 percent. Police would pay 11.55 percent instead of 9.3 percent.

Many of the proposed changes would only affect workers hired after July 1. They would work longer besides paying higher contribution rates and not be able to boost their pensions like current workers.

For example, newly hired state workers, municipal workers and teachers could not collect retirement benefits until age 65 even if they retired earlier. Vested workers could continue to retire before age 65 and get a reduced pension.

Newly hired police and firefighters could not begin collecting a pension until age 52½ even though they could retire at age 50. Currently, they can retire at age 45, and that would not change for vested workers.

Newly hired workers and workers who don't have 10 years in the system on Jan. 1 would see earnings used in pension calculations averaged over their five highest paid years instead of three years, which is the current practice.

Negotiators limited spikes in pension benefits paid to police who are paid for extra special duty assignments. The compromise would limit those earnings for police vested on Jan. 1 to the average paid over the previous seven years. New hires could not count any special duty pay in their pension calculations.

Non-vested and new hires could not include buy-out or severance payments.

The two sides agreed to drop provisions limiting collective bargaining and instead plan to study the issue.

The public pension system covers more than 50,000 active and nearly 26,000 retired state and municipal workers, teachers, police and firefighters.