No One Benefits. How teacher pension systems are failing BOTH teachers and taxpayers

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1 No Oe Beefits How teacher pesio systems are failig BOTH teachers ad taxpayers

2 Authors Kathry M. Doherty, Sadi Jacobs ad Trisha M. Madde Pricipal Fudig The Bill ad Melida Gates Foudatio ad the Joyce Foudatio. About NCTQ The Natioal Coucil o Teacher Quality is a o-partisa research ad policy orgaizatio workig to esure that every child has a effective teacher. NCTQ is available to work with idividual states to improve teacher policies. For more iformatio, please cotact Sadi Jacobs at or

3 Executive Summary The structure of teacher pesio systems i the Uited States is, by ad large, uteable. Not oly are these systems costly to states, school districts ad taxpayers, but the carefully guarded retiremet beefits are beig squeezed ad distributed ufairly i ways that are also costly to teachers. Sice 2008, the Natioal Coucil o Teacher Quality (NCTQ) has tracked the health of teacher pesio systems i the 50 states ad the District of Columbia as part of our aual State Teacher Policy Yearbook. This year, we expad our coverage of pesios to provide a more detailed picture of the pesio policy ladscape ad make a forward lookig case for pesio reform. I this aalysis, we: Provide a overview of the pesio fudig crisis i the Uited States. Explore the techical ad sometimes hidde features of teacher pesios that are costly to taxpayers. Examie the elemets of curret pesio systems that make them ot fair, advatageous or beeficial to teachers. Outlie a forward lookig approach to reformig teacher pesios that ca help shore up states fiacially ad improve their ability to recruit ad retai highly-effective teachers. Key Fidigs Pesio systems are severely uderfuded. Accordig to the most recet data available, NCTQ estimates that teacher pesio systems i the Uited States have almost $325 billio i ufuded liabilities. Fudig shortfalls have grow i all but 7 states betwee 2009 ad Pesio uderfudig is eve worse tha meets the eye due to urealistic assumptios ad projectios about returs o ivestmets. Eve with states almost certaily overestimatig how well fuded their pesio systems are, NCTQ fids that pesio systems i just 10 states are, by idustry stadards, adequately fuded. Retiremet eligibility rules add to costs. I 38 states, retiremet eligibility is based o years of service, rather tha age, which is costly to states ad taxpayers as it allows teachers to retire relatively youg with full lifetime beefits. I the just te states Alaska, Califoria, Illiois, Kasas, Maie, Miesota, New Hampshire, New Jersey, Rhode Islad ad Washigto that o loger allow teachers to begi collectig a defied beefit pesio well before traditioal retiremet age, states save about $450,000 per teacher, o average. Most pesio systems are iflexible ad ufair to teachers. May assume that defied beefit pesio plas are a clear wi for teachers. But while most defeders of the status quo fight tooth ad ail to preserve traditioal pesio plas, the reality is that these costly ad iflexible models are out of syc with the realities of the moder workforce. Curret i

4 Natioal Coucil o Teacher Quality pesio systems are built o a model that assumes low mobility ad career stability ad helps to put public educatio at a competitive disadvatage with other professios. Some of the ways teachers are shortchaged by curret pesio systems: It takes too log for teachers to vest i defied beefit plas ad it is gettig loger across the states. All but three states make teachers wait more tha three years; 15 states (up from ie i 2009) ow make teachers wait for 10 years to vest i their pesio plas. Sice 2008, 27 states have icreased the amout teachers must cotribute to their pesios. I 38 states, teachers ad/or districts are makig excessively high cotributios to their pesio systems. Curretly, teacher pesios i these 41 states are ot sufficietly fuded. I umerous ways, teachers ad school districts are beig squeezed to make up groud for poorly fuded state pesio systems. Sice 2008, 40 states have raised employer cotributio rates, at a average cost of $1,200 more per teacher each year. Over the same time period, 27 states have raised teacher cotributios, costig the average teacher almost $500 more per year. By reducig cost of livig icreases, raisig retiremet eligibility age, icreasig teacher cotributios ad fiddlig with beefit formulas, states are tikerig with systems at teacher expese while avoidig reform that would actually put states, districts, teachers ad taxpayers o firmer groud. I some cases, these chages are ecessary correctios for past over-promisig, but these small adjustmets are o replacemet for systemic reform, ad they have a real impact o teachers wallets. Sice 2008, 40 states have put the squeeze o teachers, with three quarters of these chages made just i 2011ad To date: 22 states have lowered lowerig cost of livig adjustmets 25 states have icreased retiremet age 20 states are legtheig the umber of years used as a base for computig fial average compesatio (which typically has the effect of lowerig compesatio) ii

5 No Oe Beefits: Executive Summary 13 states have chaged multipliers i ways that reduce beefits 27 states have raised teacher cotributios to pesio plas 21 states have reduced beefits while icreasig teachers cotributios (squeezig i two directios) Here is the bottom lie: The pesio crisis is real. A uptick i the ecoomy may ameliorate some of the immediate cosequeces, but pesio systems were i dire eed of attetio well before the ecoomic dowtur. The pesio crisis is systemic. States pesio woes ca t be fixed by tikerig with vestig periods or shavig dow beefits to teachers, the path most states have take to date. Real solutios require comprehesive rethikig of how we provide retiremet beefits to teachers. States are puttig their ow fiacial health, as well as the security of their teachers, at great risk by failig to take o a comprehesive approach to pesio reform that addresses fudametal problems. I all, 22 states ad the District of Columbia made chages to their teacher pesio systems (or public employee systems that iclude teachers) i 2012 aloe. But i most states the policies adopted attempt to tiker with systems i eed of serious attetio, ad may of the chages are hurtig teachers, taxpayers or both. NCTQ Recommedatios The fiacial crisis i pesio systems across the Uited States is a devastatig reality that also provides a uprecedeted widow of opportuity for reform. NCTQ has cosistetly argued that if states wat to get ad keep teachers for promisig ad productive careers while maitaiig a fiscally resposible commitmet to retirees states must: 1. Offer teachers the optio of a flexible ad portable defied cotributio pesio pla. All teachers should have the optio of a fully portable pesio system as their primary pesio pla. Today, Alaska is the oly state i the atio that has adopted a madatory defied cotributio pesio pla for teachers, as is commoplace i so may other professios. 2. At a miimum, esure that defied beefit pesio plas are as portable, flexible ad fair to all teachers as possible. If states are goig to maitai the optio of a defied beefit pla, they should cosider restructurig their systems as cash balace plas. Cash-balace pesio plas may be the best ew hybrid model as they provide greater flexibility ad a safety et to teachers while also offerig more fiacially stability to states ad districts. Kasas ad Louisiaa have recetly adopted cash-balace plas. 3. Esure some basic priciples of fairess. Teachers should be able to: Vest o later tha the third year of employmet Have the optio of a lump-sum rollover to a persoal retiremet accout upo termiatio of employmet that icludes, at miimum, the teacher s cotributios ad accrued iterest at a fair iterest rate iii

6 Natioal Coucil o Teacher Quality Have optios for withdrawal from either defied beefit or defied cotributio plas that iclude fuds cotributed by the employer Purchase time for ulimited previous teachig experiece at the time of employmet. Teachers should also be allowed to purchase time for all official leaves of absece, such as materity or paterity leave. 4. Shore up pesio fudig for existig commitmets. States eed to take actio to secure the fiacial health of teacher pesios by begiig to adjust urealistic assumed rates of retur ad make scheduled paymets to their pesio systems. Systemic reform of teacher pesios requires states to make tough decisios that are right for the log term. Ufuded liabilities serve o oe well. Ad stretchig liabilities out over eormous time or maitaiig assumptios of rates of retur that are usustaiable is a house of cards that is boud to collapse. 5. Istitute safeguards that prevet politically expediet decisios. States eed strategies to prevet the raidig of pesio fuds ad to stop policymakers from makig politically expediet commitmets ow that will ot have to be paid for util much later. Pesio ehacemets have bee a effective way to egotiate icreased teacher compesatio while deferrig the costs to future years. May of the costly features discussed i this aalysis have ever bee o the public radar but have huge public cosequeces. 6. Require that pesio systems are eutral, uiformly icreasig pesio wealth with each additioal year of work. The formula that determies pesio beefits should be eutral to the umber of years worked. It should ot have a multiplier that icreases with years of service or provide for logevity bouses. Pesio systems that set up teachers to ear vastly differet beefits for the same umber of years worked are costly ad ufair. The formula for determiig beefits should preserve icetives for teachers to cotiue workig util covetioal retiremet ages. Lookig Ahead Teacher pesio systems i the vast majority of states are ot set up for the moder professioal. Our society is more mobile. The teachig field used to be able to igore larger treds i employmet because it had a lock o smart, educated females. But this simply is ot the case aymore. Studet loa debt is o the rise the average college graduate has over $20,000 i debt for each degree eared makig cash i pocket at the start of employmet i the form of a higher salary eve more valued tha moey back loaded o the ed of a teachig career. There are myriad policy proposals for helpig to make the teachig professio more lucrative ad attractive to prospective teachers ad how we compesate teachers is a importat part of the formula. We caot afford to rethik strategies for attractig ad retaiig highly-effective teachers uless we uderstad the full rage of compesatio offered to teachers, ad that icludes retiremet beefits. Reform must address how pesios ca be shaped for the good of teachers, taxpayers ad, ultimately, studets alike. iv

7 No Oe Beefits: How Teacher Pesio Systems Are Failig Both Teachers ad Taxpayers Backgroud Util the recet prologed ecoomic dowtur, with states particularly hard hit, teacher pesios were o policymakers back burers. Doomsday predictios about states ad cities collapsig uder the weight of public employee beefit systems were largely igored, as they were most ofte delivered with a partisa slat. While the occasioal watchdog group made hay with stories about bloated pesio beefits or retiree health plas that paid for cosmetic surgery, 1 such stories did little to erode the public s commitmet to providig geerous beefits for those who dedicated their careers to educatig childre. Oly the pheomeo of early bakrupt govermets has forced policymakers to stad to attetio, cofrotig the challege that may teacher compesatio systems steadily icreased by state legislatures year i ad year out ad uder little public scrutiy are fiacially usustaiable. Teacher pesios have become big ews i major budget battles ad cotract egotiatios across the coutry. The most otable example was i Wiscosi, where Goveror Scott Walker faced a recall vote i 2011 i o small part due to his proposal to have teachers cotribute to their pesio ad health care costs. But eve where pesios are ot i the headlies, the crisis is loomig i the shadows. I this year s very public Chicago teacher strike, The New York Times reported, Oe of the most vexig problems for Chicago ad its teachers wet virtually umetioed: The pesio fud is about to hit a wall. 2 Scat public attetio to pesio reform may have at least as much to do with the mid-umbig complexities of the systems as ay effort to keep the topic out of public scrutiy. Accordig to NCTQ s 2012 aalysis of state teacher pesio systems, states have almost $325 billio i ufuded teacher pesio liabilities o the books. Our aim is to try to remedy that with a readable ad thorough overview of this complicated topic. Each year i our State Teacher Policy Yearbook, NCTQ reviews the state rules, regulatios ad policies that shape the teachig professio, icludig what states are doig to address their pesio health. NCTQ collects ad aalyzes a wealth of state data about teacher pesios, ad we preset our fidigs through two differet leses: how fiacially soud state teacher pesio systems are ad how flexible ad fair they are to teachers. 1 Lidsay Tugma, Buffalo, NY teachers get free plastic surgery, CNN, February 22, Mary Williams Walsh, Next school crisis for Chicago: Pesio fud is ruig dry, The New York Times, September 19,

8 Natioal Coucil o Teacher Quality As we have tracked these issues over the last five years, NCTQ has cosistetly argued that states rely o costly ad iflexible pesio models that do ot reflect the realities of the moder workforce. We also argue that the fiacial health ad sustaiability of most states pesio systems are questioable, at best. But the issue at had is ot just that these systems are, by ad large, uteable. The reality is that the curret structure of teacher pesios may be i the best iterest of either teachers or taxpayers. Of course, pesio isolvecy is ot i ayoe s best iterest. We also show that there are may ways that teachers, especially those early i their careers, are disadvataged, ad that carefully guarded retiremet beefits are already beig squeezed ad distributed ufairly i ways that are costly to teachers. It all adds up to make it the right time a absolutely ecessary time to scrutiize state teacher pesio systems. We aim to provide a itroductio ad referece guide o critical teacher pesio issues, with state-by-state compilatios of data ad policy, ad a effort to coect the disparate dots to explai why teacher pesios are ad should be a hot topic for educatio reformers. But before we dive i, a few words about what this paper does ad does ot attempt to do: This paper does ot make a argumet agaist teacher pesios. It does argue strogly for their sustaiability. This paper does ot argue agaist higher compesatio for teachers. Ideed, higher compesatio must be available i order to attract the caliber of teachig cadidate may schools desire. I order to rethik how teachers get paid, othig about the curret compesatio system ca be held exempt from discussio. Fially, this paper does ot argue for breakig commitmets already made to vetera teachers or for pullig the rug out from uder teachers who have dedicated their careers to educatig childre. It is about takig a ew approach to retiremet beefits that appreciates the iterests of teachers, taxpayers ad childre alike. Orgaizatio of the paper After a short itroductio to the basics i Pesios 101, which cotiues i Appedix A for those who eed a more i-depth tutorial, this aalysis is orgaized ito the followig four sectios: Part I Part II Provides a overview of the pesio fudig crisis i the states. Explores the techical ad sometimes hidde features of teacher pesios, such as cost of livig adjustmets, that are costly to taxpayers. Part III Examies the elemets of curret pesio systems such as log vestig periods ad low portability that make them ot fair, advatageous or beeficial to teachers. Part IV Outlies a forward lookig approach to reformig teacher pesios that ca help shore up states fiacially ad improve their ability to recruit ad retai highly-effective teachers. 2

9 No Oe Beefits No oe beefits The pesio crisis is real. A uptick i the ecoomy may ameliorate some of the immediate cosequeces, but o oe is predictig the massive ad uprecedeted level of fudig from improved ivestmet returs, state ad local coffers or a federal bailout-- that would be eeded to achieve soud fiscal health. Pesio systems were i dire eed of attetio well before the ecoomic dowtur. The problem also will ot be fixed with overly optimistic ad short-sighted projectios. The pesio crisis is systemic. States pesio woes ca t be fixed by tikerig with vestig periods or shavig dow beefits to teachers, the path most states have take to date. Real solutios require comprehesive rethikig of how we provide retiremet beefits to teachers. Figure 1. A o wi situatio Teacher salaries depressed because of high pesio costs Employer cotributios raised Poorly fuded pesio systems Teacher beefits are largely back loaded (which meas that teachers accumulate beefits slowly at first ad the at a faster rate the loger they stay i a school system), ad may state pesio systems are poorly fuded. Over time, this leads states to accumulate liabilities that force them to tighte retiremet beefits to teachers ad require higher paymets ito pesio systems for teachers ad for local districts. School districts fid themselves committig icreasigly higher shares of the dollars for compesatio just to pesios, uable to either raise salaries or expad the workforce. With a workforce that is likely to live loger ad, as we will show, ofte ecouraged to retire at relatively youg ages, states, districts ad teachers are ultimately i a o-wi cycle of dimiishig returs. 3

10 Natioal Coucil o Teacher Quality Fidig: Very few states are takig a comprehesive approach that addresses fudametal problems ad results i systemic reform. Rather tha take o the heavy liftig of log term solutios, most state efforts just fidget with short term fixes, may of which rest o the backs of teachers. Figure 2. States that have made pesio policy chages i 2012 I all, 22 states ad the District of Columbia made chages to their teacher pesio systems (or public employee systems that iclude teachers) i 2012 aloe. But i most states the policies adopted attempt to tiker with systems i eed of serious attetio, ad may of the chages are hurtig teachers, taxpayers or both. Figure 3 lays out some critical elemets of a state pesio system that would go a log way towards true ad lastig teacher pesio reform. Combied, these elemets represet a system that is fair, eutral ad portable. 1. FAIR: Each year a teacher works accrues pesio wealth i a uiform way. 2. NEUTRAL: Resposible fiacig of pesio systems to esure they are sustaiable, without excessive ufuded liabilities or a iappropriately log timelie required to pay off such liabilities. 3. PORTABLE: Teachers are give flexible optios about how they wat their pesios to work. A simple glace of where states stad o these seve elemets reveals how few states are attedig to pesio reform i a systemic way ad how far states have to go. 4

11 Figure 3. Key elemets of fair, eutral ad portable teacher pesio systems No Oe Beefits State offers a fully portable pesio pla State sets a short vestig period for teachers of 3 years or less State guaratees at least partial match whe teachers withdraw their cotributios after a reasoable period of service State esures that teacher pesio systems are well- fuded ad stable State sets reasoable teacher/employer pesio cotributio rates State esures a fair accrual of pesio beefits to teachers State disallows ureduced retiremet beefits before age 65 Alabama Alaska NA Arizoa Arkasas Califoria Colorado Coecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illiois Idiaa Iowa Kasas NA Ketucky Louisiaa Maie Marylad Massachusetts Michiga Miesota Mississippi Missouri Motaa Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolia North Dakota Ohio Oklahoma Orego Pesylvaia Rhode Islad South Carolia South Dakota Teessee Texas Utah Vermot Virgiia Washigto West Virgiia Wiscosi Wyomig TOTAL

12

13 Pesios 101 Despite the eormity of the fiacial implicatios of teacher pesio systems for the professio ad for taxpayers, there is oe simple explaatio for why the issue is off the radar i most discussios of teacher policy. It s complicated. So we begi with a bit of a lay of the lad about how teacher pesios work today. This Pesios 101 tutorial cotiues i more detail i Appedix A. Defied beefit pesio pla The vast majority of states 37 states ad the District of Columbia offer teachers oly a defied beefit pesio for their madatory pla. A defied beefit pla is a pesio that promises to pay a guarateed specified amout per moth for life to each perso who retires after a set umber of years of service or upo reachig a set age. Teachers usually cotribute to these plas, ad states ad districts are resposible for the remaider of the costs; i a few cases, teachers do ot cotribute ad all paymets ito the system are made by states ad school districts. The pesio system is resposible for the ivestmet of paymets ad bears the risk of lower tha expected ivestmet returs. The defied beefit pesio is rarely portable. That is, as the sayig goes, you ca t take it with you. If a teacher moves across state lies ad cotiues to work as a teacher, she starts agai from square oe i a ew system. Figure 4. State retiremet systems for teachers Teachers participate i separate pesio systems 23 Teachers are part of statewide public employee pesio systems Defied cotributio pesio pla Much less commo for teachers, but much more typical for recet geeratios of workers i geeral, is the defied cotributio pla. To date, oly Alaska has adopted a madatory defied cotributio pesio system for teachers. Defied cotributio plas, such as 401(k) plas, set a fixed level of cotributios for both teachers ad their employers ad allow teachers to choose amog ivestmet optios for the cotributios (usually amog stock, bod ad moey market accouts). I cotrast to the defied beefit pla, i a defied cotributio pla beefits vary depedig o the amout cotributed ad the retur o ivestmets. I additio to beig employee cotrolled, defied cotributio plas are portable. 7

14 Natioal Coucil o Teacher Quality The retiremet fuds that accrue stay with the employee, regardless of whether s/he moves to a ew state or leaves the professio. Because it does ot provide a guarateed beefit for life, the defied cotributio pla ivolves more risk. Together, cotributios, ivestmet returs ad a teacher s ivestmet decisios over time determie a retiree s pesio icome. Cash-balace pesio pla The cash-balace pesio pla is a ew type of pesio optio for teachers oe that has bee aroud for a while but is ew to the K-12 educatio sector. I a cash-balace pla, teachers have idividual retiremet accouts (similar to 401k plas) fuded by cotributios from states/districts ad teachers, but ulike typical idividual accouts, members are guarateed a miimum rate of retur by the state rather tha beig subject to market fluctuatios. This model resembles defied cotributio pesios because beefits accrue fairly ad are portable, but with a kid of safety et. Asset maagemet is shared by teachers ad fud maagers, trasferrig ivestmet risk away from idividual teachers. The Teachers Isurace ad Auity Associatio of America (TIAA) plas that are commo i higher educatio are similar i operatio. Kasas has recetly adopted a cash-balace pla; Louisiaa will soo offer teachers the choice of a cash-balace pla. Figure 5. What kids of pesio plas do states offer teachers? 38 Defied beefit 5 Hybrid 6 Choice 1 Defied cotributio 1 Cash balace Hybrid pesio pla Several states icludig Idiaa, Michiga, Orego, Rhode Islad, ad Virgiia operate a relatively ew pesio structure that has come to be kow as the hybrid pesio pla because it icludes elemets of both a defied beefit pla ad a defied cotributio pla. While these systems vary, geerally most or all of districts retiremet cotributios go toward the defied beefit pla compoet while some or all of the teachers cotributios go to the defied cotributio pla compoet. I this traditioal hybrid, teachers beefits result from the two compoets essetially a smaller versio of a traditioal defied beefit pla with a small, portable savigs accout added. I a traditioal hybrid pesio pla, oly some of the beefits are portable. The defied beefit compoet has the same retiremet eligibility rules ad vestig as traditioal defied beefit plas. The defied cotributio compoet is solely 8

15 No Oe Beefits: Pesio 101 fuded by the teacher, so if a teacher leaves before she qualifies for retiremet ad withdraws her fuds, she may oly take with her the defied cotributio compoet. The ewest hybrids are experimetig with teachers ad employers fudig both compoets ad addig portability optios. Hybrid highlights A closer look at Idiaa s hybrid system Idiaa teachers are members of the Teachers Retiremet Fud, a hybrid that operates much like a traditioal defied beefit pla. Madatory teacher cotributios are placed ito a persoal Auity Savigs Accout (ASA), i which teachers immediately vest. Teachers may make additioal cotributios of up to 10 percet of their salaries oce they have five years of service if their district allows it, ad teachers may allocate their ivestmet fuds amog optios predetermied by the state, icludig oe fud that guaratees a miimum rate of retur. I some ways, this is a laudable structure. However, i practice, there is o guarateed employer cotributio to the defied cotributio compoet, the ASAs may still oly amout to teachers ow cotributios plus simple iterest, ad the state does ot provide ay employer cotributio for teachers who leave the system ad withdraw their accouts. Idiaa s late vestig at te years of service for the defied beefit portio of the pla greatly decreases portability ad may couteract ay good that its hybrid approach creates. Choice of plas What we refer to i this paper as choice states are those that allow teachers to choose oe pla or aother that is, depedig o the choices offered, teachers have the optio of erollig i a defied beefit pla, a defied cotributio pla, a hybrid pla or, as of late, a cash-balace pla. Across the Uited States, six states Florida, Louisiaa, Ohio, South Carolia, Utah ad Washigto provide teachers with a choice of plas. 9

16 Natioal Coucil o Teacher Quality Figure 6. Type of pesio pla offered by states to ew teachers Alabama Alaska Defied beefit pla oly Hybrid pla Choice of plas Cash balace pla oly Arizoa Arkasas Califoria Colorado Coecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illiois Idiaa Iowa Kasas 1 Ketucky Louisiaa 2 Maie Marylad Massachusetts Michiga Miesota Mississippi Missouri Motaa Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolia North Dakota Ohio Oklahoma Orego Pesylvaia Rhode Islad South Carolia South Dakota Teessee Texas Utah Vermot Virgiia 3 Washigto West Virgiia Wiscosi Wyomig Defied cotributio pla oly TOTAL Figure 6. 1 Kasas will offer a cash balace pesio pla as the oly type of pla available to ew teachers as of Jauary 1, Louisiaa will offer a cash balace pla as a optio i additio to its existig defied beefit pla effective July 1, Virgiia will offer a hybrid pla as the oly type of pesio pla available to ew teachers effective Jauary 1, 2014.

17 No Oe Beefits: Pesio 101 Social Security I additio to participatig i teacher pesio systems, teachers i 35 states participate i Social Security. 3 Estimates suggest Social Security coverage for teachers atiowide is somewhere betwee percet 4 but, sice participatio i some states is decided at the district level, o oe appears to have a hadle o how may teachers participate. 5 Figure 7. Do states teachers participate i Social Security? Yes 13 No 3 I some districts For the purposes of this aalysis, the importat takeaways about teacher participatio i Social Security are the followig: Participatio i Social Security is a importat cotext for examiig teachers ad state/district cotributio rates ito teacher pesio systems. Teachers who do ot participate i Social Security have a added level of depedecy o their pesio plas. Most teachers participate i two iflexible retiremet plas. Havig two defied beefit sources has a low risk, but teachers ed up with two plas from which they are excluded from makig decisios that impact the beefits they receive. There are may specific features of pesio systems some of them very techical that cotribute to how costs ad beefits are defied. For those already well familiar with cocepts such as vestig, fial average salary, beefit multipliers, amortizatio periods ad ormal costs, please read o. For others i eed of more explaatio about how pesio systems work, see Appedix A for a referece guide to the terms ad cocepts discussed throughout this aalysis. 3 See Appedix E for more details o which states participate i Social Security. 4 The U.S. Departmet of Labor estimates 73 percet of public school teachers are covered by Social Security (2008, Table 5). Teacher employmet weights from the Commo Core of Data ad iformatio o teacher coverage from the NASRA public fud survey ad other sources suggest a coverage rate of 61 percet. See Robert Costrell ad Michael Podgursky, Teacher Retiremet Beefits: Are Employer Cotributios Higher Tha for Private Sector Professioals? (February, 2009). 5 Whe NCTQ called several states i which ot all districts participate i Social Security, pesio system staff did ot kow which or how may districts i their states participated ad suggested callig each district idividually. Iquiries to the Social Security Admiistratio were similarly fruitless. 11

18 PART I: The Pesio Fudig Crisis I this sectio we provide the lay of the lad of the basic costs ad fudig levels of teacher pesio systems across the Uited States. The bottom lie is clear, however you cut it, or spi it, or justify it: States do t have the fuds to meet the promises they have made to teachers. Fidig: Pesio systems are uderfuded. Accordig to the most recet data available, NCTQ estimates that teacher pesios i the Uited States have almost $325 billio i ufuded liabilities. State fudig for pesios has falle i all but 6 states betwee 2009 ad Most teacher pesio systems across the atio are uderfuded, may severely so. State ad local govermets have kowigly cotributed less tha their required portio to fud promised beefits, ad lower tha expected ivestmet returs have exacerbated those actios. Also cotributig to the crisis are ehacemets made to pesio systems durig better ecoomic times, icludig the bull market i the 1990 s. Rather tha accumulatig surpluses durig the years of above average returs, most pesio plas sigificatly ehaced beefits. The result was widfall gais for teachers who were close to retiremet but a less attractive professio for ew teachers ad prospective teachers who had ot yet etered the labor force. Ad whe the stock market declied, these ehacemets helped cotribute to what are ow large ad growig liabilities. 7 Ideally, pesio systems should be 100 percet fuded. 8 Ay system far below this mark carries a sigificat liability, because sufficiet resources have ot bee set aside for the purposes committed. Most states are t eve close. Figure 8 provides a state-by-state overview of ufuded liabilities compiled i 2012 from the most recet publicly available Comprehesive Aual Fiscal Report (CAFR) or actuarial valuatios for the pesio plas i which teachers participate. Some of these plas are for teachers (educators/school professioals) oly while others are larger state plas that iclude may differet classes of public employees icludig teachers There is reaso to look critically at the states whose fudig levels have ot dropped as well. Missouri, for example, lowered the assumed rate of iflatio while maitaiig the omial rate of retur. Wiscosi s fudig level was shored up by a bod issue, offsettig debt of oe kid with aother. 7 Cory Koedel, Shaw Ni ad Michael Podgursky, Who Beefits from Pesio Ehacemets? (Jue 2012), ceter.org/publicatios/calder-workig-paper-76.cfm. 8 Accordig to the America Academy of Actuaries, 100 percet should be the miimum fudig goal of a pesio system. While it is uderstadable that a system would fluctuate, the variace should be slight, ad it should ot oly be dowward. Ideally, systems should be more tha 100 percet fuded durig flush times i order to save for times whe they hit ivestmet hardships.

19 No Oe Beefits: Part 1 Figure 8. Teacher pesio fudig liabilities i the states 9 Ufuded pesio liability ($) Alabama $8,167,000,000 Alaska 1 $2,747,113,000 Arizoa $3,626,000 Arkasas $4,375,000,000 Califoria $196,315,000 Colorado $12,720,089,000 Coecticut $9,066,000 Delaware $119,841,000 District of Columbia 2 Noe Florida $9,258,000 Georgia $9,062,621,000 Hawaii $2,297,854,000 Idaho $539,129,000 Illiois $43,529,992,000 Idiaa $11,091,661,000 Iowa $3,630,652,000 Kasas $8,264,125,000 Ketucky $11,060,600,000 Louisiaa $10,810,459,000 Maie $1,381,159,000 Marylad $9,401,092,000 Massachusetts $11,773,000 Michiga $17,633,000,000 Miesota $5,039,110,000 Mississippi $4,849,294,000 Missouri $4,995,944,000 Motaa $1,792,100,000 Nebraska $1,772,248,000 Nevada $3,892,647,000 New Hampshire $2,192,308,000 New Jersey $16,278,021,000 New Mexico $5,650,800,000 New York Noe North Carolia $1,581,105,000 North Dakota $927,200,000 Ohio $40,655,709,000 Oklahoma $7,600,200,000 Orego $3,221,019,000 Pesylvaia $19,698,600,000 Rhode Islad $1,386,013,000 South Carolia $8,214,125,000 South Dakota $77,368,000 Teessee $361,877,000 Texas $24,062,000,000 Utah $3,756,036,000 Vermot $845,108,000 Virgiia $8,610,888,000 Washigto $1,800,000,000 West Virgiia $4,760,772,000 Wiscosi $50,641,000 Wyomig $625,223,000 Figure 8. 1 Alaska has o ufuded liability for its curret defied cotributio pla. The state has a closed defied beefit pla that still has a shortfall. 2 While icluded i this aalysis, the District of Columbia s pesio system is uique. The federal govermet is resposible for payig beefits attributable to service performed by District of Columbia Public School teachers o or before Jue 30, The District of Columbia Retiremet Board (DCRB) is resposible for payig beefits attributable to teacher service performed after that date. TOTAL $324,313,370,000 9 Figures are from the most recet actuarial valuatios icluded i aual fiacial reports. For systems that iclude members other tha teachers, the total reported ufuded liability was adjusted to reflect the percetage of teachers i the system (see Appedix D). I some cases, the percetage of teachers was ot published by the system ad other approximatios were used. Several states, icludig Alaska, Idiaa, Utah ad Washigto, have closed systems ad opeed ew oes. Where applicable ad reported, the ufuded liabilities for those closed systems are icluded. 13

20 Natioal Coucil o Teacher Quality Fidig: Uderfudig is eve worse tha meets the eye. Urealistic assumptios ad projectios make the problem of uderfudig eve worse tha it appears ad is cotributig to states ad districts diggig ito deeper holes of debt. Eve with states almost certaily overestimatig how well fuded their state pesio systems are, NCTQ fids that pesio systems i just 10 states are, by idustry stadards, well-fuded. The pesio system fudig levels reported here are based o each state s idividual actuarial valuatio that is a set of mathematical procedures used to calculate the value of beefits to be paid, the fuds available, ad the aual cotributios required. These valuatios use a series of assumptios iflatio rate, ivestmet rate of retur, salary icreases, cost of livig adjustmets, mortality rate some of which rage from too optimistic to dowright urealistic. There are several reasos why, as bad as these umbers are, they will get worse: Recet bad years for the ecoomy (FY 2012 for example) are ot yet reflected i most reported pesio umbers because there is a data lag regardig ivestmet returs. Pesio fuds typically smooth data over several years (ofte 5 or more years) proportioally spreadig gais or losses over a set period of time i a averagig procedure. While it is a commoly accepted accoutig practice, this process meas the full impact of the recet ecoomic dowtur has t eve bee fully accouted for yet. There is less tha a 50% chace that the et retur will be 7.5% or more over the ext 50 year period. - Cavaaugh McDoald Cosultig LLC o Mississippi s 8 percet assumed rate of retur o pesio ivestmets Oe of the assumptios with a big impact o a pesio system s fudig level ad oe that is comig uder icreased public scrutiy is the assumed rate of retur, or discout rate. If ivestmet returs fall short of assumptios for a give year, fudig for that year will show a deficit; if returs are greater tha expected, the fud will have a surplus for that year. Higher assumed rates ivolve more risk, while rates closer to iflatio (typically i the 3-5 percet rage) are less risky because they are more likely to be achieved. Most state pesio fuds assume a rate of retur betwee 7.5 percet ad 8.25 percet. While may states still report that they do meet or exceed a eight percet rate of retur over the life of the pla, o pesio plas are meetig those rates of retur i today s ecoomy. Califoria s teacher pesio fud, for example, eared just a 1.8 percet retur from ivestmets for 2012 ad Marylad s eared oly 0.36 percet Mary Williams Walsh, Public pesios faulted for rosy bets o returs, New York Times (May 27, 2012). 14

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