The state should ensure that excessive resources are not committed to funding teachers' pension systems.
As of June 30, 2015, the most recent date for which an actuarial valuation is available, Arizona's pension system for teachers is 77.1 percent funded, an increase of 0.8 percentage points since last fiscal year. Its pension debt is about $9,000 per pupil throughout the state. Arizona also has a 30-year amortization period, meaning that if the plan earns its assumed rate of return of 8.00 percent and makes its full actuarially determined contribution payments, it would take the state 30 years to pay off its unfunded liabilities.
In addition, Arizona commits excessive resources toward its teachers' retirement system. The current employer and employee contribution rates of 11.34 percent are too high, in light of the fact that local districts and teachers must also contribute 6.2 percent to Social Security. The rate is determined according to statutory requirements, which mandate that the employer contribution rate must equal the cost to fund this year's expenses (the normal cost) plus any amount needed to amortize its unfunded liabilities. While these rates allow the state to pay off liabilities within 30 years, it does so at high cost, precluding Arizona from spending those funds on other, more immediate means to retain talented teachers.
Arizona State Retirement System, Actuarial valuation Report as of June 30, 2015.
Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded to allow more protection during financial downturns. However, Arizona should consider ways to improve its funding level without raising the contributions of school districts and teachers. In fact, the state should work to decrease contributions. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention. Improving funding levels necessitates, in part, systemic changes in the state's pension system. The goals on pension flexibility and pension neutrality provide suggestions for pension system structures that are both sustainable and fair.
Arizona did not respond to repeated requests to review this analysis.