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, Hawaii's pension system for teachers is 62.2 percent funded, an increase of 3.2 percentage points since NCTQ's last report. Its current pension debt is about $13,000 per pupil throughout the state. It also has a 25-year amortization period, meaning that if the plan earns its assumed rate of return of 7.65 percent and makes its full actuarially determined contribution payments, it would take the state more than 28 years to pay off its unfunded liabilities. Hawaii's amortization period falls below the regulatory benchmark of a 30-year period, though its funding level is too low. The state's system is not financially sustainable according to actuarial benchmarks.
In addition, Hawaii commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 17.0 percent is too high, even before the additional 6.2 percent contribution that the state must make to Social Security. The rate is determined according to statutory requirements, which mandate that the employee and employer contribution rates are set with the intention to fund this year's expenses (the normal cost) plus any amount needed to amortize any unfunded liabilities over a 30-year period; when the amortization period is over 30 years the employer rates are subject to adjustment. There are currently no more scheduled rate increases in the future, however, and the current statutory rate is below the rate actuarially required rate of 17.89 percent to pay down the system's liabilities. If this continues, then debt will become larger in the future. The current mandatory employee contribution rate to the defined benefit plan of 8 percent is slightly high.
Hawaii Employees' Retirement System, Actuarial Valuation Report for fiscal year ended 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 and had an amortization period of less than 30 years to allow more protection during financial downturns. However, Hawaii should consider ways to improve its funding level without raising the contributions of teachers. In fact, the state should work to decrease employer 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.
Hawaii was helpful in providing information that enhanced this analysis.