Pension Sustainability: Hawaii

Retaining Effective Teachers Policy

Goal

The state should ensure that excessive resources are not committed to funding teachers' pension systems.

Does not meet
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Sustainability: Hawaii results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/HI-Pension-Sustainability-9

Analysis of Hawaii's policies

As of June 30, 2010, the most recent date for which an actuarial valuation is available, Hawaii's pension system for teachers is 61.4 percent funded and has a 41.3-year amortization period. This means that if the plan earns its assumed rate of return and maintains current contribution rates, it would take the state more than 41 years to pay off its unfunded liabilities. Hawaii's amortization period significantly exceeds the regulatory benchmark of a 30-year period, and 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 15 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. The employer rate will increase incrementally to 17 percent for the 2015-2016 fiscal year. The current mandatory employee contribution rate to the defined benefit plan of 6 percent is reasonable; however, the rate for new employees hired as of July 1, 2012, is slightly high.

Citation

Recommendations for Hawaii

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. Goals 4-G and 4-I provide suggestions for pension system structures that are both sustainable and fair.

State response to our analysis

Hawaii recognized the factual accuracy of this analysis. The state was also helpful in providing facts that enhanced this analysis.

Research rationale

NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.

For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Robert Costrell and Michael Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute (2011).

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see Joshua Furgeson, Robert P. Strauss, and William B. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy (Summer, 2006).

For examples of how teacher pension systems inhibit teacher mobility, see Robert Costrell and Michael Podgursky, "Golden Handcuffs," Education Next, (Winter, 2010).

For additional information on state pension systems, see Susanna Loeb, and Luke Miller. "State Teacher Policies: What Are They, What Are Their Effects, and What Are Their Implications for School Finance?" Stanford University: Institute for Research on Education Policy and Practice (2006); and Janet Hansen, "Teacher Pensions: A Background Paper", published through the Committee for Economic Development (May, 2008).

For further evidence supporting NCTQ's teacher pension standards, see "Public Employees' Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit and Defined Contribution Retirement Plans." The Segal Group (2010).