Pension Sustainability: Idaho

2011 Retaining Effective Teachers Policy

Goal

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

Meets in part
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Sustainability: Idaho results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/ID-Pension-Sustainability-9

Analysis of Idaho's policies

As of July 1, 2010, the most recent date for which an actuarial valuation is available, Idaho's pension system for teachers is 78.9 percent funded and has a 17.5-year amortization period. This means that if the plan earned its assumed rate of return and maintained current contribution rates, it would take the state more than 17.5 years to pay off its unfunded liabilities. While its amortization period meets regulatory benchmarks, Idaho's funding level is just below the conventionally recommended minimum funding level of 80 percent. The state's system is just short of being financially sustainable according to actuarial benchmarks.

In addition, Idaho commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 10.39 percent is too high (and is set to increase in future years), in light of the fact that local districts must also contribute 6.2 percent to Social Security. The rate is set annually by the pension board based on the retirement system's status. While this rate allows the state to pay off liabilities relatively quickly, it does so at great cost, precluding Idaho from spending those funds on other, more immediate means to retain talented teachers. The mandatory employee contribution rate to the defined benefit plan of 6.23 percent is reasonable.

Citation

Recommendations for Idaho

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, Idaho 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 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

Idaho noted that preliminary reviews of its most recent annual actuarial valuation show that Public Employee Retirement System of Idaho has a funded ratio of 90 percent or higher. The state asserted that the school districts it has met with overwhelmingly have indicated that the current benefit is essential to attracting and retaining quality teachers in the state of Idaho.

The state added the following comment: "The PEW Center on The States describes that pension systems that are 80 percent or higher funded are considered to be solidly funded.   National experts such as Charles D. Ellis, one of the acknowledged giants in the investment industry suggest:

   'The crucial need for investment counseling for individuals has been magnified by the huge shift in retirement security funds from defined-benefit (DB) to defined-contribution (DC) plans.  Arguably the most valuable financial service ever offered to individuals, DB pension plans provide retirees with regular payouts form low-cost, long-term, well-supervised investments and require no investment knowledge or skill, no need for caution at market highs, no need for courage if and when markets collapse, and no concern for outliving the funds.
    'In contrast, in today's DC plans, 55 million participants are on their own to decide portfolio structure.  Nearly 20 percent "invest" entirely in money market funds - because that is how they started out when the balances were small and they have not changed their original allocations.  In plans that allow investments in the sponsoring company's own shares, 17 percent of participants have over 40 percent of their accounts in that one company. (As Enron corporation, Polaroid Corporation, and others have shown, that is potentially painful non-diversification.)  For larger numbers of workers, the more serious question is, How many beneficiaries do not realize how much capital it will take to pay out a comfortable monthly amount, and how many of these will run out of funds in their old age?  One norm is to limit withdrawals to 4 percent of assets a year.  For participants in their mid-50s - with only 10 years to save more - the average balance is now $150,000.  At 4 percent this produces - before taxes and inflation - only $6,000 a year, and even at 6 percent, it only produces $9,000 a year.  Ouch!'"

Last word

This analysis is based on the most recent actuarial report publicly available.  It is commendable if the system's funding level is improving, but NCTQ was not able to verify the state's projections.  

To the state's other comments, certain teachers may be attracted to the defined benefit system, but that does not mean that all teachers are nor does it mean that the state can afford the system.  NCTQ maintains that a defined benefit pension plan does not treat all teachers fairly and does not attract people to the profession that may be interested in a more flexible and portable deferred compensation system.

A funding ratio of 80 percent may be viewed as solid at times, but that level still leaves a system vulnerable to financial downturns.  A system would ideally be more highly funded to protect itself and the taxpayers that support it from the need to increase contribution levels or decrease benefits when the market fluctuates.

NCTQ agrees that there is a need for investment advice for those in defined contribution plans.  Systems can help prevent individuals from solely investing in low-yield or risky portfolios. Plans can also allow individuals to invest in statewide professionally managed funds, or states can structure defined contribution accounts as cash balance plans.  Defined contribution accounts allow for flexibility that some individuals need.  Teachers that leave defined benefit systems before vesting are not given any pension security, and teachers that leave at a relatively young age, even after several years of services, may see their benefits erode to inflation over the decades.

How we graded

Many states' pension systems are based on promises they cannot afford to keep.

Teacher salaries are just one part of the compensation package that teachers receive. Virtually all teachers are also entitled to a pension, which, upon vesting, provides compensation for the rest of their lives after retirement. In an era when retirement benefits have been shrinking across industries and professions, teachers' generous pensions remain fixed. In fact, nearly all states continue to provide teachers with a defined-benefit pension system, an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers.

Under defined benefit systems, states have made an obligation to fund fixed benefits for teachers at retirement. However, the financial health and sustainability of many states' systems are questionable at best. Some systems carry high levels of unfunded liabilities, with no strategy to pay these liabilities down in a reasonable period, as defined by standard accounting practices. Without reform, these systems are a house of cards, vulnerable to collapse as funding cannot keep up with promised benefits. And it is taxpayers who will have to pay if it all tumbles down.

Pension plans disadvantage teachers early in their careers by overcommitting employer resources to retirement benefits.

The contribution of employers to their workers' retirement benefits is a valuable benefit, important to ensuring that individuals have sufficient retirement savings. Compensation resources, however, are not unlimited, and they must fund both current salaries and future retirement benefits. Mandated employer contributions to many states' teacher pension systems are extremely high, leaving districts with little flexibility to be more innovative with their compensation strategies. This is further exacerbated for states in which teachers also participate in Social Security, requiring the district to pay even more toward teacher retirement. While retirement savings in addition to Social Security are necessary, states are mandating contributions to two inflexible plans rather than permitting options for teachers or their employing districts.

This approach to compensation disadvantages teachers early in their careers, as the commitment of resources to retirement benefits almost certainly depresses salaries and prevents incentives. Lower mandatory employer contribution rates (in states where they are too high; in some states they are shamefully low) would free up compensation resources to implement the kinds of strategies suggested elsewhere in the Yearbook. In addition, some states require high employee contributions; the impact this has on teachers' paychecks may affect retention, especially early in teachers' careers.

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).