Pension Sustainability: Montana

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: Montana results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/MT-Pension-Sustainability-9

Analysis of Montana's policies

As of July 1, 2010, the most recent date for which an actuarial valuation is available, Montana's pension system for teachers is 65.4 percent funded and has an amortization period of 49.5 years. This means that if the plan earns its assumed rate of return and maintains current contribution rates, it would take the state more than 49 years to pay off its unfunded liabilities. Recent legislation reportedly reduces the amortization rate by 2.3 years, but an official valuation including its impact has yet to be released. Neither the state's funding ratio nor its amortization period meets conventional standards, and the state's system is not financially sustainable according to actuarial benchmarks. 

In addition, Montana commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 9.96 percent is too high, in light of the fact that local districts and teachers are also contributing to Social Security. The current employee contribution rate of 7.15 percent is not unreasonable, although it is very close to what is considered excessive. The employer contribution is a combined contribution from local districts and the state. The Montana constitution requires that each pension system be funded on an actuarially sound basis, which means contributions to the systems must fund the full actuarial cost. For defined benefit systems, this cost is defined as the cost to fund this year's expenses (the normal cost) plus any amount needed to amortize any unfunded liabilities over a period no more than 30 years. 

Citation

Recommendations for Montana

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, Montana 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

Montana declined to respond to NCTQ's analyses.

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).