Pension Sustainability: North Carolina
Pensions Policy
Analysis of North Carolina's policies
As of December 31, 2014, the most recent date for which an actuarial valuation is available, North Carolina's teacher pension system is 95.6 percent funded, an increase of 1.4 percentage points since NCTQ's last report. Its current pension debt is $2,000 per pupil throughout the state (about $1,000 per pupil after considering only classroom teachers). It also has a 12-year amortization period. This means that if the plan earns its assumed rate of return of 7.25 percent and makes its full actuarially determined contribution payments, it would take the state 12 years to pay off its unfunded liabilities. Both the funded ratio and amortization period are better than regulatory recommendations, and North Carolina's system is financially sustainable, according to actuarial benchmarks.
North Carolina, however, commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 8.47 percent is somewhat excessive, in light of the fact that local districts also contribute to Social Security. The employer contribution is paid by the state, which lifts the burden from local districts, but it still uses funds that could have been used in more immediate ways to attract and retain effective teachers. The employer 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 any unfunded liabilities. The mandatory employee contribution rate to the defined benefit plan of 6 percent is reasonable.
Recommendations for North Carolina
While the state meets actuarial benchmarks for a financially sustainable system, it does so at a somewhat high cost, precluding North Carolina from spending those funds on other, more immediate means to retain talented teachers. The state, however, must be careful to maintain its funding level to allow for protection during financial downturns. The state might consider systemic change such as directly tying benefits to contributions.
State response to our analysis
North Carolina did not respond to repeated requests to review this analysis.
-
North Carolina
Select another topic
Delivering Well Prepared Teachers
- Admission into Teacher Preparation
- Elementary Teacher Preparation
- Elementary Teacher Preparation in Reading Instruction
- Elementary Teacher Preparation in Mathematics
- Early Childhood
- Middle School Teacher Preparation
- Secondary Teacher Preparation
- Secondary Teacher Preparation in Science and Social Studies
- Special Education Teacher Preparation
- Special Education Preparation in Reading
- Assessing Professional Knowledge
- Student Teaching
- Teacher Preparation Program Accountability
Expanding the Pool of Teachers
Identifying Effective Teachers
- State Data Systems
- Evaluation of Effectiveness
- Frequency of Evaluations
- Tenure
- Licensure Advancement
- Equitable Distribution
Retaining Effective Teachers
Exiting Ineffective Teachers
Pensions
Research rationale
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.
Pension Sustainability: Supporting Research
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.