Pension Sustainability: North Carolina

Retaining Effective Teachers Policy

Goal

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

Nearly meets
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Sustainability: North Carolina results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/NC-Pension-Sustainability-9

Analysis of North Carolina's policies

As of December 31, 2009, the most recent date for which an actuarial valuation is available, North Carolina's teacher pension system is 95.9 percent funded and has a 9-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 nine years to pay off its unfunded liabilities, if it had any. Both levels are better than regulatory recommendations, and North Carolina's system is financially sustainable, according to actuarial benchmarks.

However, North Carolina commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 13.12 percent is 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.

Citation

Recommendations for North Carolina

Avoid committing excessive resources to the pension system.
While the state meets actuarial benchmarks for a financially sustainable system, it does so at great cost, precluding North Carolina from spending those funds on other, more immediate means to retain talented teachers. However, the state must be careful to maintain its funding level to allow for protection during financial downturns.

State response to our analysis

North Carolina recognized the factual accuracy of this analysis. However, the analysis has been updated subsequent to the state's review to reflect recent policy changes.

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).