Pension Sustainability: New York

2011 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: New York results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/NY-Pension-Sustainability-9

Analysis of New York's policies

As of June 30, 2009, the most recent date for which an actuarial valuation is available, New York's teacher pension system is 103.2 percent funded and has a 30-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 30 years to pay off its unfunded liabilities, if it had any. Both levels are better than regulatory recommendations, and New York's system is financially sustainable according to actuarial benchmarks.

However, New York does commit excessive resources toward its teachers' retirement system. The current employer contribution rate of 11.11 percent slightly exceeds recommended levels, in light of the fact that local districts must also contribute 6.2 percent to Social Security. While this rate enables the state to fully fund its system, it does so at a cost, precluding New York from spending those funds on other, more immediate means to retain talented teachers. The mandatory employee contribution rate of 3.5 percent is reasonable.

Citation

Recommendations for New York

Avoid committing excessive resources to the pension system.
The state is commended for having a system that is over 100 percent funded. However, in light of this overfunding, the state should consider decreasing employer contributions to allow the state and local districts to spend those funds on more immediate recruitment and retention strategies.

State response to our analysis

New York was helpful in providing NCTQ with facts that enhanced this analysis. In addition, the state noted that the employer contribution rate is determined annually in accordance with an actuarial valuation of system assets and liabilities, following appropriate actuarial procedures and standards of practice. 

The system is not funded in accordance with a 30-year amortization, as the NCTQ analysis states. For funding purposes the system uses the aggregate actuarial funding method. This method does not establish a separate unfunded accrued liability. The funded ratio provided as of June 30, 2009 equal to 103.2 percent is accurate. As of June 30, 2010, this funded ratio is equal to 100.3 percent. These ratios are calculated in accordance with Governmental Accounting Standards Board requirements.

Last word

This analysis is based on the most recent published reports that are available to the public. The June 30, 2010, funded ratio was not included in the 2010 Comprehensive Annual Financial Report.

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).