The state should ensure that excessive resources are not committed to funding teachers' pension systems.
As of June 30, 2015, the most recent date for which an actuarial valuation is available, Rhode Island's pension system for teachers is 58.8 percent funded, an increase of 0.7 percentage point since NCTQ's last report. Its current pension debt is $18,700 per pupil throughout the state. It also has a 22.3-year amortization period. This means that if the plan earns its assumed rate of return of 7.50 percent and makes its full actuarially determined contribution payments, it would take the state 22.3 years to pay off its unfunded liabilities. While its amortization period meets requirements, Rhode Island's funding level is too low. The state's system is not financially sustainable according to actuarial benchmarks.
In addition, Rhode Island commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 23.13 percent is extremely high, in light of the fact that most local districts are contributing an additional 6.2 percent to Social Security. 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 over a closed period ending June 30, 2029. Before minor adjustments, the state pays 40 percent of the employer contribution and the local districts pay 60 percent. While these rates allow the state to pay off liabilities within a relatively short period, it does so at great cost, precluding Rhode Island from spending those funds on other, more immediate means to retain talented teachers. Teachers contribute 3.75 percent to the defined benefit plan and 5 percent to the defined contribution plan, plus 2 percent if the member is not enrolled in Social Security. The combined rate of 8.75 percent for employees enrolled in Social Security and 10.75 percent for teachers not contributing to Social Security are both reasonable.
Employees' Retirement System of Rhode Island, Actuarial Valuation Report as of June 30, 2015.
Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded to allow more protection during financial downturns. While Rhode Island is commended for implementing a hybrid plan that is more fiscally sensible than its old plan, Rhode Island still faces large unfunded liabilities from its old plan. It should continue to seek ways to improve its funding level without raising the contributions of school districts and teachers. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention and crowd out funding for other areas in education. Improving funding levels necessitates, in part, systemic changes in the state's pension system. The goals on pension flexibility and pension neutrality provide suggestions for pension system structures that are both sustainable and fair.
Rhode Island did not respond to repeated requests to review this analysis.