The state should ensure that excessive resources are not committed to funding teachers' pension systems.
As of June 30, 2010, the most recent date for which an actuarial valuation is available, Rhode Island's pension system for teachers is 48.4 percent funded and has a 19-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 19 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 22.32 percent is extremely high and is set to increase to 35.25 percent for fiscal year 2012, 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. 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. The employee contribution rate of 9.5 percent (with an additional 1 percent if the municipality has a COLA provision) is reasonable for those teachers in districts not contributing to Social Security but is excessive for those teachers who must also contribute 6.2 percent to Social Security.
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. However, Rhode Island should consider 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. 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.
The Employees' Retirement System of Rhode Island did not respond to repeated requests to review NCTQ's analyses related to teacher pensions.