Pension Sustainability: Indiana

Analysis of Indiana's policies

As of July 1, 2010, the most recent date for which an actuarial valuation is available, Indiana's pension system for teachers is 44.3 percent funded and has an amortization period of over 30 years. This means that if the plan earns its assumed rate of return and maintains current contribution rates, it would take the state over 30 years to pay off its unfunded liabilities.

However, Indiana has two pension plans. The state's pre-1996 plan, which is now closed, is a pay-as-you-go system and is only 33.1 percent funded. Indiana's current plan is 94.7 percent funded, and contributions were actually higher than the actuarial required contribution to meet a 30-year amortization period. Despite the strong funding of the current plan, Indiana's funding ratio and amortization period for its total system are still well below conventional standards, and the state's system is not financially sustainable according to actuarial benchmarks.

In addition, Indiana's required contributions to its teachers' retirement system leave little room to improve its funding level and amortization period. The current employer contribution rate of 7.5 percent, which the district pays for employees hired after 1995, is not unreasonable, but districts must also contribute 6.2 percent to Social Security. This puts the state very close to an excessive contribution requirement. The state pays flat sums based on actuarial determined values for the pre-1996 account but has fallen short of contributing the amount needed to meet benefit demands. The mandatory employee contribution rate of 3 percent is also reasonable.

Citation

Indiana State Teachers' Retirement Fund, Annual Actuarial Valuation as of June 30, 2010 http://www.in.gov/inprs/files/TRFValReport2010.pdf

Recommendations for Indiana

Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded and had an amortization period of less than 30 years to allow more protection during financial downturns. The state's current plan almost meets this funding level, but the state needs to improve the funding of its pre-1996 plan. However, Indiana should consider ways to improve its funding level without raising the contributions of school districts. In fact, the state should work to decrease employer contributions. 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.

State response to our analysis

Indiana was helpful in providing facts that enhanced this analysis. The state also noted that the contribution rate for the current plan is higher than the actuarial required contribution by a decision of the board of trustees to establish a more stable rate over time. Knowing that the contribution rates would likely rise in the near future, it was decided to establish a rate that could most likely remain the same over the next few years. The pre-1996 plan's contributions are provided directly by the state as benefits become due. By design, the funding ratio is very low. The state has a solid plan in place to manage projected pre-1996 plan benefits payments. A part of the plan includes a separate fund (Pension Stabilization Fund) established in 1996 to provide a stable and sustainable growth rate to future state payments. By design, the pre-1996 funding status will gradually increase over time and is projected to be 100 percent funded in 2035.

Last word

The state is commended for providing its districts with a stable, predictable contribution rate for its teachers in the current pension plan and for having a plan to fund the pre-1996 plan. However, even with a viable plan, the pre-1996 funding status places a burden and large liability on the state, and a plan is always subject to policy changes based on a state's changing funding needs and politics.