Pension Sustainability: North Dakota

Analysis of North Dakota's policies

As of June 30, 2010, the most recent date for which an actuarial valuation is available, North Dakota's pension system for teachers is 69.8 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. Neither the state's funding ratio nor its amortization period meets conventional standards, and the state's system is not financially sustainable according to actuarial benchmarks.

In addition, North Dakota commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 8.75 percent is too high, in light of the fact that local districts and teachers must also contribute 6.2 percent to Social Security. While this rate allows the state to pay off liabilities, it does so at great cost, precluding North Dakota from spending those funds on other, more immediate means to retain talented teachers. The mandatory employee contribution rate of 7.75 percent is not unreasonable, although very close to what is considered excessive.

Citation

2010 Comprehensive Annual Financial Report, North Dakota Retirement and Investment Office, for the year ended June 30, 2010 http://www.nd.gov/rio/SIB/Publications/CAFR/2010AnnualReport.pdf

Recommendations for North Dakota

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 30 years or less to allow more protection during financial downturns. However, North Dakota should consider ways to improve its funding level without raising the contributions of school districts and teachers. 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

North Dakota asserted that to improve funding levels, which declined primarily because of the market downturn in 2008-2009, the 2011 state legislature approved North Dakota Teachers' Fund for Retirement contribution rate increases. Employee and employer contribution rates will both increase by 2 percent on July 1, 2012, and by another 2 percent on July 1, 2014, reaching 11.75 percent for employees and 12.75 percent for employers. Rates will return to 7.75 percent for employee and employer when NDTFFR reaches the 90 percent-funded level.

The state also noted that in addition to the contribution increases, the 2011 state legislature also approved benefit modifications to improve TFFR funding levels. School districts, teachers, and administrators supported the contribution and benefit changes recognizing the importance of a well-funded defined benefit plan. 

Last word

North Dakota's further increases in contribution rates will place excessive burdens on local districts and individual teachers.  While the state is commended for making an effort to restore solid funding status, the state should investigate other ways and consider opening a defined contribution plan to prevent future unfunded liabilities. In addition, the changes made are only predicted to have North Dakota reach 80 percent funded over 30 years.