Pension Sustainability: Hawaii
Pensions Policy
Analysis of Hawaii's policies
As of June 30, 2015, the most recent date for which an actuarial valuation is available, Hawaii's pension system for teachers is 62.2 percent funded, an increase of 3.2 percentage points since NCTQ's last report. Its current pension debt is about $13,000 per pupil throughout the state. It also has a 25-year amortization period, meaning that if the plan earns its assumed rate of return of 7.65 percent and makes its full actuarially determined contribution payments, it would take the state more than 28 years to pay off its unfunded liabilities. Hawaii's amortization period falls below the regulatory benchmark of a 30-year period, though its funding level is too low. The state's system is not financially sustainable according to actuarial benchmarks.
In addition, Hawaii commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 17.0 percent is too high, even before the additional 6.2 percent contribution that the state must make to Social Security. The rate is determined according to statutory requirements, which mandate that the employee and employer contribution rates are set with the intention to fund this year's expenses (the normal cost) plus any amount needed to amortize any unfunded liabilities over a 30-year period; when the amortization period is over 30 years the employer rates are subject to adjustment. There are currently no more scheduled rate increases in the future, however, and the current statutory rate is below the rate actuarially required rate of 17.89 percent to pay down the system's liabilities. If this continues, then debt will become larger in the future. The current mandatory employee contribution rate to the defined benefit plan of 8 percent is slightly high.
Recommendations for Hawaii
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. However, Hawaii should consider ways to improve its funding level without raising the contributions of 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. The goals on pension flexibility and pension neutrality provide suggestions for pension system structures that are both sustainable and fair.
State response to our analysis
Hawaii was helpful in providing information that enhanced this analysis.
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Hawaii
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Delivering Well Prepared Teachers
- Admission into Teacher Preparation
- Elementary Teacher Preparation
- Elementary Teacher Preparation in Reading Instruction
- Elementary Teacher Preparation in Mathematics
- Early Childhood
- Middle School Teacher Preparation
- Secondary Teacher Preparation
- Secondary Teacher Preparation in Science and Social Studies
- Special Education Teacher Preparation
- Special Education Preparation in Reading
- Assessing Professional Knowledge
- Student Teaching
- Teacher Preparation Program Accountability
Expanding the Pool of Teachers
Identifying Effective Teachers
- State Data Systems
- Evaluation of Effectiveness
- Frequency of Evaluations
- Tenure
- Licensure Advancement
- Equitable Distribution
Retaining Effective Teachers
Exiting Ineffective Teachers
Pensions
Research rationale
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.
Pension Sustainability: Supporting Research
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.