Pension Sustainability: Arizona
Pensions Policy
Analysis of Arizona's policies
As of June 30, 2015, the most recent date for which an actuarial valuation is available, Arizona's pension system for teachers is 77.1 percent funded, an increase of 0.8 percentage points since last fiscal year. Its pension debt is about $9,000 per pupil throughout the state. Arizona also has a 30-year amortization period, meaning that if the plan earns its assumed rate of return of 8.00 percent and makes its full actuarially determined contribution payments, it would take the state 30 years to pay off its unfunded liabilities.
In addition, Arizona commits excessive resources toward its teachers' retirement system. The current employer and employee contribution rates of 11.34 percent are too high, in light of the fact that local districts and teachers must also contribute 6.2 percent to Social Security. The 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 its unfunded liabilities. While these rates allow the state to pay off liabilities within 30 years, it does so at high cost, precluding Arizona from spending those funds on other, more immediate means to retain talented teachers.
Recommendations for Arizona
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, Arizona 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 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
Arizona did not respond to repeated requests to review this analysis.
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Arizona
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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.