Retaining Effective Teachers Policy
As of June 30, 2010, the most recent date for which an actuarial valuation is available, Missouri's pension system for teachers is 77.7 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 more than 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, Missouri commits excessive resources toward its teachers' retirement system. The current employer and employee contribution rates of 14.5 percent are too high. State statute dictates that both contribution rates combined may not increase by a total of more than 1 percent each year, even if actuarial requirements are higher.
In order to meet the recommended benchmark of a 30-year amortization period, Missouri's employee and employer combined contribution level would need to be 31.34 percent. Missouri law also prohibits any future increases in benefits above those that can be funded by a contribution rate of 10-1/2 percent, which would be a reasonable rate considering that local districts and teachers are not making additional contributions 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 and had an amortization period of less than 30 years to allow more protection during financial downturns. However, Missouri 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.
Missouri stated that following the down markets in 2008 and 2009, PSRS/PEERS responded with two very strong years. The fiscal year 2010 return was 13 percent and the fiscal year 2011 return was the highest in recent history at 21.8 percent. As a result of its investment returns, a positive actuarial experience study and a Funding Stabilization Policy adopted by its Board, the funded status is expected to increase to over 83 percent. The state maintained that this is a very sound position.
Missouri further asserted that in addition, PSRS/PEERS will be paying the annual required contribution (ARC) and will utilize a 30-year amortization period with the goal of paying off the unfunded actuarial accrued liability (UAAL) and becoming 100 percent pre-funded within the time period. As fiduciaries of PSRS/PEERS, the board and staff are dedicated to serving over 220,000 active and retired Missouri educators and education employees. Missouri contended that it has demonstrated its long-term stability since 1946 and will continue to provide retirement security to this generation and generations to come.
Missouri is commended for having a plan to raise its funding level to over 80 percent and meet an amortization period of less than 30 years; however, this analysis is based on the current status as reported in published valuations. Plans for future funding increases are always subject to political and financial changes, and the fact that the state has previously not met its annual required contributions remains worrisome.