Pension Sustainability: Montana
Pensions Policy
Analysis of Montana's policies
As of July 1, 2015, the most recent date for which an actuarial valuation is available, Montana's pension system for teachers is 67.5 percent funded. Its current pension debt exceeds $12,000 per pupil throughout the state. It also has an amortization period of 26 years. This means that if the plan earns its assumed rate of return and makes its full actuarially determined contribution payments, it would take the state 26 years to pay off its unfunded liabilities. While Montana's amortization period is below the standard 30-year period, its funding level is too low. The state's funding ratio does not meet conventional standards, and the system is not financially sustainable.
In addition, Montana commits excessive resources toward its teachers' retirement system. School districts contribute 8.67 percent while the state contributes 2.49 percent from the general fund. The current combined employer contribution rate of 11.16 percent is too high, in light of the fact that local districts and teachers are also contributing to Social Security. The current employee contribution rate of 8.15 percent is also excessive. The employer contribution is a combined contribution from local districts and the state. The Montana constitution requires that each pension system be funded on an actuarially sound basis, which means contributions to the systems must fund the full actuarial cost. For defined benefit systems, this cost is defined as the cost to fund this year's expenses (the normal cost) plus any amount needed to amortize any unfunded liabilities over a period no more than 30 years.
Recommendations for Montana
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, though the State is commended for taking measures aimed at achieving 90 percent funding. Montana, however, should consider other 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 and crowd out funding for other areas in education. 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
Montana was helpful in providing information that enhanced this analysis.
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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.