Pension Sustainability: North Dakota

Retaining Effective Teachers Policy

Goal

The state should ensure that excessive resources are not committed to funding teachers' pension systems.

Does not meet goal
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Sustainability: North Dakota results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/ND-Pension-Sustainability-9

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

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.

Research rationale

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.

For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Robert Costrell and Michael Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute (2011).

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see Joshua Furgeson, Robert P. Strauss, and William B. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy (Summer, 2006).

For examples of how teacher pension systems inhibit teacher mobility, see Robert Costrell and Michael Podgursky, "Golden Handcuffs," Education Next, (Winter, 2010).

For additional information on state pension systems, see Susanna Loeb, and Luke Miller. "State Teacher Policies: What Are They, What Are Their Effects, and What Are Their Implications for School Finance?" Stanford University: Institute for Research on Education Policy and Practice (2006); and Janet Hansen, "Teacher Pensions: A Background Paper", published through the Committee for Economic Development (May, 2008).

For further evidence supporting NCTQ's teacher pension standards, see "Public Employees' Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit and Defined Contribution Retirement Plans." The Segal Group (2010).