Pension Sustainability: Utah
Pensions Policy
Analysis of Utah's policies
As of December 31, 2015, the most recent date for which an actuarial valuation is available, Utah's teacher defined benefit pension plan is 85.4 percent funded, an increase of 7.5 percentage points since NCTQ's last report. Its current pension debt is almost $5,000 per pupil throughout the state. It also has an amortization period of 20 years. This is due to an accounting method, however, in which Utah uses an open 20-year amortization period, meaning that the amortization period is reset to 20 years every year. Thus, the unfunded liability is never fully amortized. Under a closed amortization schedule, if the plan earns its assumed rate of return of 7.50 percent and makes its full actuarially determined contribution payments, it would take the state 20 years to pay off its unfunded liabilities. While not ideal, both levels are better than regulatory recommendations, and Utah's system is financially sustainable according to actuarial benchmarks.
Utah, however, commits excessive resources toward its teachers' retirement system. The current employer contribution rate to the defined benefit plan of 17.70 percent is too high, in light of the fact that local districts must also contribute 6.2 percent to Social Security. While this rate allows the state to pay off liabilities relatively quickly, it does so at great cost, precluding Utah from spending those funds on other, more immediate means to retain talented teachers. Teachers are not required to contribute to the pension system.
Utah closed its defined benefit plan to new employees as of July 1, 2011. All employees hired after this date will have a choice between a defined contribution plan and a hybrid plan. As set by statute, the employer contribution to both of these plans is 10 percent, plus the employer must contribute toward the amortization of the old plan. Any additional costs of the new plan that are beyond 10 percent will be paid by the employee. This employee rate is still too high, in light of the fact that local districts must also contribute 6.2 percent to Social Security.
Recommendations for Utah
Avoid committing excessive resources to the pension system.
The state is commended for maintaining a system that is financially sustainable. Utah, however, should consider decreasing employer contributions to allow local districts to spend those funds on more immediate recruitment and retention strategies. In addition, Utah should ensure that its new system is financially sustainable without demanding excessive contributions from employers.
State response to our analysis
Utah did not respond to repeated requests to review this analysis.
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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.