Pension Sustainability: Washington
Pensions Policy
Analysis of Washington's policies
As of June 30, 2015, the most recent date for which an actuarial valuation is available, Washington's teacher pension system for Plans 2 and 3 is 94 percent funded. The report does not disclose the number of years remaining to amortize the system's unfunded liabilities. Washington's system is financially sustainable according to actuarial benchmarks. It should be noted, however, that Plan 1, which was closed to new members in October 1977, is only 69 percent funded. Combining all three plans, the system's funded ratio is 81.4 percent, a decline of 12.5 percentage points since NCTQ's last report, and its current pension debt exceeds $3,300 per pupil throughout the state.
Washington commits excessive resources toward its teachers' retirement system, however. The current employer contribution rate of 14.78 percent for Plan 2 and Plan 3 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 overfund its current plan and pay off unfunded liabilities of its previous plan, it does so at a high cost, precluding Washington from spending those funds on other, more immediate means to retain talented teachers. The mandatory employee contribution rates for Plan 2 of 5.95 percent and for Plan 3 of 5 percent are reasonable.
Recommendations for Washington
Avoid committing excessive resources to the pension system.
Washington is commended for having a current system that is over 100 percent funded. Its closed system, however, is underfunded and remains a financial burden on the current employees and employers. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention and crowd out funding for other areas in education. The state should consider decreasing employer contributions to allow the state and local districts to spend those funds on more immediate recruitment and retention strategies.
State response to our analysis
Washington was helpful in providing information that enhanced this analysis. Washington also indicated that the employer contribution rate is 13.13%.
Updated: December 2017
Last word
The FY2015 actuarial valuation indicates the employer contribution rate is 14.78%. This is the most recent report available.
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Washington
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Research rationale
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.[3] Without reform, funding is unlikely to keep up with promised benefits and these systems will become increasingly vulnerable to collapse.
Pension plans disadvantage teachers early in their careers. By overcommitting employer resources to retirement benefits, these plans often require districts to depress salaries and restrict incentives. The contribution of employers to their workers' retirement benefits is a valuable benefit, important to ensuring that individuals have sufficient retirement savings. Compensation resources, however, are not unlimited, and they must fund both current salaries and future retirement benefits. Mandated employer contributions to many states' teacher pension systems are extremely high, leaving districts with little flexibility to be more innovative with their compensation strategies.[4] Lower mandatory employer contribution rates (in states where they are too high; in some states they are shamefully low) would free up valuable compensation resources to ensure pension systems are more sustainable and equitable for all teachers. In addition, some states require high employee contributions; the impact this has on teachers' paychecks may affect retention, especially early in teachers' careers.[5]
The burden placed on districts to fund unsustainable pension systems is further exacerbated for those in states where teachers also participate in Social Security, requiring the district to pay even more toward teacher retirement. While retirement savings in addition to Social Security are necessary, states are mandating contributions to two inflexible plans rather than permitting options for teachers or their employing districts.[6]
[1] Doherty, K. M., Jacobs, S., & Lueken, M. F. (2017, February). Lifting the pension fog: What teachers and taxpayers need to know about the teacher pension crisis. Retrieved from National Council on Teacher Quality website: https://www.nctq.org/dmsView/Lifting_the_Pension_Fog
[2] For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Costrell, R. M., & Podgursky, M. (2011, February). Reforming k-12 educator pensions: A labor market perspective. New York, NY: TIAA-CREF Institute. Retrieved from https://www.tiaainstitute.org/public/institute/research/briefs/institute_pb_reforming_K-12_educator_pensions.html
[3] NCTQ's analysis of the financial sustainability of state pension systems is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office. (2007). Government Accounting Standards Board statement No. 25. Retrieved from http://www.gasb.org/st/summary/gstsm25.html
[4] Costrell, R. M., & Podgursky, M. (2011, February). Reforming k-12 educator pensions: A labor market perspective. New York, NY: TIAA-CREF Institute. Retrieved from https://www.tiaainstitute.org/public/institute/research/briefs/institute_pb_reforming_K-12_educator_pensions.html
[5] For further evidence supporting NCTQ teacher pension standards, see The Segal Group, Inc. (2010). Public employees' retirement system of the state of Nevada: Analysis and comparison of defined benefit and defined contribution retirement plans. Retrieved from https://www.nvpers.org/public/executiveOfficer/2010-DB-DC%20Study%20By%20Segal.pdf
[6] For additional information on state pension systems, see Loeb, S. & Miller, L. (2006). 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. Retrieved from http://web.stanford.edu/~sloeb/papers/Loeb_Miller.pdf; and Hansen, J. (2008, May). Teacher pensions: A background paper. Committee for Economic Development. Retrieved from http://eric.ed.gov/?id=ED502293