Topic:
RETIREMENT AND PENSION SYSTEMS; TEACHERS; CONSTITUTIONAL LAW;
Location:
TEACHERS;

OLR Research Report


March 8, 2004

 

2004-R-0269

CONSTITUTIONAL PENSION PROTECTION FOR TEACHERS

By: Judith Lohman, Chief Analyst

You asked which states have constitutional provisions protecting teachers' pensions, what type of protections they provide, and whether teacher pension plans in those states are fully funded.

SUMMARY

Thirty-one states have language in their state constitutions that establish standards for funding and use of public employee pension plans and assets. Only four of the 31 states are in the Northeast: Maine, New Hampshire, New York, and Pennsylvania. The protection provisions typically require actuarially sounding funding, no diversion of retirement plan assets to other uses, and separate trust funds for plan assets. The Connecticut Teacher Retirement System has similar statutory provisions but Connecticut has no constitutional provisions concerning public employee pensions.

A pension plan is considered underfunded if its liabilities exceed its assets. Of the 31 teacher retirement plans covered by the constitutional protections, 18, 24, and 23, respectively, were reported as underfunded in state pension funding surveys published in 2000 by the Wisconsin Legislature's Retirement Research Committee, in March 2003 by Wilshire Associates, and in August 2003 by the National Association of State Retirement Administrators and the National Council on Teacher Retirement. Connecticut's Teacher Retirement System (TRS) was also listed as underfunded on all three surveys.

STATE CONSTITUTIONAL PROVISIONS

According to information compiled in 2000 by the National Retired Teachers Association (NRTA), a division of AARP, 31 states have constitutional provisions protecting assets in public pension systems covering public school teachers. The state constitutional provisions fall into four general categories:

● Requirements that pension plans be funded on a sound actuarial basis

● Requirements that pension fund assets be used exclusively for retirement purposes

● Prohibitions against pension fund assets being diverted to other uses

● Requirements that pension fund assets be held in a separate trust fund

Some states have more than one category of protection.

Connecticut law requires TRS to be funded on an actuarial reserve basis ( 10-183z), requires the fund to be periodically valued (10-183l), and gives custody of the plan's assets to the state treasurer (10-183m). State law also defines the Teachers Retirement Fund as a state trust fund under the treasurer's control for investment management purposes (3-13).

PENSION FUNDING

Public pension funding is measured by the ratio of the plan's assets to its liabilities. This ratio is known as the actuarial funding ratio. A plan whose assets equal or exceed its liabilities is said to be “fully funded,” a shortfall of assets is called an “unfunded liability,” and a plan with an unfunded liability is considered “underfunded.” Because calculating an actuarial funding ratio involves making various financial and demographic assumptions and because any ratio is simply a snapshot of a plan at a particular time, this report shows three ratios for each state teacher retirement plan covered.

Table 1 lists the states with constitutional pension provisions, according the NRTA and with various funding ratios described below. We include the ratio for the Connecticut TRS for comparison.

Column 2 is a funding ratio calculated according to standards issued by the Governmental Accounting Standards Board (GASB) Statement 25, known as GASB 25. GASB 25 requires actuarial valuations of public pensions to include a ratio that compares the actuarial value of assets with the actuarial accrued liability over time. Thus, GASB 25 adjusts for short-term market fluctuations, smoothing out rapid market rises and declines. The GASB 25 funding ratio for all major public pension plans is reported in the 2000 Comparative Study of Major Public Employee Retirement Systems, published by the Wisconsin Legislature's Retirement Research Committee.

Column 3 shows ratios published on March 12, 2003 by Wilshire Associates, a private investment advisory company, in its annual survey of state retirement systems. Column 4 shows funding ratios published in August 2003 by the National Association of State Retirement Administrators (NASRA) and the National Council on Teacher Retirement (NCTR).

Table 1: State Constitutional Pension Protections and Teacher Retirement Plan Funding Ratios

STATE

GASB 25

(2000)

WILSHIRE

(March 2003)

NASRA/NCTR

(August 2003)

Alabama

102.5%

90%

97.4%

Alaska

97.7

90

95.0

Arizona

116.6

109

104.6

California

104.0

94

98.0

Connecticut

81.0

74

75.9

Florida

113.5

104

115.0

Georgia

97.2

107

102.0

Hawaii

94.4

83

84.0

Illinois

68.2

52

52.0

Indiana

48.2

43

42.1

Louisiana

77.9

65

73.9

Maine

74.8

66

72.9

Michigan

99.3

88

96.5

Mississippi

82.6

70

83.0

Missouri

105.1

83

95.3

Montana

77.2

69

83.4

Nebraska

103.2

81

Not listed

Nevada

82.5

72

83.5

New Hampshire

Not listed

79

82.1

New Mexico

91.6

69

86.8

New York

Not listed

117

125.0

North Carolina

99.4

118

111.6

North Dakota

101.6

74

91.6

Oklahoma

49.8

44

51.4

Pennsylvania

119.0

100

114.4

South Carolina

98.9

88

87.4

Texas

107.4

80

96.3

Virginia

95.3

99

107.3

Washington (2 funds)

Not listed

78/87

94.4/100.0

West Virginia

20.1

21

19.2

Wisconsin

95.8

126

97.1

Wyoming

105.8

94

92.2

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