ISTA and K-12 and Public schools and Department of Education and Teachers and Education & Workforce Development and Government & Economic Development and Public Pensions and Government

Report: Indiana far short of funding teacher pensions

April 21, 2010

Indiana is among the nation's five most underfunded teacher pension programs, with the assets to cover just over a third of the benefits it owes by state law, according to a report released this month by school-choice advocates.

But according to a co-author of the report, the state is an unusual case in the sample, and is in that bottom-level designation for a different reason than the other states.

The national study by the Foundation for Educational Choice and the Manhattan Institute for Policy Research found that unfunded pension liabilities — the gap between the benefits promised to retired schoolteachers and the assets of the fund used to pay them — for all 50 states total almost $1 trillion. That's nearly three times the $332 billion state officials have on their combined balance sheets for unfunded liabilities.

Only five plans are 75-percent funded or better, the report said. West Virginia is cited as the most underfunded, at an estimated 31-percent funded. The Indiana State Teachers' Retirement Fund is short by about $15 million, and has the assets to cover about 35 percent of its liabilities, the report said.

The TRF had no comment on the report, said spokeswoman Joy Smith, but provided information about how the fund works.

The Teachers' Retirement Fund administers a two-part benefit: an annuity savings account and a monthly pension benefit, Smith said. Employees must contribute 3 percent of their pretax income to the annuity savings account. Many employers pick up this contribution as a benefit to the worker.

Employers make a contribution for the monthly pension benefit, she said. As of January 1, 2009, that rate is 7 percent of an employee's salary.

The state's teacher retirement benefits are divided into two funds. One includes teachers hired before July 1, 1995, and was established by the state legislature as a pay-as-you-go plan, Smith said. It is by definition not pre-funded, and annual pension payments are appropriated by the legislature.

The other plan includes teachers hired after June 30, 1995. It was established as an actuarially funded plan, meaning future liabilities are funded by contributions to the plan as a percentage of the member's salary as it is earned, Smith said. As of June 30 last year, that plan was 93-percent funded, according to Smith.

Common practice establishes 80 percent as the minimum to be considered healthy, she said.

To combat the unfunded pension liabilities in the first plan, the state legislature created the Pension Stabilization Fund.

Indiana stands out among the bottom five because it moved so recently from a pay-as-you-go-system, and because its general public employee fund, which does not include teachers, is in such good shape, said Josh Barro, a research fellow at the Manhattan Institute for Policy Research who co-wrote the study.

"Most of the states that had very low funding are states that generally have pension problems across the board, for teachers and non-teachers," Barro said.

Indiana's general public employee retirement fund, however, is actually in extremely good shape, and the state has a AAA credit rating, Barro said.

The study authors used financial data provided by the teacher pension funds, Barro said. In Indiana's case, the report's calculations of assets include both what's in the new fund and what's in the pension stabilization fund for teachers hired before 1996, Barro said. The report includes the accrued liabilities for all the teachers in both plans, he said.

Nate Schnellenberger, president of the Indiana State Teachers Association, says the report could be misleading and believes it could be used to give legislators a reason to cut teacher pensions.

"Part of the report implies that this high pension teachers are getting is a big burden on the state, when in actuality, Indiana's pension is low compared to a lot of other states," Schnellenberger said. "I'll say this — it would be very difficult for somebody to retire and just live off their TRF pension."

Barro said the report is merely making clear that a problem exists.

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