The post below was originally published on June 5, 2015, and has been updated to include the most recent data.
The Census Bureau’s annual Public Education Finances compiles total education spending and revenue across the entire country. The latest data, released earlier this summer, shows teacher benefits continue to eat away at school budgets. (The new data tell a similar story as our Pension Pac-Man report.)
Public school expenditures have more than doubled since 1992 (including inflation), and the percentage of those funds spent on teacher benefits has increased as well. The percentage spent on teacher salaries, however, has dropped. The table below captures various education expenditures* by all public schools across the country over time.
Employee benefit expenditures include costs such as retirement plans and health insurance. School district expenditures on benefits leapt 123 percent since the early 2000s, and climbed steadily over the past four years as well, now taking up nearly 23 percent of school district spending. Spending on salaries increased by just 43 percent during this same window.
As a share of total expenditures, benefits are also increasing; they now eat up six percentage points more than in 2001. Over the same time period, the percentage spent on teachers’ day-to-day wages has declined, down seven percentage points since 2001.
The changing ratio of salaries to benefits is troubling. Increasing spending on benefits saps already limited funding, and prevents districts from taking on new teachers or rewarding experienced ones with raises. A low starting salary can also serve as a deterrent to those considering the teaching profession and could potentially keep talented new graduates from pursuing teaching roles.
*Note: Data do not include capital costs or debt, just current spending
Tomorrow will be July 1st. For teachers that means summer school, prep for next year, and some well-deserved time off. For Major League Baseball fans, July 1st is Bobby Bonilla day. For any non-baseball fanatics out there, Bonilla remains famous not for his playing career, which ended in 2001, but for an odd deferred-money contract the New York Mets gave him in 2000. Instead of paying him roughly $6 million at the time, the Mets instead offered to pay him in yearly installments, paid out on July 1st every year from 2011 until 2033. In short, the club offered him something very similar to a pension.
Even though Bonilla was getting paid in the millions, his story relates to millions of teachers: In most cases a pension might not be worth it over the long run.
Let's unpack this comparison a little further.
In 2000, the Mets wanted to save some cash, so they delayed Bonilla's salary. In exchange Bonilla would receive a much greater, albeit delayed, sum. It seemed like a win-win. The club was deeply invested with Bernie Madoff and they (incorrectly) assumed that they would earn good returns in the market. Many pension funds make the same mistake. Nevertheless, the Mets were after much-needed financial wiggle room to make payroll, and giving Bonilla a contract worth more than a player of his caliber and age might have otherwise demanded seemed prudent at the time.
Teacher pensions are a lot like Bonilla’s deal.
Nearly all teachers receive a pension, also known as defined benefit (DB) retirement plan. Here is how it works. States and often districts pay a percentage of a teacher’s salary into a pension fund. Teachers also are required to make an annual contribution. At retirement teachers receive annual benefits according to a formula based on their age, years of experience, and an average of their final salaries.
Like the Bonilla arrangement, teachers forgo higher salaries today in exchange for more lucrative benefits tomorrow. This approach reduces how much money states need to pay in salaries and provides teachers with the opportunity to make up, and maybe even exceed, the difference later through the pension fund. A win-win, right?
Unfortunately, however, neither Bonilla nor teachers made out as well financially as one might have guessed. According to an estimate by ESPN last Bonilla Day, had he taken the money upfront and invested it, even with a conservative rate of return, he would have made more money. And for the Mets, they're still paying a 50 year-old man over $1 million a year.
Most teachers get a raw deal as well. In the current pension system it takes teachers on average 24 years to earn a pension as valuable as the money they invested themselves. Many teaches would be better off financially if they could take their pension payments as salary. Or alternatively, a defined-contribution (DC) plan such as a 401k plan would produce a more valuable retirement benefit for most teachers.
The news isn't any better for states. Nationally, states carry around half a trillion dollars in unfunded liabilities. Pension funds in Puerto Rico and states such as Illinois and New Jersey face bankruptcy if they don't reform their systems.
The truth is that Bonilla, bad deal aside, will very likely be fine financially. For millions of teachers, however, it is a different ball game.
All teachers deserve a secure retirement. But under today’s current teacher retirement savings plans, more than half of all new educators won’t qualify for even a minimal pension benefit. We took a state-by-state look at public teacher retirement plans, and the findings were dismal. Here’s what we saw:
Retirement plans for public-sector workers, including teachers, are, by and large, getting worse. The last recession came down hard on state governments; so much so that, in terms of retirement benefits, now is the worst time in at least three decades to become a teacher. Those cuts fall hardest on new and future teachers, particularly those who do not plan teach in the same state for their entire careers. Our rankings aimed to capture these discrepancies, highlight areas of progress, and provide recommendations for reform.
We didn’t pull any punches – the reality of the situation is bleak, and it is important to share the facts. The majority of states are enrolling their teachers in expensive, debt-ridden retirement systems that fail to provide most teachers with adequate savings. These plans are unfair and unsound. We also aren’t the first to champion for pension reform. The Urban Institute has an excellent resource on public pensions, and our report draws on data from the National Council on Teacher Quality, in partnership with EducationCouncil. Our rankings build on these efforts in an important way, by adding in details to reflect the key differences between states. Teachers in California may have different needs than those in Idaho; these states may need to implement different policies to meet these needs. We believe states should design retirement plans that support their particular teacher workforce.
To measure the extent to which states have created retirement systems that match and adequately support their existing teachers, we created a grading rubric focused on two questions: 1. Are all of the state’s teachers earning sufficient retirement benefits? And 2. Can teachers take their retirement benefits with them no matter where life takes them? Our rankings use an equally weighted grading system comprising six variables that help answer our two guiding questions. Those variables are:
- The percentage of teacher salaries going toward retirement
- The percentage of teacher contributions going toward pension debt
- The percentage of teachers who qualify for employer-provided retirement benefits.
- The percentage of teachers who earn retirement savings worth at least their own contributions plus interest
- The percentage of teachers covered by Social Security
- Whether or not a portable retirement savings option exists
Our rankings paint a sobering picture. No state scored higher than a C, and most came in at an F. Overall, while states tend to be contributing enough toward benefits, they haven’t managed debt well or ensured that all teachers have access to adequate retirement savings. Few states have adopted reforms that would give teachers portable retirement benefits with the freedom of mobility or other personal or career choices. Others do not offer Social Security coverage to their teachers, depriving them of a solid base of retirement savings. It’s also important to note that just because a state has managed its debt costs reasonably well does not necessarily mean its plan is working well for teachers.
New York is one such example. The state does okay overall in our rankings, coming in ninth. Debt costs are low, but the state requires new teachers to stay 10 years before qualifying for retirement benefits. This leaves 60 percent of the state’s teacher workforce without any pension benefit at all. Similarly, Wisconsin has debt costs of just 1 percent of teacher salaries, but teachers are left out of Social Security coverage and must stay in the classroom 21 years before they break even on their own contributions plus interest. Both states have managed their finances reasonably well, but neither one is truly meeting the retirement needs of their teacher workforces. In fact, they’re managing their pension finances on the backs of teachers, at least in part, by perpetuating heavily back-loaded systems that reward a few at the expense of most teachers.
Something needs to change. Our teachers deserve better, and while specific action steps will vary state-to-state, we believe all states should aim to provide all their teachers with a secure retirement. They can start by:
1. Getting their finances under control
2. Making portable teacher retirement plans the default, to provide all teachers with financially secure benefits
3. Expanding Social Security coverage to include teachers
More money for schools is good news. It’s even better when a large portion of those funds will be distributed equitably across the state. In California, the state recently approved a new budget that includes a one-time payment of roughly $1 billion for the state’s school districts. This amounts to more funding than is required by the state funding formula. It’s big news.
But don’t pop the champagne just yet.
School district expenditures for the state’s teacher pension fund (CalSTRS) will increase by more than $1 billion annually until 2020-21. In other words California will need to make this onetime payment every year until 2021 to fill the budget gap created by the increase in districts’ pension spending. As it stands now, the state’s school districts will be around $3 billion short.
Without any additional help, districts will likely need to cutback in other education expenditures to be able to fund the pension system. This consequence makes clear that pension spending cannot be separated from school funding. One affects the other.
Unfortunately, the new state budget won’t help either despite allocation an additional $6 billion from the state’s reserves to pay its public employee pension fund. Nearly doubling the state’s investment into the public pension system this year will reduce the fund’s long-term debt and save taxpayers billions in the long run. And while that is good news for the state’s own pension obligations, it will do nothing to help districts make their payments this year.
California may at first look like it is increasing funding for school districts, but in reality this budget serves only to blunt the impact of rising pension costs for a year. It’s a Band-Aid too small to cover a gaping wound. Barring a massive increase in K-12 education spending, pension reform is necessary to actually grow school district budgets and to direct more funds to schools.
Last winter, I wrote about an effort in Michigan to reform the state's teacher retirement plan. At the time, Republican lawmakers were pushing to close the state's defined benefit pension plan to new workers and instead enroll all new teachers in a defined contribution plan identical to the one offered to other state employees.
In anticipation of a similar bill coming up again this year, we created a Michigan-specific version of our 3-minute pension "explainer" video. If you want a simple, easy way to quickly understand the debate over pensions in Michigan, you might start with the video below:
As fate would have it, the story we articulate in the video is now playing out in Michigan. Legislators continued to push for reform, and this week they agreed on a new version of the bill. It would set a portable defined contribution plan as the default, but it would also allow teachers to opt-in to a pension plan if they chose to. The authors of the bill argue it would be better for teachers and taxpayers, but Michigan union groups are attacking the bill as being anti-teacher.
Who's right? Well, consider how bad Michigan's plan is today. In a report released this week, we analyzed every state's teacher retirement plan. Along with most other states, Michigan earned an "F" grade. Here are the basic stats:
- Only about half of all incoming teachers will stick around for 10 years, the minimum required to earn a pension;
- Less than one-in-ten young teachers will teach in Michigan for their full career and reap the large back-end benefits promised to them;
- The current "hybrid" plan is dominated by its defined benefit component, and it has no way to keep costs in check over time if its assumptions prove inaccurate; and
- Michigan districts are currently contributing about 22 percent of each teacher's salary toward the pension plan, but most of that is being used to pay down past debts, not to pay for actual teacher benefits. In fact, about 80 percent of school district contributions toward the pension plan today are going to pay off past debts, not as benefits for current workers.
Combined, this leaves Michigan teachers in an expensive, back-loaded system. The vast majority are losing out in terms of retirement benefits, and all of them are losing out because their employers have to keep paying down pension debts.
The new legislation won't solve the state's existing debt problems, but it will prevent the state from accruing new debts in the future. And more importantly, it will enroll new teachers in a portable defined contribution plan, with a shorter vesting period and more money going toward teacher retirements. That will cost the state more money, but it's a win for teachers.
Whoever wins New Jersey’s Governor race in November will face a growing financial crisis. The state’s government employee pension fund is in dire financial straits. In fact, the fund is in the worst financial shape of any in the country. Now, the state has just over $49 billion in debt, and New Jersey’s local governments have another $17 billion in unfunded liabilities. The state’s teacher pensions owns the largest share of the problem. It is funded at less than 50 percent and is by itself $30 billion short. In fact, New Jersey’s teacher pension plan scored an F according to our new ranking of all 50 state teacher pension plans.
So what do the gubernatorial candidates propose to do?
Republican Kim Guadagno, the state’s current Lieutenant Governor, would tackle the pension crisis in four ways. First, she wants to increase the number of public employees enrolled in a cash-balance plan rather than the state’s pension fund. These plans are much like 401k retirement accounts, but they carry a guaranteed (but usually more conservative) interest rate. She then wants to find savings by cutting back on “Cadillac” health benefits. Third, she would like to ensure that government employees don’t simultaneously receive a paycheck and a pension, and, finally, she would cut fees paid to Wall Street firms investing those pension dollars. Guadagno believes this multifaceted approach will solve New Jersey’s pension woes.
The other candidate is Phil Murphy, a Democrat who served as President Obama’s top diplomat to Germany and a former Goldman Sachs executive. Murphy has some experience working to reform pensions. In 2005, he served on a task force to reform pensions. His plan is to divest from private equity and hedge funds, reinvest the millions paid in fees to those funds, and to close tax loopholes. Murphy argues that together these actions will fix the problem and allow the state to meet its pension obligations to government employees.
There are things to like about both the Republican and Democrat proposals.
Guadagno’s plan to increase the share of public employees in a cash-balance plan would help in a few ways. For teachers, for example, a cash balance plan typically provides a more valuable retirement benefit for a majority of educators. Furthermore, shifting more public employees into a DC plan will slow down the growth of New Jersey’s pension debts.
Decreasing the rapid accrual of pension debt is critically important, but it won’t be sufficient to ensure that the state can meet its current obligations. On that front, Murphy put forth a strong proposal. His goal of closing tax loopholes would secure significantly more revenue for the state to direct to its pension obligations and ensure that retirees receive the full benefits they earned.
The truth of the matter, however, is that whether Guadagno or Murphy wins in November, their individual proposals alone are likely not enough to solve New Jersey’s pension problems. The best strategy for the victor would be to borrow the elements of their opponent’s proposal described above. Together, this would be a stronger approach that would increase funding for existing pension obligations, slow down debt accrual, and provide higher quality benefits to many public employees.