Blog: Funding

States can shift new workers into new retirement plans easier than many pension advocates claim.

WalletHub recently released its new rankings of the best states for teachers. This year, there is a new best and worst state. New York grades as the best state overall, while Arizona came in last.

WalletHub graded states based on their opportunity and completion, which included salaries, pensions, growth, and even tenure. They then also took into account the state’s academic and work environment, which among other things, was based on student-teacher ratios, turnover, and union strength. Altogether, this ranking is based on a breadth of variables.  

WalletHub made at least one key improvement from its rankings last year: They amended how they evaluate teacher pensions. Previously, they rated states solely on the average pension paid out to retirees. As I wrote last year, it is a big problem to evaluate a state pension system this way, because average pensions don’t tell the whole story of a state’s pension system. Less than half of teachers even qualify for a pension. Take New York, WalletHub’s highest rated state. It has an average pension of around $44,000 but only 40 percent of teachers stay long enough to qualify for one in the first place.

To their credit, WalletHub responded to this criticism and upgraded how they assess the quality of state pensions. They now also include the percent of teachers whose pension doesn’t break even. In other words, teachers whose pension benefits are less valuable than their own contributions to the pension fund. This is a good decision by WalletHub that improves how they evaluate teacher pensions across the country.

We have our own 50-state ranking of state pension systems. Check out how your state measures up.

NFL players and teachers surprisingly have a lot in common. Neither has a pension plan that meets the majority of their needs. But for teachers, the failure of the plan to provide a good retirement benefit is particularly costly.

Want to see the future of school district budgets? Take a look at a slide deck presented this week by the Chief Financial Officer of the Los Angeles Unified School District (hat tip to reporter Kyle Stokes). The presentation was primarily about the rising cost of healthcare and post-employment benefits, but it included this alarming slide:

As shown in the graph, Health and Welfare (labeled “H & W” in the graph) benefits consumed 9.2 percent of the district’s budget in the 1991 school year. By 2021, they are projected to consume 18.5 percent of the district’s budget, rising to 28.4 percent by 2031. Pensions are similar: Los Angeles devoted 4.1 percent of its budget toward pensions 1991, but that will rise to 19 percent in 2021, and rise again to 22.4 percent by 2031.

Los Angeles is now considering a range of cost saving “opportunities,” primarily on the healthcare side, but assuming no policy changes, benefit costs for current workers and retirees will eat up more than half of L.A.’s budget by the year 2031.

As we’ve written before, this is a national trend, and it’s not a good one. It will compress teacher salaries and mean less money for books, field trips, libraries, foreign language, after-school programs, pre-k, etc. Like the Pac-Man game, benefit costs are steadily eating into the budget for everything else we care about in schools.

Spending on teacher pensions is often overlooked in analyzing school finance equity. Here are three reasons why that is a mistake.
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.
California' legislature recently approved a onetime payment of $1 billion for the state's school districts. However, it won't translate into a real increase in district budgets since those funds are hardly enough to cover burgeoning pension costs.
Over the last 15 years, teacher salaries have risen less than inflation, but insurance and retirement costs have risen much faster.
Judge recently dismissed CPS's lawsuit claiming the state funds schools inequitably and operates an inequitable pension system. As a a result, the district once again faces serious finance troubles and Gov. Rauner is withholding $215 million for CPS until the legislature enacts pension reforms.
Puerto Rico’s pension system is an accelerated example of pension problems in the rest of the country. This is where many states are headed if they don't make reforms now.