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.
Taxonomy:Money spent on public teacher pensions is often left out of analyses of school finance equity. Rather than a being seen as an issue affecting students’ education, pensions are often viewed as a budgetary dilemma for state legislators. Yet, both of these approaches overlook the effect pension spending can have on increasing the funding gap between schools based on students’ race.
Last week I released a new report, “Illinois’ Teacher Pension Plans Deepen School Funding Inequities,” that shows just how much pension spending in Illinois affects the state's finance equity. The results are startling and reveal that teacher pensions are yet another example of how states and districts underinvest in the education of low-income students, and the educations of black and Hispanic students.
Here are three key reasons why teacher pensions should be thought of as a key part of the push to ensure educational equity:
- Class-based gaps grow by more than 200 percent after accounting for pension spending. Teacher salaries comprise the lion’s share (roughly 80 percent) of school expenditures. And, unfortunately, the most experienced and highest paid teachers are unevenly distributed across schools. In Illinois the salary gap between the schools serving the highest and lowest concentrations of low-income students is on average around $550 per pupil. After factoring in pensions, however, the disparity jumps to over $1,200 per student.
- Race-based gaps increase by more than 250 percent after accounting for pension spending. In Illinois, the average teacher salary-based gap is $375 between schools serving predominantly white students and those serving predominantly nonwhite students. But after accounting for money spent on teacher pensions, the inequity increases to nearly $950 per pupil.
- States are investing more money in their pensions (because they’re in significant debt), and that will widen the gaps even further. From an educational equity point of view, the Illinois pension system is the problem. Since pensions are paid as a percentage of teachers’ salaries, which are unevenly distributed across the state, funneling more money into the system may help to decrease unfunded liabilities, but it also will result in even larger funding disparities.
Illinois is widely considered to operate one of, if not the most, inequitable school finance system in the country. Yet, many prior analyses underestimated the problem because they have not always included money spent on teacher pensions. This problem is not unique to Illinois. On the contrary, pensions will increase funding disparities in any state with an uneven distribution of teachers. The effect will likely be greater and more closely resemble Illinois in states, such as Missouri and New York, where large urban cities operate separate pension funds.
There are a couple of steps states can take to mitigate the increase in education funding disparities due to pension spending. Those states with more than one retirement system should consider folding the district plans into the state fund. The state has greater resources and almost always contributes to the pension fund at a higher rate. This would ensure that schools in the district — which disproportionately serve low-income students and students of color — receive pension payments at the same rate as other schools.
As it stands now, low-income students and students of color receive far less than their fair share in school funding. To change that, states must address the structure of their teacher pension systems as well as their school funding formulas. Teacher pensions are a key feature in the broader education equity debate.
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
Curious about your state? Click here to see where it stands, or see the report for a breakdown of our overall rankings.
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.
