The Big Squeeze: Retirement Costs and School-District Budgets

Dara Zeehandelaar and Amber M. Northern
Publication Date: 
June 3, 2013

Economist and pension expert Robert Costrell and education finance expert Larry Maloney parsed the budgets of the Milwaukee, Cleveland, and Philadelphia school districts to estimate just how big an impact their pension and retiree health care obligations will have on their bottom line in coming years. They find that many factors are to blame for pension costs, including financial mismanagement, shortsighted decision making, artificially rosy investment projections, and declining asset values due to market downturns. Skyrocketing costs and more-generous benefits, along with relatively meager contributions from employees, have also placed a monumental financial burden on many retiree health care systems. States are now scrambling to address this burden by rethinking the ways they will structure and fund their retirement systems going forward. But in many places the fiscal challenge exceeds the capacity—or political will—of state leaders to make substantive changes. In the meantime, much of the cost is passed on to school districts (including their current and future teachers and students) and to local taxpayers. 

Local jurisdictions are, in essence, being forced to pay for many past decisions they did not make. Districts generally cannot alter the state’s rules regarding pensions and how they are financed. With rare exceptions, the state is where the retirement system was designed, where the rules for how it would be funded and governed were established, where actuarial projections of fiscal stability were made honestly or shaded for shortterm advantage, where employer and employee contribution rates were set, and where benefit levels were established and retirement eligibility policies fashioned.  

Because districts can seldom alter the state’s pension rules and financing arrangements, they face painful choices.