If something doesn't change fast, many public school districts around the country will soon be paying enormous chunks of their per-pupil funding to cover the pension and health care benefits of retired teachers, according to a new study by the Washington, D.C.-based Thomas B. Fordham Institute.
The first of three case studies was released last night, focusing on the School District of Philadelphia. Subsequent studies will soon be released on the Milwaukee Public Schools and Cleveland Metropolitan School District.
At the heart of Philly’s problem, the Fordham report argues, are long-standing promises to teachers about both pensions and health care that were inadequately funded, especially after the stock market crashes of 2000 and 2008.
Looking into the near future, the Fordham report estimates that the total cost of teacher retirement benefits in Philadelphia will explode from $73 million in 2011 to $349 million by 2020 — in constant 2011 dollars.
To put that in perspective, the report frames the burden in terms of per-pupil cost, jumping from $438 in 2011 to $2,361 in 2020.
The problem is widespread across the nation, stemming from years of generous benefits promised by school districts and state governments without realistic investment planning, the report suggests. Earlier this year, California learned that its retirement system for state teachers was $73 billion in the red, and Education Week recently reported that 10 percent of the budget for St. Louis schools goes to cover costs for retired teachers.
“It’s a huge drain on resources available for the classroom,” Costrell said.
How did Philadelphia get here?
Generous benefits granted to Philadelphia teachers during boom times were never dialed back or buttressed with current revenue. “They said, 'Well, we don't need to pay anymore. We're overfunded,'” said Robert Costrell, one of the report's analysts and a professor of education reform and economics at the University of Arkansas.
In fact, Costrell noted, the school district actually took a "pension holiday,” diverting funds from pensions when those funds looked solid, rather than save the excess for bad times. When the market headed south and the funds weakened, no correction was made, leaving a gap for the next generation of students, teachers and taxpayers to fill.
While the burden of the pension problem falls directly on local school districts, solutions are actually out of their hands, Costrell said. "In many of these cases, decisions are made at the state level, but the contributions have to be made at the school district level.” Philadelphia, he says, is "more or less at the mercy of the state legislature."
Each of the three school districts studied got into its mess through a unique pathway, and each has pursued a different set of solutions. Some of these solutions have been intensely controversial.
The imbalance in Milwaukee's school pension system was addressed in Wisconsin Gov. Scott Walker's controversial public benefits reforms in 2011, known as Wisconsin Act 10.
“Teachers in Milwaukee had been receiving very generous benefits, and their premiums were highly subsidized,” noted Dara Zeehandelaar, research manager for the Fordham Institute, during a June 7 panel discussion in Washington, D.C..
According to Zeehandelaar, Walker's aggressive reforms — which ultimately riveted the nation with recall elections and borderline riots — removed pensions and retiree health care out of collective bargaining going forward, but also for the first time required teachers to begin paying their own share of pension contributions.
"Previously in Milwaukee the district was paying the employer share and also covering the employees' share as well,” Zeehandelaar said, “but Act 10 forced teachers to actually pay for that portion of it."
Overpromising and underfunding resulted in a similar story in Pennsylvania.
“Pennsylvania got into this problem largely because of a lost decade of stock market returns," said Charles Zogby, Pennsylvannia’s secretary of the budget, at the panel discussion.
In an effort to make up for lost ground, Zogby said that the state is currently paying 16 percent of teacher salaries into the pension fund, and that will bump up to 20 percent next year. Even that is not enough, he added. “It should be 25 percent.”
Weak stock market returns were exacerbated by a "series of decisions made under three different governors,” Zogby said. These included benefit expansions that were paid for, a cost of living increase that bumped salaries by $1.7 billion annually, and $6 billion worth of contribution "deferrals” — the holidays as outlined above.
The result, Zogby said, was a perfect storm resulting in a $47 billion gap in the state’s teacher pension fund.
Zogby said that there is strong support in the state legislature for shifting toward a "defined contribution" system, which would cap the liability of the state going forward, for new hires.
Zogby says "the notion that public officials can have a guaranteed pension,” while private sector employees are left “overwhelmingly in defined contribution plans is a politically untenable situation."
Understandably, Zogby said the teachers unions and public sector unions are fighting such a policy shift, "and the teachers union is one of the strongest lobbies in Harrisburg (Pennsylvania's state capital).”
Zogby noted that none of the proposals would touch current retirement benefits. "There needs to be fairness to the individual," Zogby said. "The way the governor's plan is designed, the closer teachers are to retirement the less it will impact them."
Eric Schulzke writes on national politics for the Deseret News. He can be contacted at firstname.lastname@example.org.