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November 02, 2009
Today, Fordham released our latest, "Charting a New Course to Retirement: How Charter Schools Handle Teacher Pensions." Authors Amanda Olberg and Michael Podgursky explain the report's findings here.
In the wake of the economic downturn, American public schools face serious, long-term fiscal challenges. Of them, rising pension costs are a particular concern. Yet school districts have no mechanisms for reining in these costs; almost all districts are tethered by statute to state pension systems (or, sometimes, their own local pension systems). It turns out, though, that some states allow their public charter schools to opt out of those systems. How they handle this opportunity bears scrutiny?and may suggest some lessons for the larger public-education system.
Nationally, teacher compensation comprises 55 percent of current expenditures in K-12 education. (That figure rises to 81 percent when all school staff are included.) A large and growing share of these costs goes to help fund retirement benefits. Between 2004 and 2010, for example, district pension costs (not counting retiree health insurance) increased from 12 percent to over 15 percent of salaries. A recent report from the Pew Center on the States estimated that unfunded public employee pension liabilities in the U.S. grew to $1.26 trillion during the 2009 fiscal year; other studies estimate that the true liability is even higher. Even as states attempt to pay down this liability, pension costs for all public employees, including teachers, will likely keep rising.
In search of alternatives, we looked at public charter schools in some states where there is no requirement to participate in the state teacher-pension plans. That's the situation today in sixteen states. When given the option, how many of these schools choose to participate in their regular state (or local) teacher pension plans, and how many do not? When they do not participate in state plans, what?if anything?do they offer instead?
To answer these questions, we examined data regarding the pension arrangements of ?opt-out? charter schools in six states: Arizona, California, Florida, Louisiana, Michigan, and New York. We chose these six because they contain large numbers of charter schools and comprise over 75 percent of all of the charter schools that have the pension opt-out right.
We found that the rates at which charter-schools participate in their state plans are low in jurisdictions where teachers in the state plan also participate in Social Security (New York, Florida, Michigan, Arizona). However, in states where teachers in the state retirement plan are not also included in Social Security (California, Louisiana), charter participation rates are high. In the latter states, opting out of the state system means opting in to Social Security, which evidently creates an incentive for charters to favor their state retirement systems.*
We surveyed a random sample of opt-out charters and found that their most common alternative retirement plans are 401(k) and 403(b) plans. The figure below shows the overall results. (Detailed state-level profiles and a more extensive analysis of the results are included in the full report on this topic, released today).
Alternative Retirement Plans Offered by Charters
A significant number of charter schools that opt out of their state retirement plans offer no alternative retirement plans for their teachers. This varies widely by state, however. For instance, while only one non-participating school in Michigan offers no alternative, 18 percent of non-participators in Florida and 24 percent in Arizona have no alternative retirement plan. In Michigan, 401(k) retirement plans are overwhelmingly the preferred alternative; a majority of charter schools in Florida and Arizona also choose those plans. Most charter schools in Louisiana and New York instead opt for 403(b) retirement plans. In California, the majority of charters are split evenly between 401(k) and 403(b) retirement plans. Types and amounts of employer and employee contributions also varied widely, as shown in the figure below. (Again, a detailed examination of these findings is available in the full report).
Types of Employer Contributions for Charters Not Participating in State Plans
As is often the case in this kind of analysis, the data raise at least as many questions as they answer. For example, do charter-school participation rates vary depending on characteristics such as authorizer type or grade span? What might we find in the other ten states that also allow charters to opt-out of state retirement systems? What is the effect of charter-pension policies on teacher recruitment, retention, and quality? What important lessons can be gleaned from charter-school experimentation with alternative retirement systems? And finally, how can these lessons inform ongoing reform efforts in traditional public schools?
Charter schools were created in part to serve as laboratories for innovative practices and alternative approaches within the broad framework of public education. In certain areas, such as personnel policy, they've diverged considerably from traditional public-school practices. Most, for example, forego formal collective bargaining and conventional teacher tenure. Many use various forms of differentiated and performance-related pay. The present study, the first of its kind, makes clear that some charter schools are also innovating in the teacher-pension arena.
There is no single pattern in the retirement alternatives offered by charter schools, but it is clear that traditional defined-benefit plans are not the only possible way to organize teacher pensions. Mobile teachers are apt to spend parts of their careers in different places and even different lines of work. Perhaps these teachers prefer portable 401(k)-style retirement plans, whereas those interested in job security and planning a long career at the same school might be less satisfied with such plans. Perhaps it is possible to restructure retirement options in a way that enhances the growth of human capital in all our schools. At the very least, we know that fiscal realities dictate fresh thinking about teacher pensions?and charter schools may point the way forward.
*Note: Not all public employees participate in Social Security; this participation varies by state and is at state discretion.