Pensions pinching schools
June 06, 2007
"More money for better schools" is a mantra that can be heard across the nation. The problem, districts will have you believe, is that state budgets are being cut, that local voters are tightwads, and that, in places such as Detroit and Cincinnati, charter schools are taking away funding and thereby preventing the districts from delivering a quality education to every child.
These timeworn protests pale, however, in comparison to the real damage being wrought by state teacher pension funds, too many of which are siphoning precious dollars from classrooms at alarming rates. This is an issue with national implications. But we know it best in our home state of Ohio, where the State Teachers Retirement System (STRS) faces a looming fiscal crisis.
STRS, and by proxy its members and Ohio taxpayers, is currently shouldering an unfunded liability of about $20 billion (well over $4,000 per Ohio household). The system is also riddled with perverse incentives that seriously hinder teacher recruitment and mobility. Such incentives have multiplied and ramified over a number of years and through a series of well-intended ad hoc fixes seeking to keep decent teachers in the system. Unfortunately, these fixes have rendered the system even more complex and costly. One band-aid on the system, for example, allows many teachers to collect their pensions while continuing to work full time in the classroom (i.e., "double dipping"). This at a time when STRS assets fall far short of its accumulated pension and health insurance liabilities.
In a new Fordham report, Golden Peaks and Perilous Cliffs: Rethinking Ohio's Teacher Pension System, renowned economists Robert Costrell and Michael Podgursky illuminate some of the serious challenges facing Ohio's teacher retirement system. Several striking conclusions emerge from their analysis:
- The system is obsolete and in need of a serious overhaul. Ohio's teacher retirement system was designed for a different era (one in which employees were far less mobile), and for a time when life expectancies were considerably shorter than they are today. Now, many new retirees can expect to collect pensions for as many years as they taught. These incongruities are expensive, and the costs rise further when relatively young people (some in their early fifties) retire.
- The system is too pricey to sustain in its current form. In 2005, the National Association of State Retirement Administrators reported that STRS faced $20 billion in unfunded liabilities--commitments made to current and retired employees that the program's current assets cannot cover but that the state is obligated to honor. Couple these fiscal pressures with steep drops in district enrollments over the past several years, and public coffers may run dry sooner rather than later. Consider the Columbus Public Schools. Even as the district sheds teachers and students, its "instructional" expenditures, which include teacher salaries and benefits, ballooned by 52.6 percent per teacher from 2001 to 2005. Similar trends are found across Ohio's urban districts and well beyond.
- The system is out of step with the state's current teacher needs, labor markets, and career patterns. While Ohio's retirement system provides impressive benefits to teachers who make it through a thirty-year classroom career, these benefits come at a serious cost to younger instructors, to taxpayers, and to the state. For instance, teachers who separate from the system before the twenty-five or thirty-year mark face substantial losses in pension wealth due to its pension formula. Thus the system contains potent and perverse incentives that seriously hinder teacher recruitment and mobility, and that foster generational inequities between younger and older teachers. Costrell and Podgursky term these erratic incentives, rewards, and penalties the "golden peaks" and "perilous cliffs" along the path to teacher retirement in the Buckeye State.
Similar problems exist across the land. The recent NCEE report Tough Choices or Tough Times wisely calls for giving younger teachers higher salaries and portable 401(k)-style retirement accounts, rather than mediocre salaries and old-fashioned "defined benefit" pensions. The current system, which encourages young teachers to work 30-odd years and then retire with lifetime benefits, is not attractive to generations X, Y, and Z, whose members are apt to work in multiple fields (and places) over the course of their careers. Nor does it help our schools hang on to their most talented teachers--especially those at the younger end of the spectrum.
Since its creation in the 1920s, Ohio's teacher pension system, like those in other states, has morphed into an unwieldy monster. Costrell and Podgursky outline several measures needed to navigate STRS into the 21st century, and transform it into a more sustainable, transparent, and portable pension system that better serves its members as well as taxpayers, schoolchildren, and the teaching professions.
Meanwhile, the "Ohio Coalition for Equity and Adequacy of School Funding," comprised of traditional public-education groups, is currently seeking 400,000+ signatures to place a revenue-enhancing constitutional amendment onto the November 2008 ballot. But if flaws in the state's teacher pension system remain unaddressed, new spending on public education would do little more than prop up a system badly in need of repairs and upgrading. Indeed, such a fix might still be temporary, for the spiraling costs associated with the current system will ultimately impact the state's general operating budget, and its ability to support public education in the Buckeye State.
As Golden Peaks and Perilous Cliffs: Rethinking Ohio's Teacher Pension System clearly demonstrates, any responsible parties in search of added dollars for public education should first take a hard look at how such funds are spent today.