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.
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 our full
report, released yesterday).
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
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
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; individual states decide.