Politicians Ignore Education Funding Realities

Recent campaign rhetoric and debate exchanges about education funding between gubernatorial candidates Ken Blackwell and Ted Strickland have been disingenuous at best. Neither candidate has raised the most critical issue affecting school funding for whoever next sits in the governor's chair: the growing fiscal crisis facing Ohio's education system caused by rapidly rising healthcare and pension costs.

No one knows for certain how much has been promised to Ohio's educators and other active school employees in the form of pensions and retiree health care benefits. (This will change in coming years as Ohio, like all states, will have to comply with new Government Accounting Standards Board rules requiring public agencies to disclose future retirement burdens.) But promises made through the State Teachers Retirement System and the School Employees Retirement System provide a glimpse of what's to come. According to the National Association of State Retirement Administrators (NASRA) report for fiscal year 2005 (see here), Ohio faces over $20 billion in unfunded liabilities for state teacher pension plans alone. That's about $62,500 in promised pension benefits per active participant in the state's teacher and non-teaching staff retirement systems. Only the states of California (at $24 billion) and Illinois (at $23 billion) face a more significant unfunded liability burden.

This will come as little surprise to companies in the private sector, which have been coping with rising pension and healthcare costs for the better part of a decade. In Ohio, we've seen the repercussions for big employers such as General Motors and Delphi, whose strong unions and generous benefits packages have forced drastic cuts and shuttered several manufacturing sites. Dayton-based NCR (see here) just announced it will no longer contribute to employee pension plans, in an effort to reduce its annual retirement expenses by $40 million. And the rising costs of employer-sponsored healthcare premiums are taking an enormous toll on Ohio's small businesses.

These same health care and pension costs are putting a squeeze on Ohio's school districts. According to Standard & Poor's (see here), between 1998 and 2002, benefit costs for Ohio's school districts rose 42.8 percent on average over the four year period. In 2003, almost $1,700 of average per student spending, which comes to about $8,500 with both state and district contributions, went to subsidizing employee benefits. Such numbers, coupled with steep drops in enrollment over the past several years, are quickly emptying district coffers--particularly in urban areas. Even as it lost teachers and students, Columbus Public Schools' "instructional" expenditures, which include teacher salaries and benefits, ballooned by 52.6 percent per teacher over four years from 2001 to 2005 (see here). Cleveland Public Schools' instructional spending grew by 44.1 percent, and Dayton Public's increased by 35.4 percent, again despite dwindling enrollment and fewer teachers.

At the same time, many teacher unions have been loath to concede any portion of their generous benefit packages. A recently settled teacher strike in southwestern Ohio's Huber Heights was instigated, in part, by the district's request that teachers pay a greater portion of their health insurance costs--though only in the form of marginally higher co-pays (see here). Come October 9, Barberton City School District teachers in northeastern Ohio will take to the picket lines to protest, among other things, the district's recent announcement that it can no longer pay 100 percent of teachers' family healthcare premiums--about $10,000 per employee (see here). Instead, the district is now asking that teachers pay $45 a month next year, with monthly payments eventually reaching $85 after two years. (Most Ohioans can only dream of such healthcare premiums.) And teachers in Dayton Public Schools aren't ruling out the option of a strike (see here) if their contract concerns--healthcare premiums chief among them--aren't met.

To be sure, the massive unfunded liabilities associated with teacher pensions and healthcare benefits will eventually impact the state's general operating budget (and taxpayers' wallets). Ohio is constitutionally obliged to meet all public employee retirement costs, including those for teachers and other school employees.

There are measures that states can take to deal with these unfunded liability costs. For instance, studies by Deloitte Research and the Reason Foundation (found here and here), among others, offer guidance on transitioning to more modern and flexible pension plans. (A few charter schools already contribute to "defined-contribution" plans, which allow employees to invest money as they choose and, more importantly, take their investments with them from job to job.) Any reform will still require substantial growth in state and local revenues. And Ohio's cities are hemorrhaging residents, many of them young professionals, by the thousand, leaving fewer and fewer taxpayers to shoulder the mounting costs of education.

One thing is certain. If these issues continue to go unaddressed, policymakers will be faced with a formidable dilemma: reduce benefits to public employees or slash key services in programs such as education and healthcare.

Messieurs Blackwell and Strickland will face the polls in just under six weeks; it remains to be seen if they will face the realities of education funding in Ohio.

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