LAO: Alter new teachers’ pensions
Districts face big increases regardless
New teachers would be among public employees whose state-financed retirement benefits would shrink under a proposal that the non-partisan Legislative Analyst’s Office outlined last week to limit taxpayers’ future liability. Stating that the current pension system is “too expensive and inflexible,” Jason Sisney, the LAO’s director of state finance, said that the goal should be to “preserve a robust retirement system that more closely resembles that of other Californians.”
Sisney outlined two retirement models for future public employees. One would be a hybrid system, combining a smaller guaranteed pension with an employee-employer matching 401(k)-type investment plan like those found in private industry. The other would be to continue the current defined benefit pension, but with employees bearing a bigger share of risks and costs. Those aren’t spelled out in Sisney’s 14-minute online presentation and accompanying slide presentation. (Update: CalSTRS CEO Jack Ehlers took issue with some assertions in the LAO presentation in a Feb. 23 letter to the LAO. Read it here.)
Retroactive additional benefits – one cause for current problems facing public pension systems – would be banned. And new employees would be told from day one that pension benefits could change in the future; they would no longer be an iron-clad guarantee that puts taxpayers on the hook when investments turn sour. Public employees pension costs have risen over the past decade from 2 percent of the state budget to 7 percent – and are facing sharp increases.
The LAO also recommends that the pension system for teachers and administrators – CalSTRS – be weaned from state government subsidies. The state general fund currently funds 23 percent of annual payments (non-investment income) to CalSTRS – about $1.3 billion this year – with teachers and school districts roughly splitting the rest. (One way or the other – through the general fund or Proposition 98 funding to districts, it’s still house money.)
There have been rumblings, particularly among Republicans, that public pensions must be reformed this year as a price for their support of putting Gov. Jerry Brown’s $12 billion in tax extensions and revenues on the ballot in June. With its framework, the LAO’s proposal has now launched what’s expected to be an intense debate.
The LAO presentation coincided with a report last week to the CalSTRS’ Teachers’ Retirement Board confirming alarming liabilities for taxpayers and rising burdens for school districts. Because CalSTRS investments took a 25 percent hit in the stock market downturn two years ago, CalSTRS staff is saying that an additional $3.8 billion in annual contributions is needed to make the system sound over the next 30 years. Contributions as a portion of total teachers’ and administrators’ payroll would have to rise 14 percentage points above the current level of 20.75 percent, to nearly 35 percent (currently split 8 percent contributed by the employee, 8.25 percent by the district, and 4.5 percent by the state).
The CalSTRS report acknowledges that the additional contributions will have to be phased in over a number of years, because the state is broke. But it also assumes that school districts, not teachers or administrators, would pick up the total additional cost. The impact on districts, already reeling from budget cuts, could be substantial. As a rule of thumb, teachers’ and administrators’ pension costs now comprise about 4 percent of a school district’s budget. That could easily rise to 10 percent in coming years, based on current assumptions.
That’s because the state’s liability to meet CalSTRS’ pension obligations is distinct among the state’s public pension systems. Before he left, Gov. Schwarzenegger renegotiated with several state employees’ unions to raise their share of pension contributions to CalPERS, the state’s largest pension system. The state and its unions can do that. But only the Legislature can set contribution levels for CalSTRS, and, according to Sisney and others, courts have broadly interpreted employees’ vested pension rights. From the day they start, their pension contributions and promised benefits are locked in; employers and taxpayers bear the full risk. They can be modified only in exchange for something of equal value, the courts have said. Only the benefit levels of future employees can be altered.
It’s not a foregone conclusion that the Legislature couldn’t also change the future benefit levels of current employees. There’s a legal argument that this can be done in an economic emergency. But it would face “significant legal hurdles,” Sisney said.
That’s probably worth testing, because otherwise, new teachers will bear all of the burden for past investment problems and unwise pension bonuses given during the market’s go-go years. The more the Legislature can tinker with current benefits – raising the retirement age, restricting unused sick days in pension calculations or putting a top limit on pensions for administrators among options – the less new teachers will have to take it in the shorts.
Changing pension benefits of future teachers wouldn’t help solve the state’s immediate pension problems. But over time, the savings would help to offset districts’ higher obligations as they’re phased in over the next decade. But the longer the state waits to address the issue, the more it will to have to eventually kick in.
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Morally reprehensible to even mention changing benefits for current retirees or current workers. New hires can take it or leave it but current workers & retirees have relied on the law and promise of no changes and deserve that. Increase contribution levels but to even suggest changing the formulas or other aspects is disgusting. Honor the law, Honor your promises.
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Public safety (cops and firefighters) retirement benefits are far more generous than those of teachers. Why aren’t the Republicans attacking those?
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What Jim said. Teacher’s base pay does not compare to public safety employees. Retirement benefits aren’t as generous, and educators can’t get overtime pay that bumps police and fire pensions even more. Retired educators aren’t double-dipping, going back to work after they retire like well-publicized cases for police and fire lately, and not even a portion of educator health benefits are covered when they retire.
Lack of job security (a right now problem involving budget cuts and layoffs, not a future hypothesis from merit pay discussions) in teaching make this whole discussion of reducing retirement benefits even more unfair. Here’s a discussion about reducing benefits, but the one-dip policy (http://www.nbcsandiego.com/news/local-beat/Ripoff-Social-Security-and-California-Teachers.html) still hasn’t been dealt with. It isn’t just discouraging for someone mid-career thinking about taking that experience to teaching. Why should a young person put all their eggs in a CalSTRS basket, putting their 8% in, if they end up having to go in and out of teaching for employment and at retirement can choose one or the other, and be at a significant disadvantage to their peers– and potentially hurting themselves and their family? When people ask me about getting a credential and the cost of school, I think it’s only fair I mention the potential even higher cost at retirement.
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The Legislative Analyst’s report reads like a political tract, not a factual presentation. The information is selective, and the manner in which it is presented, misleading.
The graph on the second of three slides entitled “State Retirement Benefit Costs Have Been Growing” does not allow precise comparisons of the four categories, because it is hard to gauge, in the latter years, where each segment begins and ends. The vertical scale could easily have been repeated on the right, and the grid lines, extended through the segments. The vertical order of the segments is arbitrary, with the thinnest one — “Other” — at the bottom and the thickest — “CalPERS Retirement” — in the middle. Why was CalSTRS placed on top, if not to draw undue attention to it? Without an index line, such as the Consumer Price Index, the total size of the General Fund, or the sum of relevant federal, state and local expenditures (since both policing and education have relied increasingly on federal and local revenues in recent years), the upward trend shown in this graph cannot be interpreted at all.
The graph on the third slide of the same title fails to solve the problem. Though this last graph shows the state’s share of retirement costs as a percentage of the state general fund, federal and local funds are still excluded from the denominator. (Consider the tens of thousands of teachers over the past two years whose salaries — and employer pension contributions — have been paid not from the state general fund but from federal ARRA funds.) Worst of all, this graph — and all of the other graphs and figures in the report — fail to show retirement costs on a per-employee or per-retiree basis. The changes could simply be due to yearly fluctuations in the number of active employees, the number of retirees, or the relationship between the two.
As Jim and Pamela suggest, costs differ dramatically from one retirement regime to the next. Police and firefighters retire at age 50 or 55 with 90% of a six-figure terminal salary (before overtime). The state’s contribution to their health benefits also continues until these retirees become eligible for Medicare. Under local collective bargaining agreements, some municipal governments even pay the employee share of PERS contributions. The police and fire retirement programs cost employers as half of payroll, by some reports.
Teachers, by contrast, typically retire with 60% of a five-figure terminal salary. There is no overtime. It is unheard of for a school district to pay the employee share of STRS contributions. Post-retirement health benefits depend on local collective bargaining agreements. (Two of the four districts for which I have worked provide no post-retirement health contributions at all.) The teachers’ retirement program costs employers much, much less than the police and fire programs.
Although the LAO report opens with the observation that retirement benefits are just “a part” of total compensation, the report does not elaborate on this crucial fact. What would happen to teacher recruitment if teachers’ already modest salaries continued to stagnate and if teachers’ retirement benefits were actually reduced? It is telling that even charter schools opt to participate in STRS. Access to a reasonable retirement is a bottom line for teachers.
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A very thoughtful analysis by Pablo and others. I agree that teachers’ retirement packages don’t compare with other public employees packages. And with the 5-8 years of college education neither do our salaries. I took a cut in pay from selling tires on weekends (get through college) when I started teaching. We also can’t get our full benefits from social security. We’ve had retirees that started teaching late in life having to make up their mind between CalSTRS and Social Security. Not too many graduates will consider teaching if we take away the very little financial incentives we have now.
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They have modified social security benefits for those already in the system to make it last so modifying the teacher retirement package is hardly immoral. If those already in the system are not to be subject to any changes then they should not be subject to the earlier increases in benefits either. Or is it a “heads I win, tails you lose” thing where changes to retirement benefits are just peachy as long as they are increases but immoral if they are decreases?
It is true that some people have a better retirement plan than teachers, but the vast majority have it worse. Saying no one can touch teacher’s plan until it is the most generous plan available will never get anywhere. It would be like never prosecuting robbery until every murderer is caught and punished.
I absolutely think teachers should get paid enough to make it worth their while to teach but the market will decide that as it does everyone’s salary. Right now we can’t compare teachers total compensation because we don’t know what it really is. It will be apples to oranges until teacher’s retirement plan is brought into modern economic reality. If no one wants to teach with the standard Soc. Sec. and 401K then salaries will rise until the field becomes attractive. Coming straight out of college, a typical engineer does not make the same as a philosophy major regardless of how much they worked to get their degree because the market for philosophers is not that great at the moment.
There is not an infinite amount of money available. Right now about 20% of people are “underwater” in their house and another 5% are on the edge. It looks like housing nationwide will decline another 20-25% which will put the majority of people underwater and many will be forced out of their home. Nationwide, unemployment is slated to rise from 9.0% to 9.4% by the end of 2011. In California, unemployment is still in double digits.
If you think the law is on your side, you may wish to talk to the former shareholders and employees of GM and Chrysler. Worst case scenario – states declare bankruptcy, throw everything on the feds who have always reserved the right to renegotiate contracts themselves, and the public school systems get reconstituted as a new and separate entity with no obligations from the previous establishment. I don’t think that will happen because I think the layoffs that will be necessary to fund the current retirement system will be more threatening and will get teachers coming to grasp with economic realities.
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Looks like even police officers and firefighters are going to share the pain:
http://www.mercurynews.com/crime-courts/ci_17397188?nclick_check=1
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I have a problem with the “race to the bottom” argument when discussing any pension fund. The fact that many workers do not look forward to a stable retirement does not mean teachers shouldn’t, either. It means that we need to consider seriously the economy as a whole, with special consideration of the widening inequality between the very rich and everyone else.
What is the LAO’s plan for the Social Security that those new teachers may have earned and must give up at present?
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Probably because:
1. Cops’ and firefighters’ compensation is set by local governments, not the state
2. It’s a lot tougher to become a cop or firefighter than it is to become a teacher
3. Cops and firefighters literally put their lives on the line daily
4. The public generally places a higher priority on public safety than on public education (no judgment, just fact). Given a choice between releasing prisoners early versus increasing class size, I’m certain that a majority of voters would choose the latter
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Ours is a capitalist economy, with generally free markets for labor, capital, goods, and services. With all due respect, no one held a gun to your head and forced you to become a teacher. If you think teachers’ total compensation (wages + benefits) is too low, you are free to change jobs. I further submit that saying, “Respect me, respect me, respect me” will do nothing to increase teachers’ salaries.
The number of qualified individuals (both recent graduates & former teachers) who comprise the supply of teachers greatly exceeds the number of vacant positions. Under these conditions, there should be no surprise that teachers’ compensation is relatively low. When school budgets are tight, they are in layoff mode. When they are hiring, they can choose from multiple applicants (except in certain areas, such as special ed & the sciences).
Another reason why teachers’ average salaries aren’t higher than they are is that districts are prohibited (by collective bargaining agreement) from paying more for teachers in these hard-to-staff areas. In other words, they can’t raise the salary of one position without raising those of all.
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Because “tougher” is subjective, I withdraw my Point 2, and substitute the following:
The public’s demand for safety is very “inelastic” (an economic term meaning that a very large price increase does little to decrease demand). At the same time, the supply of public safety employees (and those wanting to become public safety employees) is comparatively small. Add a little bit of police and firefighters’ union power into the mix and you have high salaries & pensions.
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edfundwonk,
1. I don’t see how the situation differs, or why the question is even relevant. Pay for police and firefighters is set by local governments, not by the state. So it is for teachers, whose pay is determined by local school districts. Post-retirement health benefits for police and firefights are set by the state; these are standard PERS benefits. Post-retirement health benefits for teachers, where such benefits exist, are set by local school districts. Pension benefits for teachers, police and firefights are all set by the state, except that STRS essentially offers one formula, whereas PERS has several formulas from which local governments can choose.
2. You withdrew your original point, but it makes sense to address the initial misconception. A career as a police officer or a firefighter requires a high school diploma; some employees have, or later receive, a 2-year (associate’s) degree. In California, a career in teaching requires a 4-year (bachelor’s) degree, a 5th year of university study, and 2 years of “induction”. Police (not firefighters) and teachers are subject to particular ethical standards (criminal background check, etc.). Physical fitness is the only sense in which you can claim that it is harder to become a police officer or firefighter than it is to become a teacher.
3. Contrary to popular belief, police work and firefighting are not statistically dangerous occupations. Construction and mining, to pick just two examples, are far more dangerous. Unfortunately, job-related deaths of police and firefighters — relatively infrequent — are sensationalized. It would be instructive for you to look up occupational injury statistics.
4. Agreed. California voters, in practice, place a relatively low priority on education.
In a later message, you remind us that teachers entered the field knowing that they would be poorly paid. True. They did not, however, anticipate that their pensions would be cut, an option that the LAO is now recommending. And my general point stands: the same people who complain about ‘excessive’ teacher pay and benefits are pushing for higher standards in public education (NCLB, larger classes, longer school day, least restrictive environment, supplies to be purchased from teachers’ salaries rather than public funds, etc., etc.). At some point, the balance will tilt, and you will simply not be able to find people to do the job. Enrollment in teacher preparation programs has dropped precipitously (again, these statistics are worth looking at), and retirements have slowed temporarily, due to the recession. Just give it a year or two…
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