For decades, public workers, including teachers, have been promised pensions and health care benefits when they retire. As more baby boomers do so, states are starting to pay out – and coming to grips with the fact that they’ve negotiated themselves into a fiscal crisis.
A new report by the Thomas B. Fordham Institute, a conservative education policy think tank, looks at three school districts – Milwaukee Public Schools, the Cleveland Metropolitan School District and the School District of Philadelphia – to see how prepared, or ill-prepared, they are to deal with making good on their financial promises.
The research found large differences in what the impact of retirements would be on school districts’ budgets over the next decade, which reflects a larger pattern of variation across states. Even Milwaukee, the district with the best projections, faces large costs. The paper also highlights a problematic truth of these guaranteed retiree benefits: someone must pay for them, whether it’s school districts, taxpayers or younger teachers.
Pension and retiree health care benefits are a staple of teachers union demands. Throughout a teacher’s career, the employer pays into a pension fund. In some places, the teacher doesn’t need to make any contributions. After retiring, teachers receive pension payments that are based on their years of service and final salary and which are often adjusted for inflation. Because many teachers retire in their 50s, before being eligible for Medicare, unions have also negotiated for school districts to cover the health care of retirees.
As of 2010, the difference between what states had promised to their public employees and what they had reserved to actually pay for these costs was $1.38 trillion, according to an analysis from the Pew Charitable Trusts. In all, states will have to pay out more than $3 trillion. Audits of the Los Angeles Unified School District estimated that the school system’s future health care benefits costs for retirees would be $5 billion. For the Fresno Unified School District, the costs were predicted to be $1.1 billion – double the district’s annual operating budget.
Critics have suggested that problems faced by pension funds have been overstated, and that the picture is rosier than depicted by the conservative groups in particular that have raised alarms about public pensions.
The Fordham study, The Big Squeeze: Retirement Costs and School-District Budgets, found the most dire situation to be in Philadelphia, where researchers estimated the school district will have to pay $2,361 per pupil on retirement costs by 2020, up $1,923 from its current level. In a best-case scenario, the system would have to cut classroom instruction by $62.4 million and instructional support by $14.7 million.
“They’re faced with this catastrophic situation,” said Robert Costrell, a pension expert from the University of Arkansas who worked on the analysis. Pennsylvania Gov. Tom Corbett has proposed legislation that would overhaul the state’s pension plan, but it has yet to gain momentum in the legislature. “It’s very surprising,” Costrell said. “There are still some who will bury their heads in the sand.”
Costrell said he was also surprised by Milwaukee, but pleasantly so. Wisconsin Gov. Scott Walker’s controversial 2011 Budget Repair Bill that significantly weakened labor in the state required employees to contribute to their own pension funds. The legislation also prevented teachers unions from using collective bargaining to determine retiree health benefits. Districts can now determine those on their own. Milwaukee Public Schools will be implementing large changes, including increasing eligibility requirements and reducing subsidies for premiums beginning in July.
The changes will actually drop Milwaukee’s pension costs from $1,029 per student to $845 in 2020, Fordham researchers projected. The cost of retiree health care will rise $248 per pupil in that time to $1,079.
Ohio also recently took steps to address its pension problems. Legislation passed in 2012 will keep retirement costs per pupil fairly constant over the next decade at about $1,200. But the state chose a reform that essentially requires young employees to pay for the pensions and health care of their older, retiring peers.
Costrell noted that if a private company set up a retirement structure like that, it would be forced to forfeit tax benefits because it’s illegal to take money out of the paychecks of younger workers for the benefits of their older peers. “That raises huge issues going forward,” he said.