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Analysis: It’s Possible to Fix Teacher Pension Funding Problems

Analysis: It’s Possible to Fix Teacher Pension Funding Problems

A few critical adjustments to teacher-pay plans would allow states to work toward fully funding their pension plans, and boost pay for newer, younger teachers.

A fresh analysis of teacher pensions shows that U.S. school districts unwittingly grow teacher-pension debt by "back-loading" their salary schedules: paying teachers a percentage of current base salary, leads to outsized pay hikes in the final years of their careers, which then triggers sizable jumps in pension debt.

In "How Late-Career Raises Drive Teacher-Pension Debt," Marguerite Roza found that every dollar awarded to a late-term teacher's final salary generates $10 to $16 of new pension obligations in present-day dollars, swelling state debt. This problem is very real as nearly 80% of the country's teacher pension plans are underfunded.

"State leaders are likely unaware of the massive debt created by late-term raises or the potential opportunity to mitigate pension debt by better managing final salaries," said Roza, director of Edunomics Lab and research associate professor at Georgetown University.

While many states have attempted to reduce pension debt with the unpopular move of adjusting plan contributions or raising retirement age, few appear to have considered the role late-term raises play. The long-standing division of responsibilities—districts setting raises and states paying pension obligations—leaves districts immune to the consequence of these late-career raises and taxpayers carrying the burden of debt.

Roza examined this problem in the San Diego Unified School District. For the current 2014-15 school year, leaders there settled on a 5% raise. For a veteran teacher set to retire at the end of the year, a five 5%t increase amounts to a $4,700 raise for the last year of teaching. For a junior teacher earning $40,000, the raise paid only $2,000 for the same time period.

Not only did senior teachers get more dollars this year, bigger earnings are built into the pension. The retiring teacher will see lifetime pension earnings jump by $101,000 as a result of this single year raise (or $64,000 in present day dollars).

The San Diego example illustrates the problem: that the pension annuity in teachers' pension plans depends on the highest annual salary, or the highest over a small number of years, rather than the career-average salary commonly used in other defined benefit plans like Social Security.

Roza's study, conducted with her colleague Jessica Jonovski, examined the teacher-pension systems in California, Illinois and New Jersey. Every dollar awarded in final average salary triggers $13.89 in California pension obligations, $15.51 for the Illinois pension fund and $9.96 in New Jersey's pension obligation.

To better manage teacher-pension debt—without completely overhauling the pension system—Roza recommends policymakers modify how teacher pay raises are granted:

  • Improve compensation transparency. Recognize and communicate that salary increases for teachers who are near retirement translate into public debt, which is ultimately passed on to state taxpayers. Pension costs should be reported alongside pay raises so that policymakers can plan to finance future obligations.
  • Create a single district stakeholder group. Combine responsibilities for teacher compensation and pension obligations into one set of district-level decision-makers.
  • Restructure raise payouts. Districts might choose to pay out the same total funds, but do so in fixed-dollar increments (versus the current practice of using fixed-percentage increments). Not only would this model reduce pension debt across the board, it could also increase pay for new teachers struggling to stay in the profession and support their families.

Edunomics Lab, a university-based research center dedicated to exploring and modeling complex education fiscal decisions and growing the capacity of education leaders on the topic of education finance. The Edunomics Lab is affiliated with the McCourt School of Public Policy at Georgetown University. The report is part of the "Rapid Response" brief series, designed to bring relevant fiscal analyses to policymakers amidst the current economic crisis.

Article by Daniel B. Kline, Education World Contributing Editor

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