Source:National School Board Association

High pension costs cutting into school budgets

By Del Stover, 2/22/05

When Michigan Gov. Jennifer M. Granholm proposed boosting public school funding by $280 million next year, officials in the Lansing school district were grateful -- but hardly ecstatic.

That’s because nearly half of that new money -- $98 out of every $175 promised per elementary school student -- will never make it to the classroom. It already is earmarked to pay the district’s rising obligation to the state teacher pension system.

If that’s not bad enough, school officials are worried the future could leave them with even higher pension costs. “As these costs grow, the only way to [handle them] is to downsize other areas of the budget, and eventually that will touch the classroom,” says Scott Powers, the district’s chief financial officer.

Such worries are not limited to Lansing -- or even Michigan, concludes the Southern Legislative Conference (SLC), which published a report examining government pension plans nationwide. Although some state teacher retirement systems are fully funded, the majority (many of which serve all public employees) don’t have enough money to meet current and future financial obligations. The total shortfall is $200 billion.

Several factors have contributed to this worrisome state of affairs, say state pension officials. In many states, pension fund investments in the stock market took a nosedive during the recent recession, and in the early 2000s, the worst state budget crisis in decades forced states to cut back payments to the funds.

At the same time, future obligations for these pension systems are expected to jump significantly as the first of the Baby Boomer generation begins to retire.

“It’s a very serious issue,” says Sjuit Canagaretna, SLC’s senior fiscal analyst and author of the report, America’s Public Retirement Plans [Stresses in the System]. “This is something that demands the attention of policymakers at every level of government.”

Although no one is suggesting that states will default on their obligations to retirees, the issue has forced state policymakers to debate proposals to shore up the financial health of state pension systems.

In Illinois, which has one of the most underfunded state pension systems in the nation, state officials sold $10 billion in bonds in 2003 to reduce a shortfall of nearly $12 billion.

In South Carolina, where the state retirement system has a $4.2 billion unfunded liability, state officials are proposing a variety of solutions, including an increase in the number of years that teachers must work before they can receive benefits.

Earlier this month, the West Virginia legislature approved a statewide referendum proposal for $5.5 billion in bonds to trim unfunded pension liabilities that are almost as large as the state’s entire $6 billion annual budget.

But that won’t have an effect on local school districts. “The pension program is basically paid for by the state,” says David Haney, executive director of the West Virginia Education Association. “The money is not coming out of county school board budgets.”

Not all states are affected by rising pension costs. The $74 billion New York state teacher retirement fund is in good shape, and local school boards are expected to see pension costs account for only 8 percent of wages. School districts in Pennsylvania will likely pay less than 5 percent of their payroll for retirement costs.

But in other states, talk has turned to cutting retirees’ benefits, boosting school district and teacher contributions to the retirement plan, and revising the plans’ investment strategies.

One of the most controversial proposals -- to privatize some or all of the teacher retirement system -- is promising to become a major political battle in the months ahead.

At the forefront of this debate is California, where Gov. Arnold Schwarzenegger has proposed requiring new public employees to use a 401(k)-style individual investment plan as a way to curb the state’s growing retirement obligation, which has grown from $160 million annually in 2000 to $2.6 billion this year.

This plan also would shift nearly $500 million in pension fund payments to local school districts.

Without privatization, Schwarzenegger says, the state’s $125 billion pension system is “another financial train on another track to disaster.”

Not everyone agrees. The board of the California Teachers Retirement System voted 10-2 to oppose the plan (resulting in Schwarzenegger firing four board members), and teachers union officials have promised to fight privatization.

Officials in half a dozen states are planning a national campaign to fight against privatization efforts.

For local school boards, the issue isn’t how to fix these pension plans -- but how to bear the financial burden while state lawmakers tackle rising costs.

Local school officials say much depends on the unique circumstances in their states.

In Oregon, for example, where school districts must contribute to the state’s public employee retirement system, costs are expected to jump from a statewide average of 10.6 percent of employee salaries to as high as 19 percent next year.

In Alaska, where the legislature recently boosted education funding by 12 percent, school boards are returning 30 to 40 percent of that increase to the state retirement system, says Carl Rose, executive director of the Association of Alaska School Boards. The state pension system says school district contributions could account for one-quarter of wage costs by 2007.

Contributions to the Michigan state pension system will soon account for one-sixth of a school district’s labor costs.

This isn’t just a financial concern for school boards, says Don Wotruba, director of legislative affairs for the Michigan Association of School Boards.

His worry is that, with state funding increases consumed entirely by rising pension and health care costs, school boards could be forced to turn to staff layoffs and school closings to balance their budgets.

Will the public understand why such drastic measures are needed at a time when the state is boosting education funding? Wotruba asks. “It’s going to make the public look at school board members and say, ‘You must be doing something wrong. You must be managing something wrong.”

Reproduced with permission from School Board News. Copyright © 2005, National School Boards Association. Opinions expressed in this newspaper do not necessarily reflect positions of NSBA. This article may be printed out and photocopied for individual or educational use, provided this copyright notice appears on each copy. This article may not be otherwise transmitted or reproduced in print or electronic form without the consent of the Publisher. For more information, call (703) 838-6789.

TOP

Comments. Questions. Broken links? Bad spelling! Incorrect Grammar? Let me know at webmaster.
Last modified: , 2005

Disclaimer: This website is the sole responsibility of Mike McMahon. It does not represent any official opinions, statement of facts or positions of the Alameda Unified School District. Its sole purpose is to disseminate information to interested individuals in the Alameda community.