Baltimore announced plans over the weekend to offer buyout incentives to teachers with more than 10 years of experience. Buyout plans–where states or districts offer up-front money to encourage experienced employees to retire–are tempting budgetary solutions, but they’re not viable long-term human capital strategies.
Using the Baltimore proposal as an example, they plan to give 350-750 experienced teachers 75 percent of their annual salary, spread out over five years, if they announce plans to leave the district by April 15. Because it’s open to anyone with more than 10 years experience, some of these teachers will be eligible for retirement benefits immediately, but some won’t. Many will be eligible for health care benefits as well.
Running the numbers from the proposal, Baltimore calculates they’re going to be saving about $14,000 per teacher ($5 million in savings if 350 teachers participate or $10 million if 750 sign up), but these numbers do not include some hidden costs. To begin with, the move will shift costs from the district’s salary rolls to the state’s retirement system, which will eventually trickle back down to Baltimore. With employees retiring earlier than they planned to, this means the state will be paying out an additional year of benefits to those who are eligible.
The savings also include budgeting for new hires to fill the vacated positions. So Baltimore will be replacing one experienced teacher’s salary and benefits with a new teacher’s salary and benefits plus the cost of the retired teacher’s pension and health care. It also costs money to hire, train, and retain new employees.
None of this gets to the fact that experienced teachers are, on average, more effective teachers than the unexperienced ones Baltimore plans to replace them with. Nor does this measure target individual teachers who are more or less effective in the classroom: The only basis will be years of experience, with only a slight nod to the area they teach (teachers from the same subject area will be ranked by seniority). Essentially, with this plan Baltimore will be buying a less expensive teacher workforce. The losses to students are incidental.
This blog entry first appeared on The Quick and the Ed.
New York City Mayor Michael Bloomberg has proposed new pension rules that would require workers to work at least 10 years, double the current requirement, to qualify for a pension. This is a really short-sighted idea for someone who professes to care about the quality of government workers, including the city’s 75,000 teachers. Raising the vestment age would save the city money in the short-term, but it would mean government workers would essentially not have a retirement plan until they reached 10 years of service. That would hurt recruitment and retention efforts, and it would also create strong push and pull incentives to stay on the job, regardless of burnout or a desire to pursue a new career, until they reach that 10-year milestone. For better ideas on revamping pensions, see here.
This blog entry first appeared on The Quick and the Ed.
Taxonomy:New Jersey Governor Chris Christie has been in the news a lot lately for his handling of the Garden State’s budget crisis around government-worker benefits. The New York Times did a piece earlier this week on a confrontation between Christie and teacher Marie Corfield around cuts to education funding, and 60 Minutes featured Christie in a wide-ranging piece on the state of state budgets. Neither of these stories has fully gotten to the heart of why the state now has a $20 billion liability for teacher pensions, and neither of them mentions the fact that only eight years ago the state had a teacher pension fund surplus.
So what happened? A stock market crash certainly hurt, but the state has made its own problems along the way. Through a combination of low contribution rates and benefit enhancements, New Jersey starved the pension beast.
Traditionally, Starve the Beast has been employed by fiscal conservatives to force budget deficits, which in turn lead to demands for reductions in the size of government. The argument goes that if the government spends more than it takes in, it should stop spending. As the chart below shows, this tactic has certainly been employed in New Jersey’s Teachers’ Pension and Annuity Fund. The blue line represents what the state’s actuaries have told the legislature it needs to invest in order to cover its future teacher pension obligations. The red line represents what it actually put in. In only one year of the last 13 did the state meet its actuarial obligation, and it only met it that year, 1997, because the state issued pension obligation bonds to help retire previous underfunding debts. In two years, 2001 and 2002, the state actuary decided the fund required no contributions, and the state gladly complied. In the other ten years, the state has failed to invest enough to cover its teacher pension obligations. Collectively, the difference between what New Jersey should have invested and what it actually put in–the difference between the blue and the red lines–is $5.2 billion.
This is the classic Starve the Beast tactic: Make government programs look unsustainable by not providing enough money to cover their costs. Over time, they look worse and worse.That’s exactly what’s happened, but that’s not the end of the story.
Teachers unions and their Democratic legislative advocates are to blame as well. In 2001, thinking the fund was running a surplus, the state passed legislation increasing government pension benefits by 9 percent across the board. Following the lead of the state contributions, legislators cut teacher employee contributions by a third. In 2003, the state legislature passed another new law adding an early retirement incentive and enhancing teacher pension and health care retirement packages that led to a 13 percent increase in liabilities in 2004 alone.
The combination of low contribution rates and simultaneous benefit enhancements happened in states all across the country, and Governor Christie and leaders like him are now seeking to roll back these increases. Christie still refuses to fund the pension system, arguing that the “totally unsustainable” public sector pensions should be replaced by a 401k-style system. There are plenty of reasons New Jersey and other states should seek to change their pension structures. But the financial messes states are in are of their own doing. The current financial problems of state pension plans are a manifestation of the worst impulses of Republican and Democratic politicians, and it won’t be easy to repair the damage. Understanding how we got here is the first step on the road to recovery.
This blog entry first appeared on The Quick and the Ed.
Ezra Klein has a good post laying out some of the issues around public-sector workers and their retirement benefits, but I want to amplify two of his points. The first is around some of the overblown rhetoric going around right now (epitomized by this David Brooks column that was Klein’s inspiration in the first place) suggesting that public-sector defined benefit pension plans are causing massive holes in state budgets. In our report on teacher pensions, we write:
A historical context is also useful. While the current funding ratios are less than ideal, they are not catastrophic. The most recent figures from the Public Fund Survey, a compilation of 101 state and municipal retirement plans, show that the aggregate funding ratio for these plans reached a high of 102 in 2001 at the end of the Internet-led bull market.Through a combination of poor investment returns and benefit enhancements, the ratio had fallen to 85 by July 2008, about where it was in 1994.
In other words, after the longest bull market in history followed by one of the worst decades for investment returns on record, we’re in roughly the same position we started in. That doesn’t mean the financial problems with teacher pension plans are insignificant–and the political incentives to raise benefits during boom times skews things here–but it is useful to view them in an historical context (I might argue some of the non-financial problems are actually more important).
The second point worthy of amplification is when Klein writes:
And while states are facing serious pension problems because they still offer defined-benefit pensions, we’re also going to see the retirement of millions of private-sector workers who don’t have defined-benefit pensions, and either haven’t contributed enough to their 401(k)s or saw their wealth wiped out in the recent turmoil. We’re facing a pension crisis in the public sector, but we’re also looking at a retirement crisis in the private sector.
This is spot-on. As we get closer to the mass retirements of workers who’ve never had a defined benefit pension plan, something that will be upon us in the coming decades, we really have no idea what to expect. Preliminary research suggests it’ll be downright ugly:
A 2007 GAO report found that, among workers aged 55-64 with a current or former DC plan, the median account balance was $50,000, a sum that would convert to an annual benefit beginning at age 65 of just $4,400.
Individuals are fallible. They don’t know how much to save, they don’t know what to save in, they park too much of their money in too-risky or too-safe investments, or they cash out too early. We’ll know more about how these things played out in the grand defined contribution experiment in the coming years.
This blog entry first appeared on The Quick and the Ed.
Taxonomy:The Wall Street Journal highlights a lawsuit going before a Minnesota court today that could significantly impact the way teacher pensions are looked at from a legal standpoint. Essentially, the state said it was broke, its teacher pension plan was too generous, and it was going to reduce future benefits, even to current retirees. The Minnesota case is the first of three key tests in the states to determine whether these actions are legal. The graphic below shows what changes other states are making to their pension plans.
First, if you care about teacher pensions, go read a copy of the Minnesota lawsuit (.pdf). One defendant worked for the City of Duluth for 34 years as a Draftsman before he retired in 2000. The other taught at a Minnesota public school for 14 years before retiring in 2008. These two retirees are part of a potential class-action lawsuit that could include up to 130,000 persons already receiving pensions from the state of Minnesota. The state has chosen not to enroll its public-sector employees in Social Security, meaning they have no other government-provided retirement benefit. To ensure that worker pension benefits do not wear away over time, the state has used a dual-component formula to allocate regular cost-of-living adjustments (COLAs) indexed to the rate of inflation.
In 2009 and 2010, Minnesota decided the COLAs were too generous, and so they reduced them and made them contingent on the plan’s overall funding level. We’re talking about small percentage changes here, but, over time, it adds up to real money.
The state claims its pension fund is broke and it needed to make these changes to ensure the plan’s long-term survival. That claim falls short on several accounts. For one, the state pension plan has never been fully funded and, after one of the worst decades in stock market history, it looks worse than it probably should. Two, Minnesota, like other states, enacted retirement benefit enhancements during the stock market boom of the late 1990s.
As opposed to targeting current retirees, there is a middle ground. Some states have laws on the books that give workers the right to accrue future benefits, so even if they’ve been working as little as one day, their pension formula can never be reduced. Those laws are extreme and should be reworked. But at the same time, states should protect the promises they’ve already made and be careful about making new ones. For more background and ideas forward on teacher pensions, see here.
This blog entry first appeared on The Quick and the Ed.
Taxonomy:Public- and private-sector workers’ retirements used to be structured similarly. Not that long ago, both groups were likely to have access to defined benefit pension plans that guaranteed monthly payments until death. Both sets of workers retired at about the same ages.
These things have changed over the last 25 years as private-sector employers have abandoned DB plans, private-sector workers have been retiring at older ages, and public-sector workers, including teachers, have been retiring younger. By 2009, only one in five private-sector workers had access to a DB plan, compared to 89 percent of teachers and 84 percent of all state and local government employees who are still enrolled in one.
People make retirement decisions for all sorts of reasons. Maybe they have grandchildren they want to spend time with, or a hobby they want to develop. People also base their retirement decisions on both the amount and the structure of their retirement benefits. Even after controlling for total wealth, the security offered by DB plans–those guaranteed monthly payments until death–lead people to retire 1-2 years earlier than they would with 401k plans. Because of the generosity and the structure of their retirement plans, teachers now retire more than four years younger than private-sector workers.
This divergence didn’t always exist, but it’s becoming a real problem. The workers at companies that used to offer DB plans but now only have access to less-secure 401ks are not likely to tolerate this imbalance forever. The Wall Street Journal is reporting that many employers who cut their matching contributions during the Great Recession have been slow to reinstate them, which will only make the problem more pronounced. Teachers and other public workers have long traded lower base salaries for better benefits and more security, but that dichotomy has become more obvious and more important. Taxpayers may not continue to look kindly on generous teacher and government-worker retirement plans as their own are being cut.
This blog entry first appeared on The Quick and the Ed.