Teacher Pensions Blog

Should public charter schools be allowed to opt out of state-run teacher pension plans? 

There are strong arguments in favor of letting charter schools opt out. Most charter school teachers would be better off in more portable retirement plans. And charter schools tend to be new, so it might be unfair to ask them to pay off the debts of the old system.

Still, if charters are allowed to opt out, that puts added pressure on traditional school district budgets as they’re forced to take on proportionately larger shares of state pension legacy costs. As the charter sector has grown over time, and as pension debts eat up a larger and larger share of school spending, the charter school pension question has been bubbling up. It’s even played a small role in the debate over the nomination of Betsy DeVos to serve as the U.S. Secretary of Education.

As my colleagues Bonnie O’Keefe, Kaitlin Pennington, and Sara Mead noted earlier this week in their slide deck analyzing the education landscape in Michigan, DeVos’ home state of Michigan has one of the nation’s largest charter sectors, with more than 40 charter school authorizers and 10 percent of its students attending charter schools. Michigan’s charter school sector is also unique in that 71 percent of its charters are run by an Education Management Organization (EMO), which is a for-profit operator of public schools.

Although DeVos has been personally maligned for Michigan’s large for-profit charter sector, one thing that’s been missing from the debate is that Michigan’s EMOs are exempt from the state teacher pension fund. That means Michigan’s EMOs get to avoid paying a share of the state’s pension legacy costs, and in the process, they’re playing a small part in exacerbating the pension debt problem for all other Michigan public schools.

How big of a problem is this? In order to separate fact from fiction, here are six things to know about charter schools and teacher pensions nationwide, with Michigan as an example:

1. Most charter schools already participate in state teacher pension plans. In the majority of states with charter school laws, charters are required to participate and, consequently, they’re paying a share of pension debt costs. In Michigan, all the nonprofit charter schools participate, while the EMOs do not.
2. Most charter school teachers who do participate in state pension plans are getting a raw deal. They’re paying for debt costs that they did not create, in a retirement system from which they won’t benefit. Those charter school teachers, including those working in nonprofit charters in Michigan, should be asking why they’re being forced into such a system when they could have something that better meets their needs (see here for examples). 
3. Even in voluntary states, charter participation varies widely. A 2011 report for the Fordham Institute found that, of the 16 states that allowed charter schools to choose whether or not to participate in the state pension plan, participation ranged from 23 percent in Florida to 91 percent in California.
4. Pension contributions are determined on a statewide basis. We’re talking about state pension debt here. Just because the charter sector grows in any given city does not mean it will dramatically alter the dynamics of an entire state’s pension plan. Looked at from the statewide perspective, charter school market share is still relatively small. For example, it doesn’t really matter for pension contributions that charters enroll 53 percent of the students in the city of Detroit. Michigan runs a statewide teacher pension plan, so what matters is that approximately 7 percent of students statewide are enrolled in EMOs that do not participate in the pension plan.
5. Traditional public schools do face higher contributions when charters opt out of state pension plans, but those costs pale in comparison to overall state pension debts. In Michigan, for example, participating school districts are required to pay 13.9 percent of each teacher’s salary toward unfunded pension liabilities. If Michigan forced EMOs into the system, that would broaden the total payroll base in the pension plan by roughly 7 percent*, meaning the contribution rate could also fall 7 percent, to 12.9 percent of salary. But consider this in perspective. Michigan’s contributions towards its unfunded liabilities have increased 143 percent over the last 10 years. The state’s charter sector has played only a tiny role in that increase.
6. Charters may be an easy target, but they are not the cause of, nor the solution to, state pension debts. Although states vary in how they plan to pay off their pension debts — whether the money is coming out of state or district budgets — all states calculate their debts as a percentage of teacher salary.** That is, states think of their pension debt obligations as a percentage of the total salary base of all members of the plan (mostly teachers but other district staff may be included as well). This arrangement is sensitive to the number of employees in the system and the salaries they earn. Pension debts must be spread over fewer workers if a recession hits and districts hire fewer teachers, if charters expand and are allowed to opt out, or simply if school enrollment declines due to demographic factors.

In this case, the problem is not charter schools, it’s the fact that states accrued large pension debts and are using an unfair funding mechanism to pay them off. Unfunded pension liabilities were not caused by students or teachers, and legislators should not expect schools to bear their full burden. Given that state politicians caused these problems, the states —not school districts, and certainly not charter schools — should bear the budgetary burden of fixing them.

*I’m making some broad assumptions here about student/teacher ratios and salaries in Michigan’s EMOs, but given national data, I think these estimates are probably conservative on the high side.

**Some state governments take full responsibility for teacher pension plans, other pass all the costs on to local school districts, while others split the responsibility between state and local governments. Each of those options carries a different set of incentives. Those incentives are worth a separate discussion, but they’re not the subject of this piece.