Teacher Pension Systems Headed in Opposite Directions, Report Finds

A report published today examines projected retiree costs for three large school districts, evaluating cost savings of recent pension reforms.
by | June 6, 2013

Recent pension reforms drastically altered teacher retirement systems in Milwaukee and Cleveland, strengthening their long-term fiscal health. But the School District of Philadelphia, absent any reforms, could be on the hook for huge unfunded liabilities for years to come.

That’s according to a report published today by the Thomas B. Fordham Institute examining each of the three cities’ school districts, evaluating the extent to which legislation changed the course of projected retiree costs.

The districts highlighted in the study underscore looming fiscal hurdles others throughout the country face. A National Council on Teacher Quality report pegged the total unfunded liabilities for all U.S. teacher pension systems at $325 billion, although other studies have arrived at different figures.

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Local school districts find themselves in a tough spot. It’s generally up to states to set rules, contribution amounts and make other changes to teacher retirement systems. Much of the unfunded liabilities will be passed on to individual school districts at the expense of taxpayers in affected localities,  the report argues.

In its evaluation of each of the three systems, the conservative-leaning think tank calculates combined retirement benefit costs per pupil before and after enacted reforms (figures listed in constant dollars):

Cleveland Metropolitan School District

FY 2011: $1,364 per pupil

FY 2020 (absent reforms): $2,476 per pupil

FY 2020 (with SB 341, SB 342): $1,257 per pupil

Pension reform savings: $1,219 per pupil

The Ohio state legislature passed multiple reforms last year as plans started to fall below statutorily-required funding levels. Teachers saw pension contributions jump from 10 percent to 14 percent of their paychecks, coupled with a slew of benefit cuts.

However, Robert Costrell, a professor of education reform and economics at the University of Arkansas who contributed to the report, expressed concern that the changes disproportionately hurt newer hires.

In fact, he says, most will effectively be taxed, receiving fewer benefits than they contribute to cover the cost of employees with more tenure. “They’re going to have to put in a good 20 or 30 years before they get anything out of it.”

Milwaukee Public Schools

FY 2011: $1,860 per pupil

FY 2020 (absent reforms): $3,512 per pupil

FY 2020 (with Act 10): $1,924 per pupil

Pension reform savings: $1,588 per pupil

The Wisconsin Budget Repair Bill made sharp cuts to teacher benefits, mandating that employees split the cost of their annual pension contribution with employers. On top of that, it effectively removed retiree health benefits from the collective bargaining process, giving districts the authority to make adjustments to contribution rates and other cost-cutting measures.

"They acted very responsibility and pretty much got things under control," Costrell said.

With the reforms in place, the report estimates total health and retiree costs will rise only $64 per pupil by fiscal year 2020.

School District of Philadelphia

FY 2011: $438 per pupil

FY 2020 (absent reforms): $2,361 per pupil

Unlike Ohio and Wisconsin, Philadelphia teachers haven’t yet felt the same adjustments to their plans.

Pennsylvania reimburses school districts for pension contributions, typically half or more of the total. The Fordham study cites concerns that the Commonwealth may not raise its reimbursements as costs rise or, instead, make other education cuts to offset the added expenses.

Consequently, the study estimates the School District of Philadelphia’s costs could increase between $752 and a staggering $1,923 per pupil absent any reforms.

Costrell blames state officials for deferring payments for years and increasing benefits in the early 2000s.

“The policymakers in Pennsylvania have really put their head in the sand,” he said. “It’s just a shocking story of fiscal irresponsibility.”

The think tank also published a companion report today assessing Philadelphia’s teacher retiree costs.

Other states implemented similar reforms in recent years to shore up their systems. From 2009 through 2011, 43 states enacted “significant” pension reforms affecting at least one of their state employee or teacher plans, according to the National Conference of State Legislatures.

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