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School districts reform pensions to cut costs

Some states are enacting laws that cut benefits and require more contributions from employees

The total unfunded liability of U.S. teacher pensions is currently anywhere from $390 billion to $1 trillion, according to recent estimates. In an effort to bolster depleting pension funds, some states are enacting laws that cut benefits and require more contributions from employees, according to a June report from the Thomas B. Fordham Institute, “The Big Squeeze: Retirement Costs and School District Budgets.”

“It’s no secret that public sector retirement costs are a problem now, and in many cases are projected to get a lot worse,” says Dara Zeehandelaar, research manager at the Fordham Institute and co-author of the report. “The fact is that somebody is going to have to pay for them.”

In large part, pension shortfalls are a result of financial mismanagement, shortsighted decision making, unrealistic investment projections, and the 2008 market downturn, the report states. The report examines the pension crisis and reform efforts in three districts—Cleveland, Milwaukee, and Philadelphia.

Retiree health benefits in Milwaukee Public Schools were projected in 2011 to increase from $1,860 per pupil that year to $3,512 in 2020—a district total of $105 million. The state legislature passed Gov. Scott Walker’s controversial Act 10 in 2011, requiring teachers and other public employees to pay half of their annual pension contribution, which had previously been covered in full. It also removed retiree health benefits from the scope of collective bargaining, allowing districts to change benefits and contribution rates.

Under Act 10, the district’s retirement costs are projected to go up by only $64 per student by 2020, saving the district $1,600 per pupil, the report states.

In the Cleveland Metropolitan School District, a combination of retiree health benefits and deferred pension funding drove retirement cost increases. State legislators passed a law in 2012 to raise employee contributions and cut benefits for new hires. The changes are projected to drop costs from $1,364 per pupil in 2011 to $1,257 in 2020. Costs would have risen to $2,476 under the previous system.

And in Pennsylvania, despite 2010 pension reform efforts that cut benefits for new hires, no laws address the past shortfalls that are driving up the state’s retirement costs in the coming years.

Pennsylvania is facing a $47 billion unfunded liability in its pension systems for school employees and other state employees.

Retirement costs in the School District of Philadelphia in 2011 were $438 per pupil, a number considered to be artificially low because legislators had deferred pension funding. Costs are projected to rise to $2,361 per pupil in 2020.

As the pension crisis threatens retirement funds, more teachers are investing in supplemental plans. About one-third of teachers are now contributing to these plans, which are voluntary investment programs similar to a 401k, says Bruce Corcoran, managing director of institutional development for the K12 market at financial services company TIAA-CREF.

“We know that in many cases, a state’s core pension plan is designed to add a lot of security but not everything the participant is going to need, even with social security,” Corcoran says. “When teachers have confidence in their ability to retire successfully on their terms, it allows schools to recruit and retain the best teachers.”