Special Report

Golden Apples

Rotting teachers' pension systems.

By 1.12.09

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California residents are all too familiar with fiscal imprudence and the lack of balanced budgeting. After all, this is home to the ongoing, litigation-plagued battle between the ex-action movie star-turned-governor, Arnold Schwarzenegger, and the Democratic-controlled legislature over what kind of taxes will be raised to close the state's $15 billion budget deficit.

But Golden State residents are becoming as familiar with Government Accounting Standards Board rules and actuarial charts as they are with the intricacies of program-based accounting. Thanks to decades of generous pension deals with teachers unions and fiscal mismanagement, taxpayers are on the hook for the state teacher pension system's $19 billion deficit (as of 2007); the underfunding has likely grown since then thanks to the fund's $46 billion in investment losses.

An even larger bill comes in the form of unfunded costs for teacher healthcare deals. School districts -- and ultimately, taxpayers -- will pick up $16 billion in unfunded healthcare payments on behalf of retiring teachers. This includes the $10 billion in as-yet-to-be funded health insurance payments owed by the Los Angeles Unified School District, the nation's second-largest (and most visibly dysfunctional) school district. The tiny Encinitas Union School District near San Diego, which educates a mere 5,600 elementary school children, has $4 billion in unfunded healthcare payments.

"It's the same problem the Big Three faced in Detroit," said Keith Richman, a California state assemblyman from Los Angeles, to Capitol Journal. Indeed it is. Like GM, Ford and Chrysler, school districts will eventually be bailed out by the taxpayers. And California isn't alone in wrangling with these staggering costs.

Most of the public attention on education has focused on battles between school reformers and teachers unions over academic standards, school choice and the reauthorization of the No Child Left Behind Act. But an even more fractious battle is emerging over the array of generous defined-benefit pensions, employer-subsidized healthcare plans, job protections and degree- and seniority-based pay scales struck by states, districts and locals of the National Education Association and American Federation of Teachers.

Evidence that such compensation fails to reward high-quality instruction or lure collegians into teaching, along with No Child's provision that all teachers must be well-versed in the subjects they teach, are forcing states and districts to rethink teacher compensation. The development of a statistical technique called value-added assessment -- which allows individual student test-score growth to be measured against those in the same grade -- also means that teacher performance can be objectively measured and rewarded accordingly.

This is a battle already seen in districts such as D.C. Public Schools, where Chancellor Michelle Rhee is sparring with the AFT local over a pay plan that would allow teachers to increase pay by as much as $43,000 a year if they subject themselves to more-rigorous performance evaluations, as I've noted this month in Labor Watch, a newsletter on labor reform published by the Capital Research Center.

But it is the mounting costs of the lavish retirement deals -- fueled by the upcoming retirement of Baby Boomers -- that will likely force states into embracing performance-based pay plans. Thanks to four decades of generous retirement deals and new accounting rules, citizens are realizing that teaching has become the best-compensated profession in the public sector. This, however, has come at the expense of taxpayers and children alike.

THE TAB STARTS WITH TEACHER PENSIONS, which are even more-abysmally managed than other public pension programs. The Indiana State Teacher Retirement Fund, for example, has been chronically underfinanced for decades; its deficit doubled from $5 billion to $10 billion between 1993 and 2007. West Virginia's teacher pension has long-been the nation's most heavily-indebted based on the percentage of uncovered liabilities. Just 55 percent of benefits owed to teachers are covered by the plan; its $3.4 billion deficit (as of June 2008) has grown in the last six months thanks to $1 billion in investment losses.

Then there are the healthcare benefits. Unlike pensions, almost no money has been set-aside for those future costs. Texas has only set-aside 3 percent of the money needed to cover its $22 billion tab healthcare tab for retiring teachers, according to the state's Teacher Retirement System in a report released last year. In Utah, taxpayers must eventually pay down the $1 billion tab for retired teacher health expenses.

New Jersey taxpayers face an even heftier $36 billion invoice for unfunded healthcare costs, according to a state treasury analysis released last year. The benefits cost the state $3.6 billion a year, most of which is never fully paid. The state has yet to set-aside money to begin paying down those costs. This, by the way, is on top of the $10 billion teacher pension deficit Garden State residents must eventually pay.

What taxpayers are buying on behalf of these teachers are very sweet deals. A teacher in Ohio with 29 years of service can retire and collect pension benefits at age 55. That's five years earlier than the state's mandatory retirement age of 60 -- and 10 years earlier than the average private-sector worker. A Missouri teacher can technically retire as early as age 52 so long as her combined age and time of employment totals 80 years. Even better, she can retire and then get rehired, allowing her to double-dip -- or collect a pension and a regular teaching salary -- at the same time.

The healthcare benefits are even sweeter. A retired teacher in Michigan who isn't eligible for Medicare picks up just 12 percent of her $1,171 monthly premium for herself and her spouse; the state picks up the rest. When she qualifies for Medicare, she will pay just five percent of her monthly premium; the remaining cost is subsidized by taxpayers.

AS IN OTHER PARTS OF THE PUBLIC SECTOR, the rise of unions has helped make these perks more lucrative and expensive. Starting in the 1960s, as the NEA and AFT won the right to collectively bargain in 34 states, teachers unions became potent forces within districts, at the statehouse and in campaign finance. In turn, they struck deals with legislatures and districts for the kind of early-retirement packages, boosted pension annuity payments, free healthcare deals and lowered retirement ages long-ago rejected by the private sector.

By 2003-04, states spent $50 billion on teacher benefits, a near three-fold increase over the amount spent 16 years ago, according to the U.S. Department of Education. The average state now spends 28 cents on benefits for every dollar spent on teacher salaries; four states -- Indiana, West Virginia Wisconsin and Oregon -- spend twice that amount.

This spending has made teaching one of the most lucrative in both the public and private sectors. By 2002, the average teacher earned 25 percent more than that of the average American worker, according to the Education Intelligence Agency, a teacher union watchdog think tank; this doesn't even include pension benefits. A Missouri teacher retiring at age 52 will get 200 percent more in pension benefits than she actually paid into the plan during her career.

But now states and districts -- and ultimately, taxpayers -- are straining to pay this burden. As it turns out, the benefits are also exacerbating teacher shortages. Twenty-five percent of Michigan teachers and other school employees retire before age 55 while 64 percent leave before reaching 60, according to a 2007 analysis by the Detroit News. At the same time, the benefits -- along with the lack of performance pay -- makes teaching less attractive to the talented collegians needed to replace retiring teachers.

Some states are now taking stabs at reform. South Carolina Gov. Mark Sanford has spent the past four years pushing to that state's early-retirement plan for teachers, which allows double-dipping. In November, Georgia Gov. Sonny Perdue pushed for a reform that would have ended automatic cost-of-living raises for retirees on the state's $47 billion teacher pension. It was defeated by the Peach State's NEA affiliate. More of such skirmishes loom on the horizon, especially as states -- egged on by both school reformers and angry taxpayers alike -- realize that comfy retirements for teachers are too expensive for citizens and their children.

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About the Author

RiShawn Biddle the editor of Dropout Nation , is co-author of A Byte at the Apple: Rethinking Education Data for the Post-NCLB EraHe can be followed at Twitter.com/dropoutnation.