Protecting CA Students From Pension Costs

“The secret to stellar grades and thriving students is teachers,” writes The Economist in a recent editorial. One study cited by the magazine found that “in a single year’s teaching the top 10% of teachers impart three times as much learning to their pupils as the worst 10% do” and another “estimates that if African-American children were taught by the top 25% of teachers, the gap between blacks and whites would close within eight years.” The magazine argues that a rigorous form of pedagogy can “make ordinary teachers great” and that “the biggest gains will come from preparing new teachers better and upgrading the ones already in classrooms.”

But California is radically boosting pension spending instead. Legislation bailing out California’s teacher pension fund requires a doubling of spending on pensions to more than $10 billion per year, leaving that much less for preparing, hiring, paying and upgrading active teachers. $10 billion is nearly three times more than the state spends on California State University or the University of California. Needless to say, California cannot deploy a sufficient number of great teachers for six million students when so much of its education budget is being diverted to pensions.

It didn’t have to be this way. The least expensive time to address underfunded pensions is early, before interest compounds. But state legislators a decade ago bet differently and citizens lost, resulting in the $240 billion* bailout. At this stage protecting students requires three ugly solutions, all of which must be in the mix:

Higher Taxes: Government employee unions have already placed a tax increase initiative on the November ballot. But education’s share of the tax increase is largely consumed by the pension cost increase, producing little benefit for active teachers and other services.

Lower Services: Rising retirement costs have already crowded out public services such as welfare, courts, parks and higher education despite sharply higher state revenues and tax increases. California is already one of ten US states spending more on retirement costs than on higher education. The bailout means more crowd-out, plus Governor Brown has warned of reduced revenues as the stock market cools, implying even less money for higher education and other services. More cuts to services isn’t the answer.

Benefit Cuts: No individual gets rich on a teacher pension in California but the combination of compound interest and hundreds of thousands of beneficiaries produces a huge bailout cost. Retired teachers did not cause the pension problem, but neither did students, welfare recipients, taxpayers and other citizens already paying for rising pension costs, and neither did young and future teachers whose jobs, compensation and training will — in the absence of concessions by retirees — be sacrificed to the pension cost increase. Everyone must chip in to solve this problem. As a start, California should look to legislation in Rhode Island and New Jersey temporarily suspending annual pension increases for current and future retirees until plans are better funded.

 

Source: California Legislative Analyst’s Office

 

The state must not allow past pension promises to devour student futuresOnly the governor and state legislature can fix this problem. Charities cannot make up for $10 billion per year and the federal government is not likely to intervene in a financial issue of California’s own making. To succeed in an increasingly competitive world, California’s public school students require a full roster of great teachers. The governor and legislature must compel retirees to share in the cost.

*N.B.: More pension cost increases will be needed down the road because the teacher pension fund employed unrealistic assumptions when proposing the bailout (i.e., the bailout will cost more than $240 billion) and continues to use unrealistic assumptions when establishing contributions for new pension promises, creating additional unfunded obligations.

About the Author: David Crane is a Lecturer in Public Policy at Stanford University, SIEPR Research Scholar and president of Govern For California. From 2004 – 2010 he served as a special advisor to Governor Arnold Schwarzenegger and from 1979-2003 he was a partner at Babcock & Brown, a financial services company. Crane also serves as a director of Building America’s Future, California Common Sense and the University of California’s Investment Advisory Group. Formerly he served on the University of California Board of Regents and as a director of the California State Teachers Retirement System, California High Speed Rail Authority, California Economic Development Commission, Djerassi Resident Artists Program, Environmental Defense Fund, Legal Services for Children, Jewish Community Center of San Francisco, Society of Actuaries Blue Ribbon Panel on the Causes of Public Pension Underfunding, and Volcker-Ravitch Task Force on the State Budget Crisis.

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