Modest Strike Settlement Nonetheless Puts LAUSD in Even Worse Financial Shape

One of the grievances expressed by the union during their recent strike against Los Angeles Unified School District was that, according to them, charter schools are draining funds from public schools. This assertion, repeated uncritically by major news reports on the strike, does not stand up to reason.

Public schools in California receive government funding based on student attendance. Since one of the other primary grievances of the union was overcrowded classrooms, it would be reasonable to conclude that LAUSD schools are not underfunded, but overfunded. There should be plenty of money, but there’s not. LAUSD is teetering on insolvency, and the strike settlement agreement is going to make their financial challenges even worse.

Charter Schools Outperform LAUSD’s Unionized Schools

The reason LAUSD is running out of money has little or nothing to do with charter schools. It has to do with inefficient use of funds. A study conducted by the California Policy Center in 2015 calculated the per student cost in LAUSD’s traditional public high schools to be $15,372 per year. The same study evaluated 26 charter high schools and middle schools located within LAUSD’s geographic boundaries, and found their cost per student to be $10,649 per year.

At the same time as LAUSD spends far more than charters per student, they do a poorer job educating their students. The same 2015 study, “Analyzing the Cost and Performance of LAUSD Traditional High Schools and LAUSD Alliance Charter High Schools,” compared the educational outcomes at nine charter high schools to nine traditional public high schools in LAUSD. These 18 schools were selected based on their having nearly identical student demographics to LAUSD’s traditional public high schools – i.e., the same percentage of English learners, learning disabled students, and low income students. The charter schools clearly outperformed LAUSD in every important metric – SAT scores, graduation rates and college admissions.

There are two critical issues here, neither of which appear to have been discussed in the strike negotiations. One, why do charter schools generally manage to educate students better than traditional public schools, and two, why do they manage to do it for so much less money?

The answer to the first may be hard for the union leadership and their supporters to accept: These charter schools are able to better educate students because they are not subject to union work rules. Incompetent teachers can be dismissed. If layoffs are necessary, the best teachers can be retained, instead of the most senior. What is more teachers do not acquire “tenure,” a job-for-life right negotiated by the teachers union despite its origins in the university with the purpose of protecting scientific inquiry, not protecting bad teachers in K-12 schools.

There are a host of reasons charter schools don’t cost as much as traditional public schools. Much of it has to do with teacher compensation. The average base pay in charter schools is less than in public schools, as is the average cost of benefits. But the “other pay,” typically taking the form of performance incentives, is higher in the charter schools. An interesting compilation, using data taken from Transparent California, estimated the bonus pay in the charter networks within LAUSD (Green Dot and Alliance) to average two to three times the average in LAUSD’s traditional public schools. This disparity, wherein compensation in charter schools is linked to the effectiveness of individual teachers, undoubtedly also helps explain why they achieve better educational outcomes.

The Cost of Benefits is Breaking LAUSD

LAUSD’s cost of employee benefits increased from $1.54 billion in 2015-16 to $1.92 billion in 2016-17, an increase of 25 percent, when the total employee headcount only increased by six-tenths of one percent. The reason for the increase is simple, and immutable: LAUSD, like many public agencies throughout California, has fallen woefully behind in its funding of retirement benefits, and they have reached a point where they must dramatically increase payments in order to catch up.

Staggering Pension Debt: LAUSD now carries an unfunded pension liability of $6.8 billion. Just paying down that debt over twenty years should be costing LAUSD over $600 million per year, not including the normal contribution they have to pay each year as their active employees earn additional pension benefits. As it is, including the normal contribution, in 2018 LAUSD “only” paid $584 million to CalSTRS and CalPERS.

The financial sickness relating to pensions is a statewide problem. CalSTRS, the pension system that collects and funds pension benefits for LAUSD teachers, as of June 30, 2017, was only 62 percent funded. Sixty-two percent. CalPERS, the pension system that collects and funds pension benefits for LAUSD support personnel, is only slightly better off financially than CalSTRS. It has already announced it will roughly double the required employer contributions between now and 2025. CalSTRS, if it wants to survive, will likely follow suit.

Retiree Healthcare Costs: If anything, the financial challenges surrounding LAUSD’s other primary retirement obligation, retiree health benefits, are even more daunting. LAUSD’s OPEB unfunded liability (OPEB stands for “other post employment benefits,” primarily retirement health insurance) has now reached a staggering $14.9 billion. Like many public agencies, LAUSD does not pre-fund their retiree health benefits. In 2018, retiree healthcare cost the district nearly $400 million. A 2016 study prepared for LAUSD estimated that cost to double in the next ten years, and to nearly quadruple within the next twenty years.

LAUSD does face declining enrollment, something they claim is exacerbated by diversion of students into charter schools. Total enrollment in 2013-14 was 621,796, and by 2017-18 it had declined somewhat to 591,411. As a percentage of total enrollment during that period, unaffiliated charter enrollment rose from 15 percent to 19 percent of all students. But LAUSD nonetheless contends with bursting classrooms. LAUSD’s traditional, unionized public schools are still collecting revenue based on attendance that stretches the capacity of their facilities. If they are still attempting to teach more students than their facilities can handle, they can’t blame charters for their financial problems.

There is, however, an indirect financial threat that charters represent to traditional unionized public schools that is very serious indeed. The problem is not that charter enrollment steals money from LAUSD’s classrooms, because the classrooms are full. More students might bring in more money, but they would also require more classrooms. The problem is the growth of charters shrinks the revenue base LAUSD needs to pay the costs for retirees.

Charter Schools Dilute LAUSD’s Revenue Base Necessary to Pay Retiree Benefits

As LAUSD’s traditional unionized public schools contend with burgeoning per-retiree costs, every student that they lose to charters represents less available revenue to feed the pension funds. Every student lost to charter schools decreases LAUSD’s ratio of active workers to retirees.

These compounding effects are similar to what faced the auto industry back in the 1980s – retirees collecting expensive benefits, supported by companies with fewer workers and lower revenues. The difference, of course, is that public schools, and public sector unions, do not contend with the irresistible reality of global markets. Instead their ultimate solution will be to call for higher taxes.

This prediction is borne out by the strike settlement, which called for more hiring of teachers and support personnel, retroactive raises, and nothing in the form of benefit reductions or higher employee contributions to their benefits through payroll withholding.

The other key victory for the union, an aggressive stance by the LAUSD Board against any new charter schools, is a rear guard action to preserve the revenue base necessary to pay retiree benefits. Stop the charters, or reform pensions and retiree healthcare formulas. It was one or the other. But all this war on charters does is buy time.

LAUSD Will Eventually Have to Adapt to Financial Reality

Sooner or later, financial reality will strike. LAUSD’s total expenses in 2016-17 were $7.6 billion. Benefits constituted $1.9 billion. Twenty-five percent of all spending. Ten years from now, those benefit costs are likely to double, as the pension fund payments rise to around $1.2 billion, annual OPEB contributions near the $1.0 billion level, and current benefits – which constituted around $900 million in spending in 2016-17 – rise with inflation. Can LAUSD afford to pay current and retiree benefits equal to 40 percent of all spending? Will higher taxes, to enable much higher per student reimbursements – make up the difference?

Financial reform to put LAUSD on a stable financial footing requires benefit reform. Teachers will have to pay, through payroll withholding, a higher percentage of the costs for their current health benefits, their retirement health benefits and their pensions. The alternative is for them to get more state funding for these benefits, or accept lower benefits. Increased state funding is on the way, but it is unlikely it will be sustainable.

There is another solution that bears discussion, which concerns the ratio of teachers to other employees. Based on their own data, LAUSD in 2016-17 had 26,556 classroom teachers, and 33,635 administrators and support personnel. Why is it necessary to have so many non-teachers? Why is it that between 2016-17, and the year before, the number of classroom teachers declined by 271, while the number of non-teaching employees grew by 639? In this regard, charter schools also offer a lesson. Just as they don’t spend precious funds on employee benefits that dwarf what private sector professionals typically expect, charters also don’t spend as much money on support personnel.

Not all charter schools succeed academically, but the ones that do offer examples that LAUSD and other traditional public school districts could emulate, and would emulate, if it weren’t for the intransigence of the teachers union. In all critical areas, from benefits reform to tenure, dismissal policies, and layoff criteria, the teachers union fights change. They have declared war on charters, and just won a major battle in LAUSD. But like the auto industry in Detroit back in the 1980s, unionized public schools need to adapt to changing times.

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Edward Ring is a co-founder of the California Policy Center and served as its first president.