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March 25, 2015 standard

As a candidate for Illinois governor, Bruce Rauner promised to address the Land of Lincoln’s virtually-bankrupt defined-benefit pensions. So far, he has at least put some effort on that front. But it will be all for naught if Rauner and state legislators force the pensions — especially the Teachers Retirement System — to provide honest numbers of the extent of their insolvencies.

Last month, as part of the proposed budget for the 2015-2016 fiscal year, the private equity player-turned-politician introduced a plan in which so-called Tier 1 employees — or teachers and state employees on the payroll before the passage of the Senate Bill 1 pension reform bill last year — could volunteer remove themselves out of one of the state’s pensions and into defined-contribution plans; as part of the deal, workers would get a lump-sum payment equaling what they would get out of the pension — essentially a version of the cash-balancing approach companies have used to transition employees out of their defined-benefit pensions — that would go into the defined-contribution account.

As you can expect, Rauner’s plan hasn’t gone down well with the NEA’s Illinois Education Association and the AFT’s Illinois Federation of Teachers. Through the coalition We Are One Illinois, the two unions (along with other public-sector unions such as the American Federation of State County and Municipal Employees) have already managed to get a state court judge to halt implementation of S.B. 1, the modest series of pension changes successfully pushed by Rauner’s predecessor, Pat Quinn. [The case is now before the Land of Lincoln’s Supreme Court, whose members are also covered by a pension that will eventually be targeted by reforms similar to S.B. 1 and thus, are essentially burdened by conflict of interest.] The suit, along with efforts by the unions to force the Democrat-controlled legislature to oppose the Republican governor’s proposal, essentially make Rauner’s effort more difficult than it should be.

Rauner’s plan could still be passed in some form by the legislature. After all, State Senate President John Cullerton was responsible for making S.B. 1 a reality. There’s also the presence of Chicago Mayor Rahm Emanuel, who as I noted today in an American Spectator column, is battling against public-sector unions such as AFT’s Second City local to solve the municipality’s equally-unenviable pension woes.

But as with so many pension reform plans, Rauner’s proposal will only work if it is based on realistic assessments of the state’s public pension insolvencies. This is especially true when it comes to dealing with TRS, which accounts for half of the Land of Lincoln’s $111 billion in (officially-reported) pension shortfalls. But as revealed by Dropout Nation‘s analysis of TRS’ comprehensive annual financial report, it is still less-than-candid about its true fiscal condition.

TRS officially reports that it is insolvent to the tune of $62 billion in 2013-2014; based on officially-reported numbers, this is a 10 percent increase over the previous fiscal year. But as readers know by now, the official numbers don’t represent reality. For one, this leaves out $3.7 billion in investment gains made during the fiscal year, all but 20 percent of the gains accounted for by TRS because of smoothing, an actuarial trick the state forced the pension to adopt six years ago. This allows the pension to effectively hide investment gains and losses under the guise of keeping the volatility pensions experience with investments from wreaking havoc on state and district budgets. As a result, taxpayers and policymakers aren’t getting a full picture of the pension’s insolvency.

The bigger problem is that TRS is using overly inflated assumptions of investment growth over time. The pension assumes that investments will grow by 7.5 percent every year. Certainly, this is a tad less dishonest than the eight percent rate of return the pension assumed in previous years. But the rate is still inflated by a country mile. TRS’ 10-year rate of return on investments is just 7.3 percent — and that’s only thanks to the bull market of the last two years (which helped overcome the losses of the last decade’s global financial meltdown). In fact, TRS admits that the actuarial value of its assets increased by a mere 23.7 percent (or an average growth rate of 2.4 percent a year) between 2005 and 2014; even if you just stick to fair market value, TRS’ assets have only increased by 34.4 percent (or an average annual rate of 3.4 percent) within that time.

As you readers know, using overly-inflated assumed rates of return are problematic because pensions can report insolvencies as being lower than they actually. During good times, when the stock and bond markets are performing stellar, pensions can claim that investments can cover shortfalls. This leads politicians to abandon all fiscal prudence by increasing annuity payments and reducing contributions paid by states, districts, and teachers in the hopes that Wall Street will cover the shortchanging. During periods such as the recent economic malaise, pensions can simply continue assuming that the markets will cover those insolvencies some day; because rates of return are key in determining shortfalls, a high rate of return gooses up the value of assets even if isn’t reality.

To get to the true level of TRS’ insolvency, Dropout Nation uses a version of a technique developed by Moody’s Investors Service, which assumes a more-realistic 5.5 percent rate of a return. [Moody’s bases its rate of return on the Citibank Pension Liability Index, which is based on the yield for AA-rated corporate bonds.] Based on the calculation, TRS’ true insolvency is likely $78 billion, or 27 percent more than officially-reported. When compared to the likely levels of insolvency calculated by Dropout Nation last year, TRS’ insolvency increased by 2.6 percent over the previous year. [The increase would have been even higher if not for the pension’s move to reduce its assumed rate of return.]

If Illinois state government was forced to pay down the insolvency over a 17-year period of amortization, taxpayers and teachers would have to contribute an additional $4.6 billion to eliminate TRS’ insolvency. This is more than double the $4.5 billion poured into the pension in 2013-2104. This would also hit hard Illinois’ already-strapped budget. If the state paid an additional $3.5 billion in contributions in 2013-2014, the percentage of the state budget dedicated to TRS would increase from 3.7 percent to 7.7 percent.

As Dropout Nation noted last year, state legislators along with Rauner need accurate numbers on TRS’ pension woes because even more Baby Boomers are heading into retirement than in previous years. Some 6,443 teachers covered by the pension retired in 2013-2014, 4.2 percent more than the average of 6,182 who have left classrooms in the past decade. With each retiree collecting annual annuities of $48,339 a year, TRS will have to pay out at least an additional $299 million a year.

None of this, by the way, even accounts for the three percent annual cost-of-living increases that TRS must pay out, which essentially means that a retiree can collect an annuity that it 30 percent higher than when they first retired; S.B. 1 put an end to those increases, but thanks to a state court ruling invalidating the plan late last year, those out-of-control raises continue to increase the pension’s insolvency.

When a pension system is so terrible for both teachers and taxpayers that its executive director admits it publicly and bluntly, it is time for a governor and state legislature to scrap the entire system altogether. This can be done constitutionally. Illinois is required to provide workers with retirement benefits, but it can be done in better ways than it does now.

With the We Are One coalition suit complicating matters, Rauner has no easy solution for this crisis. Any step he and legislators take must be bolder than those taken by Quinn in previous years. This includes wrestling control of the boards of TRS and other state pensions from public-sector unions; figuring out how to end the cost-of-living increases that are fiscally senseless; and requiring teachers to pay more into their retirements than the 21 cents of every dollar they current contribute. Rauner must also force legislators to stop making deals with teachers’ unions such as one contained in a 2007 pension bill that allowed AFT affiliate lobbyist David Piccioli to garner a pension despite having just spent one day working in a classroom as a substitute teacher.

At the same time, Rauner should scrap his current plan and embrace an approach touted by Dropout Nation as well as by pension researchers such as Josh B. McGee of the John & Laura Arnold Foundation and Marcus Winters of the Manhattan Institute. This would mean moving both existing and new employees out of defined-benefit pensions into hybrid approach that features defined-contribution accounts as well as cash-balanced accounts that guarantees an annual savings rate. [Rauner could still allow existing workers the ability to cash out of the old pensions and put that money into the new accounts.]

Particularly for younger teachers who have been forced by S.B. 1 to subsidize veteran colleagues (through contributions as well as taxes they also pay), and lose out on opportunities to truly save for their own retirements, such a plan would actually allow them to fully benefit from their hard work in classrooms. This, by the way, would also benefit younger workers currently paying into the state’s other pensions.

But the most-important step of all Rauner must take starts with forcing TRS and other pensions to offer honest data on their fiscal condition. Simply requiring them to issue special report to him and the legislature using the approach developed by Moody’s would go a long way toward accurate disclosure. Rauner should also demand the legislature to rescind the state law passed six years ago requiring TRS and other pensions to smooth out gains and losses; this means moving to fair market value assessment of assets and liabilities that are honest and clear for everyone.

Through moves such as issuing an executive order ending the ability of public-sector unions to forcibly collect dues from workers who aren’t in their rank-and-file, Rauner has shown so far that he is willing to take tough action that can help taxpayers and public employees alike. Demanding honest numbers from TRS and other pensions is another tough step he can — and should — do.

March 24, 2015 audio

On this week’s Dropout Nation Podcast, RiShawn Biddle looks at data from Stanford University’s CREDO on urban charter schools, and explains why school choice is necessary for helping kids and communities succeed.

You can listen to the Podcast at RiShawn Biddle Radio or download directly to your mobile or desktop device. Also, subscribe to the podcast series, and embed this podcast on your site. It is also available on iTunesBlubrry, Stitcher, and PodBean.

March 23, 2015 standard

The U.S. Department of Education is celebrating improvements in United States high school graduation rates overall and its finding that the graduation rates of Latino and Black students are improving faster than the national average. Putting aside the dubious measure used – four-year adjusted cohort graduation rate – and the serious conceptual and technical issues in the calculations (don’t ask), the data accompanying the announcement directs our attention to some matters of interest at the state level.

For all the debate over the reauthorization of the No Child Left Behind Act, we must remember that primary and secondary education are state responsibilities, administratively, fiscally and in terms of policy, except insofar as the federal government takes a role in these matters, which is sometimes quite minor and never predominant. The quality of education available to students therefore varies among the states and, because of differences in state policies and practices, opportunities for education vary within states.

For example, the U.S. Department of Education has recently found that funding within states between districts with high rates of poverty and those with low rates of poverty can greatly differ. In fact, the gap between per-pupil spending between our poorest and wealthiest districts have increased over the past decade. Wealthier districts spent 10.8 percent more than high-poverty districts in 2002; they now spend 15.6 percent more today.

In 23 states districts serving the highest percentage of students from low-income families are spending fewer state and local funds per pupil than districts that have fewer students in poverty. In 20 states, districts serving a high percentage of minority students are spending fewer state and local funds than districts that have fewer minority students. Now school spending isn’t everything – and lots of districts regardless of demographics spend money badly. But it is clear that nearly half the nation’s state governments have decided to spend more of taxpayers’ funds on White and comparatively well-off students than on children from low-income and minority families.

But then there are other examples of how poorly political leaders and others think of Black, Latino, and low-income children. This can be seen in Minnesota and Wisconsin. Both are prosperous states with progressive histories; Minnesota even has a self-proclaimed reputation for “niceness.” But neither state are all that nice for Black, Latino, and poor children or for their families.

Minnesota’s traditional public schools work very well for White children, with 85 percent of them graduating in four years according to the federal government’s adjusted cohort graduation rate. But they don’t work so well for other children. The graduation rate for Minnesota’s black students is 28 percent lower than that for Whites, while the graduation rates for Latino and American Indian students are, respectively, 26 and 36 percentage points below that of Whites.

Wisconsin’s public schools are also highly successful for White children, graduating more than 92 percent of the adjusted cohort of White children in four years. But the schools are also not very nice for poor and minority children. Black students graduate at levels 26 percent lower than White students. The graduation rates for Latino and Native students are also in the pits.

How bad are the gaps in graduation rates between White and Black students in both states? Their gaps are, respectively, 15 and 13 percent greater than that for Mississippi, and 18 and 16 percent greater than that for Alabama. Based on the data, you can ascertain that opportunities for high-quality education in the Deep South are greater than in two of our most “progressive” states. You can also say it the other way: That Minnesota and Wisconsin are twice as racist as Mississippi and Alabama. Either way, how nice is that?

But this isn’t a surprise. Minnesota and Wisconsin also have astronomical incarceration rates for Black men, as well as astronomical disparities between incarceration rates for Black and White men. As I wrote in 2013 about Milwaukee and Wisconsin, a Black family would be better off in Mississippi than in the Dairy State, and this also holds true when it comes to the Land of 10,000 Lakes.

But are the conditions for Blacks and other minorities in Minnesota and Wisconsin examples of institutional racism. Though they could be unforeseeable racist outcomes of blind institutional forces, I wouldn’t say so. These are examples of the decisions made, every day, by individuals in both states as well as throughout this entire country.

Just as a new police chief in Ferguson or New York City can simply order the police to behave toward Black men as they behave toward White men, so in Minneapolis and Milwaukee the police chiefs and prosecutors could do the same. But they don’t. Similarly, it is the individual responsibility of chief state school officers, superintendents, school boards and others to give Black students the same educational opportunities, schools of the same quality that they provide for White students. But in Minneapolis and Milwaukee, they don’t.

These police chiefs, district attorneys, district and state superintendents, go to their offices each morning and decide to arrest, prosecute and imprison much higher percentages of Black than White people, to provide better schools for White than for Black children. Don’t they? Of course they do. If they didn’t, it wouldn’t happen.

The education officials in Wisconsin and Minnesota have, no doubt, read the press releases from the U.S. Department of Education containing this latest batch of data telling of their shame. And now they could, if they wish, improve the prospects of the Black children in their care. Or they might, as they have been doing, simply encourage their colleagues to build more prisons.

March 17, 2015 standard

On this week’s Dropout Nation Podcast, RiShawn Biddle takes aim at reformers who defend practices such as overuse of harsh school discipline and restrictions on school choice, as well as remind the movement of why these failed approaches in American public education must be ditched.

You can listen to the Podcast at RiShawn Biddle Radio or download directly to your mobile or desktop device. Also, subscribe to the podcast series, and embed this podcast on your site. It is also available on iTunesBlubrry, Stitcher, and PodBean.

March 13, 2015 audio

On this edition of On the Road, RiShawn Biddle joins Noodle and Princeton Review founder John Katzman and Jessica Reid Sliwerski of Lightsail Education for a debate on an emerging issue in education: Who should get use of — and access to — formative tests and other student and teacher data. Should it only be teachers? Or should it include school leaders and families, too?

You can listen to the Podcast at RiShawn Biddle Radio or download directly to your mobile or desktop device. Also, subscribe to the On the Road podcast series and the overall Dropout Nation Podcast series. You can also embed this podcast on your site. It is also available on iTunesBlubrry, Stitcher, and PodBean.