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July 2, 2014 standard

As you may remember, Dropout Nation gave a preview of its analysis of the financial condition of Pennsylvania’s virtually-insolvent pension during Saturday’s report on the School District of Philadelphia. Since then, Keystone State Gov. Tom Corbett has failed to convince Keystone State legislators to pass his plan to increase contributions to the Public School Employees’ Retirement System. On Tuesday, the state’s lower house voted to effectively kill debate on the plan by steering the legislation into a committee chaired by one of Corbett’s fellow Republicans, Eugene DiGirolamo, who collected $19,750 in political contributions from public-sector unions (including $2,750 from the American Federation of Teachers affiliate there, and $1,000 from the National Education Association’s state unit) during the 2012 election cycle, according to data from the National Institute on Money in State Politics. With DiGirolamo proclaiming that he will not hold any hearings on Corbett’s plan, and with the governor himself likely to lose the state’s top executive spot in November, there is no chance that the state government will address PSERS’ insolvency until after the new year begins.

Regardless of DiGirolamo’s unwillingness or that of Democrats in the Keystone State to take action, and no matter what happens to Corbett (whose tenure as governor has been weak, especially on systemically reforming public education), PSERS is still virtually busted. And based on Dropout Nation‘s analysis, the underfunding is increasing at alarming levels.

PSERS officially reports a pension deficit of $30 billion for 2012, the latest year available. That is an 11.4 percent increase over its officially-reported underfunding for the previous fiscal year. But as your editor pointed out in last year’s analysis, the Keystone State pension’s official numbers are not to be trusted. This is because it assumes an investment rate of return of 7.5 percent, which is far higher than the 5.3 percent five-year return rate experienced on the market, according to Wilshire Associates, and much higher than the 2.5 percent five-year return rate PSERS has actually experienced. Thanks to an inflated rate of return, the Keystone State teachers’ pension is understating its virtual insolvency.

Another problem lies with Act 10, the pension law passed four years ago that has exacerbated the pension’s insolvency with such moves as boosting annuities collected by teachers to equal 75 percent of final year’s salary. The law mandates that PSERS recognizes its gains and losses over a 10-year period, instead of an already-ridiculous five years. Because this approach, called smoothing, allows for the pension to not immediately account for losses or gains, it gives the false impression that its financial condition is in good shape.

To get to the heart of matters, Dropout Nation uses a version of a method developed by Moody’s Investors Service that uses a more-realistic 5.5 percent rate of return on investments. [Moody's uses a rolling rate based on the return on a long-term bond index; Dropout Nation uses the 5.5 percent rate Moody's originally used in its preliminary analyses for the sake of consistency.] The result? DN determines that PSERS is underfunded to the tune of $37 billion, a 10.4 percent increase over the pension’s $33.5 billion insolvency as figured out by this publication in last year’s analysis. The $37 billion underfunding is 27 percent higher than PSERS’ officially-reported unfunded liability.

Based on a 17-year amortization rate, Pennsylvania taxpayers will have to shell out an additional $2.1 billion a year, 90 percent more than the $2.4 billion in contributions made in 2013. The Keystone State government’s plan to contribute an additional $600 million into the pension this year will do nothing to address the shortfall.

As with other teachers’ pensions, addressing PSERS’ insolvency is critical for Pennsylvania largely because of the number of Baby Boomers retiring from the teaching ranks. The number of retirees (net of deaths and other removals) added to PSERS’ rolls increased by 20 percent (from 168,026 annuitants to 202,015) between 2007 and 2012, while the payouts increased by 38 percent in that same period. Based on the pace of increases in annuitants in that six-year period, the pension will likely add 12,438 new annuitants (excluding deaths  and other removals) to the rolls ever year for the next decade before retirements. With each retiree likely collecting at least $28,501 a year, PSERS will have to pay out at least $354.5 million more in annuities every year, further increasing its insolvency.

Pennsylvania Gov. Tom Corbett will likely end his rather weak tenure without addressing another key aspect of the nation’s education crisis. Photo courtesy of PoliticsPA.com.

Keep in mind that the numbers only cover the pension’s underfunding alone. There’s also PSERS’s unfunded retired teacher healthcare costs with which the state must also contend. PSERS officially reports unfunded liabilities of $1.2 billion. But hold on: Unlike most pensions, PSERS uses the same inflated rate of return for the investments used to cover those costs as it uses for the pension. Using the same method applied to the pension, Dropout Nation determines that the true unfunded liability is $1.6 billion, 27 percent higher than PSERS officially reports. Based on a 17-year amortization rate, Keystone State taxpayers will have to pay $95 million more a year to pay down that shortfall, almost double the $109 million paid out last year.

At some point, given the increasing liabilities, Pennsylvania will have to deal realistically with PSERS’ insolvency. This must start with increasing contributions. But more-aggressive action must be taken.

While teachers officially pay 41 cents out of every dollar contributed last year. But as in most states, it is likely that districts are actually the ones covering the share of contributions teachers are supposed to make (on top of their own payouts to the pension). Embracing the approach taken by Detroit’s main city government to freeze the existing pension (save for paying out remaining contributions to retirees and whatever currently-working teachers are owed), and move current and new teachers to a hybrid pension. This would include a defined-contribution plan to which teachers can contribute as much toward their retirement as they so choose (with a five percent match from districts) along with a smooth accrual defined-benefit element similar to an approach advocated by Josh McGee of the John and Laura Arnold Foundation and Marcus Winters of the Manhattan Institute in a report released last month. As for PSERS itself? The state must end any cost-of-living increases for current retirees as well as reduce promised final-year salary payout percentages in order to get the pension’s financial house in order.

This move would help taxpayers and teachers by ending increases in PSERS’ unfunded liabilities as well as making the pension solvent. These moves woud also be helpful to younger teachers who are often the ones who bear the brunt of most pension reform plans. Given that defined-benefit pensions such as PSERS already do little for younger teachers because half of them are likely to leave classrooms within five years (and thus, unlikely to fully vest in the plans), moving away from the current pension would actually make teaching more attractive, both to those already working in the profession as well as to talented collegians who would otherwise look to gigs in the private sector.

But such a reform can only happen if Pennsylvania’s legislators and other political leaders actually address the long-term burdens facing the taxpayers and children they are supposed to represent. Sadly for the Keystone State, such action won’t happen anytime soon.

Featured photo courtesy of paindependent.com.

 

June 25, 2014 standard

For the moment, once-and-future Gov. Jerry Brown can claim that he has taken some sensible steps in addressing the California State Teachers’ Retirement System’s massive virtual insolvency. Last week, legislators backed Brown’s plan to increase contributions to the pensions by $5.5 billion (from the current $2.2 billion) over the next seven years. [Brown signed the legislation yesterday.] This is an important (if still less-than-satisfactory) step toward addressing CALSTRS’ officially-reported underfunding of $74 billion, which is more likely $93 billion based on a Dropout Nation analysis of the pension’s financial using a formula developed by Moody’s Investors Service.

Whether or not Brown’s plan will survive beyond legislative approval and his signature on the dotted line is another question entirely. Why? Because school districts are none too happy about the move, and they can easily claim that state law is on their side.

As your editor pointed out last month, Under Brown’s plan, districts bear most of the burden of increased contributions, paying 75 percent of the increased contributions (along with the nine percent that teachers are supposed to pay themselves, but in most cases, will actually be covered by the districts as part of collective bargaining agreements with NEA and AFT locals); this is greater than the 38 percent districts currently contribute (along with the 39 percent that they often pay on behalf of teachers). This certainly makes sense. After all, Brown’s move last year to end full state funding of education and place the bulk of school subsidizing onto local property taxes effectively makes districts responsible for their fiscal affairs. There’s also the fact that the fiscal fecklessness of districts is a key reason for CalSTRS’ virtual insolvency; this includes the penchant to engage in spiking, or ratcheting up the salaries of teachers and school leaders during their last five years on the job in order to boost annuity payouts upon retirement.

The problem? California’s state constitution bars the state from forcing districts and other local governments to bear what they may consider to be unfunded mandates. This provision, which has been an obstacle to other statewide reform efforts — including the development of longitudinal data systems needed to improve student and school achievement — will also likely prove to be a stumbling block to Brown’s pension plan. Given that districts are up in arms over the contribution increases (and angered at Brown’s teachers’ union-driven plan to limit their ability to build substantial financial reserves), expect districts and their lobbying groups to proceed with litigation to stave off the hikes.

Litigation isn’t the only obstacle to the success of Brown’s plan. As Dropout Nation noted last month, the plan is based on faulty numbers that don’t fully reflect the true extent of CalSTRS’ virtual insolvency. Because CalSTRS assumes a 7.5 percent rate of return on its investments, a rate far higher than the 5.2 percent five-year rate experienced in the market and the pension’s own actual five-year rate of return of 3.7 percent, the teachers’ pension is understating its level of unfunded liabilities. The fact that CalSTRS also engages in actuarial tricks such as smoothing of investment losses and gains means that Brown’s plan is not based on a realistic picture of the pension’s financial condition.

Then there is the fact that Brown’s plan for reducing CalSTRS’ insolvency is based on a way-too-long 30-year timeline. For one, given that CalSTRS will likely add 13,398 new annuitants (excluding deaths and other removals) to its rolls every year for at least the next decade before retirements slow down, and will have to pay out at least $611 million more in annuities every year, a 30-year payment plan will not fully address those growing liabilities. At the same time, by using a 30-year timeline instead of a 17-year plan as originally recommended by Moody’s, the state isn’t being aggressive enough in getting CalSTRS’ financial condition — and that of the entire state — in order.

Finally, there is the fact that Brown’s plan doesn’t reduce the growth in unfunded liabilities at all. That can only happen by moving existing and new teachers out of the defined-benefit pension and putting them into a hybrid plan that features a defined-contribution element into which they can save as much as they choose for retirement. This is a step being taken by Detroit next week as part of its effort to emerge from bankruptcy. For the state, districts, and ultimately, taxpayers and children, this move would immediately slow the growth in liabilities. It is also beneficial for teachers. Particularly for younger teachers, half of whom are likely to leave the profession within their first five years, such a move would actually allow them to reap the full rewards of their work by having a portable retirement savings plan.

Neither Brown nor the state legislature were willing to take any of these steps. But districts may be able to do so, especially if a court ruling next month in the bankruptcy proceedings for Stockton, Calif.’s main city government end up reflecting that handed down in December by the judge overseeing Detroit’s Chapter 9 filing.

Earlier this month, one of the creditors in Stockton’s bankruptcy, Franklin Templeton Resources, challenged the city’s proposed plan to exit Chapter 9. The money manager argues that no proposal can be valid unless CalSTRS’ sister pension, the State Employees Retirement System, is treated like a contractor or creditor under the U.S. Constitution’s Supremacy Clause, superseding the state constitution’s provision treating pensions as a vested right that cannot be tinkered with under any circumstances. Essentially, bankrupt municipalities can voluntarily (or be forced by creditors) to slash annuity payments for retirees, restructure defined-benefit pensions, and even replace traditional pensions with defined-contribution plans. And it is a position already validated by the federal bankruptcy court in Detroit’s case.

Whether or not the judge in Stockton’s case will go along with Franklin Templeton’s argument is an open question, and one that won’t be known until he hands down his ruling on July 7. But given that the judge has already allowed Stockton to slash its unfunded retiree healthcare benefits from $544 million to $5.4 million using the same reasoning, you can bet that he may likely rule the same way on how Stockton’s obligations to CaLPERS. If it happens, it could lead to other financially-strapped municipalities in California (and even in the rest of the country) taking much-needed steps toward addressing their pension insolvencies. And given that CalSTRS is similar in structure to CALPERS, equally cash-strapped districts may force pension reforms that neither Brown nor legislators want to do.

The future of CalSTRS may end up being a matter decided by the courts and not by Sacramento’s mandarins.

June 23, 2014 standard

When Dropout Nation last looked at Tennessee’s defined-benefit pension for teachers, the State Employees, Teachers, Higher Education Employees, it noted that its overly-inflated assumed rate of return on investments had hidden the true size of its virtual insolvency by 27 percent. Volunteer State taxpayers essentially would have to take on a true pension deficit of $3.3 billion, which would require contributing an additional $328 million annually over 17 years (or 45 percent more than the $731 million paid out in 2012) to bring the pension back to solvency.

Since then, the Volunteer State under the leadership of Treasurer David Lillard and Gov. Bill Haslam, has taken some important steps toward addressing its pension woes. This is good news. Yet the Volunteer State still understates the actual size of the teachers’ pension’s insolvency, meaning that the solutions aren’t fully addressing the long-term problem at hand.

At least the good news is that Tennessee is slowly moving new teachers and other employees into a hybrid pension plan. Starting this month, newly-hired teachers would still get a defined-benefit pension. Unlike colleagues currently on payrolls, who can retire at age 60, new teachers can only collect a full pension once they either reach age 65. New hires would also be required to contribute at least percent of salary to a defined-contribution plan, to which a district or local government will match dollar for dollar up to a maximum of five percent of salary. Theoretically, the plan should save Volunteer State taxpayers

Another change, signed into law last week by Gov. Haslam, requires districts and other local governments to fully pay required contributions to the pension. Under the state’s new Public Employee Defined Benefit Financial Security Act, districts and local governments that aren’t fully paying their contributions must submit plans to do so by 2020 and it must meet a formula prescribed by the Government Accounting Standards Board. If they don’t, the state will divert subsidies from its coffers to SETHEEPP in order to make up the shortfall.

Yet it isn’t all good news for Tennessee taxpayers and children on the pension front. For one, under the new hybrid pension, retiring teachers will still be eligible for cost-of-living increases that can range from one-half of one percent to three percent; those increases, by the way, compound annually. This means that the Volunteer State’s pension insolvency can continue to grow because of generous annuity hikes. There’s also the fact that all pensioners are getting a 1.5 percent cost-of-living hike this year, which further exacerbates the pension’s insolvency.

The defined-benefit part of the hybrid pension also doesn’t have a guaranteed saving rate, an important feature because it actually ensures teachers that they will actually be able to collect some money instead of a promise to be paid 30 percent of final year’s salary, as the current defined-benefit pension currently does. In fact, new teachers are still guaranteed to get annuity payments equal to 30 percent of the salary earned before retirement. Again, this only adds to Tennessee’s burdens, not alleviates them.

Then there’s the fact that the pension reforms undertaken by the state really haven’t dealt with the underlying issues driving the teachers’ pension’s virtual insolvency.

SETHEEP still assumes a rate of return of 7.5 percent on its investments, according to its 2013 annual report. This is an inflated number that doesn’t square with the 5.2 percent five-year return rate experienced in the market (according to Wilshire Associates). In fact, the 7.5 percent assumed rate of return is higher than the five-year return rate of 5.3 percent experienced by both the teachers’ pension and the rest of the Volunteer State’s Consolidated Retirement System. Requiring districts and other local governments to fully pay their contributions to the pension doesn’t mean much if they are still paying far less than they should to cover the insolvency. The state should immediately adopt a more-realistic assumed rate of return, around 5.5 percent as used by Dropout Nation in its analysis (and originally used by Moody’s Investors Service in the development of its pension analysis formula), and adjust contribution levels accordingly.

Another problem that went unaddressed: The fact that SETHEEPP, along with the rest of the state’s pension system, only conducts actuarial analysis of its financial condition. In fact, none of Tennessee’s pensions have provided up-to-date data on their fiscal conditions since 2011. As a result of this data lag, the officially-reported pension deficit of $2.6 billion (and more-likely $3.3 billion because of its overly-inflated assumed rates of return on investments) is likely even higher. Considering that the pension’s annuity payouts have increased by 8.5 percent within the last year (from $1.5 billion in 2012 to $1.6 billion in 2013) — and has increased more than a two-fold (from $827 million to $1.6 billion) between 2004 and 2013 — the Tennessee teachers’ pension isn’t providing policymakers or taxpayers the knowledge they need to assess its actual financial position.

Meanwhile none of Tennessee’s pensions have addressed their unfunded commitments, or obligations to invest in hedge funds and other risky private equity investments. These unfunded commitments can wreck havoc on the balance sheets of pensions because the money managers running hedge funds and other alternative investment vehicles can issue capital calls at any given moment — even if private equity investments account for a smidgeon of an overall portfolio. By 2013, SETHEEPP, along with the rest of the state’s Consolidated Retirement System, still had $774 million  in unfunded commitments it had to meet. If forced to pay up right now, SETHEEPP would likely have to bear $564 million of that burden, wiping out 60 percent of the $932 million contributed to the pension in 2013. This reality is one reason why pensions, which are geared toward providing safe long-term income to its annuitants, should not be investing in any form of alternative investment vehicle in the first place.

Finally, while the pension reforms did not address the fact that veteran teachers and other employees are still not contributing enough to their own retirements. Teachers contribute just 21 cents out of every dollar put into SETHEEPP in 2013, unchanged from the previous year; given that collective bargaining agreements often end up giving districts full responsibility for both employee and employer contributions, teachers aren’t likely putting in that much. Placing the onus of addressing the pension’s insolvency on districts and other local governments isn’t a sensible solution.

Dropout Nation will take a further look at Tennessee’s teachers’ pension numbers once the state issues its annual report. But it is clear that while the Volunteer State has taken some steps towards addressing its teachers’ pension’s insolvency, it hasn’t done enough to address its woes for the long haul.

Photo courtesy of Nashville Public Radio.

June 4, 2014 standard

These days, California is usually the state where systemic reform efforts go to die. Over the past four years, traditionalists led by the affiliates of the National Education Association and American Federation of Teachers have succeeded in rendering the Democrat-controlled state legislature servile, and putting the kibosh to teacher quality reforms such as Senate Bill 1530, which would have made it easier to fire teachers accused and convicted of criminal abuse of children. Thanks to their success in returning once-and-future governor Jerry Brown to the state’s top executive post, traditionalists have also succeeded in stopping efforts at providing families, schools, researchers, and policymakers with high-quality data on student progress, as well as ending efforts to use objective student test score growth data in evaluating teacher performance. Last year’s move by Brown to effectively eviscerate accountability through the signing of Assembly Bill 484 was the high-water mark for traditionalists who oppose any effort to hold districts and laggard teachers responsible for their failures in helping children succeed.

So reformers can’t help but be surprised by the results in yesterday’s primary for state superintendent. The fact that incumbent Tom Torlakson didn’t get enough votes to avoid a run-off election in November against former Green Dot Public Schools boss Marshall Tuck offers reformers an opportunity to bring the Golden State back on the path to transforming education for all of its children.

Certainly reformers must keep in mind that Tuck still has a tough road ahead. After all, Torlakson still managed to garner 47 percent of the vote thanks in part to the efforts of the NEA affiliate, the California Teachers Association, which spent $3.6 million (including $1.6 million to an independent expenditure committee the union, along with the national AFT and its state affiliate, has formed) on his behalf. Given the high stakes, the NEA’s national office will surely toss in a few million dollars to help Torlakson out the same way it spent $5 million two years ago to help pass Prop. 30 (which raised $50 billion in new taxes) and defeat Prop. 32 (which would have ended the ability of teachers’ unions to force teachers to pay dues into its coffers). So will the national AFT, which has already poured $50,000 into the independent committee backing Torlakson.

There’s also the fact that Tuck is a relative newcomer to political campaigning. While the one-time aide to former Los Angeles Mayor Antonio Villaraigosa has run a strong campaign so far, he lacks the natural advantages of incumbency that Torlakson, a former state senator, has at his disposal. This includes being able to cash in on the favors he has done for labor unions who dominate the Golden State Democratic Party’s activist core, as well as rally support from incumbents in the state legislature, who will naturally be pressed by the NEA and AFT to lend him a hand. Sure, Tuck’s 795,419 vote total is impressive, especially given that it is 57,387 more votes than that garnered by former state Sen. Gloria Romero in the primary four years ago, and just a few thousand votes less than what Torlakson gained in that same election. But Tuck wants to win, he will have to outwork and outspend Torlakson over the next five months.

Yet there are plenty of reasons why Tuck can oust Torlakson as the Golden State’s top schools chief. And if Tuck, along with his fellow reformers, take some important steps (including in rallying grassroots support), sending Torlakson and his traditionalist allies packing can become a reality.

Let’s remember this fact: California’s reversal on systemic reform is only a recent occurrence. For most of the previous two decades, the Golden State has been as much a hotbed for reform as Indiana, Florida, and Texas. Twenty-three years ago, it was the second state in the nation to allow for the existence of public charter schools; today, California is home to 1,069 charters — 17 percent of all charter schools operating in the nation — accounting for 10.7 percent of all public schools in the state, according to data from the National Alliance for Public Charter Schools. Even with the successful effort of districts and traditionalists to kibosh the ability of the state Board of Education to authorize charters, the sector remains vibrant as more families look to escape failure mills and warehouses of mediocrity that serve their children poorly.

Five years ago, California helped spark the modern Parent Power movement by passing the nation’s first Parent Trigger law. Despite efforts by the NEA and AFT (along with districts), families have successfully used the laws to force the overhaul of failing schools in the neighbors in which they live. Last month, families of children attending West Athens Elementary School in the City of Angeles proved the value of Parent Trigger laws in helping them gain lead decision-making roles in education when they struck a deal with L.A. Unified to help them gain $300,000 in new funding from the district for school services as well as stronger roles in implementing Common Core reading and math standards.

But the benefits of the state’s Parent Trigger law go beyond just allowing families to lead the overhaul of schools. Because the law also involves families becoming active in education politics, they also get involved in spurring reform on the ground. This was seen two years ago in Adelanto, Calif., during the successful effort by families of kids attending the former Desert Trails Elementary to take over the school. That campaign led to another successful push — this time, to oust two Adelanto district board members who helped lead the opposition to the takeover initiative.

The fact that families have embraced choice and Parent Power so wholeheartedly even amid strong opposition from traditionalists shows that reformers can make a strong case for transforming public education. Latino families whose children now make up the majority of the state’s student population, along with those from immigrant households, recognize that high-quality education is key to their long-term success in becoming part of the nation’s economic mainstream. That the Golden State’s traditional public schools are still performing abysmally in improving student achievement for all kids (including the fact that 42 percent of fourth-graders reading Below Basic on the 2013 National Assessment of Educational Progress (versus just 33 percent of children nationwide), also gives reformers ammunition.

Meanwhile Torlakson, along with Brown and affiliates of the NEA and AFT, have also given reformers plenty of evidence to support their cause. Torlakson’s unwillingness (and that of Brown’s appointees on the state board) to embrace even simple teacher quality reforms was made clear last month when they rejected a request by San Jose Unified and the NEA local there to increase the time some newly-hired teachers to work one more year (from an already too easy two years to a slightly better three) before being able to gain near-lifetime employment. The fact that neither Torlakson nor Brown lifted a finger two years ago to back S.B. 1530 shows that they are all too willing to do the bidding of NEA and AFT affiliates in protecting even criminally-abusive teachers who shouldn’t be in classrooms.

At the same time, reformers can easily make the case that Torlakson and his colleagues inn Sacramento are too corrupt and too beholden to NEA and AFT interests to be trusted with high office.  Last April’s federal indictments against state Sen. Leland Yee on corruption charges are particularly damaging to Torlakson. Not only did Yee receive $29,000 in funds from the NEA’s state affiliate between 2006 and 2010, he was also worked closely with Torlakson while the latter was in the state senate. [Yee, by the way, garnered 288,000 votes in yesterday's primary race for his current seat, enough to take third place in the race.]

This isn’t to say that Torlakson engaged in any of the crimes with which Yee has been charged. But Yee’s alleged misbehavior, and Torlakson’s toadying toward the NEA and AFT offer prime examples of the culture of sleaze and abetting of educational abuse toward children, both in California and throughout the nation, that can reformers can clean help up. And while some reformers may call this mudslinging, the reality is that you can’t take on those who support failed policies and practices without calling things what they are.

So how can Tuck and his fellow reformers take advantage of this opportunity? It starts with money. Considering that California’s retail political environment — including the high cost of television ads — Tuck and reformers need to raise plenty to beat back the millions that will be spent by Torlakson and his traditionalist allies. Eli Broad, whose eponymous foundation is the leading reform outfit in the Golden State, is already spending big on Tuck’s campaign as is entrepreneur Bill Bloomfield. But as evidenced by the fact that Tuck has raised just $558,326.60 so far, other reformers have barely chipped in their dimes. This is unacceptable. Given that money is the mother’s milk of politics, reformers can’t lament about not winning political support for their cause if they don’t put their dollars where their mouths are.

At the same time, reformers must build grassroots support — including appealing to immigrant households as well as Latino and black families in the state — in order for Tuck to win office.This is especially important because the state superintendent’s race has long been dominated by NEA and AFT affiliates, who have counted on strong turnout from their rank-and-file to get their way. School reformers should reach out to Parent Power activists and families of kids attending charter schools to remind them that another day of Torlakson in office means greater obstacles to expanding choice and giving them lead decision-making roles in schools they deserve. They should also launch registration drives that attract more people to voting.

Building support on the ground should also include concretely connecting California’s and the nation’s education crisis to the other statewide issues that are of concern to voters. Thanks to the efforts of former L.A. Mayor Villaraigosa and his predecessor, Richard Riordan, more citizens in the City of Angels are aware of how failing and mediocre schools weigh down on its economic and social fortunes. But voters in the rest of California — especially dual-income households without children as well as those concerned with other issues —don’t always see the connection between the Golden State’s abysmally high levels of functional illiteracy and the state’s struggles to compete economically against Florida and other states with strong focus on overhauling public education. The job is for Tuck and his fellow reformers to connect the proverbial dots, not for voters to do the work.

Finally, reformers need to both explain how systemic reform can help all children gain the knowledge they need for lifelong success (along with the communities in which they live), and at the same time, take aim at how Torlakson has done the bidding of traditionalists less-concerned about the futures of kids than with comforting themselves ideologically and financially. One one side, this means vividly detailing how expanding choice and bringing back accountability helps families provide their kids with high-quality teachers and comprehensive college-preparatory education. On the other, reminding voters that Torlakson stood by as legislators refused to pass legislation that would protect kids from criminally-abusive teachers such as notorious former Miramonte Elementary School instructor Mark Berndt is critical. NEA and AFT affiliates are already taking aim at Tuck; reformers must do the same to Torlakson.

Thanks to Tuck’s campaign, the school reform movement now has an opportunity to revive systemic reform in California, and help its children attain high-quality education. But it is up to reformers to take advantage of the moment.

Photo courtesy of the Los Angeles Times.

 

May 16, 2014 standard

Let’s say this much about California Gov. Jerry Brown’s plan to address the Golden State’s virtually-insolvent teachers’ defined-benefit pension: At least he has put a plan on the table. By proposing that an additional $5 billion annually will be poured into the California Teachers’ Retirement System by the 2020-2021 fiscal year — and that some of $2.4 billion in additional tax revenue it is collecting should go to that purpose — Brown is forcing the state to admit that it must address the biggest drag on its long-term fiscal prospects. Considering that his colleagues in the Democrat-controlled state legislature would rather spend more money on their pet programs, Brown is actually acting like the grown up Golden State taxpayers need at this time.

Yet Brown’s plan for addressing CalSTRS’ insolvency isn’t nearly as adequate as it should be. For one, Brown’s proposal to require the state, districts, and teachers to contribute an additional $450 million to the pension next fiscal year doesn’t even come close to the $5.5 billion Dropout Nation estimates will be needed to make it solvent in 17 years. [More on the timeline later.] Certainly it would be difficult for Brown to use all $2.4 billion in additional tax collections in order to help make that possible; after all, two-fifth of any additional revenue goes to school funding as a result of Prop. 98 , the three decades-old law governing education finance. There’s also the fact that districts (along with the National Education Association’s and American Federation of Teachers’ state affiliates the California Teachers’ Association and California Federation of Teachers), would balk at such immediate hikes. But in light of the Golden State’s penchant for fiscal fecklessness, Brown would be better off forcing everyone to pay the piper now than hope that legislators and districts (both of which have proven more than willing to do the bidding of the NEA and AFT) will go along with a gradual increase over the next seven years. If that means opposing any increases in spending on other programs — and ditching his own plan to revive the state’s senseless high-speed rail project — then in should be done.

Part of any revised plan would likely have to include the state and teachers paying even larger shares of contribution increases than Brown currently proposes. Under Brown’s plan, districts would pay 75 percent of the $450 million in new contributions (along with the nine percent that teachers are supposed to pay themselves, but in most cases, will actually be covered by the districts as part of collective bargaining agreements with NEA and AFT locals), while the Golden State contribute the rest; this is greater than the 38 percent districts currently contribute (along with the 39 percent that they pay on behalf of teachers). In light of the Golden State constitution’s provision barring the state from forcing local governments to bear unfunded mandates, Brown’s attempt to shift the bulk of contributions to districts is unlikely to survive any legal challenge. So Brown should figure out a way for the Golden State to cover at least 23 percent of any new contribution increases — which is equal to its current level of contributions to CalSTRS — as well as force legislators to pass a law mandating that veteran teachers actually contribute to the pension out of their own pay checks. Pushing the legislature to give CalSTRS the ability to increase contribution rates without seeking state permission, something that sister pension CalPERS can do now, would also make sense.

There’s also the fact that Brown is going along with CalSTRS’ push to address the insolvency over the next 30 years instead of in a shorter, more-sensible, 17 year period. This makes no sense. For one, given that CalSTRS will likely add 13,398 new annuitants (excluding deaths and other removals) to its rolls every year for at least the next decade before retirements slow down, and will have to pay out at least $611 million more in annuities every year, there’s no way that a 30-year payment plan can address those additional increases. Based on Dropout Nation‘s estimate, CalSTRS will end up paying out at least $6.1 billion in additional annuities (excluding reductions because of deaths and other removals) by 2021-2022 — and that’s not accounting for the usual cost-of-living increases. If Brown wants to address the insolvency in a meaningful way, he needs to have it done in the next 17 to 20 years.

Then there is the fact that Brown’s bases its assumptions on CalSTRS’ official numbers, which deliberately hide the true extent of its virtual insolvency. This is because CalSTRS assumes a 7.5 percent rate of return on its investments, which is far higher than the 5.2 percent five-year rate experienced in the market and the pension’s own actual five-year rate of return of 3.7 percent. [That CalSTRS also excludes all but a smattering of investment losses and gains through actuarial tricks such as smoothing is another reason why the officially-reported numbers aren't real.] Based on a more-realistic 5.5 percent rate of return, CalSTRS’ insolvency is likely $93.3 billion, or 27 percent higher than the $74 billion it officially reported in 2011-2012. The only way Brown and the state can get a real handle on CalSTRS’ pension underfunding is by getting the real numbers and basing any plan on that data.

But the biggest problem with Brown’s plan is that it doesn’t offer better options for younger teachers to save for their retirements. Defined-benefit pensions such as CalSTRS are of no use to most newly-hired teachers because half of them are likely to leave classrooms within five years, which means they are unlikely to fully vest in the pension and be able to collect any kind of annuity payment. Particularly for high-quality new teachers, whose attrition rates are likely even higher, both because of the lack of support they get from school leaders and districts as well as because of their own desires to utilize their talents beyond classroom instruction, CalSTRS ends up being a bum deal; the lack of reward (in the form of performance-based bonuses and other recognition) they receive for their good-to-great work is compounded by a shoddy retirement deal that only works well for laggards (who often remain in classrooms because they are not sent out of the profession).

Brown should have proposed a new retirement option for younger teachers so that they can reap the full rewards of their work. This would feature a defined-contribution account toward which teachers can contribute as much of their income to retirement as they see fit (with a five percent match from districts and the state), as well as a cash-balanced plan that guarantees an annual savings rate. Such a move, by the way, would also help CalSTRS (and ultimately, taxpayers) by reducing the number of new annuitants that will add to its insolvency.

Don’t expect Brown to take up any of these suggestions. After all, Brown’s fealty to the state’s NEA and AFT affiliates is well-established. But in light of the fact that Brown has offered a plan to address CalSTRS’ insolvency, perhaps he will do the right thing.

Photo courtesy of the Sacramento Bee.