When people talk about the nation’s insolvent teachers’ pension that make up a key part of traditional compensation, the Massachusetts State Teachers Retirement almost never comes to mind. But it should. With a reported pension deficit of $12 billion (as of 2011, the latest year available) — and a key reason why Massachusetts’ state government spend 50 cents for every dollar of teacher salary in 2010, a 25 percent increase over the amount spent in 2005 — MTRS is such a burden on the Bay State’s fiscal and educational fortunes that the state attempted to stem the long-term costs of it two years ago by restricting such practices as spiking (under which districts granted retiring teachers and school leaders double-digit wages in order to boost the annuity payments they received), and increasing the minimum retirement age from 55 to 60.

statelogoBut the Bay State and its governor, Deval Patrick — an aspirant to succeed Barack Obama as the Democratic Party’s standardbearer and U.S. President in 2016 —  still haven’t taken enough steps to address MTRS pension deficit, much less taken strong steps to overhaul how it pays teachers — especially high-quality teachers for who pensions (along with seniority- and degree-based pay scales) do little to fully reward and recognize their work. Such steps start with honestly admitting the extent to which MTRS is insolvent.

Even among the inflated rates of return for teachers’ pensions, MTRS is especially high given, assuming an 8.25 percent rate of growth for investments at a time when market performance on the Standards & Poor’s’ 500 is little more than half that. Because of such an inflated rate of return, MTRS hides what is likely the actual extent of its virtual insolvency. This, in turn, makes it harder for Patrick and the state legislature to get a full handle on the problems besetting it.

So Dropout Nation conducted its own analysis based on a formula developed by Moody’s Investors Service. Assuming a more-realistic rate of return of 5.5 percent — or 2.75 percent lower than MTRS’ assumed rate — the pension’s likely deficit is $16.1 billion, or 36.6 percent higher than it officially reports. None of this, by the way, includes the $1.2 billion in unrealized losses still on MTRS’ books, which would increase the reported pension deficit to $13 billion Based on a 17-year amortization schedule, Massachusetts (and ultimately, taxpayers) will have to pay an additional $946 million annually to get rid of the underfunding; that’s double the $831 million the state paid into the pension in 2011, according to the state’s annual valuation report. If Bay State districts used a slightly more-lenient 20 year amortization schedule — the one Moody’s now uses in its analysis since it was finally revised this month — they would still have to pay an additional $804 million, or almost double what was actually paid in 2011.

What if the unrealized losses were included? Based on DN‘s analysis, MTRS’ pension deficit would be $17.8 billion, or 36.6 percent higher than it officially reports. Based on a 17 year amortization schedule, districts in the Bay State would have to pay an additional $1 billion a year just to eliminate the pension deficit, and would have to pay a slightly lower $887 million in additional payment each year if a 20-year pay down schedule was chosen. No matter what, MTRS actual financial picture is worse than it publicly reports. And for the state, the troubles are just beginning; after all, it also bears a share of Boston’s costs for providing pension annuities to its teachers, and that burden is also understated. [The good news at the state level is that it doesn’t bear the full share of healthcare costs; but for districts such as Springfield, which picks up 75 percent of the tab for both teachers and their dependents according to the National Council on Teacher Quality, there will also be a reckoning, especially with unfunded retired teacher healthcare costs being a long-term problem.]

The true level of pension underfunding won’t be the only issue weighing heavily on Massachusetts as well as on other states. Last year, the Government Accounting Standards Board issued new guidelines requiring states, school districts, and other local governments to fully report the extent of their long-term pension woes. Under GASB 68, districts and states will have to break out all the increases and decreases in pension liabilities over an 11 year period; this will include investment losses, increases in benefits given to teachers as part of the deals struck by states, districts and affiliates of the National Education Association and the American Federation of Teachers (which have made teaching the most-comfortable of all public-sector professions), and borrowings to pay down pension deficits. Such revelations, which will finally be completed by next year, will force Massachusetts to deal seriously with its pension insolvencies.


But Massachusetts isn’t the only state understating its teachers’ pension woes. There’s also the even more-woeful teachers’ pension in Illinois, the Teachers Retirement System, which has become notorious for being one of being among the nation’s biggest busts. The 31 percent increase in its officially-reported pension deficit between its 2010 and 2012 fiscal years (on top of a 93 percent increase in the insolvency between 2002 and 2010) has contributed to S&P cutting the state’s debt rating to A-, a level lower than that given by the rating service to the more-woeful California. Yet for much of this year, state legislators and Gov. Pat Quinn have been sparring among themselves over how to address this and the Prairie State’s other pension insolvencies. One plan, already passed in the lower house, would only cut all of the state’s insolvencies by $100 billion over 30 years (including a supposed $20 billion reduction in the first year), while the senate passed its own version; legislators then went on vacation, causing the Chicago Tribune to hope that they will have “vacationed at leafy resorts, collected your thoughts, planned for Illinois’ future — and read pension legislation, poolside” by the time they return. Gov. Quinn has decided to not put his signature on legislation allowing for online gambling (as well as the expansion of traditional casinos) until both houses offer a pension reform plan he considers worthy of his pen. Meanwhile the NEA’s and AFT’s’ Prairie State affiliates, along with other public-sector unions, are already doing their best to scuttle any pension fix that will lead to a decline in their influence.

But the question that Quinn and legislators (including House Speaker Michael Madigan and Senate President John Cullerton) should be asking is whether the pension plans are based on solid, realistic numbers. This is especially true for the teachers’ pension. It officially reported a deficit of $52 billion for 2012, according to its annual financial report. But that number only includes the recognition of 20 percent of its $3 billion in investment losses during 2012. This means that $2.3 billion in losses for which the pension does not account. If those losses were added to the tally, the reported deficit would increase to $54.4 billion. When one considers that the Illinois pension assumes a rate of return of eight percent, which is nearly eight times higher than the eight-tenths of one percent return (net of fees) that it actually experienced in 2012, one can imagine how that the Prairie State’s teacher pension insolvency is even greater than it reports.

Based on Dropout Nation‘s analysis, which assumes a more-realistic 5.5 percent rate of return, Illinois’ teachers’ pension deficit is more likely to be at least $71 billion, or 36 percent more than it officially reports. Based on an amortization rate of 17 years, Illinois taxpayers would have to pay an additional $4.2 billion a year to cover the shortfall, more than double the $2.6 billion paid now by the state and local districts. Even if the amortization was extended to 20 years, Prairie State taxpayers would still have to make $3.5 billion in additional payments each year just to eliminate the insolvency.

But that calculation doesn’t include the unrealized losses. Add in the unrealized losses, and the total insolvency for the Illinois pension is $74 billion. Prairie State taxpayers would have to shell out $4.4 billion a year in additional payments over 17 years just to cover the deficit. [Under a 20-year amortization schedule, the annual additional payments would be $3.7 billion.] Taxpayers living in Chicago, who must also face $11 billion in teachers’ pension deficits for the Second City, won’t likely be too thrilled about bearing the burden for two insolvencies.

Of course, Quinn and state legislators aren’t factoring these larger numbers into either the upcoming state budget or into proposed pension relief plans. But they should be because those numbers are more accurate and honest about the state’s fiscal morass. Requiring Illinois TRS, along with the Prairie State’s other pensions, to revamp its financial reporting to offer more-realistic numbers, would be the place to start. Once that happens, Quinn and the legislator can address other issues related to the pension — including the fact that teachers contribute just 27 percent of the $3.5 billion contributed annually to the pension. Requiring teachers to pay more, along with developing a defined-contribution plan with the state guaranteeing a rate of contribution, would be a key step. Making the pension less generous (the average Illinois teacher will get an annuity equal to 75 percent of the average salary earned during the last four years of service), ending cost of living payments (which has allowed an Illinois teacher who retired in 1995 see her annuity payments increase from $65,000 to more than $100,000 a year in 2012), and ending the practice of allowing teachers to trade in as much as two full school years’ worth of sick days in order to boost payouts, would also make sense. But again, Illinois needs to deal realistically with the true extent of Illinois TRS’ insolvency.

The direct pension deficit for Illinois TRS itself will only be part of the problem. Because GASB’s new rules end the practice of allowing districts and states to report proceeds from pension obligation bonds floated for paying off insolvencies as assets — and forces them to report them as liabilities, as they should be because those dollars have to be paid back to bondholders — Illinois will finally have to be honest about the true cost of the $10 billion in bonds it floated a decade ago address all of its pension woes. Taxpayers have already paid $4.1 billion in interest and principal payments in the nine years since the bonds were issued, and will pay another $17.2 billion by the time the bonds should be paid off in 2033, according to data from the Illinois Policy Institute. Two more pension bond floats in 2010 and 2011 added another $7.1 billion (not including interest and other payments over time) to that tally.

As Everett Dirksen would say, $16 billion here, $74 billion there, and suddenly, teachers’ pension deficits are costing taxpayers, high-quality teachers — and ultimately, children — dearly. And it doesn’t matter whether you are in Amherst or Peoria. It’s time for pensions in Massachusetts, Illinois and other states to provide realistic numbers on the extent of their fiscal woes.