Even with fractious battles over implementing Common Core reading and math standards or expanding school choice, the biggest battle of all in the war over reforming American public education lies over traditional teacher compensation deals struck by states, districts and affiliates of the National Education Association and American Federation of Teachers. Defined-benefit pensions, in particular, are becoming too costly for states and districts to maintain, especially as they must deal with increasing Medicaid costs driven by the passage of the Affordable Care Act, and other structural deficits resulting from similar deals with other public-sector unions. The high costs of these pensions, along with the longstanding , evidence that pensions are ineffective in attracting and rewarding high-quality teachers for their work, and data showing that they do little to spur improvements in student achievement, have led to alliances of sorts between cost-cutting governors and reformers. And thanks to efforts over the past year by Moody’s Investors Service and the Government Accounting Standards Board, states and districts are now being forced to fully reveal the extent of pension insolvencies.
But the next steps in overhauling traditional teacher compensation will come in the next year in the aftermath of a ruling in the nation’s largest municipal bankruptcy and efforts in California to overhaul pensions. These moves may prove to play even bigger roles in advancing systemic reform than efforts on the standards and accountability front.
The most-recent shock came last week when U.S. Bankruptcy Court for Eastern District of Michigan Judge Stephen Rhodes ruled last week that Detroit’s city government can proceed with its Chapter 9 bankruptcy filing, it did more than just allow for the largest municipal bankruptcy in American history. Because Judge Rhodes ruled that Motown’s defined-benefit pensions were little more than contractual obligations guaranteed under the Wolverine State’s constitution — and not an absolute constitutional right that cannot be modified in any way — municipalities can use bankruptcy as a strategic tool for reducing its pension deficits and unfunded retiree healthcare costs. The ruling effectively now allows Detroit’s emergency financial manager, Kevyn Orr, to cut the contributions it owes to the pensions from $3.5 billion to $583 million, or a mere 16 cents for every dollar owed. The deal, which is opposed by both the boards operating the pensions and affiliates of public-sector unions such as the American Federation of State County and Municipal Employees, could end up becoming a reality if Orr moves to seize operational control of the pensions in the next few weeks.
Thanks to Judge Rhodes’ ruling, other virtually-insolvent municipalities, like their counterparts in the private sector, can use bankruptcy strategically to significantly restructure their pension and other compensation deals with union affiliates and the rank-and-file workers they represent. Particularly for busted school districts, especially those with pensions that are controlled at the local level instead of being state-operated, the bankruptcy may prove to be useful in restructuring their balance sheets.
One can expect Detroit Public Schools, which like the main city government, is under state receivership, to head into bankruptcy within the next year just to deal with its pension woes. After all, the district is on the hook for part of the Michigan Public School Employees Retirement System’s official pension deficit of $22.4 billion (and more like $30.4 billion, or 36 percent more than officially reported, according to a Dropout Nation analysis of the pension using a calculation developed by Moody’s) as well as $26 billion in unfunded retired teacher healthcare liabilities. If Michigan adopted more-realistic accounting for the teachers’ pension than it does now, Detroit Public Schools would have to pay $138 million, or 35.6 percent more than it contributed to the pension in 2011-2012, the latest year reported, just to make up its share of the underfunding. One can also expect other districts, including Chicago — which is faces an officially-reported pension shortfall of $8 billion (and, more likely, $11 billion based on DN‘s analysis) to talk about the possibility of bankruptcy in order to force reductions in pension contributions as well as move more teachers into less-costly defined-contribution plans.
But the Detroit bankruptcy ruling isn’t the only shock with long-term implications for efforts to ditch pensions and overhaul traditional teacher compensation. Last year, voters in the Silicon Valley hub of San Jose surprised the Golden State when they approved Measure B, which now requires city employees to contribute more to their pensions (which are managed under the umbrella of CALPERS) and pay more for their retiree health plans, as well as eliminated lucrative annuity bonus payments. The measure, crafted by the city’s mayor, Chuck Reed, in response to a three-fold increase in pension liabilities within the past decade (from $72 million to $271 million), will allow taxpayers to save $32 million a year in payments that were no longer sustainable. More importantly, the success of the San Jose measure, along with a pension reform effort approved by voters in San Diego, has led Reed and other pension reform advocates across California to put a pension overhaul plan on next year’s ballot. If passed next year over the objections of public sector unions, the Pension Reform Act of 2014 would amend the state constitution by allowing municipalities to modify annuity benefits and undertake other actions that would lead to full funding of the pensions within 15 years.
The Pension Reform Act would have particular impact on traditional districts, which must deal with their unfunded retired teacher healthcare costs and, along with the state government, must address the virtual insolvency of the California State Teachers Retirement System. [The pension has already announced its opposition to the initiative.] If passed, districts would have to immediately develop plans to fully fund their healthcare costs within 15 years; this would likely mean requiring retired teachers and others to pay at least 20 percent of their healthcare costs (as opposed to the nearly-free deals many of them get now), as well as cutting bak on coverage. The state government would finally be forced to deal with CalSTRS’ officially-reported pension deficit of $64 billion for 2012 (and more-likely to be $87 billion based on Dropout Nation‘s analysis). Given that Golden State Gov. Jerry Brown, Supt. Tom Torlakson and others have already used their political capital to get voters to approve $50 billion in new taxes to finance education as part of the passage of Prop. 39 last year, it is unlikely that they will want to go back to the well for more. So the state and districts will end up drastically reducing annuities, especially for Baby Boomers who are just a few years away from retirement.
Even if the Pension Reform Act doen’t pass, the success of San Jose and San Diego in passing pension reform referendums only encourages districts and other municipalities to undertake similar measures. Cities such as Vallejo and San Bernardino are already in bankruptcy court; districts with equally busted balance sheets such as Los Angeles Unified (which faces $4 billion in unfunded retiree healthcare costs along with its share of CalSTRS’ shortfall) could end up filing for bankruptcy as well. The strains of the increasing costs, especially with no rescue from the federal government in the near-future, offers more incentive to reduce retirement liabilities than the desire for peace with NEA and AFT locals. Expect school reformers and pension reform advocates in other states to undertake similar efforts in the coming years. In fact, combining pension reform measures with other teacher quality reform efforts (including
None of this bodes well for NEA and AFT affiliates for the long haul. After all, they derive their influence and their revenue (through forced dues payments) from the bargains they struck decades ago with rank-and-file teachers to ensure that teaching is the most-lucrative public sector profession. Ensuring the existence of defined-benefit pensions as part of traditional teacher compensation packages, and making sure the annuities are generous, are two parts of that arrangement. But with states and districts no longer able to pay annuities at those levels (as well as less willing to offer across-the-board salary increases as they did when cash was flush), NEA and AFT affiliates increasingly find themselves unable to meet their end of the bargain. More-radical traditionalists, most of which are Baby Boomers, are already dismayed with teachers’ union affiliates over their inability to beat back the expansion of school choice and the implementation of teacher quality reforms such as replacing subjective observation-based teacher evaluations with performance measurement systems based on objective student test score growth data. They will be even angrier with NEA and AFT leaders when it turns out that they can’t force states and districts to honor their pension promises.
For these problems, NEA and AFT affiliates will have only themselves to blame. For the past three decades, both in their negotiating roles at the bargaining table and through their control of seats on pension boards, NEA and AFT affiliates have allowed districts and states promise generous benefits without fully funding them. The unions also allowed pensions and states to exacerbate matters by using inflated inflated rates of returns on their investments (often around eight percent, even as actual rates of return of stocks on the Standard & Poor’s 500 index was only around four percent during the last decade) that have also hidden the true levels of insolvencies. And by agreeing to modest pension fixes that did little to address insolvencies while shortchanging younger teachers in the rank-and-file by providing less-generous payouts than Baby Boomers in classrooms, NEA and AFT affiliates have effectively betrayed the myth of solidarity that they use in defending traditional compensation practices that also don’t favor younger teachers.
With pensions and other aspects of traditional teacher compensation no longer sustainable, NEA and AFT affiliates will find their influence further weakened — and their existential crises continue unabated. The old-school industrial model they defend never worked for the teaching profession in the first place. But it could at least be hidden by the promise of generous pension payouts. No longer. For reformers, the need to address pension insolvencies offer new opportunities to advance systemic reforms that help teachers, taxpayers, and ultimately, children.