Category: At the State Level

How Money is Spent Matters

Who knows what Virginia State Sen. Chap Petersen was expecting when he attended a Back to School night for his four kids at a Fairfax County school? But what he…

Who knows what Virginia State Sen. Chap Petersen was expecting when he attended a Back to School night for his four kids at a Fairfax County school? But what he saw pleased him not one bit. The Democrat’s complaint brings up one of the most-fractious issues in discussions around the direction of American public education: Do schools get enough money to help kids succeed?

geniuslogoOn Facebook, Petersen expressed dismay that Fairfax County school leaders deemed it appropriate to force families to watch a five-minute video asking them to lobby state legislators for additional funding. While sympathetic to the district’s call, Petersen declared that “forcing a captive audience of parents to watch a five-minute political commercial before meeting their kid’s teacher is not the answer.” That the “video’s facts were highly selective” – including leaving out news that Fairfax County gained large increases in state funding as well as gave school leaders 60 percent pay raises – also bristled the state legislator.

But there’s a reason why Fairfax County played that video: Because it works. Twice as many upper-income Americans as lower-income Americans tell pollsters that “lack of financial support” is the biggest problem facing schools (28 percent vs. 14 percent). Because affluent families have influence in American politics, teachers’ unions and school districts use their considerable resources to win their support. As Dropout Nation noted last year, National Education Association and American Federation of Teachers spend $700 million annually to shape education discussions.

But as Petersen points out, there’s far more to the story than the claims that public education systems are underfunded. Can America’s traditional public schools use resources more-effectively? Absolutely. Can more resources help schools improve the odds for our children? The answer to question number two is more-qualified than the first. Which is why Sen. Petersen had more than a few reasons to look askance at the video he was shown that night.

The best, though, imperfect way, to understand how well America is spending money on education is look at how much other nations – most-notably highly-touted Finland and South Korea — spend on their schools.

There are numerous differences between those two systems, from class size (smaller in Finland, bigger in South Korea), to levels of school choice (more in Finland, less in South Korea), to testing (recently less in Finland after decades of central testing; continued heavy testing in South Korea), to the role of unions in education policy and practice (collaborative in Finland, adversarial in South Korea).

What they have in common, however, is that they spend less than the United States. Finland’s per-pupil spending of $10,905 in 2011 is lower than the $15,345 spent by the United States; South Korea’s $8,382 per-pupil is 83 percent lower. Based on comparisons with those two countries alone, it becomes clear that money isn’t the main problem in American public education.

But traditionalists tend to dismiss those facts – and the results achieved by both countries – by pointing to the fact that America has different prevailing conditions – from levels of poverty to the legacy of slavery and immigration – than Finland and South Korea. But that argument falls apart when you look at the performance of the nation’s public charter schools.

Earlier this year, Stanford University’s Center for Research on Education Outcomes (CREDO) released an extensive study based on six years of data on the performance of charters in 41 urban communities. From that data, CREDO concluded that “urban charter schools in the aggregate provide significantly higher levels of annual growth in both math and reading” than traditional public schools – results that translate to “roughly 40 days of additional learning per year in math and 28 additional days of learning per year in reading.”

Two top-performing countries, South Korea and Finland, spend far less than America on their public education systems.

Two top-performing countries, South Korea and Finland, spend far less than America on their public education systems.

The study also concluded, “gains for charter school students are larger by significant amounts for Black, Hispanic, low-income, and special education students in both math and reading. … Gains for these subpopulations amount to months of additional learning per year.” Further, the study showed that the charter sector is steadily improving, with significantly larger gains at the end of the time period studied than at the beginning.

These results, by the way, come even though charters spend $1,800 per-pupil less than traditional public schools.

Traditionalists claim that charters succeed by taking the best students or pushing out the worst students. Research since 2009 has empirically rejected these claims. But the most decisive repudiation emerged recently from analysis of the charter sector in New Orleans.

Since the city of New Orleans moved to a charter system, Tulane scholar Doug Harris was able to assess the impact of a system-wide move to charter schools by comparing post-Katrina performance in New Orleans to that of nearby Baton Rouge (which also suffered terrible hurricane damage but did not switch to an all-charter model). Harris wrote of the New Orleans result that “on average student outcomes is quite positive by just about any measure. … We are not aware of any other districts that have made such large improvements in such a short time. The effects are also large compared with other completely different strategies for school improvement, such as class-size reduction and intensive preschool.”

The evidence shows that other nations provide high-quality education to their children while spending significantly less money than spent in America – and that charter schools, with little in the way of bureaucracies that typify traditional districts, deliver significantly better results than their counterparts. We even know from the New Orleans experience that charter schools can improve student achievement across an entire system, at more significant levels than expensive interventions such as class size reduction and universal preschool.

But does that mean American public education doesn’t need more money? That is a different question entirely.

In 1966, President Lyndon Johnson commissioned Professor James Coleman to conduct research as to how much school funding mattered to student achievement. To Coleman’s shock and that of many other liberals, the answer that emerged was “very little if any.”

Over the following five decades, scholars pressure-tested those assumptions in the context of rapidly rising school budgets. As Stanford’s Eric Hanushek concluded in 1989, “Two decades of research into educational production functions have produced startlingly consistent results: Variations in school expenditures are not systematically related to variations in student performance.”

How is this counter-intuitive result possible? Don’t kids in rich areas do better? Isn’t it because of all the fancy buildings they have? Well, no. Kids in rich areas have lots of advantages in life. Those advantages, not school funding, make most of the difference for those children.

Virginia State Sen. Chap Petersen, D-Fairfax, gestures during debate on the budget conferees report at the Capitol in Richmond, Va., Tuesday, April 17, 2012. (AP Photo/Steve Helber)

Parents and politicians such as Virginia State Sen. Chap Petersen are right to be skeptical about claims that American public education needs more money.

But this doesn’t mean that money can’t help. Neither Coleman nor Hanushek have ever said that money never matters. In fact, within the last decade, research shows that money spent properly can be helpful in improving achievement.

Three years ago, the American Federation of Teachers’ Albert Shanker Institute released a study by Rutgers University Professor Bruce Baker that concluded that money can help children and that they can’t be helped without it. Baker reanalyzed the same sources that Hanushek used, but dismissed some as methodologically flawed, while choosing to emphasize others.

Earlier this year, however, a team led by Northwestern University Professor Kirabo Jackson reached similar conclusions in a study that ran in Education Next. Isolating the effects of additional funding resulting from court rulings in school funding torts, Jackson and his team realized that the dollars served as an exogenous shock that could be isolated from the advantages wealthier students already had. They analyzed concluded that in this specific case, additional resources helped improve results for low-income students.

A careful review of both reports, however, reveals three important caveats. First, “can” is not the same as “will” or “must.” As Coleman and Hanushek observed, money is usually spent in ways that don’t make a significant difference for children. Fancy offices for central headquarters or gold-plated and retroactive pension increases do little for current students. As Hanushek notes, Jackson’s team based their conclusions on student achievement results from 1970 to 2010, during which time real per-student spending increased by 150 percent. While results for students have improved during that time, the improvements have been very small compared with the spending increases, and the improvements have been mostly concentrated in places that have adopted aggressive non-spending reforms.

Secondly, what can be done at scale with more money is often much less than what can be done better with existing funds. While any effort at precision will lead to a false sense of certainty, the scale of the difference is clear. For example, the CREDO report showed that urban charter students obtained the equivalent of 40 extra days of math instruction, which would add up to 480 days — or more than 2.6 school years — over the course of 12 years. By comparison, Jackson concludes that a 10 percent increase in funding would result in .44 years of extra schooling for poor children. A zero-cost investment, therefore, would deliver about six times the impact of the $60 billion additional national investment that Jackson’s team suggests.

Finally, even Baker and Jackson concede that what matters most is how money is spent. As seen in school funding torts, traditional district bureaucracies don’t immediately capture court-ordered increases in funding. New money goes first to instructional and support services, at higher levels than traditional budgets. But ultimately, bureaucracies find ways to absorb the money, a fact that my colleague Sandy Kress will discuss in tomorrow’s commentary. This provides further weight to the argument of school reformers that new money should be allocated to what works – especially via the mechanism of Parent Power and School Choice to make sure the money stays focused on kids. [Ulrich Boser of the Center for American Progress, by the way, hints to this in his studies of school spending.]

Petersen has good reason to be skeptical – and so should we. America’s schools are not underfunded. There’s nothing wrong with using new money to help all children succeed. But we can do much, much more with the dollars we have, and do it in ways that are focused on kids.

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De Blasio’s $33 Billion Teachers Pension Woe

New York City Mayor Bill de Blasio hasn’t had a good year so far. State Senate Republicans, angered over his effort with the American Federation of Teachers’ Empire State affiliate…

New York City Mayor Bill de Blasio hasn’t had a good year so far. State Senate Republicans, angered over his effort with the American Federation of Teachers’ Empire State affiliate last year to end their control over that legislative body, weakened his control over the Big Apple’s traditional district by extending mayoral control for just another year. De Blasio’s arch-rival for supremacy as the Empire State’s most-powerful politician, Gov. Andrew Cuomo, steamrolled over him during the legislative session, convincing legislators to increase the number of public charter schools that can open, and allowing the Board of Regents to take over 62 of the district’s failure mills if their performance doesn’t improve within a year. Cuomo also made sure to remind De Blasio who was boss last month when he declared that the mayor must prove that he deserves to keep control over the city’s traditional district.

wpid-threethoughslogoDe Blasio’s successful tag-team with public-sector unions and Big Apple political bosses to put Carl Heastie in control of the state assembly didn’t work out as expected: Heastie, who succeeded the notorious Sheldon Silver as Assembly Speaker in February after his indictment on corruption charges, largely gave in to Cuomo’s demands and those of his Senate Republican colleagues. Meanwhile mayor’s unnecessary alliance with the American Federation of Teachers’ Big Apple local, the United Federation of Teachers, has also not proven to be of much value; the local, along with the AFT’s state affiliate, New York State United Teachers, lost big in Albany as Cuomo and school reformers succeeded in enacting another teacher evaluation regime.

But none of those current problems facing De Blasio are as big as the long-term fiscal woe facing him and Big Apple taxpayers: The city’s virtually-busted teachers and school employee pensions. As a Dropout Nation analysis reveals, the pension shortfalls for the Teachers Retirement System and the Board of Education Retirement System continue to increase unabated.

Start with TRS, the larger of the two pensions. It officially reports a shortfall of $25.8 billion (as of 2012-2013, the latest year available), a 3.4 percent increase over the underfunding in the previous fiscal year. But as readers already know, the official numbers do not reflect reality. For one, this doesn’t include $5 billion in unrealied gains that have been left out as part of “smoothing” efforts by the city to avoid dealing with the shocks that come with the volatility of financial markets. If those gains were calculated, TRS’ unfunded liability would be a just slightly more manageable $20.7 billion. Such accounting tricks can either make pensions more-solvent — or in the case of TRS, less-solvent — than they really are, making it difficult for policymakers to make smart fiscal decisions.

The bigger problem lies with the fact that TRS assumes an investment rate of return of seven percent. That’s higher than the six percent median rate of return Wilshire Associates expects over the next decade. In fact, TRS’ rate of return for 2014-2015 so far is just 4.46 percent, or more than two percentage points below the assumed rate, according to data from the New York City Comptroller. As a result of this inflated rate of return, TRS (and ultimately, the Big Apple) understates what is likely the true level of insolvency that taxpayers will ultimately have to bear.

To figure out TRS’ true 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 on investments. [Moody’s bases its rate of return on the performance of a bond index, which can range between four and six percent.] Based on the formula, using just TRS’ officially-reported number, Dropout Nation concludes that the pension is underfunded to the tune of $30.9 billion. This is 20 percent more than it officially reports. If the shortfall had to be made up (or amortized) over the next 17 years, Big Apple taxpayers and teachers would have to contribute an additional $1.8 billion a year, or 59 percent more than the $3.1 billion paid into the pension in 2012-2013.

That number, of course, doesn’t include the unrealized gains. Account for those and Dropout Nation estimates that TRS’ insolvency is $25 billion, 20 percent more than the unfunded liability adjusted for unrealized gains. Based on a 17-year amortization schedule, taxpayers and teachers would have to pay an additional $1.5 billion a year, or 48 percent more than contributed to the pension in 2012-2013.

But there’s another catch: Because of the actuarial tricks used by TRS, the pensions assets can be overstated or understated compared to market value. As Dropout Nation noted in its analysis last year, TRS overstated the actuarial value of its assets by $1.1 billion in 2011-2012. This time around, the pension understated the value of its assets on an actuarial basis by $1.7 billion; on a market value basis, the assets are worth $36.9 billion. Subtract that number from the $61 billion in annuity payments owed to Big Apple teachers, TRS’ insolvency would stand at $24 billion. Over a 17-year period, taxpayers and teachers would have to contribute an additional $1.4 billion to TRS, or 46 percent more than what was paid into the pension in 2012-2013.

But TRS’ virtual insolvency isn’t the only pension woe weighing on New York City’s finances. There’s also the Board of Education pension, which is also busted.

Board of Education officially reports a shortfall of $1.6 billion for 2012-2013, an 11.6 percent increase over the previous year. But like TRS, Board of Education’s numbers don’t reflect reality because it also assumes an investment rate of return of seven percent. The pension is only earning 4.86 percent so far into 2014-2015, according to the City Comptroller. Based on the Moody’s formula, which uses a more-realistic 5.5 percent rate of return, Dropout Nation concludes that Board of Education is actually underfunded to the tune of $1.9 billion, or 20 percent more than officially reported. If the shortfall had to be amortized over 17 years, taxpayers and school employees would have to pay an additional $110 million a year into the pension, 47 percent more than the $235 million paid in 2012-2013.

Altogether, the Big Apple must pay down as much as $33 billion in shortfalls for the two school pensions. This, of course, doesn’t include the virtual insolvencies of the city’s pensions for cops, firefighters, and other city workers. How big a drain is that on the city and its traditional district? The two pensions account for 38 percent of the $85 billion in total pension insolvencies facing New York City, according to a Dropout Nation analysis of the municipality’s pension shortfalls, a difficult burden for taxpayers to bear.

The additional $1.9 billion that the New York City would have to pay to bring TRS and Board of Education to solvency over 17 years would have forced the city’s traditional district to devote 27.3 percent of its budget to pensions and debt service on capital projects in 2012-2013, versus the 19.3 percent that those costs actually took up. More than likely, the city would have either had to increase taxes, shut down schools, or reduce the number of guidance counselors and so-called classified staff (including janitors and other employees).

For De Blasio and for New York City taxpayers, matters on the pension front aren’t going to improve anytime soon. The most-recent bull market has helped TRS and Board of Education (along with other state and local teachers’ pensions) avoid even-faster increases in unfunded liabilities. But the financial meltdown in China — whose economy accounts for as much as a fifth of revenues for many companies — is now leading to declines in stock market prices. This bodes ill for TRS and Board of Education, because stocks make up the bulk of their investment portfolios. Because of actuarial smoothing techniques, the likely losses will be hidden on an actuarial basis for at least the next five years, resulting in both appearing in better financial condition than they actually are.

Certainly De Blasio isn’t responsible for much of the mess. The blame can be laid at the feet of predecessor Michael Bloomberg, who struck more-than-generous pension and salary deals with UFT and other school worker union in order to gain support for his otherwise-laudable reform efforts. New York City teachers contribute a mere five cents of every dollar put into TRS, while other school employees pitch in a slightly-higher 17 cents for each dollar contributed to Board of Education. Thanks to Bloomberg’s fecklessness, TRS’ liabilities increased by 84 percent between 2004 and 2013, even as the actuarial value of its assets increased by a mere 6.1 percent; Board of Education’s liabilities increased by a two-fold in that same period while assets increased by just 31 percent. As in the case of other busted teachers’ and school employee pensions, the bet was that stock market gains would cover boosts in pension payouts. It didn’t panned out.

But De Blasio hasn’t exactly helped matters during his two years in office. The contract De Blasio struck last year with the United Federation of Teachers, which increases salaries by 18 percent, didn’t require teachers to contribute more toward their retirements. That the deal included an eight percent salary increase to those teachers who retired from the city’s employ by the end of June 2014 — which led to 777 more teachers retiring last year than the previous period — adds to the city’s pension woes; after all, annuity payouts are based on the salary a teacher earns in the last year before retirement. Given De Blasio’s cold war with Cuomo and Senate Republicans, he can expect no help in the form of a pension bailout.

At this point, De Blasio may only have two years left on a tenure that was never all that promising in the first place. He just as well go ahead and address New York City’s pension woes while he has time.

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Andrew Cuomo’s Victory for Kids

Certainly your editor is a tad skeptical about New York Gov. Andrew Cuomo’s successful effort this week to convince legislators to pass a reform package that includes the overhaul the…

Certainly your editor is a tad skeptical about New York Gov. Andrew Cuomo’s successful effort this week to convince legislators to pass a reform package that includes the overhaul the state’s teacher evaluation regime. At the same time, Cuomo deserves credit for making key steps that can help all Empire State children.

statelogoWhy the skepticism? Start with the statement by Meryl Tisch, who heads the Empire State’s Board of Regents, that high-performing schools could be exempted from the new evaluation system is none too pleasing because it essentially allows teachers working in those classrooms off the hook for their performance. Given that even top-performing schools have laggards working within them, and that the quality of education varies between classrooms than between schools, exempting one group of teachers from performance management means denying school leaders, families, researchers, and even teachers the data they need to help all children succeed.

The fact that the state doesn’t ensure that state test score growth data accounts for 50 percent of the new evaluations leaves too much room for mischief (and watering down of performance management) to take place. The American Federation of Teachers’ Big Apple and Empire State affiliates, knowing that Tisch and her fellow Regents are up for reappointment over the next two years, can simply lean on Assembly Speaker Carl Heastie to oppose their continued rolls on the body, leading them to allow test score growth data to account for as little as a quarter of the overall evaluation. This, in turn, will make subjective observations count for a greater portion of the performance review, essentially making the evaluations as inaccurate as they are now.

Given that a decade of evidence (including the Measures of Effective Teaching studies conducted by the Bill & Melinda Gates Foundation) shows that observations are absolutely ineffective in measuring how teachers improve student achievement — the unobservable aspect of teacher performance that is the most-important for our children’s lifelong success — the lack of a specified percentage makes almost no sense at all. Gov. Cuomo will have to put pressure on Tisch and her fellow Regents to ensure that test score growth data takes up 50 percent of the overall evaluation.

[Your editor knows that some reformers, most-notably Educators4Excellence and Michael Petrilli of the Thomas B. Fordham Institute, think that test score growth data shouldn’t account for half of an evaluation. But they are arguing against evidence, including studies by Thomas Kane (who also oversaw Gates Foundation’s MET initiative) and are incorrect in their respective stances. That’s all.]

Then there’s the fact that Cuomo dropped his demands for expanding charter schools and passing a tax credit scholarship initiative as conditions for signing the state budget in order to get the package — which includes a school takeover plan and an effort to improve the state’s ed schools — passed by the legislature. After all, by doing so, the governor loses critical leverage in expanding school choice. Yet your editor isn’t as concerned as charter school advocates about this move because Cuomo still has leverage it the form of New York City Mayor Bill de Blasio’s effort to renew mayoral control of the Big Apple’s traditional district.

Because de Blasio played a key role in helping Heastie succeed the disgraced Sheldon Silver as assembly speaker, de Blasio will work hard with him to renew mayoral control. The fact that de Blasio must also make amends with the state senate’s Republican majority, which is still perturbed over the mayor’s effort last year to help Democrats take control over the upper house is also a factor. If expanding charters and passing tax credits (the latter of which is a key priority of State Senate Majority Leader Dean Skelos) are the conditions for winning renewal of mayoral control, then de Blasio will probably support it. Cuomo knows this and will likely get his way in the end.

As I said, your editor reserves some skepticism about the reform package. Yet at the same time, that Cuomo has managed to get the legislature to go his way is good news for children and families in the state.

The fact that the new evaluation system will only use score growth data from the Empire State’s battery of standardized tests is a strong blow for high-quality data on teacher performance. No longer will data from district-developed assessments of lower quality (including formative tests from Northwest Evaluation Association — which aren’t aligned to Common Core’s reading and math standards, and those written up by teachers lacking the knowledge to develop high-quality tests) be included in evaluations. The current evaluation regime’s use of locally-developed tests for 20 percent of evaluation is likely one reason (along with the low percentage of state test data used in the reviews) why nearly all of the Empire State’s teachers were ranked as meeting or exceeding expectations, which is laughable given the low levels of student achievement.


UFT President Michael Mulgrew (right) and NYSUT boss Karen Magee (far right) suffered another big defeat.

If the state education department and the Board of Regents do their jobs properly on this front and require state test data to be used for half of evaluations, this will lead to more-accurate (and fair) data on teacher performance that is useful to everyone. Especially families, who under state law, can actually look at data on the teachers serving their children. This is also true with the new evaluation system’s requirement that observation from outsiders, along with those from school leaders, be included in the evaluation. As D.C. Public Schools has demonstrated through its successful IMPACT evaluation system, using skilled outside evaluators to observe teacher performance can be especially helpful for newly-hired teachers

The even bigger moves lie with two key aspects of Cuomo’s reform plan: Extending the time it takes for newly-hired teachers to attain near-lifetime employment through tenure from three years to four; and making it easier for districts to fire laggard teachers.

New York has long been one of 36 states in which newly-hired teachers gain near-lifetime employment within one-to-three years of entering classrooms. Given that it takes at least four years for teachers to prove their worth, granting such status so quickly makes it difficult for districts to weed out laggards (and even criminally-abusive teachers). By becoming the 12th state to grant near-lifetime employment after four-to-five years on the job, the Empire State is making it easier for districts to keep those who don’t belong in classrooms from gaining near-permanent jobs. Which will help end the role of tenure as protection for bad teachers and AFT locals living off their dues payments.

Just as importantly, by requiring newly-hired teachers to demonstrate that they are effective or highly effective for three years before attaining tenure, the state is also setting a high bar for attaining near-lifetime jobs in classrooms. By the way: This also puts the onus on districts to do a proper job in evaluating new hires — and gives reformers as well as families a tool for holding school leaders accountable for failure in personnel management.

An even bigger move lies in requiring districts to remove laggards after being rated ineffective for three consecutive years — and requiring those being fired to prove that the ratings are fraudulent in order to win an appeal. Currently, laggard Empire State teachers can appeal their dismissals without proving that the district engaged in an unfair firing. This change in the state’s tenure law, along with another rule allowing districts to remove laggards rated ineffective for two years in a row, also keeps school leaders from using excuses for failing to do proper work in providing all the children they serve with high-quality teachers.

By overhauling the teacher dismissal law, Cuomo and legislators finally made incompetence grounds for dismissal and allow districts to no longer waste precious time on trying to improve the performance of teachers who have long ago demonstrated they can’t hack it. This matters because under previous the state’s previous teacher dismissal law, there was almost no way for districts to remove laggards for low-quality teaching. Between 1997 and 2007, three out of every five New York City teachers found to be incompetent, abusive of children, or excessively absent still remained in classrooms, according to an analysis of the state’s teacher dismissal law by the American Enterprise Institute.

The inability to remove laggards and the criminally abusive in classrooms is one reason why the New York City Parents Union and Campbell Brown’s Partnership for Educational Justice launched their Vergara suit last year challenging the state’s tenure and dismissal laws. The suit is one reason why Cuomo pushed hard for the teacher quality reforms in the first place. His moves help address the issues raised by the suit, and, along with the tort, hasten even stronger reforms in the next few years.

The fact that Cuomo managed to get all these reforms passed by the legislature despite the opposition of the AFT’s United Federation of Teachers and New York State United Teachers is absolutely astounding. Certainly NYSUT has been significantly weakened over the past year, as an internal feud, along with political mistakes such as refusing to endorse Cuomo’s re-election bid and backing Democrats in their bid to take control of the state senate, earned it the ire of the governor and Republicans alike. In fact, NYSUT’s influence is in such decline that its president, Karen Magee, has been forced to lobby families to opt out of standardized tests in order to keep the data from being used in evaluations. This is just pure desperation.

But the fact that UFT, which once again has sway over New York City’s traditional district, couldn’t convince Heastie and other Big Apple legislators to shoot down Cuomo’s entire agenda is shocking. The AFT local, after all, has spent the past three months lobbying classrooms and organizing sham protests against Cuomo’s reform plans. For UFT President Michael Mulgrew, who is angling to succeed Randi Weingarten as national AFT president, the passage of the teacher quality reforms is defeat plain and simple. [AFT national also takes a beating this time around.] And this political loss will be magnified if Cuomo manages to get the charter school expansion plan passed.

The jury is still out on Cuomo’s evaluation reform. Whether Cuomo will succeed in expanding school choice is also an open question. But one thing is clear: The governor has succeeded in passing a series of reforms that will help provide Empire State children with high-quality teaching they need and deserve. And for that, Cuomo deserves praise.

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Tom Wolf’s $41 Billion Pension Mess

As Dropout Nation readers know, Friday’s analysis of Philadelphia’s virtually-insolvent district’s fiscal condition also previewed this magazine’s evaluation of the financial state of Pennsylvania’s Public School Employees Retirement System. What…

As Dropout Nation readers know, Friday’s analysis of Philadelphia’s virtually-insolvent district’s fiscal condition also previewed this magazine’s evaluation of the financial state of Pennsylvania’s Public School Employees Retirement System. What has become clear from the latest analysis is that the Keystone State must take decisive action to address the defined-benefit pension’s woeful financial state — and that starts with demanding accurate accounting that reflects the dire reality.

statelogoWithin the last week alone, state legislators have taken some steps toward addressing the woes of PSERS and Pennsylvania’s pension for state employees. This past Tuesday, the Keystone State’s House of Representatives held a hearing on a plan offered up by Rep. Warren Kampf, a pension reform hawk, to close participation in state pensions to new employees and require new hires to save money in defined-contribution plans. On the senate side, Majority Leader Jake Corman is putting together his own plan, which would follow along Kampf’s proposed move as well as essentially roll back Act 10, the state pension law passed in 2010 that boosted annuities collected by teachers to equal 75 percent of final year’s salary.

If Kampf and Corman can get their legislation passed any possible opposition within their own caucuses — a reason why former Gov. Tom Corbett’s pension reform plan was defeated last year — this would be one clear sign that legislators are finally taking the state’s pension crisis seriously.

Standing opposed to any reform plan is Gov. Tom Wolf, who successfully defeated Corbett for the state’s chief executive spot with the help of $732,400 in donations (along with other spending) by the American Federation of Teachers and its state affiliate there. Mindful of the debt he owes to AFT as well as to other public-sector unions, Wolf has made clear that he would not agree to any reductions in pension annuities. But given that Corman and his fellow Republicans control both houses of the state legislature and want to tie pension reform to the passage of next year’s state budget, Wolf may have to give something in order to get legislators to pass other aspects of his agenda.

But in order for Kampf, Corman, and Wolf to undertake any meaningful and substantive pension reform, it must have accurate data on the fiscal state of PSERS and the state employee retirement plan. Based on Dropout Nation‘s analysis of the teachers’ pension’s comprehensive annual financial report, the pension isn’t dealing honestly with its condition.

PSERS officially reports that its was underfunded to the tune of $33 billion in 2012-2013, a 10 percent increase over the previous year. But as you all know by now, those numbers aren’t real. As your editor detailed in last year’s analysis, one reason why lies with Act 120, the law passed by state legislators five years ago which senselessly hiked annuities when PSERS was already virtually-insolvent. Under the law, PSERS recognizes gains and losses over a 10-year period, instead of an already-ridiculous five years. This even more-aggressive-than-usual form of smoothing — which allows the pension to effectively hide investment gains and losses under the guise of keeping investment volatility from wreaking havoc on state and district budgets — gives gives the false impression that its financial condition is in good shape.

The bigger problem lies with the PSERS’ assumed investment rate of return of 7.5 percent. Given that the pension’s assets declined in value by 3.7 percent between 2008-2009 and 2012-2013, there’s no way it could even meet such an overly-optimistic rate of return. Using overly-inflated assumed rates of return are problematic because pensions can report insolvencies as being lower than they actually are. This can result in politicians abandoning any fiscal prudence, handing out annuity raises based on inaccurate data. What PSERS should do is base its rate of return on an average such as the Citibank Pension Liability Index (which is based on the yield for AA-rated corporate bonds) or at least assume a more-realistic return rate such as 5.5 percent.

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. The result? PSERS is virtually insolvent to the tune of $41.3 billion for 2013-2014, or 27 percent higher than officially reported. Using last year’s analysis, the pension’s insolvency increased by 11.6 percent over 2011-2012. Based on a 17-year amortization rate, taxpayers would have to shell out an additional $2.4 billion in contributions just to get the pension back into solvency; that’s 82 percent more than the $2.9 billion in contributions made in 2013-2014.

Districts such as Philadelphia have already seen double-digit increases in contributions over the past few years. The impact of any effort on hiking contributions to finally address the insolvency would be tremendous.

For Philly, a $135 million hike in 2013-2014 would have led to a loss of $203 million, or more than the $165 million it lost in 2012-2013. For Pittsburgh Public Schools, which paid $28.3 million into PSERS in 2013-2014, a repayment of the pension’s shortfall would mean an additional $23 million in contributions; this would have meant that the portion of the district’s budget going to pensions would have increased from 5.3 percent to 9.7 percent, and more than doubling its $14 million operating deficit.

This isn’t just a problem for Keystone State districts. After all, Pennsylvania state government reimburses districts for as much as 56 percent of PSERS contributions. This means that the state (you know, taxpayers) would likely have to take on $1.4 billion of the bailout cost, based on Dropout Nation‘s estimates. This would be double than the $1 billion paid out by the state in 2013-2014; the percentage of that year’s state budget dedicated to PSERS would increase from 3.6 percent to 8.5 percent.

Meanwhile the problem is going to get worse thanks to the growing numbers of Baby Boomers heading into retirement. Some 16,404 retired teachers and other traditional district employees were added to the pension rolls in 2012-2103, a 12 percent increase over the previous year; the number of new retirees (before removals) increased by 54.6 percent between 2006-2007 and 2012-2013. With PSERS likely to add likely add 12,438 new annuitants (excluding deaths  and other removals) to the rolls ever year for the next decade, the pension’s will add at least $306 million a year in new annuity expenses over that time.

By the way: None of this includes PSERS’s unfunded retired teacher healthcare costs with which the state must also contend. The pension officially reports unfunded liabilities of $1.3 billion for 2012-2013. But 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 for the healthcare costs is $1.6 billion, or 27 percent more than officially reported. Based on a 17-year amortization rate, taxpayers would have to put down $95.7 million a year over 17 years to pay off that insolvency, 89 percent more than the $108 million contributed in 2012-2013.

Put simply, the Keystone State’s teachers’ pension is busted. Addressing that insolvency requires honest numbers about the true condition of its finances. Corman and Kampf should take steps toward that by passing legislation that ends the 10-year smoothing required by Act 120, as well as force the pension to reduce its assumed investment rate of return from 7.5 percent to a more-realistic 5.5 percent (or an average based on the annual change in Citibank’s pension index). Both moves would lead to accurate data on the PSERS true fiscal condition and force the state (along with districts) to deal honestly with it.

Along with those steps, legislators should pass legislation 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. The existing pension would then be cash-balanced, allowing workers already in the pension to move whatever they have already saved and whatever has been contributed by districts into the new accounts. Such a move would effectively stop PSERS’ insolvency from increasing. At the same time, it would also help younger teachers, who often lose out in most pension reforms, by providing them a portable plan that allows them to fully benefit from their hard work in classrooms.

One likely argument against such a plan from Gov. Wolf will be that such a transition would be too costly to the state. This is because the Government Accounting Standards Board recommends that states closing down pensions should aggressively reduce their insolvencies. But as Andrew Biggs of the American Enterprise Institute noted last week in the Wall Street Journal, Pennsylvania could reduce the insolvencies by a longer period than recommended by the accounting transparency organization.

While your editor recommends a 17-year amortization period (as Moody’s uses), the Keystone State could use as long as 20 or 30 years (the latter used by states such as California in far more-modest pension fixes). And if the existing pension is cash-balanced, with existing teachers moving what they are due to receive in a lump-sum payment into the new retirement package, the cost of the transition wouldn’t be all that prohibitive at all.

Ultimately, what matters most is that Pennsylvania officials finally force PSERS to honestly detail its virtual insolvency. Without accurate numbers, even the most-radical pension reform will fall apart.

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Bruce Rauner’s $78 Billion Quandary

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….

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.

statelogoLast 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.

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UFT’s 17,513 Reasons for Special Ed

As you already know, one of the key reasons the United Federation of Teachers cites for its opposition to Gov. Andrew Cuomo’s effort to expand the number of charter schools…

As you already know, one of the key reasons the United Federation of Teachers cites for its opposition to Gov. Andrew Cuomo’s effort to expand the number of charter schools in New York State is that the privately-operated public schools serve fewer numbers of kids condemned to special ed than traditional districts. If you only pay attention to the American Federation of Teachers local’s talking points, it is concerned that charters are shortchanging the neediest children by dissuading them from their classrooms.

But as I wrote back in January, the big reason why UFT is so concerned about the dearth of kids in special ed being served by charters has almost everything to do with money. In this case the additional state and federal subsidies collected by the Big Apple for every kid condemned to special ed, which, in turn, flows into the union’s coffers through the dues paid by teachers and paraprofessionals who work in them. At that time, the estimated pull from the state was $1,227.61 based on the data available at the time.

statelogoBut as a new Dropout Nation analysis of federal data shows, the per-pupil dollars collected by the Big Apple for kids in its special ed ghettos is greater than originally known. Which provides an even better understanding of why UFT is so opposed to the expansion of school choice.

The Big Apple district collected $8,850.81 from the state in 2011-2012 for every one of the 160,134 children condemned to its special ed ghettos, according to data submitted by the district to the U.S. Census Bureau and U.S. Department of Education. How big a haul is this? The Big Apple collected 55 percent more from the state for each kid in special ed than the $5,715.45 it receives in general aid from the state for all of its students.

The cash flow from special ed gets even better once the federal subsidies are added in. New York City collected $2,090.39 in special ed subsidies from the federal government for every kid in its ghettos in 2011-2012. This is 144 percent more than the $856.58 per pupil in Title 1 dollars the district collects from the federal government for each child it serves.

Put altogether, the Big Apple collects $17,513.23 in state and federal subsidies (not including other subsidies and the city’s tax dollars) for every kid condemned into its special ed ghettos. This is nearly three times the $6,572.03 the district collects for kids in regular classrooms (not including other subsidies and the district’s own tax dollars).

Such additional dollars can help the Big Apple hire additional teachers and staff to work in special ed ghettos — and this is good for UFT. As I noted back in January, UFT may generate $14,154.60 per 186 teachers and paraprofessionals (based on an equal number of 93 of each) every month. This is just on the conservative side; after all, the Big Apple likely hires more than teachers and paraprofessionals than the statewide average of 186 per 1,000 students (which is already greater than the national average of 129 per 1,000). Any reduction in the number of kids in special ed ghettos means a reduction in money that the Big Apple can use to keep teachers on payrolls — and, in turn, means fewer dues-paying members for the union.

This is certainly a possibility if Cuomo successfully convinces his colleagues in Albany to allow more charters to open. After all, charters are less-likely to label kids as special ed cases than the traditional district in large part because simply educate kids who would otherwise  be labeled as such as regular students as they often should be. One of the reasons why? Because New York City, like other traditional districts, often place kids into special ed for reasons other than actual cognitive and physical disabilities.

As you can already see, one reason is financial, with the district collecting far more money for kids in special ed than their peers in regular classrooms. Another culprit lies with the reality that diagnosing learning disabilities other than blindness or low-incidence disabilities such as severe cerebral palsy can be a guessing game. Illiteracy, for example, can be mistaken for mental retardation or developmental delays. Such mistakes in diagnosis (along with cultures in schools that don’t work out for active young men of all backgrounds) explain overdiagnosis of kids as suffering from Attention Deficit Hyperactivity Disorder is so rampant. This is problematic because at least two out of every five in kids in special ed are either labeled mentally retarded, developmentally delayed, emotionally disturbed or with a specific learning disability, all categories subject to mistaken diagnosis.

But the biggest problem lies with adults in New York City’s schools and their belief that only some kids are worthy of high-quality education. This is a group that includes some of the most-ardent traditionalists in the UFT’s own rank-and-file. As education scholars such as Vanderbilt University Professor Daniel J. Reschly have pointed out, adults in schools label certain groups of students as learning disabled because they think they are destined to end up that way. As studies such as one by a team led by Tobias Rausch of Germany’s Otto-Friedrich-Universität Bamberg show, teachers and school leaders can end up favoring kids who look like them or share their personality traits; those kids who don’t can end up either in special ed ghettos, targeted for harsh school discipline, or subjected to other forms of educational neglect and malpractice.

Considering the damage that comes from condemning kids to special ed — especially lower high school graduation rates and greater instances of being subjected to the harshest school discipline — UFT should be doing all it can to help reduce the percentage of kids condemned to the Big Apple’s special ed ghettos. This includes championing the expansion of charter and other forms of choice, as well as pushing for a reduction in special ed subsidies that can lead districts such as New York City to focus its special ed efforts on kids truly in need of help.

But given its financial concerns, as well as the sorry record of its now-partly shuttered charter school in handling students in special ed, no one should expect anything less than utter disdain for the futures of children. For UFT, condemning kids to despair is just the cost of doing business.

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