Analysis finds teacher pension gaps worse than previously disclosed
CapitolBeatOK Staff Report
New York City, April 13 — Teacher pension liabilities for all 50 states now total almost $1 trillion, almost triple the cost of what state officials have on their balance sheets. This unfunded public burden could bankrupt state budgets including education programs, according to a new study released today (Tuesday, April 13) by the Manhattan Institute and the Foundation for Educational Choice. Oklahoma ranks among the five worst states.
In “Underfunded Teacher Pension Plans: It’s Worse Than You Think,” authors Josh Barro and Stuart Buck reveal the major disparity between what states report and the true value of unfunded liabilities for teacher pensions. States put the price tag at teacher pension liabilities at $332 billion. The study shows the red ink is actually $933 billion when applying private sector-style discounting.
“States are already caving under the pressures of the recession and this is bad news for governors and state legislatures,” said Robert Enlow, president and CEO of the Foundation for Educational Choice. “Every dollar in the red ink column for pensions is one less dollar that is used to educate children.”
The Manhattan Institute – Foundation for Educational Choice report is the first to focus on the fact that states and cities aggressively “discount” or underestimate the cost of paying teachers’ retirement benefits in the future. The most underfunded pension programs are in West Virginia, Illinois, Oklahoma, Indiana, and Kansas.
Oklahoma state Treasurer Scott Meacham has previously described Oklahoma’s Teacher Retirement System as “the number one financial threat the state is facing.”
At his March 9 revenue briefing for reporters, Meacham told CapitolBeatOK, “By far the worst of all our systems in terms of unfunded liability is the teacher retirement system, and in fact it is one of the worst in the entire country.” The new study gives hints that even past dire analyses may have understated the seriousness of the teacher pension problem in general, and Oklahoma’s crisis in particular.
Barro and Buck released their study today at the National Press Club in Washington. They recommend reforms to prevent the gap from widening beyond repair, including an honest accounting of the current cost of future benefits. Under current laws, states and cities can estimate the funds needed to meet future pension obligation on higher-than-expected returns on the performance of stock investments. That allows sponsors to cut their contribution rates. Public pension funds also are able to set aside fewer assets in their accounts to cover pension payouts.
“This report makes clear that it will be even more difficult than previously thought for states and school districts to honor pension benefit promises to teachers — without putting actual classroom services at risk” says Howard Husock, vice president of policy research at the Manhattan Institute. “Taxpayers and beneficiaries alike need to know the extent of that unfunded liability, however — and this report is an important contribution to that understanding.”
Going forward, states can prevent future unfunded liabilities by shifting to defined-contribution retirement plans especially on behalf of new and young employees or consider hybrid options like cash balance plans and TIAA-CREF, which has provided saving for employees of public colleges and universities for decades. Current teachers are legally entitled to the future benefits owed to them and states must pay these costs over time, at taxpayer expense. However, there needs to be more accountability when promising benefits to future workers — although higher wages are visible and in the present, the promise of future retirement benefits is also a very real cost of hiring teachers, one just as real as paying current teachers’ salaries.
Highlights of the study include:
• All 59 pension funds studied face shortfalls.
• California, the most populous state, has the largest unfunded teacher pension liability: almost $100 billion.
• The worst funded plan is West Virginia’s, which we estimate to be only 31 percent funded.
• The four states whose plans have the next-worst funding gaps are Illinois, Oklahoma, Indiana, and Kansas; are all less than 40 percent funded.
• Five plans are 75 percent funded or better: teacher-dedicated plans in the District of Columbia, New York State, and Washington State and state employee retirement systems in North Carolina and Tennessee that include teachers.
The study can be accessed online at http://www.edchoice.org/research/ShowResearchItem.do?id=10124.
Josh Barro is the Walter B. Wriston fellow at the Manhattan Institute focusing on state and local fiscal policy. He is the co-author of the Empire Center for New York State Policy’s “Blueprint for a Better Budget.” He writes weekly on fiscal issues for RealClearMarkets.com and has also written for publications including the New York Post, Investor’s Business Daily, the Washington Examiner, City Journal, and Forbes.com. His commentary has been featured on CNN, Fox News Channel, CNBC, the Fox Business Network, and Bloomberg Television.
Stuart Buck is a Ph.D. candidate in the Department of Education Reform at the University of Arkansas. He is the author of a forthcoming book, Acting White: An Ironic Effect of Desegregation, from Yale University Press (2010). He has also authored numerous scholarly articles in journals such as the Review of Public Personnel Administration, Harvard Law Review, Harvard Environmental Law Review, and the Stanford Technology Law Journal. Buck received a J.D. with honors from Harvard Law School in 2000, where he was an editor of Harvard Law Review.
The Foundation for Educational Choice, a 501(C)(3) non-profit organization established in 1996 as the Milton & Rose D. Friedman Foundation, was founded upon the ideals and theories of Nobel Laureate economist Milton Friedman and economist Rose D. Friedman.
The Manhattan Institute, a 501(c)(3), is a think tank whose mission is to develop and disseminate new ideas that foster greater economic choice and individual responsibility.
Note: Editor Patrick B. McGuigan contributed to this report.