The Pension Debt Challenge for Equity in Education
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The Pension Debt Challenge for
Equity in Education
Across the country, states have made promises of a secure retirement for teachers and promises of improved equity outcomes for students. However, both have gone largely unfulfilled thanks to rising pension debt costs that have outpaced K-12 spending.
Years of irresponsible management, poorly crafted funding formulas, and ballooning debt have resulted in disappearing resources for students and rising contribution rates for educators. And it's disproportionately impacting low-income districts.
Opportunity Institute and Equable Institute have partnered on four papers that highlight these unique pension debt challenges in four states: California, Florida, Ohio and Texas.
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Read the Reports
California has sought to improve education outcomes for students and inequitable impacts on teachers. But growing pension teacher debt costs totaling more than $100 billion and regressive funding mechanisms that subsidize wealthy districts are threatening education equity by squeezing school district budgets in the state.
Key Findings from the Report:
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An increasing share of California’s state and local K–12 education spending is being spent to cover pension costs.
C​alifornia retirement costs for teachers and public school employees as a share of combined state and local K–12 spending have grown 176% between 2001 and 2020.
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Overall education spending hasn’t increased at the same rate as pension spending. This is effectively a cut to education funding that disproportionately harms low-income communities.
Teacher retirement spending increased at more than six times the rate as K–12 spending from 2014 to 2020.
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The CalSTRS board is likely to lower its investment assumption in the coming years due to market performance trends, which will trigger a need for additional contributions.
CalSTRS estimated that lowering the investment assumption to a more reasonable 6.5% could trigger a contribution rate increase of between 3% and 5% of payroll, which for the current 2022-23 fiscal year could have meant between $1 billion to $1.6 billion more in required contributions.
The costs of providing retirement benefits through the Teachers Retirement System of Texas have been rising rapidly — and that is despite the pension plan providing some of the lowest valued benefits in the country and no consistent cost-of-living adjustment for retirees. Without a change to the way the state finances its public school employee retirement benefits, the cost of paying down nearly $60 billion in pension debt will continue to exacerbate already existing education finance inequities and drain resources necessary to help high-need students.
Key Findings from the Report:
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An increasing share of Texas' state and local K–12 education spending has been siphoned off to cover pension costs.
Texas retirement costs for teachers and public school employees as a share of combined state and local K–12 spending have grown 32.9% between 2012 and 2020.
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Overall education spending hasn’t increased at the same rate as pension spending. This is effectively a cut to education funding that disproportionately harms low-income communities.
State and local employer spending on TRS increased an average of 10.46 percentage points every year between 2012 and 2020, K–12 spending increased just 4.24 percentage points a year during the same time period.
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Despite the current ramp up of contributions to the Teacher Retirement System of Texas for the state, districts and teachers set to end in 2026, there will likely be a need to adjust investment assumptions and further increase contribution rates.
Due to market forecasts, Texas will likely need to adjust their assumed rate of return below the current 7%. TRS’s own analysis shows that if they used a more realistic 6% assumed rate of return, their 2022 level of unfunded liabilities is actually closer to $92.4 billion than the $59.4 billion they are currently reporting.
Growing and unpredictable teacher pension debt costs are straining school budgets in Florida. As mandatory pension contributions continue to increase, Florida's funding policy for teacher pensions will continue to exacerbate already existing education finance inequities and drain away resources necessary to help Florida’s students and educators.
Key Findings from the Report:
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An increasing share of state and local K–12 education spending has been siphoned off to cover pension costs, even after major changes to the Florida Retirement System in 2012.
School districts pay all FRS costs. As a result, the $1.2 billion spent on retirement costs accounts for 3.5% of local revenue provided for K–12 spending as of 2020.
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These growing pension costs are effectively education funding cuts that disproportionately harm low-income communities.
Pension debt now accounts for nearly 27.81% of total K-12 spending per student. It was just 4.68% in 2014. These rising pension debt costs are regressive and pass a greater burden to high-poverty districts because Florida distributes the unfunded liability costs evenly across the state event though wealthier school districts generate a greater share of FRS’s unfunded liability as a result of higher teacher salaries.
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Additional contributions from Florida school districts will be likely be required in the coming years unless the state legislature intervenes.
Actuaries for Florida Retirement System have already requested a contribution rate increase for the 2023-24 fiscal year that would raise the average employer contribution above 16% of payroll for the first time in recent history. This is also twice the employer contribution rate required in 2012 the first year after Florida’s last attempt to reform FRS.
Managing Ohio's $20 billion in teacher pension debt has come at the cost of available K-12 education dollars, inflation protection for retiree benefits, and retiree healthcare funding. While Ohio's unfunded liabilities have decreased in recent years, it is highly unlikely these improvements are sustainable based on market trends. If Ohio doesn't adjust their approach to how pension funding affects K-12 budgets, students, teachers and retirees will face more cuts.
Key Findings from the Report:
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An increasing share of Ohio's state and local K–12 education spending has been siphoned off to cover pension costs.
Between 2001 and 2020, pension spending as a share of state and local K-12 education spending has increased by 45.5%.
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Overall education spending hasn’t increased at the same rate as pension spending. This is effectively a cut to education funding that disproportionately harms low-income communities.
State and local K–12 education spending in Ohio increased 26.9% between 2001 and 2020, adjusted for inflation. During the same period, spending on employer retirement costs jumped 84.6%. When K-12 spending doesn't increase at the same rate as pension spending, low income districts suffer as they don't have the same ability to raise revenue through property taxes to cover the budget shortfall.
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Ohio has maxed out its use of active teachers and retirees to pay for growing retirement costs.
Barring an extended market bull-run, unfunded liabilities will flat line at $23 billion in the best case scenario. In a worse scenario, they could increase to nearly $50 billion by 2031. Currently, Members pay 14% of salary and the STRS board is no longer allocating any portion of employer contributions to the health care trust fund. The retired teachers COLA has been lowered twice, and is now at 0%. Without changing how pensions are funded relative to K-12 budgets, Ohio school districts could face significant cuts to available funding for student programs and resources to support educators.
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