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State Efforts To Control Pension Costs Spark Controversy

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Since 1982, a commission appointed by the governor of New Jersey has been studying ways to "balance the interests of the employers of the state-administered pension and health-care system and the interests of the employee."

That panel has yet to issue its recommendations. But so sensitive is the issue that the New Jersey Education Association, anticipating that the commission will seek cuts in benefits, penalties for early retirement, and increases in the amount teachers pay into the system, is already undertaking a statewide campaign to block legislative action on its findings.

"This is one-sided and totally unacceptable," charges Edithe A. Fulton, president of the 117,000-member association.

State Problems Spreading

The clash in New Jersey is only the latest of at least a half-dozen that have erupted nationwide in recent months, as states seek to contain pension costs in anticipation of a flood of retirements in the next few years. Alabama, Arizona, California, Illinois, and Maryland are also involved in disputes over teacher-retirement systems, and virtually every state, according to experts, is, or may soon be, facing pension-plan problems.

"Many states are now making a real effort to do something about stabilizing the funding of the pension programs, and they are asking the teachers to pay the bill," said Bernard Jump, chairman of the department of public administration at Syracuse University's Maxwell School of Citizenship and Public Affairs.

Economics are at the heart of those problems, experts say. Personnel benefits, including pensions, are "the fastest-growing budget category in almost every school district across the country," says William H. Wilken, president of Cost Management Systems, a consulting firm based in Washington, D.C. Fringe benefits have risen so steeply in the last decade, he adds, that states' and districts' contributions to personnel-benefit programs have risen from an average of 12.6 percent of teachers' salaries in 1972 to about 22 percent today.

The average for all workers outside the teaching profession is about 19 percent, Mr. Wilken says, citing U.S. Commerce Department data.

In some states, the bill is considerably higher. In California, Michigan, and New York for example, employer contributions toward fringe benefits run to about 35 percent of teachers' salaries and are continually rising, according to Mr. Wilken, who formerly was executive director of the National Association of State Boards of Education.

Reasons Complex, Varied

The reasons for the soaring pension costs, experts say, differ from state to state. But the following factors are usually involved to some degree:

Extensive fringe benefits negotiated by teachers' unions over the past decade, often in lieu of salary increases;

Inflation, particularly in plans where cost-of-living increases are automatic, and federally mandated increases in employers' contributions to employees' Social Security benefits;

The aging of the teaching force and the probability of a large number of teacher retirements in a short space of time, beginning within the decade;

The prospect of significantly higher personnel costs as a result of higher salaries and differential-pay plans enacted or under consideration as part of the education-reform movement;

The underfunding of state pension programs over the last 20 years, particularly in the New England states. (See Education Week, Nov. 23, 1983.)

In their efforts to control soaring costs, states are moving to cut teacher benefits, increase employee payments, and establish penalties for early retirement. Some states are using funds saved by these actions to offset budget deficits or finance new programs.

Past Commitments

During the lean economic times of the 1970's, according to Mr. Wilken, employers helped create the current situation by agreeing to increased personnel benefits, which would be paid in what then seemed to be the distant future, instead of larger salary increases that would have to be paid out immediately.

Says Alabama's pension-fund manager, Marcus H. Reynolds: "During the 1960's and early 1970's, we provided teachers with higher pension benefits--which we did not have to pay off then--in lieu of adequate cost-of-living increases." As a result, he says, "Alabama is now concerned about the long-term stability of its pension programs."

The state, he adds, has the dual problem of starting to pay off the benefits negotiated in the past and answering the difficult question of how to "make the program afford-able" in the future.

Two bills were introduced in the legislature late last month at the request of Gov. George C. Wallace that would raise the contribution rate for current employees and cut future benefits for new teachers.

The bills, SB 284 and HB 270, would raise the contribution rate for employees hired prior to Oct. 1, 1984, from 5 percent to 6 percent; employees hired after that date would be part of a new benefit plan that would require them to contribute 4 percent of their salary toward benefits that would be 30 percent lower than current levels.

Under the plan, teachers hired before October 1984 would be eligible to receive 60.6 percent of their salary after 30 years of service. Those hired after October 1984 would be eligible for 42 percent of their final salary upon retirement after 30 years.

The system would bring down the costs of the pension program, Mr. Reynolds says, but it is not expected to discourage new teachers from entering the profession. "Typically, new employees could care less about retirement benefits," he adds.

Inflation and Retirements

Increases in the base rate of the federal Social Security program and inflation generally have accounted for much of the increase in pension costs, according to Mr. Wilken.

Between 1972 and 1982, the Consumer Price Index, widely used to gauge changes in the cost of living, increased by 131 percent, from 125.3 to 289.1. At the same time, employers' contribution to workers' Social Security accounts rose dramatically.

In 1972, employers paid into the system 5.2 percent of the first $9,000 earned by an employee. Ten years later, an employer was paying 6.7 percent of the first $32,400 of an employee's earnings, according to the Social Security Administration in Baltimore.

That means that average employer payments jumped from $468 per teacher per year in 1972, when the average salary slightly exceeded $9,000, to about $1,340 per teacher per year in 1982, when the average salary was about $20,000. The Reagan Administration has further increased the employer-contribution rate to 7 percent of the employee's first $37,800 of earnings.

"In many states, salaries were low until the late 1970's and the pension benefits were tied to Social Security and were gradually increased during that period," says Jewell C. Gould, associate director of research for the American Federation of Teachers. Mr. Gould notes that when teachers' salaries finally began to rise, pension costs to the employers--states and districts--escalated.

The problem has been compounded, Mr. Gould says, by the aging of the teacher workforce. Now, with about 1.25 million teachers approaching retirement by the end of the decade, he says, there is "additional pressure on the pension system to fund the benefits."

As the wave of retirements begins, "a lot of money will start rolling out of the systems," he adds, and the pressure to pay for the programs will be felt particularly by new employees who may be asked to make higher contributions or accept lower benefits.

That situation--which has been further exacerbated in states whose financial problems have caused them to underfund programs--is likely to create a painful dilemma for teachers' unions, observers say. With the fears of rising pension costs draining away limited funds available for salaries, unions are already beginning to debate whether to seek more money for benefits or more money for salaries, Mr. Gould points out.

The aft is trying to find out what types of benefits union members prefer. "The employer doesn't often come up with fringe benefits, and we know that to gain something somewhere, you have to give up something somewhere else. These concerns begin in the union hall at bargaining time," says Mr. Gould.

Paying for Improvements

The widespread movement during the past few years to upgrade education will almost certainly bring even more pressure to bear on state officials already faced with soaring pension costs, according to Mr. Jump of Syracuse University.

Programs to raise teachers' salaries generally or to establish merit-pay and career-ladder systems are under consideration in most states and many districts, and under present retirement plans, those salary increases will mean increased contributions by the states and districts.

Most pension benefits are based on the last two to four years of service and are funded assuming annual salary increases of about 4 percent, according to Mr. Jump. But if a teacher about to retire received raises of 8, 9, or 10 percent and if these raises were included in the final average salary used to determine retirement compensation, the changes could "throw off actuarial assumptions," Mr. Jump says.

Florida is currently debating whether master-teacher payments ought to be included in the calculation of pension compensation for retirement, according to Ruth B. Sansom, bureau chief of retirement calculation for the Florida Retirement System.

"We're not sure if bonuses will be included in the final average or not," she says. "It could cost a lot of money."

When the Tennessee legislature passed its $1-billion master-teacher package last month, lawmakers included in the cost of the program more than $50 million in added pension costs over the first three years, according to Stephen D. Adams, director of Tennessee's retirement system.

The state annually puts in roughly $118 million for teachers each year; the $50-million increase over three years represents about a 14-percent increase in payments. The money provides for the retirement benefits of teachers in their final years of service who will be receiving raises beyond the amount planned in the actuarial estimates, according to Steven L. Curry, assistant director of the system.

Union Battles

Some governors are already resorting to cuts in pension contributions and benefits as a way of helping to offset rising education costs, particularly those incurred in connection with the nationwide school-reform movement.

A plan proposed by Maryland's Gov. Harry Hughes would have reformed the pension program and used the savings to provide money for statewide education reform and for a program to clean up the Chesapeake Bay.

The Governor had proposed that the legislature place a cap on cost-of-living increases in the pension program and that it reduce benefits and increase employee payments in order to "ensure the actuarial soundness of the retirement programs," according to Louis Panos, the Governor's press secretary.

But last month, Governor Hughes decided to withdraw the plan and asked the legislature to seek alternative funding sources to pay for the new initiatives, Mr. Panos said.

"The Governor decided--after meeting with officials from bonding houses in New York--that using savings in pension costs as a funding mechanism might have endangered the state's perfect bond rating next year," Mr. Panos said. But the Governor said he would still seek legislation to save money on the pension programs, an announcement that has sparked an angry response from the state's teachers.

The Maryland State Teachers' Association, working with two other state-employee unions, has been actively fighting changes in the retirement benefits.

The msta has set aside $44,000 for activities aimed at protecting the retirement system. The teachers have used the money to launch a letter-writing campaign to delegates, support lobbyists in Annapolis, buy radio advertisements across the state, and produce a 20-minute television program.

In addition, last month the association staged one of the largest rallies in the state's history; some 7,000 teachers from every school district marched on the steps of the statehouse to protest the proposed changes.

The state's teachers' unions have promised to file a legal challenge to any statutory change in the retirement program. Such a suit would be based on a "guarantee clause," approved by the legislature in 1979, which stipulates that participants in the state retirement system "could remain in the system without changes in benefits provided," according to Janice A. Piccinini, president of the msta

California Lawsuit

Late last month, a lawsuit brought about by the California Teachers Association challenging the right of Gov. George Deukmejian to underfund the state's retirement program came to trial in a state court of appeals in Sacramento.

The lawsuit centers on a 1979 statute that requires the state to make annual payments large enough to limit the pension plan's "unfunded liability"--the difference between its assets and its obligations to current and prospective retirees.

Last fall, the Governor used a line-item veto to delete $211 million from the $261-million general-funds subsidy for teacher retirement, thus increasing the plan's unfunded liability. (See Education Week, Oct. 5, 1983.) The money was used to help eliminate a $1.5-billion deficit in the state's $26-billion budget and to fund part of the $800-million school-reform package.

Although Governor Deukmejian's fiscal 1984-85 budget includes $307 million for the retirement system for the current year, plus an additional $211 million to make up for underfunding for last year, union officials say that they are proceeding with the suit because there is "no guarantee" that this year's money will make it into the final state budget.

"We are still apprehensive about the line-item veto," says W. Ronald Brown, retirement consultant for the California Teachers Association.

He adds that "the Governor also has made no provisions for interest lost or for investment lost from the underfunding last year."

Pennsylvania Plan

In Pennsylvania, the teachers' union recently had success in reaping new retirement benefits for its members despite the state's tight economic circumstances.

A retirement bill, HB 728, that would cost an additional $129.5 million was passed by the House of Representatives last month. The bill was initiated by the Pennsylvania State Education Association.

The bill permits teachers to retire at age 62 or after 30 years of service and would provide a cost-of-living adjustment for current school retirees. The plan would cost an estimated $60 million annually for the early-retirement provision and an additional $69.5 million annually for the cost-of-living adjustment, according to estimates provided to the House Appropriations Committee.

School districts would be responsible for one-half of all additional costs, and school employees would be asked to pay an additional 1 percent in their contribution rate. The rate increase originally was enacted last year, but it is being challenged in court by teachers' groups because no additional benefit was enacted at the same time.

"We have no problem whatsoever with the bill," said William H. Campbell, assistant director of communication for the psea The benefits provided under the bill "render the court case dead if it becomes law,'' he said.

National Economy

Many of the changes in pension programs across the country reflect changes in the national economy that are not likely to be reversed in the near future.

"States are looking for ways to balance budgets," says Suzanne Taylor, coordinator of research for the Connecticut Education Association, who has studied pension programs nationwide. "Those states that have come upon hard times have seen how expensive retirement programs are and have suggested different kinds of changes. Some states have proposed establishing a new second tier of less generous benefits. Simply stated, teachers have to teach longer to get similar benefits, or have them pay less or get less."

Ms. Taylor, author of a forthcoming book, The Governance and Financing of Teacher Retirement Systems, suggests that in general, "there has been a trade-off between what is in the best interests of the retiring teachers and the states themselves, but this is not always the case."

"Unions naturally want to keep what they already have," she adds, ''which is generally better than what is being now offered."

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