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Published in Print: February 19, 2003, as Slump in Stocks Yields Big Losses In Pension Funds

Slump in Stocks Yields Big Losses In Pension Funds

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State retirement systems, which manage the nest eggs of millions of active and retired teachers, have lost billions of dollars in the past two years as the stock market has plunged. To help keep those systems healthy, states and districts are now faced with finding extra money at a time when many of them have little to spare.

Since 2000, for instance, the holdings of the New York state teachers' fund have plummeted by $21 billion, the teachers' pension fund in Texas has lost $16.2 billion, and the California fund has taken a $14 billion dive.

On the upside for teachers, retirees receive "defined benefits," meaning they are guaranteed their contractual payments. What they won't see in most cases are any increases, including cost-of-living adjustments that retirees enjoyed during the economic boom of the '90s.

"You will not see those types of increases for a while," said Cindy Moore, a legal consultant for the National Council on Retired Teachers, in Sacramento, Calif.

States, districts, and active teachers, meanwhile, are going to have to ante up more to pay for pensions.

Still, just because the funds are losing money doesn't mean they are in danger of collapsing, experts stress.

"Pension funds are 30-year investments," said Fred Nesbitt, the executive director of the Washington-based National Conference on Public Employee Retirement Systems. "We expect up markets and down markets."

During the days of the bull market, many retirement systems were earning so much profit on their investments, they built up surpluses. As a result, states and employers—that is, school districts—had to contribute less, and active and retired teachers saw bigger benefits.

For example, when the California State Teachers' Retirement System was performing well—it was valued at $108 billion in December 2000 and is at $94 billion currently—the legislature upped retired teachers' benefits, based on a formula that included years of service. Teachers who stayed in the classroom for 30 years, say, received an extra $200 a month.

In addition, from 1998 to 2001, California lawmakers were able to cut the state's contributions to the retirement system in half—from 4 percent of the total money paid in teachers' salaries to 2 percent, the rate at which the system is currently funded. That decrease translated into roughly $1 billion a year in savings to the state general fund.

Now that the retirement funds are not doing so well on Wall Street, higher shares of local and state contributions are coming due again.

State law determines how contributions are divvied up. In some cases, the state pays all; in some, the state shares the tab; and in others, districts pay the entire amount for their employees.

"I suspect that school districts and other public employees are going to wind up increasing their contribution," said John Abraham, the deputy director of research for the American Federation of Teachers. "If the downward trend continues for another year or two, then we will start talking about benefit cuts."

Retirement systems generally make such cuts by establishing a new tier of benefits so that retired and current workers receive the same level, while new employees would get fewer benefits upon retiring or have to wait longer to receive them, Mr. Abraham said.

'Our Worst Fears'

In New York state, both Albany and school districts contribute to the fund, which is one of the largest in the country and is valued at just under $70 billion, according to David Daly, the manager of the public information office for the New York State Teachers' Retirement System.

That amount is "down from a peak of $91 billion two years ago," he said. "We basically have experienced the same dropoff as other pension funds."

Like their counterparts in many other states, New York legislators decided to increase benefits to teachers two years ago, when the retirement system was deemed to be overfunded.

Not everyone thought that was a wise move. "We had some reservations," said Thomas L. Rogers, the executive director of the Albany-based New York State Council of School Superintendents, a branch of the American Association of School Administrators.

"We worried that maybe [Federal Reserve Chairman Alan] Greenspan was right, and the stock was a little overvalued," Mr. Rogers said. "Our worst fears have been realized."

As a consequence of the whopping $21 billion loss in the value of the New York teachers' retirement system, the amount of money districts must pay into the system has increased from 0.36 percent of active teachers' salaries during 2001 and 2002, to 2.5 percent now.

That percentage could rise further, depending on how the stock market performs, Mr. Daly of the retirement system added.

In the late 1980s, districts' contribution rates hovered around 14 percent of teachers' salaries, according to Mr. Rogers. The rate could rise to those levels again, he said, and that could mean less money for other education purposes.

"Our fear is that as the contribution increases, we will see either major property-tax increases or a loss of the things we were able to buy," such as smaller class sizes and higher teacher salaries, Mr. Rogers added.

Making matters worse, New York is facing a $12 billion budget deficit, out of a $90 billion state budget, which could lead to less money for districts. "It is clear that the state is going to do a lot of belt-tightening," Mr. Rogers said. "We are afraid it is going to impact education."

Gambling on Retirement

When the teachers' retirement system in New Jersey had more funding than was deemed necessary during the mid-1990s, then-Gov. Christine Todd Whitman decided to take money out of it in the form of bonds. The state invested that money in the stock market.

The goal was for the state to earn a lot of interest off its investment, repay the pension fund, and put the difference into the general fund.

In short, said Mr. Abraham of the AFT, Ms. Whitman "gambled people's retirement on the stock market."

At the same time, the state stopped contributing to the pension fund because it had more than enough to pay the benefits for everyone in the system. Then the stock market stumbled, and the investment didn't make as much as had been expected.

Now, the state is faced with paying back the money it borrowed and making contributions to the retirement system—while struggling with a $5 billion deficit in its $23.4 billion budget.

"It's all collapsing in on them at once," Mr. Nesbitt said. Still, the state is legally obligated to pay the benefits. "Ultimately," he said, "the burden will fall on the taxpayers."

Increasing Expenses

While the purchase of bonds with pension funds is unusual, enormous deficits in state budgets currently are not.

Texas has an estimated shortfall of $12 billion out of a total biennial budget of $113.8 billion. Simultaneously, officials there will have to find a way to shore up the teacher-retirement system, which has lost $16.2 billion in the past two years, according to a report released by the state auditor's office last month.

But the teacher-retirement system is still in good shape, Texas officials say. "I've seen nothing to imply that the fund is not perfectly solvent," or that it can't handle the benefits that have already been approved, said state Rep. Scott Hochberg, a Democrat on the House education committee.

Teachers, however, should not look forward to any benefit increases this year, he added, because the fund is not performing at the same level it had during past legislative sessions.

That's something LaBeth Pondish is not used to. Since retiring from the LaPort district in suburban Houston seven years ago, she has seen major increases in her retirement benefits, she said. "I got bigger raises when I was retired," Ms. Pondish said, "than I did when I was teaching."

The 59-year-old former junior high English teacher now grosses $3,000 a month in retirement benefits, about two-thirds her previous income.

In addition to losing a cost-of-living increase from her pension, Ms. Pondish said that last year her supplemental retirement plan, or 403(b), lost $10,000.

Without a cost-of-living adjustment, she said, she will have a harder time paying her bills as other expenses have risen, including health-insurance costs and property taxes. "I end up having to pay all of those additional taxes without having any additional income," Ms. Pondish said.

To help pay the extra expenses, she has taken a part-time job with the Texas State Teachers Association, an affiliate of the National Education Association, writing and presenting professional-development workshops.

Most likely, teachers in Oklahoma will not see their benefits beefed up this legislative session either.

Adding to their worries, districts there are trying to get a reprieve from paying in to the system, at the rate of 7 percent of educators' salaries, to help offset their own budget deficits, said Carolyn Crowder, the president of the Oklahoma Education Association, also an NEA affiliate.

"We've got teachers who are really scared now," she said. "If this suggestion is followed, then our retirement system will take a $200 million hit."

The $5 billion system currently has a 50 percent unfunded liability, which means that if every eligible teacher in Oklahoma retired today, the fund has enough in it to pay only half of their benefits.

But district budgets have been slashed statewide by more than 8 percent this year, and giving schools some temporary relief would help tremendously, said William R. White, the superintendent of the 5,700-student Ponca City school district.

"This could be an immediate relief for us," he said. His district alone would instantly see an extra $100,000 a month in its budget if it were not paying toward retirement. "We need some relief now," Mr. White said.

But that idea, which the legislature is considering, raises concerns about the health of the pension fund, Ms. Crowder said. "It is not well-funded to begin with," she said, "and now, people are looking at it as a way to solve their shortfall problems."

Vol. 22, Issue 23, Pages 1,12-13

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