Pension-System Woes Put Legislators on Hot Seat
States continue to grapple with major changes to their teacher-retirement systems, with significant legislation either recently passed or already signed in states such as Minnesota and Texas, and with Illinois lawmakers at odds on the issue as their session drew to a close.
To make pension liabilities less daunting, policymakers and legislators are trying a variety of approaches. They include requiring new employees to enter defined-contribution retirement plans, instead of existing defined-benefit systems, and creating new options for retirees in an effort to preserve the fundamentals of defined-benefit plans.
Estimates about teacher-pension shortfalls vary significantly. The National Council on Teacher Quality, which supports shifting from pensions to defined-contribution plans, estimated in December that state teacher-pension systems had about $325 billion in unfunded liabilities. But in 2010, when stock market levels were lower, the market-oriented Manhattan Institute and the Foundation for Educational Choice pegged the unfunded liabilities for those systems at $933 billion.
Between 2009 and 2012, 48 states made changes to their pension systems.
The pension systems for public school employees have become politically divisive, and some advocates use the argument that "public K-12 only exists to give people these great benefits," said Michael Griffith, a consultant with the Denver-based Education Commission of the States who studies school finance.
But supposed easy solutions should be looked at with skepticism, he said. "One hundred percent [funding for pension liabilities] is almost a mythical thing. No one gets there," he said.
The pension debate dominated Illinois lawmakers' attention as this year's legislative session approached its May 31 close.
At the end of fiscal 2012, the unfunded liabilities for the Teachers' Retirement System in Illinois, the largest of the public-employee pension systems in the state, stood at $53.5 billion. That represents the long-term obligation for which the state is not projected to have the money available to cover costs over the next three decades. (In total, projections show that only 40 percent of the teacher-pension system's projected liabilities are funded.)
State Senate President John Cullerton, a Democrat, and several public-employee unions championed a plan they said would reduce the pension shortfall by $70 billion over 30 years; some estimates put the savings at a significantly lower figure, however. Essentially, retirees would choose between receiving cost-of-living increases and receiving health insurance.
A second proposal, pushed by Speaker of the House Michael Madigan, also a Democrat, aimed to increase employee contributions and take pensions off the table in collective bargaining, among several changes. That proposal was projected to cut the pension shortfall by $150 billion. Gov. Pat Quinn, a Democrat, expressed support for Mr. Madigan's plan last month, in a statement calling it "a serious solution to the most serious fiscal challenge our state has ever faced."
But the supporters of Sen. Cullerton's plan, such as Illinois Education Association President Cinda Klickna, argued that the state constitution says benefits from such public-pension plans "shall not be diminished or impaired." (Late last week, the state Senate voted to reject Speaker Madigan's plan.)
Ms. Klickna, who represents about 135,000 members in the IEA, said that many people mistakenly believe retirees get lavish payouts. The average annual benefit for teachers now is $46,000, she noted. In 2012, the U.S. Census Bureau reported the average payout from state and local pension systems was $25,900, but most Illinois teachers don't receive Social Security.
"We in the education world want to make sure that we are continuing to attract and retain quality teachers," Ms. Klickna said. "And [the pension system] is something that people look at when they're looking at positions."
Other States Act
On May 20, the Texas House of Representatives sent GOP Gov. Rick Perry a bill that would make significant changes to that state's Teachers Retirement System. The bill would boost the state's contribution to the system to 6.8 percent from 6.4 percent, and increase employees' required contributions to 7.7 percent in fiscal 2017, from 6.4 percent in fiscal 2014.
Under the bill, teachers who retired before age 62 would receive a lower annual benefit than teachers who retired later, based on the difference between a teacher's earlier retirement age and age 62.
The Texas affiliate of the American Federation of Teachers, which represents about 65,000 school employees, estimates the latter reduction in benefits could affect about 190,000 people in the teacher-retirement system.
In Florida, meanwhile, an effort to close the state's pension system to new teachers and other public employees on Jan. 1, 2014, passed the House but died in the Senate. The proposal would have required new public employees to enroll in defined-contribution plans instead.
Vol. 32, Issue 33, Page 22