Published Online: June 4, 2013
Published in Print: June 5, 2013, as Retirement Headaches Take Root

Teacher-Pension Costs Could Put Squeeze on More Districts

For years, the St. Louis school district has experienced the convergence of two trend lines school superintendents hope never to see: rising employee-pension costs and falling student enrollment.

Despite years of fully funding its share of the teacher-pension plan, the proportion of the St. Louis district's budget tied up in paying benefits for its teachers now makes up about 10 percent—a factor that, coupled with other rising costs, is fueling ongoing cuts in this beleaguered district.

"They are tough decisions that have to be made, because they are about the survival of the entire district," said Kelvin R. Adams, the superintendent of the 22,500-student district. "There are no easy decisions anymore in public education."

St. Louis' situation has resonance far beyond the city, because its troubles are similar to those that other districts are likely to face.

See Also
To see how state legislatures are dealing with teacher pensions, see "Pension-System Woes Put Legislators on Hot Seat," June 5, 2013.

Across the nation, states have about $325 billion in unfunded pension liabilities, much of which could be passed along to districts. And, experts note, there are a limited number of ways to handle that debt—cutting services, raising taxes, or trimming benefits, none of which is particularly palatable.

"The default mechanism is service cuts, so fewer education dollars make it into today's classrooms because they are needed to pay for teachers' past service," said Joshua B. McGee, the vice president of public accountability at the Houston-based Arnold Foundation and an expert on teacher-pension systems. "The real difficulty is finding a solution that is fair to both workers and taxpayers."

In St. Louis, many of the cuts have been shaped with input from the city teachers' union. Changes to the pension structure haven't yet been made, but they have been proposed, and more are likely to be on the table in the future.

"The current system is no longer sustainable by the district," said Steven R. Carroll, the school system's lobbyist in the state capital.

Costs Rise

The Public School Retirement System of the City of St. Louis, or PSRS, was established in 1944. It predates the state teacher-pension plan serving teachers in all other Missouri districts except for Kansas City. (It is relatively rare for cities to have their own teacher-pension systems; only a handful, including St. Louis, Denver, and Cleveland, do.) The limited size of the St. Louis plan offers an unusual vantage point into the complicated relationship between pension benefits and bottom-line budgeting.

Budgets Tighten

K-12 student enrollment in St. Louis has fallen even as pension costs have begun to skyrocket. They make up about 10 percent of the district's spending.

The district's share of pension costs rose from about $14 million in 2006 to approximately $28 million by 2013, even as K-12 student enrollment fell by 10,000 students.

Pension payouts now account for about 15 percent of the district's personnel spending. And with the budget set at about $288 million, they make up 10 cents on every dollar the district spends. The figure has prompted public concern from Superintendent Adams and Rick Sullivan, the president of the special administrative board created by the state in 2007 to manage the district.

By the standards of teacher pensions, St. Louis' plan pays relatively modest benefits, and it is in better fiscal shape than most plans nationwide.

At 89 percent funded, the PSRS is not nearly as undernourished as many states', and the city has met its required annual contribution into the system for years, records show. (The Missouri state plan is 85 percent funded; the average of national state teacher-pension plans is 73 percent; and neighbor Illinois' plan is just 47 percent funded.)

The St. Louis plan's "pension multiplier," a value that helps determine each retiree's pension payout, is set at 2 percent of their final average salary, lower than the 2.5 percent in the state plan. Payouts average about $1,800 a month per teacher, according to the system's most recent annual report. (The average teacher salary in the city is $49,000.)

While teachers pay only 5 percent of their salaries into the PSRS—far lower than the 14 percent paid by teachers in the statewide plan—they also pay Social Security payroll taxes, unlike peers in the state retirement system, who do not participate in Social Security.

The factors contributing to the budget squeeze are much more interrelated: a rapidly shrinking school district, coupled with the 2008 economic downturn and a shift in the composition of the teaching force.

For decades, St. Louis has witnessed a decline in student enrollment and, consequently, a corresponding decrease in per-pupil state funding. Tax revenue is also down, as is state spending on education.

Other costs are related to the structure of defined-benefit pensions—the type in which teachers in St. Louis and nearly every state are enrolled. Such plans pool funds and pay out to retirees according to a specific formula, and as such, they are dependent on the workforce composition.

Changing Workforce

In St. Louis, the teaching force has grown gradually younger, partially because of two voluntary early-retirement programs. Younger teachers, with their lower salaries, pay less into the system and are more likely to leave the district and withdraw their contributions, noted Andrew Clark, the executive director of the PSRS. The fund is also on the verge of passing the 50-50 ratio of active members to retirees, which also will drive up district costs since fewer active members will be paying into the plan.

"Even though the number of teachers hasn't shifted that much, what they're earning has, ... and at 5 percent, someone has to make that up," Mr. Clark said. "One of the reasons we're still well-funded is that we try to temper it down about [cost-of-living increases] and extra benefits. We've been really vigilant about that."

Recession's Impact

The pension system's assets were not as hard hit by the 2008 recession as some state plans, but the recession still added to the system's costs.

Carrying an unfunded liability, or pension debt, of any size increases the cost of retirement benefits, because in addition to paying for the benefits teachers earn each year, employers are charged a premium on each employee to help pay off the accumulated pension debt, Mr. McGee said.

A look at the last few years of budget cuts reveals the options starkly. School closings. Bus-route reductions. Cuts to central-office, teaching, and school counselor positions. Furlough days. Principals now serving 11- rather than 12-month contracts.

The district's fiscal 2014 budget outlineRequires Adobe Acrobat Reader proposes closing two more schools this fall, and reducing more positions, among other cuts. Most reductions will be made through attrition and retirement, but "targeted" layoffs may be necessary, Mr. Adams said. Since his arrival in 2008, the district has had to shutter more than a dozen schools, a wrenching task.

Katherine M. Wessling, the president of the district's elected school board, which serves mainly as an advisory body and sounding-board for the community, outlined the difficulty of the choices.

"It's a tough situation. You want teachers to feel valued, and they shouldn't be in poverty when they retire," Ms. Wessling said. At the same time, she worries that reductions to some areas, such as art and music programs, will give the city's 17 charter schools an edge in attracting parents, further contributing to enrollment losses at the 77 regular district schools.

Some successes have occurred in building back the student population and teaching force, noted Byron Clemens, the vice president of the St. Louis Teachers Union, an affiliate of the American Federation of Teachers.

Over the past three years, the district has enrolled 2,200 students into a new early-childhood program financed partly through the release of funds formerly set aside for desegregation efforts, bringing up the number of enrolled students.

The closing of six charter schools belonging to the Imagine Schools chain, in 2011-12, also brought more students back to the regular public schools.

"We had an increase in enrollment for the first time in decades," Mr. Clemens said. "That's through working together in partnership with the district."

Times remain fairly tight for retirees, on the other hand. Unlike state plans that guarantee periodic cost-of-living increases, St. Louis' COLA increases must be approved by the special administration board.

Teachers have not been granted a COLA since 2006; administrators say they simply can't afford one, a decision that has been protested by a small but vocal group of retirees.

National Implications

According to the Denver-based National Conference of State Legislatures, 48 states revised public-employee plans between 2009 and 2012, often by raising contributions or the required age or service commitments, or by reducing benefits. Such changes are slowly starting to appear on the radar in St. Louis. A bill introduced this legislative session in the state capital would have gradually raised teacher contributions to 7.5 percent of their salary, among other factors. It was supported by the school district and will be reintroduced again during the next session, said Mr. Carroll, the lobbyist for the district.

Fewer states have examined alternatives to defined-benefit plans. Some of those options, such as 401(k)-style plans, tend to be vigorously opposed by teachers' unions because they shift risk from taxpayers at large onto individual teachers. Rhode Island, in 2011, recently moved to a plan combining features of both types.

Mr. Adams supports looking at a 401(k)-style option.

"The historic solutions don't work the way they did," he said. "People are not staying in the profession 25 years anymore."

It's an option the St. Louis Teachers Union says it will oppose.

"We've gotten through these really rough economic times, and because we've gone through this recession, we've seen the benefit of a defined-benefit plan," Mr. Clemens said. "Retirees keep their houses; they keep their retirement; they're able to shop at the grocery store."

Whether St. Louis' situation offers insights for other districts remains to be seen, given the variations in state laws and actuarial assumptions undergirding the plans.

Related Blog

Nationwide, teacher pensions carry a liability of around $325 billion, largely because of states' failure to make payments in full or on time. Costs have also risen as a result of some plans' assumptions and the benefits lawmakers promised to teachers in flusher times.

Among associations representing pension managers, for instance, much debate has focused on whether the 8 percent rate of return assumed over the valuation period is too high.

'Discount Rate'

The figure, known as the "discount rate," has been used by actuaries for most public-pension plans since the 1980s, but also increases risk.

"You don't have to miss your expected return by very much over that period of time, due to compounding, to end up with a huge deficit in asset values from where you expected," Mr. McGee noted. "Plan sponsors have used high discount rates to keep their current cost low, but the higher the discount rate a plan uses, the more likely it becomes that teachers' benefits will be underfunded and that costs will rise in the future."

Vol. 32, Issue 33, Pages 1,22-23

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