The Securities and Exchange Commission, which regulates the financial statements of public companies, has rigorous rules requiring the disclosure of compensation for senior executives. These rules should serve as a model for the disclosure of compensation for public school employees, especially superintendents.
The SEC’s rules were gradually built up in response to frequently recurring scandals revealing that, absent forced government disclosure, corporate CEOs, often with the tacit approval of their boards of directors, have strong incentives to secretly pay themselves above market compensation at shareholder expense. For each of the top five highest-paid executives in a public company, the SEC rules require disclosure of all forms of compensation, including salary, bonus, stock options, nonequity incentives, and changes in pension value and other deferred compensation. All of this compensation information must be disclosed in publicly filed reports freely available via the Internet.
The signature feature of the SEC’s newest rules, effective Dec. 15, is that companies must add up all compensation in a single figure, which facilitates easy comparisons across time and companies. To derive a total-compensation number, the SEC made difficult and controversial assumptions about the present value of stock options, deferred compensation, and other uncertain future income streams. But the effort was widely defended because the health of financial markets depends on such transparency.
Similarly, the efficient operation of public school systems requires that the public understand how its money is being spent. Surprisingly, however, public school systems have far lower standards of transparency for executive compensation than public companies’.
Consider the superintendent’s total compensation in the place where I live, Anne Arundel County, Md. The county’s school system is the nation’s 41st largest, with more than 10,000 employees and a budget of close to $1 billion. Last July, the county hired a new superintendent and disclosed his compensation in a press release reported by the three major local newspapers: The Sun of Baltimore, The Washington Post, and The Capital of Annapolis, Md. Using SEC accounting standards, his total compensation would have been over $1 million for his first year on the job. But the press release said that the superintendent’s “total package is worth roughly $275,000 in salary and incentives, including an annual performance bonus of up to 10 percent of his base salary and an annual $15,000 payment to a retirement fund for each year he stays in the job.” The release also announced that the new superintendent would “receive a comprehensive benefits package that includes a $750-a-month car allowance for automobile expenses and a cellphone or other communications device provided by the school system for business purposes.”
The efficient operation of public school systems requires that the public understand how its money is being spent.
Following standard Maryland accounting practice, the glossy, 282-page annual school budget includes a section on the cost of the superintendent’s office. But the superintendent’s total compensation is impossible to determine. This is largely because the budget excludes pension benefits paid by the state of Maryland and because benefits paid by the county are aggregated in a separate section called “fixed costs,” which are not allocated to the superintendent’s office—or any other employee group.
Let’s now look at the compensation components that were and were not publicly disclosed. The public portion, which was the basis of the $275,000 estimate, included base salary ($225,000), expected performance bonus ($22,500), the county’s contribution to a defined-benefit pension plan ($15,000), and miscellaneous business-expense reimbursements for car, phone, and computer, which collectively were probably under $15,000 a year.
The undisclosed portion came to $865,000 for the first year and included current insurance ($9,500), retirement insurance ($4,800), unused leave ($35,000), ordinary Maryland pension ($33,000), and extraordinary Maryland pension ($784,000). Here is a breakdown:
• Current Insurance Benefit. The superintendent was entitled to health, dental, vision, life ($500,000 worth), and disability insurance. The cost of these benefits was disclosed neither in the press release nor the superintendent’s contract. The employer contribution for the medical, dental, and vision plan for an average employee across all employee groups was approximately $9,500.
• Retirement Insurance Benefit. The superintendent was entitled to employer-subsidized health care in retirement, with an annual employer liability of approximately $4,800 per eligible employee.
• Unused-Leave Benefit. The superintendent was entitled to 28 days a year of vacation leave and 12 days a year of sick leave. If unused, these 40 days could be converted to additional compensation worth $35,000, based on a per diem rate of one-260th of the superintendent’s annual salary. Standard school holidays, plus 10 days a year of discretionary personal and bereavement leave, could not be converted into compensation.
• Ordinary State Retirement Benefit. The actuarial cost to Maryland taxpayers of the state’s defined-benefit pension is 11.58 percent of total eligible salary. This came to $33,000.
• Extraordinary State Retirement Benefit. The superintendent came to his job with 28 years of work experience in Maryland schools, plus slightly more than one year of accumulated leave. This 29 years of work meant that he was already entitled to 40 percent of his final salary for his annual pension, with the final salary determined by the average of his last three years of work. The superintendent’s previous salary was $135,000 a year, with presumably about 10 percent in unused leave, giving a total eligible salary of $149,000. His new eligible salary was $282,000, for an increase of $133,000, or 212 percent.
Maryland’s pension system assumes only a 4 percent year-to-year increase in salary for a teacher or administrator from age 55 to age 59 (the Anne Arundel County superintendent will be 55 at the end of his first contract year), which is why this is labeled an extraordinary benefit. Assuming the superintendent had at least three years of this salary (his contract was for four years), either retired at the end of his contract or moved to another district (with 30 years of eligible work an employee can retire without an early-retirement penalty), and lived to age 80 (the expected average according to the U.S. Census for a white male age 55), the total increase in the present value of his pension benefits was $1,176,000.
He was eligible for two-thirds of this in the first year of his contract because, in addition to his one year of work, he had more than a year of accumulated leave that could be used for pension benefits. This came to $784,000 for the first year (and half that sum for the second year). In effect, this was an undisclosed signing bonus.
The pattern of undisclosed superintendent compensation is not new. The previous interim superintendent, pulled out of retirement after more than 30 years of work in the district, earned a base salary of $180,000 (disclosed), plus a Maryland pension (undisclosed). To avoid Maryland laws against “double dipping” and to exploit the discrepancy in the definition of the pension calendar year (January to December) and the district-contract calendar year (July to June), the interim superintendent was paid some months at the rate of $360,000 a year and the balance at $120,000 a year.
The superintendent who served before the interim superintendent resigned under pressure from the school board. As part of his termination agreement, the board gave him an undisclosed golden parachute of benefits, totaling upwards of $100,000. The largest component was a lump-sum pension annuity paid before his resignation.
The extent of undisclosed compensation in Anne Arundel County may be extreme, but the phenomenon of undisclosed compensation is not unusual. Local governments typically report only employee compensation that they themselves pay for, so when, as in Maryland, the state pays for pensions, this benefit doesn’t appear in local budgets.
Local governments also typically report compensation on a “cash” rather than an “accrual” basis. Public companies, in contrast, provide both types of reporting. If I sign a contract to pay you $1 million five years from now, no cash changes hands during the current accounting period, but I’ve still incurred a legal obligation to pay you.
Cash-based accounting allows politicians to promise future benefits to public employees without having to raise current taxes to pay for them. Consequently, the total unfunded public-pension liability in the United States is more than $1 trillion. Anne Arundel County’s unfunded retirement-health-insurance obligation is $700 million.
The time has come to apply SEC accounting principles to public school financial statements, because current school compensation accounting can be easily manipulated to mislead the public.
Is there a compelling reason for public companies, but not public school systems, to disclose total executive compensation? If so, I haven’t found one. If anything, the rationale for public disclosure of compensation for all employee types, not just senior executives, is much stronger for public school systems than public companies.
Arguably, nothing is more important to a school system than its ability to attract and retain competent employees. So the public has a compelling interest in knowing how much individual classes of employees are actually paid. But employee groups have a common interest in minimizing their apparent cost to taxpayers. This tension helps explain why the compensation of teachers and school superintendents is frequently reported in local newspapers—but reported with misleadingly low numbers: base salary for superintendents, starting salary for teachers.
Some argue that the public cannot be entrusted with accurate information about public-employee compensation because average citizens are filled with jealousy and don’t appreciate what it costs to attract and retain first-rate public employees. This argument has some truth, but it is also very undemocratic. To the extent it is true, the proper remedy in a democracy is to educate, not mislead, the public.
The time has come to apply SEC accounting principles to public school financial statements that are presently easily manipulated to mislead the public. Those SEC principles should be extended not only to senior school executives, but also to all the major employee groups, with average total compensation disclosed for those at the bottom, middle, and top quintiles of each employee group.
Is Anne Arundel County the only local school system to have a million-dollar superintendent? If SEC-style accounting systems were in place, it would be easy to tell. But as it stands, I don’t know.
A version of this article appeared in the December 13, 2006 edition of Education Week as America’s Million-Dollar Superintendents