Budget & Finance

The Ballooning Expense That’s Cutting Into Funding for Students

By Mark Lieberman — March 03, 2023 3 min read
Illustration of money being carried away by a balloon that says "pensions"
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Pretty much everything these days is more expensive than it was a few years ago. But a new report makes the case that the precipitous rise in costs for school districts is due in large part to a line item that’s largely invisible to the casual observer: pension obligations.

In two decades, the amount of money state and local governments annually shell out for school employees’ retirement plans has tripled, from $21.7 billion in 2001 to $63.7 billion in 2021. But overall spending on K-12 schools during the same period has only increased by about a third, 32 percent.

In effect, that means while it looks on paper like education spending is on the rise, that increase is actually much smaller than it seems because districts largely can’t put it toward resources that directly influence day-to-day operations of schools.

These are among the conclusions of a new report released this week by the Equable Institute, a bipartisan nationwide nonprofit that conducts research and advocacy around improving pension systems. The report’s detailed findings, drawn from an abundance of federal, state, and private data, highlight a massive shift in school spending during the 21st century.

States’ average per-student spending has grown more than 26 percent in the last 20 years when adjusted for inflation, from $6,506 to $8,239. But subtracting pension costs from the equation paints a different picture: an increase of only 15 percent, from $6,048 to $6,950.

This means per-pupil increases in school funding are often less meaningful for students than they appear on paper.

“Rarely can we draw a direct line between increased pension costs and a specific child’s learning loss, concerning teacher retention numbers, or the lack of mental health resources in schools,” write Equable’s Anthony Randazzo and Jonathan Moody. “But we don’t even have to have such an explicit link to know that growing teacher benefit costs are putting negative pressure on K–12 budgets.”

Table chart, Growth Rate in Per Pupil State K12 Spending

Unfunded liabilities are driving up pension costs

What’s behind the explosion of pension costs? It’s not the pension benefits themselves—in fact, the value of pension benefits for the average teacher has actually declined by 15 percent since 2005.

Instead, pension costs have risen because of “unfunded liabilities.” That means states have committed to benefits at levels higher than what investment returns can support, or at levels higher than the funding they’ve allocated to pay for them.

Unfunded liabilities, a form of debt, rack up interest, which means they end up costing far more over the long haul than employees end up seeing in their pension accounts.

Nationwide, unfunded liabilities for school pensions have exploded from $86 billion in 2001 to nearly $817 billion in 2021.

Someone has to pay for these costs, which are assessed on the contributions states and districts make. In many cases, that means states are on the hook.

That also often means taxpayers see increases to their bills, to cover districts’ increased obligations.

In Illinois, for instance, a state lawmaker recently predicted property taxes would “go to Mars” if the state doesn’t do something about its unfunded school pension liabilities, which have already topped $80 billion.

Money that’s not helping students day to day

Illinois is among the states where pension costs have aggressively gobbled up an increasing share of overall K-12 spending over the last two decades. Pensions now take up more than three times the space in the state’s K-12 education budget than they did at the turn of the century.

But those numbers are dwarfed by changes in Pennsylvania and New Jersey, where pension costs as a share of school spending have risen more than tenfold in that time.

Overall, retirement benefits and pension debt obligations take up twice as much room in states’ education spending as they did in the early 2000s.

Bar chart, Retirement Costs

In essence, Randazzo and Moody contend, pension obligations siphon funds away from other key priorities, like employee salaries, instructional programs, curriculum materials, and school supplies.

“This should be alarming for anyone who cares about education resources. This should be viewed as problematic by anyone working toward education equity, expanding education choice, and/or improving education outcomes,” they write.

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