Teaching Profession

Slump in Stocks Yields Big Losses In Pension Funds

By Michelle Galley — February 19, 2003 8 min read

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.”

Related Tags:

Events

This content is provided by our sponsor. It is not written by and does not necessarily reflect the views of Education Week's editorial staff.
Sponsor
Classroom Technology Webinar
Educator-Driven EdTech Design: Help Shape the Future of Classroom Technology
Join us for a collaborative workshop where you will get a live demo of GoGuardian Teacher, including seamless new integrations with Google Classroom, and participate in an interactive design exercise building a feature based on
Content provided by GoGuardian
School & District Management Live Online Discussion A Seat at the Table With Education Week: What Did We Learn About Schooling Models This Year?
After a year of living with the pandemic, what schooling models might we turn to as we look ahead to improve the student learning experience? Could year-round schooling be one of them? What about online
School & District Management Webinar What's Ahead for Hybrid Learning: Putting Best Practices in Motion
It’s safe to say hybrid learning—a mix of in-person and remote instruction that evolved quickly during the pandemic—is probably here to stay in K-12 education to some extent. That is the case even though increasing

EdWeek Top School Jobs

Teacher Jobs
Search over ten thousand teaching jobs nationwide — elementary, middle, high school and more.
View Jobs
Principal Jobs
Find hundreds of jobs for principals, assistant principals, and other school leadership roles.
View Jobs
Administrator Jobs
Over a thousand district-level jobs: superintendents, directors, more.
View Jobs
Support Staff Jobs
Search thousands of jobs, from paraprofessionals to counselors and more.
View Jobs

Read Next

Teaching Profession Nearly 9 in 10 Teachers Willing to Work in Schools Once Vaccinated, Survey Finds
Nearly half of educators who belong to the National Education Association have gotten at least one dose of the COVID-19 vaccine.
4 min read
Nurse Sara Muela, left, administers the Johnson & Johnson COVID-19 vaccine to educator Rebecca Titus at a vaccination site setup for teachers and school staff at the Berks County Intermediate Unit in Reading, Pa., on March 15, 2021.
Nurse Sara Muela, left, administers the Johnson & Johnson COVID-19 vaccine to educator Rebecca Titus at a vaccination site set up for teachers and school staff in Reading, Pa., on March 15.
Matt Rourke/AP
Teaching Profession Q&A Nation's Top Teachers Discuss the Post-Pandemic Future of the Profession
Despite the difficulties this school year brought, the four finalists for the National Teacher of the Year award say they're hopeful.
11 min read
National Teacher of the Year Finalists (clockwise from top left): Alejandro Diasgranados, Juliana Urtubey, John Arthur, Maureen Stover
National Teacher of the Year Finalists (clockwise from top left): Alejandro Diasgranados, Juliana Urtubey, John Arthur, Maureen Stover
Courtesy of CCSSO
Teaching Profession Teachers Are Stressed Out, and It's Causing Some to Quit
Stress, more so than low pay, is the main reason public school teachers quit. And COVID-19 has increased the pressure.
7 min read
Image of exit doors.
pavel_balanenko/iStock/Getty
Teaching Profession Opinion Should Teachers Be Prioritized for the COVID-19 Vaccine?
Not all states are moving teachers to the front of the vaccination line. Researchers discuss the implications for in-person learning.
6 min read
Teacher Lizbeth Osuna from Cooper Elementary receives the Moderna vaccine at a CPS vaccination site at Roberto Clemente High School in Chicago, Ill., Thursday, Feb. 11, 2021.
Chicago public school teacher Lizbeth Osuna receives the COVID-19 vaccine at a school vaccination site last week.
Anthony Vazquez/Chicago Sun-Times via AP