Teaching Profession

The Cryptocurrency Collapse Spells Trouble For Teacher Pensions. Here’s How

By Mark Lieberman — December 07, 2022 4 min read
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Several public pension funds that serve thousands of teachers stand to lose tens or even hundreds of millions of dollars because of investments in the collapsing cryptocurrency company FTX.

FTX, a company based in the Bahamas that provides a platform for users to exchange digital currency, filed for bankruptcy last week amid increased scrutiny and a federal probe into whether it misused millions in customer funds to prop up failing parts of its business. Its CEO, Sam Bankman-Fried, has embarked on a chaotic press tour that has drawn considerable nationwide attention to the collapse of a company that attracted a slew of venture capitalist and celebrity cheerleaders.

The link between this corporate mishegoss and K-12 schools might not be apparent at first. But Anthony Randazzo, the executive director of the Equable Institute, a nonprofit that analyzes retirement systems, last week unearthed 15 public pension funds in 11 states that will suffer from FTX’s financial meltdown.

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Two of those, in Illinois and New York, specifically provide pensions to K-12 teachers. Several others, in states like Alaska, Maryland, and Tennessee, fund pensions for teachers as well as other public employees like police officers and civil servants. The fallout extends beyond U.S. borders, too—the Ontario teacher pension system is poised to lose $95 million to failed FTX returns.

The pension systems didn’t invest in FTX directly. Instead, they invested in private equity or venture capital firms that in turn directed some funds toward FTX. Untangling those investments has been tricky, Randazzo said.

“The lack of transparency is in itself part of the problem that this FTX story has unearthed,” Randazzo said.

Josh McGee

Josh McGee, a research assistant professor in the University of Arkansas’ College of Education and Health Professions who extensively studies the K-12 retirement system, compares the current FTX debacle to the 2001 fall of Enron, the massive energy company that went bankrupt after committing widespread accounting fraud. That situation, too, put a dent in public pensions, to the tune of $1.5 billion.

McGee believes some fault lies with the private equity firms and other investors that failed to adequately scrutinize FTX before buying into the hype around its efforts to revolutionize global currency.

“These firms are supposed to be the adults in the room,” McGee said. But the FTX scandal is just the latest blow to teacher pensions, many of which already reported losses in recent months.

The FTX losses represent tiny fractions of 1 percent of the overall pension system for public school employees, which is currently underfunded by $1.2 trillion. Still, the collapse of FTX could reverberate for K-12 school districts for years to come. Here’s how:

Employees may have to contribute more to their pensions.

Most states are already falling well short of their obligations to fund pensions for teachers and other employees. When revenue from investments falls short of intended targets, states are on the hook for the difference. Sometimes they require teachers to pay more into the systems, or increase districts’ payments to debt servicing.

The burden often falls to teachers to put more of their paychecks towards pensions, which already suck up roughly one-fifth of their salaries.

School budgets could take a hit.

States have finite amounts of money, even when they experience a surge in revenue as many did last year. If they’re devoting more money to paying down pension obligations, that means they’re devoting less money to other priorities, like classroom instruction and school building renovations.

That said, teachers and administrators shouldn’t panic: “This isn’t so large in any individual plan where it’s going to be really painful to anybody,” McGee said.

Pension systems could rethink their approach.

Pension experts have long highlighted the flaws with the current model: Teachers who don’t work a full career in the same place get left out; lack of transparency in investments facilitates confusion and corruption; districts bear the brunt when pension returns fall short of projections.

In less than two decades, the average share of districts’ annual budget that pays for pension obligations has nearly tripled, from 4.7 percent to 11.7 percent. In some states, it’s even higher.

Data: K-12 School District Contributions Per Pupil to Retirement Systems 2004 2022

District contributions are volatile, too. In Omaha, Neb., for instance, the school district in recent years has been contributing more than its minimum pension obligation. But proposed cuts to state aid could mean the district has to divert funds elsewhere, the Nebraska Examiner reported.

“The last 20 years of pension investment and funding policy has only led to increasing costs and fewer resources available for today’s teachers and classrooms. Something’s gotta give there,” McGee said. “Hopefully FTX is the thing that makes us take a harder look.”

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