Many of our cities are in a state of crisis—just ask the residents of Flint, Michigan. Some cities have filed for bankruptcy protection and others would if they were not constitutionally barred from doing so. A recent article in US News points to one of the major contributing culprits to these crises: underfunded public pensions that are on the brink of insolvency. The total unfunded liability for all public pension plans has reached a staggering $1.7 trillion dollars. And, as Don Boyd of The Nelson A. Rockefeller Institute of Government at SUNY points out, teacher pension plans make up a large share of these plans.
An unfunded liability isn’t the amount needed to pay retirement benefits to current and future retirees; it is the portion that is not being covered at all by those obligated to set the funds aside. A couple of decades ago, it was determined that it would be “okay” to fund just 80 percent of the total obligation to current and future public employees and then make payments on the unfunded portion spread out over as many as 30 years. Technically, state plans are supposed to fully fund the 80 percent. But to figure out how much that 80 percent is, state pension plans began assuming that what they set aside would earn a steady 8 percent return—even through recessions. So in many cities faulty assumptions led to not even hitting the 80 percent and, in a worst-case scenario, Chicago Public Schools took a few years off from making payments on the unfunded portion. You don’t need to be an actuary to see where that is going to lead.
So now we have severely underfunded teacher pension plans in cities like Chicago, Detroit, Philadelphia, and Baltimore. Illinois seems to keep emerging as the poster child for how bad things can get, and it is having a direct, significant impact on the public schools and their students. Of the Chicago Public Schools’ total pension debt of $58 billion, its retirement plan was underfunded by $9.5 billion in 2014. That is nearly $24,000 of debt for each of the 400,000 students in Chicago public schools. The pension payments in Chicago are now the subject of court cases and, not surprising, factor heavily into collective bargaining with the teacher’s unions, which are threatening a strike within the next two weeks. Recent changes to the plan, to attempt to make it solvent, have resulted in a situation where a new 25-year-old teacher in Illinois will have to work for 26 years in order receive a net positive retirement benefit.
There is plenty of blame to go around for this debacle. Not fully funding the plans and using faulty earnings assumptions has allowed the problem to snowball. Generous pension promises were made to teachers in the past, although in reality, lots of teachers may spend as many years in retirement as they did working. This reality made the teacher pension plans unaffordable and shifted the problem dramatically to new teachers. The recession also took a toll on fund balances. But, when asked, the president of the teacher’s union, Randi Weingarten, dismisses all of this out of hand. According to Weingarten, the real culprit behind these massive fiscal problems is the government’s support for charter schools because they take funds from non-charter schools. Wait, what?
Let’s do a little back-of-the-envelope math here. In 2014, there were about 60,000 charter school students in Chicago. Spending per student in that year was around $12,000, but only about one-third of that came from local revenue. So, if you assume that charter school students were funded by Chicago at the same amount as non-charter school students (which is unlikely), about $250 million would have gone to charter schools. In other words, if all charter schools were shut down (of course the students would go back to CPS where they presumably cost $12,000 each), and the entire amount was sent directly to the teacher pension plan, the unfunded liability would shrink from $9.5 billion to a measly $9.25 billion.The charter movement continues to grow because parents want to be able to choose a high-quality school for their child. And there is a growing body of evidence, particularly in our most troubled cities, that charter schools are improving the academic outcomes of their students. Charter school detractors have tried throwing mud in every direction in the hopes that some of it will stick. This one, though, is beyond the pale.