Innovation Brings Hope for Teacher Pensions
The city teacher retirement plans in Missouri are in trouble. There’s a solid chance that the Kansas City Public Schools Retirement System (KCPSRS) could be out of money in just 20 years. And the St. Louis Public School Retirement System (STLPSRS) is taking the St. Louis Public Schools (SLPS) and charter schools to court to solve its funding problems. The good news for teachers and taxpayers is that there’s still time to protect current and future retirees. The building isn’t on fire yet, but there’s smoke under the door and it’s time to start talking about innovative solutions.
According to a 2017 asset/liability analysis commissioned by KCPSRS, the system only has enough money in the bank to pay 64 percent of what it owes to current and future retirees. We’ve written about this problem before, but it’s worth repeating. The fund needs to earn at least 5 percent per year, every year, for the next 20 years, or they’ll be out of money. That’s right—no money left in the fund. (For reference, between 1998 and 2018 the annualized Dow-Jones Industrial Average inflation-adjusted return was 5.528 percent.) Not surprisingly, the KCPSRS has requested increases to the school contribution rate over the next few years from the state legislature. So, Kansas City Public Schools and Kansas City charter schools will have to take another chunk of their revenue out of the classroom to send to KCPSRS.
STLPSRS was also just 64 percent funded (see p. 11) in 2016 and has almost as many retirees as active teachers. An annual analysis by actuaries determines how much SLPS and the St. Louis charter schools have to contribute to the fund each year. However, difficulty keeping up with increasing costs led SLPS to request that the state legislature cap their contribution rate at 16 percent, and they did. Unfortunately, STLPSRS looked at how that cap would affect the fund and determined that it would leave them with a $192 million shortfall within 15 years, so they’re suing SLPS and the St. Louis charter schools.
Economic conditions, unaffordable benefit promises, and an unwillingness to use realistic investment return assumptions have resulted in shaky fund positions, lawsuits, and balancing the books on the back of the youngest workers. What’s worse is that in 2017, the average pension payment took about $1,200 per student out of the classroom.
Does it have to be this way? No. We’re actually seeing teacher retirement benefit innovation from within public education. In 19 states, charter schools may choose to participate in their state’s pension plans or not. A recent analysis of charter school participation in five states found that the schools most likely to opt out of the state plan are urban schools, elementary schools, and those that are managed by charter networks. And new schools in high-cost states like California are much less likely to join than they were just five years ago.
Most of the opt-out charter schools offer their teachers 401k or 403b plans in which the teachers are vested in less than one year. The reasons given for choosing this path include wanting to lower their estimated costs, giving teachers a wider range of investment options, and making their benefits more portable.
For today’s youngest teachers, this is an important point. Most of them will not meet a vesting period of ten years in one state, which means they will lose the amount that their employer contributed for them. Even if they stay, Missouri teachers have to work for 26 years before their contributions are higher than their expected benefit. When you take nearly 10 percent off the top of a teacher’s salary, plus another 6 percent for Social Security, you have to wonder why anyone would want to be a public school teacher in Kansas City or St. Louis.