Public Employee Pensions: Time to Get Our Heads Out of the Sand

Posted on by Susan Pendergrass

Andrew Biggs’ Show-Me Institute essay on the current condition of the Missouri State Employees Retirement System (MOSERS) demonstrates that, like so many state plans, MOSERS is experiencing a decline in its funding health. This is bad for public employees and for taxpayers.

Consider the costs to taxpayers. As of 2018, the plan has assets equal to less than 70 percent of their liabilities and—just to maintain that level of funding—the Missouri state government will have to contribute nearly 20 percent of its total employee payroll to the plan this year. In addition, employees hired after 2011 contribute 4 percent of their paychecks to the system. Imagine a private-sector benefit that cost nearly one-quarter of employee salaries but was considered so sacrosanct as so be untouchable. The hard truth is that we’re going to have to start talking about policy changes aimed at averting a funding crisis. Biggs’s essay explores various options, including grandfathering current plan participants and designing a new system for future employees.

Of course, MOSERS is just one of many public pension plans in the state. The pension systems for teachers aren’t any better.  Teachers argue that they work for low salaries and, in exchange for their sacrifice, they are “taken care of” with generous retirement benefits. But that is only true for those teachers who start their teaching career right out of college and work in the same state for at least twenty-five years. In fact, an analysis of the Missouri Public Schools Retirement System (PSRS)—the plan that covers all Missouri teachers other than those in Kansas City or St. Louis—found that a teacher in the Springfield district would have to work for 26 years in order to hit the “crossover” point at which their total retirement benefit is worth more than what they contributed.

Imagine that! Working for 26 years before your retirement plan is worth more than you put in.

While the PSRS is in better financial health than MOSERS, total annual contributions to the plan are 29 percent of payroll (with 14.5 percent coming from the teacher and 14.5 percent from the school district). This is only likely to get higher because there are now 78,000 teachers (active members) supporting 60,000 retired teachers. In 2000, roughly the same number of active teachers supported just 25,000 retirees. In addition, while the plan is currently nearly 84 percent funded, it has an unfunded liability of more than $7 billion and its administrators continue to assume that the plan will earn a 7.6 percent return on its investments every year, indefinitely. You don’t have to be a math teacher to know those numbers just don’t add up.

Do Kentucky Teachers Even Know Why They’re Protesting?

Posted on by Susan Pendergrass

Kentucky public school teachers are right to be worried about their retirement benefits. According to the Kentucky Teacher Retirement System’s (KTRS) 2017 annual financial report, the fund was about $14 billion short of what it needs to pay the benefits already promised to working and retired teachers. According to the KTRS report, “Since fiscal year 2008, the state has not paid the full recommended annual employer contribution necessary to prefund the benefit requirements of members of the retirement system as determined by the actuary.” Further, “If contributions by the employer to the system in subsequent fiscal years are less than those required, the assets are expected to become insufficient to pay promised benefits.”

The words are complicated and confusing. But two years ago, Beau Barnes, a KTRS lawyer, summed it up this way, “It’s a 100 percent certainty that if we don’t do something very soon, this problem continues to get much, much worse very quickly.”

What this means is that, as in so many states, Kentucky’s teacher retirement plan is in a hole that is only getting deeper. It is time to stop digging, and it appears they’re trying to do so. If Governor Bevin signs SB 151, current and retired teachers will be guaranteed pension payments for every dollar that they have been promised, plus an annual cost-of-living adjustment of 1.5 percent. New teachers—only those hired for the 2019–20 school year and thereafter—will be placed in a hybrid, cash balance plan, similar to what just about everyone in the private sector has today. This will allow the state to deal with the debt the plan has accumulated without it growing.

So, why Kentucky teachers are walking out? Are they that concerned about the next year’s crop of new teachers? Or is it just that they don’t really understand the system, the seriousness of the problem, and how reform actually protects their benefits by finding a way out of the financial mess? We found a similar lack of understanding when we surveyed Missouri teachers about pensions. So, while the teacher’s unions are whipping teachers into a frenzy behind the false narrative of “they’re taking our pensions!” Kentucky parents have to scramble to make arrangements for their kids.

A word of caution for St. Louis public school teachers. The financial situation of their retirement fund isn’t much better, and the fight over how much the St. Louis Public School Retirement System (PSRS) needs and how much St. Louis Public Schools (SLPS) is willing to pay is now in the courts.

Cities May Actually Be the Culprit in Underfunding Schools

Posted on by Patrick Tuohey

Education funding is a hot topic in several states, with lawsuits alleging that state governments are failing to meet their constitutional duties to provide adequate resources. While the issues regarding state funding are important, it’s often the cities that are leeching money away from local school districts.

According to National Center for Education Statistics, just under half (46.6%) of aggregate local school district funding comes from states. Forty-five percent comes from local sources, including 36.4 percent from local property taxes. Those local property taxes are the source of much consternation between cities and school districts.

Across the country, municipal economic development policies such as abatement or tax-increment financing (TIF) allow cities to freeze, reduce or redirect property taxes to developers in order to offset the risks of their investment. In short, the practices permit one political body—cities—to divert the funds of another political body—school districts! And the loss of revenue to schools can be in the millions each year. A story from the St. Louis Post-Dispatch put the cost at $18 million per year for a single district:

The school district relies far more heavily on property taxes, collecting about 61 cents on each tax dollar paid. That means the district, which has little to no say over whether property taxes are abated on real estate projects, missed out on about $18 million in revenue last year.

The Kansas City Public School District (KCPS) estimates that it loses about $26 million each year. Chicago public schools claim a much higher cost to their schools from TIF—as high as $177 million in 2015 alone.

Proponents of these economic development subsidies claim that the funds redirected from schools come only from the increase in property tax—the increment—due to the new development. Without the subsidy, they claim, there would be no new development and so no increase in property tax in the first place. But studies of TIF, such as those conducted on Chicago, St. Louis and Kansas City by UNC–Chapel Hill professor William Lester conclude that there is little if any economic development resulting from TIF. Research shows that areas without TIF grow at the same rate as those with TIF—suggesting that TIF itself plays little to no role.

Part of the reason is that one of the standards for determining the appropriateness of TIF subsidies, often called the “but-for test,” is so weak as to be meaningless. The St. Louis Development Corporation (which oversees TIF in St. Louis) issued a report on its own programs in 2016 that found that due to poor quantitative measurement, one “cannot readily determine what may or may not be deemed a project worthy of consideration for a City tax incentive.” But developers have learned how to game the system, and city politicians are often all too willing to oblige so that they can point to new construction as evidence of their political success. Even worse, these developments are often subsidized in already economically vibrant parts of the city—further evidencing the lack of need for a subsidy.

California was the first state to adopt TIF in 1952, but subsequent policies required the state to reimburse school districts for funds lost due to municipal TIF policy. As a result, California became the first state to end TIF in 2012. While states have differing TIF policies, the basic impact on school districts is the same. Tax revenue that would have gone to support education is diverted to subsidize development—development that research suggests may have happened anyway.

Missouri is considering several reforms to its TIF policy, including narrowing the circumstances under which TIF may be used, strengthening the criteria a project must meet in order to qualify for TIF, and requiring any economic impact analysis to be conducted by a third party. Last year the Illinois legislature mandated a study of its TIF policies that is due to be released soon.

Parents and educators are right to look to governors, state legislators and school boards to make sure education funding is sufficient and that the funds are spent wisely. They should also make sure that the new local housing development, shopping mall or office building isn’t being underwritten by funds diverted under the noses of those same political bodies.

St. Louis Is Failing, and It Has Only Its Government to Blame

Posted on by Patrick Ishmael

Last month the U.S. Census Bureau found that St. Louis had, once again, shrunk in population over the last year. The Bureau reported that St. Louis’s population in 2017 had dropped to fewer than 309,000 people—over 10,000 fewer St. Louisans than there were in 2010, and far fewer than half the city’s now-distant peak of over 850,000 citizens in 1950. The many reasons for the city’s precipitous decline in population are mutually reinforcing.

One reason is the City’s deserved reputation as a crime center. As recently as 2016, the city was ranked the most violent city in America by the Federal Bureau of Investigation, and property crime remains a major issue for residents and visitors alike. What drives the crime is subject to interpretation and analysis; poverty and the region’s long-simmering racial tensions are factors. But whatever its source, crime affects whether people stay in the city—or for that matter, whether they come to the city in the first place.

Taxes are also an enormously important piece of the puzzle. The negative impact of income and earnings taxes on economic growth appears in the academic literature again and again, and yet St. Louis policymakers and others have refused to change course. In a paper written for the Show-Me Institute in 2014, economist Howard Wall found that half of the population loss that took place in the city between 2000 and 2010 could be attributed to the earnings tax. Even if the effect were only half as big, it would still be a massive problem.

Additional research, including a host of Show-Me Institute papers, have demonstrated similar growth issues related to the City’s earnings tax. Still, establishment political interests continue to rally around it. Whether that’s out of stubbornness or fear, the negative impact the tax has on the City and its future remains the same.

Capital and labor are mobile, and because they are, leaving the city is very easy. Factor in that the city gives away millions in tax dollars to a cavalcade of long-entrenched special interests, and it becomes clear that an economic system that robs Peter Taxpayer to pay Paul only works if Peter sticks around. And Peter hasn’t.

The city hasn’t just beggared taxpayers through the earnings tax and its tax subsidies; it has also beggared some of the very public services that lure young families to a city. I will leave the heavy lifting on education policy to my colleagues at the Show-Me Institute, but I will observe that a city steering $30 million per year from basic city services like education does so at its own peril. Yet, that’s exactly what the St. Louis does.

There is a charm to the urban environment that attracts many. That charm can be enough to compensate for the negative effect of somewhat higher taxes, or somewhat greater risk, or somewhat poorer services.

But there is a limit. If you were 30, married, and had children or were planning to, would you put down roots in a place bedeviled by St. Louis’s problems? Or would you go someplace where safety, educational opportunity, and tax stewardship were high priorities? When fundamental public needs are left unmet, it isn’t fleeing residents who are at fault; it’s the city that is.

Regional power is moving to the north and west of the city, through St. Louis County and toward St. Charles County. Lest we forget, St. Charles County is now larger than St. Louis City—and it’s positioned to widen that population gap for the foreseeable future.

The City’s greatest issue isn’t whether it will be the economic center of the region. Its greatest issue, the one that will determine its long-term viability, is whether it will be a competent steward of public money and the public’s trust—whether the City will address the policy questions that ultimately underpin and promote long-term development and population growth. Doing so will require a meticulous commitment to getting the fundamentals of governance right and eschewing the rest.

It’s said that the best time to plant a tree was twenty years ago, and the next best time is to plant a tree is today. For the sake of its future, now is the right time for St. Louis to address its fundamental and widely recognized issues of governance in a serious and research-driven manner. Until the city gets serious about regaining public trust by getting back to the basics of governance—above all, a full commitment to security, education, and the stewardship of the public checkbook—no one should be surprised when more St. Louisans follow their predecessors out the door.

School Options and the Rise and Fall of Cities

Posted on by Susan Pendergrass

It’s a problem that plagues many U.S. cities: How can we make sure that all families have access to a high-quality school? Charter schools can be a good starting point, since they can be strategically placed in neighborhoods where parents don’t have other good options. It’s unlikely that a city will convert all of its schools to charter schools (with the exception of hurricane-ravaged New Orleans), but several cities have found a middle path. In these cities, neighborhood public schools are contracted to charter school networks or other nonprofits. While the schools are given significant autonomy, they are still overseen by the local public school district.

Indianapolis has been a standout in creating a vibrant network of schools from which parents can choose. In addition to dozens of charter schools and the Indiana Choice Scholarship voucher program, Indianapolis Public Schools (IPS) has been sponsoring Innovation Network Schools. These schools have been achieving large yearly gains in standardized test scores, for which IPS gets the credit. And parents get the benefit of a collaborative, choice-rich environment that prioritizes student needs over turf battles. Not surprisingly, Indy’s metro population has been growing by over five percent per year since 2010.

The news out of St. Louis is much less positive. Fodor’s added it to their “do not travel” list this year and the NAACP has issued a travel advisory to warn people against driving through the city. And, just last week, new census numbers revealed that St. Louis’ population—both in the city and the county—continues to decline, with the region having now dropped out of the top 20 largest metropolitan areas.

It’s hard to imagine that St. Louis is going to be able to turn this around and start growing again unless it focuses on getting the basics right: keeping people safe, providing quality schools, and not taxing people to exhaustion. It’s time to stop defending a failing status quo.

In 2017, just 31 percent of St. Louis Public Schools (SLPS) 8th graders were Proficient in English/Language Arts and just 9 percent were Proficient in Math. The Department of Elementary and Secondary Education (DESE) considers St. Louis Public Schools to be “fully accredited”; however, when only one out of ten students starts high school knowing how to do math at grade level, it’s going to be tough to turn out students who are college- or career-ready. And sure enough, the average ACT score in 2017 was 17.0, with 87 percent of those who took the exam scoring below the national average.

Fortunately, some St. Louis parents have access to public charter schools, many of which dramatically outperform the school district. But the district and the charter schools are often at odds. In fact, the district, along with the NAACP, is suing the charter schools over a desegregation sales tax the SLPS claims should not have been shared with the charter schools. If SLPS wins, most of the charter schools are likely to be bankrupted. Rather than trying to expand options for parents, the SLPS lawsuit could end up limiting them.

Too often in Missouri, it seems that giving parents options like charter schools is seen as a threat rather than a useful tool. Maybe that’s one reason the city is losing residents, as some parents vote with their feet and move elsewhere.

A Plague on Both Your Tax Credits!

Posted on by Patrick Tuohey

Economic development tax credits that, whatever their intended purpose, enrich a few at the cost of the many are simply bad policy. Such tax credits fail to deliver on their promises in a manner that is worth the public investment.

For this reason, when Governor Greitens blocked the issuance of low-income housing tax credits—a practice that Show-Me analysts have written for years should be exposed, sunsetted, and discontinued—it appeared that the state might have begun a journey toward putting tax credits in their proper place. Likewise, analysts have written about the wastefulness of stadium subsidies, and so we read with pleasure that Lt. Governor Parson voted against tax credits to build an ice rink and practice facility for the St. Louis Blues.

Unfortunately, further investigation reveals that there is less here than meets the eye.

Regarding the St. Louis Blues tax credit, the St. Louis Post Dispatch wrote that all three of the Governor’s appointments to the Missouri Development Finance Board voted in favor of issuing $2 million in tax credits for the ice rink. Parson was the sole vote against. His lone voice of opposition might be comforting to Missouri taxpayers until one reads further. According to the Post-Dispatch:

Parson said that while he appreciated the boost the project could give St. Louis’s economy, he could not vote to issue tax credits for a new sporting complex at a time when the state is refusing to issue any low-income housing tax credits.

The logic here is all wrong. We don’t need counterproductive tax credits to be evenly distributed (and for the record, the low-income housing credit is indeed counterproductive). What we need is for these credits to be eliminated.

If Missouri is to thrive, it needs a system of taxation that treats everyone equally, is efficient, and is dedicated to supporting the important functions of government. The tax credit system is none of those things. Even if the credits weren’t subject to abuse—and they are—and even if the state were good at delivering on economic development promises—and it isn’t—it’s long past time for Missouri’s leaders to focus on policies that hold promise for helping everyone by creating real jobs and real growth.

Charter Schools 101: Don’t Charter Schools Hurt Public Schools?

Posted on by Susan Pendergrass

Without a doubt, the question that I get most often about charter schools is, “But don’t they hurt the public schools?” The short answer is that charter public schools don’t hurt traditional public schools any more than other factors that can affect enrollment, but they may challenge them.

Charter schools, wherever they operate, are often accused of having a harmful effect on the traditional public schools in the area. The thinking seems to be that if parents choose a charter school, then they’re rejecting—and thereby hurting—their assigned neighborhood school. So, did the Honda Accord “hurt” the Ford Taurus, or did Sprint “hurt” AT&T because some people stopped choosing them? Or did they challenge them?

Charter schools do create change in the public school districts in which they open, and that change can take many forms. Charter school opponents tend to focus on one pain point: Charter schools take funding from the public school district. Before addressing this charge, I’d like to remind readers that charter schools are public schools and charter school students are public school students. When parents are given a choice over one of the most important aspects of their child’s life—their school—not all parents choose the public school assigned to them on the basis of their address. Many choose a public charter school instead. So, while their child’s public education funding stays within the borders of their public school district, it is no longer available to be spent by the local school board.

When a parent chooses to send a child to a charter school, the state funding that would have been sent to the public school district where that student lives is sent, instead, to the charter school the parent has chosen. Federal funding, such as that for low-income students or students with disabilities, also, theoretically, follows the student. Some, but not all, of the local funding may go with the student. The same is true whether the student chooses a charter school, moves to another school district, or moves to another state. The local public school district is no longer tasked with educating the student, so they no longer get the money to do so.

The rub seems to be that charter schools create a new school where one already exists, and when students leave, the existing school really can’t downsize—at least not quickly. Of course, the likelihood of a substantial number of students choosing a charter school is related to the perceived quality of the schools in the district. Prior to charter schools, parents in poorly performing school districts moved out if they could. Rising and declining enrollment can be challenging for public school districts. But the solution isn’t to prevent kids from leaving because the district can’t afford it, any more than it would be reasonable to prevent parents from moving out of the district.

Public school districts have some options when faced with the loss of students to charter schools. They can consider it a challenge and do what’s needed to bring parents back. They can collaborate with the charter school to better serve the needs of all students. They can move away from long-term fixed expenses to a more nimble way of doing business, similar to how many charter schools finance their buildings. If they don’t like any of those options, they can always complain that the world isn’t fair. But at the very lease they should stop trying to protect a failed status quo

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