Posts tagged ‘teacher pensions’

December 6, 2013

Detroit bankruptcy ruling shows that public pension promises can be broken

by Grace

The Detroit court ruling that weakens public pension protections should be a wake-up call for taxpayers and government employees in other states.

DETROIT — In a ruling that could reverberate far beyond Detroit, a federal judge held on Tuesday that this battered city could formally enter bankruptcy and asserted that Detroit’s obligation to pay pensions in full was not untouchable.

The judge, Steven W. Rhodes, dealt a major blow to the widely held belief that state laws preserve public pensions, and his ruling is likely to resonate in Chicago, Los Angeles, Philadelphia and many other American cities where the rising cost of pensions has been crowding out spending for public schools, police departments and other services.

The judge made it clear that public employee pensions were not protected in a federal Chapter 9 bankruptcy, even though the Michigan Constitution expressly protects them. “Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy,” he said.

In particular, the Detroit ruling could be a game changer for California municipal bankruptcy cases.

The ruling by Judge Steven W. Rhodes, who is presiding in Detroit’s bankruptcy case, that public pensions are not protected from cuts could alter the course of bankrupt cities like Stockton and San Bernardino, Calif., that had been operating under the assumption that pensions were untouchable.

Uncertainty looms for Detroit retirees.

Are retirees going to lose their pensions?
Maybe. Rhodes ruled Tuesday that pensions, like any contracts in bankruptcy, can be broken. But he also warned city officials that they’ll need to justify any deep cuts that could threaten the lives of retired workers. There are about 23,000 retirees and 9,000 city workers. Most of them receive pensions that are less than $20,000 annually. Michigan’s Attorney General Bill Schuette says he will continue to fight Rhodes’ assessment that pensions can be cut, since public pensions are protected in the state’s Constitution.

What about New York?

I’m unaware of any New York municipalities or school districts that are in danger of bankruptcy.  But with pension costs overpowering the ability of New York public schools to maintain student services and escalating 5,000% over the last decade in some towns, this latest development may diminish the perceived sanctity of guaranteed pension payouts.  In any case, it’s hard to see how taxpayers can continue to pay the skyrocketing pension costs that have been the norm in recent years.  We will have to wait to see how the pension crisis plays out in New York and other states.

Related:

May 8, 2013

Quick Links – Public pension problems round-up

by Grace

IN NEW YORK, PENSION COSTS ARE OVERPOWERING THE PUBLIC SCHOOLS’ ABILITY TO MAINTAIN STUDENT SERVICES.

Our local public schools must cut student services to pay soaring pension costs.

The budget numbers tell the story:

  • Total school costs will increase 3.3% over last year.
  • Cost of teacher pensions alone will increase 42%.
  • Pension costs account for at least 75% of the total budget increase.*
  • To pay for the 42% increase in teacher pension costs, the school will cut teaching staff and increase class sizes.

Public schools throughout the state are in a similar situation.   “Retirement and insurance costs continue their relentless climb”, causing a nearby district to cut 30 jobs.  Another local school administrator explains their pension costs:

Almost 80 percent of the hike comes from a $3.5 million rise in state-mandated retirement expenses, Purvis said.

* Total employee benefits costs account for 96% of the total budget increase.

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A SPECIAL EXEMPTION ALLOWS TAX INCREASES THAT EXCEED TAX CAP LIMITS AS LONG AS THOSE PAYMENTS ARE USED TO PAY FOR PUBLIC EMPLOYEE PENSIONS.

The New York property tax cap introduced two years ago includes a carve-out created to allow tax increases that pay for teacher pensions to be exempted from the cap.  As it turns out, this exemption has been the main reason for the average tax increase more than doubling above the 2% statutory base cap up to 4.6% .

The additional increase is driven entirely by a provision of the 2011 tax cap law that excludes a portion of increased employee pension costs from the limit on tax levy increases. Without the pension-related increase, the 2013-14 levy limit statewide would average 2.7 percent, including all other district-specific exclusions and allowances for voter-approved capital expenses and physical additions to the local tax base, along with factors such as growth in the tax base and net changes in the value of payment in lieu of tax (PILOT) agreements.

The pension exclusion hurts poor school districts the most because the calculation method especially affects communities with lower property values.

… the pension exclusion in the tax cap law effectively makes it easier for school districts to raise taxes on property owners who can least afford it.

… The pension provision—added at the insistence of Assembly Speaker Sheldon Silver—diminishes the protection the law was supposed to provide for some of the state’s poorest taxpayers.

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NEW YORK’S ‘STOPGAP’ SOLUTION TO PENSION CRISIS CARRIES ‘LONG-TERM RISKS’.

A “pension-smoothing” provision was recently introduced in New York, allowing school districts to postpone full funding of pension liabilities.

Moody’s does not look favorably on this plan to kick the can down the road.

Moody’s Investors Services warned Monday that the state’s new pension-smoothing plan is “a stopgap with long-term risks” that could endanger the state’s pension fund and the credit of local governments.

The plan, part of the state budget approved last month, allows for local governments and schools to essentially pay a flat rate for pension costs over 12 years, avoiding the steep cost increases that the municipalities have faced.

Opening the door to future underfunding of pension liabilities

Moody’s says that the concern is the flat-rate payments could underfund the state’s roughly $150 billion pension fund, which provides benefits to 1 million retirees and current local and state workers. That could lead to higher costs for municipalities and schools in future years, the credit agency said.

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PUBLIC PENSION HORROR STORIES FROM ILLINOIS AND FROM CALIFORNIA CONJURE UP TROUBLING IMAGES.

 20130505.COCPython1

 In Illinois, public pensions already gobbling up education funding

… Education funding is being strangled by the same python that is strangling the rest of state government’s finances: pension obligations….


20130505.COCPacman1

 “The pension costs really are the Pacman that’s eating our budget,” Shirey said.

March 14, 2013

Even after recent reform, New York teacher pension costs will rise 37%

by Grace

A history of New York State public school pension reform:

20130309.COCNYPensionTiers2

Recent reform that saw the creation of Tier 6 is unlikely to offer taxpayers any relief for at least a decade.

Over time, lawmakers have passed legislation to reduce the cost of pensions to state and local governments and school districts. The avenue they have used to do this is to create additional “tiers”—levels of membership that carry different benefits and requirements. After the passage of Tier 5 in 2009, calls for pension reform persisted, and a new Tier 6 was enacted this year.

Gov. Cuomo has said that the recently enacted pension reform will save the state more than $80 billion over the next 30 years. However, according to the NYS Comptroller’s Office, the creation of Tier 6 will not significantly lower pension costs for schools in the immediate future to prevent the kinds of program cuts many districts face in the next few years.

This is because the new pension tier applies only to new employees hired after April 1, 2012. With school districts struggling to balance their budgets in this difficult economy, most are laying off staff rather than hiring new employees who would fall into the new tier.

Pension costs have continued to surge out of control, as I wrote last year.

… skyrocketing public pension costs are “the single biggest threat” to local schools’ ability to deliver educational  services for New York children.  In our local district, pension costs have risen more than 50% over the last two years and now account for 7.2% of the total budget, up from 5.1% in 2010-11.  This has meant ongoing cuts in student services as taxes are diverted to pay for pensions.  The trend is up, and by 2015 pension costs are expected to eat up 35 percent of property tax collections.

There is no relief in sight.  Teacher pension costs for the 2013-14 school year will rise 37%.

Related:

March 13, 2013

Quick Links – Washington State pension trouble; NYC high school grads need remedial help; teacher evaluations are ‘costly experiment’ …

by Grace

◊◊◊  Washington State’s public pension may be in trouble.

The problem, similar to that in other states, has to do with the way pension benefits are valued.

Public pensions such as Washington’s operate under special accounting rules, one of which allows them to assume a long-term rate of return on their investments. Most plans have picked a rate between 7 and 8 percent; all but one of Washington’s plans assume 7.9 percent.

That assumed return is significant, because another special rule lets public plans use it as their discount rate — something corporate pension plans were forced to abandon nearly two decades ago.

Critics such as Munnell and Biggs say this rule ignores the fact that pension benefits are effectively almost as guaranteed as state bonds. That, they say, means they should be valued similarly to bonds.

“The way to value a stream of promised benefits is with an interest rate that reflects the riskiness of the promised benefits themselves, not the expected returns,” Munnell said.

This story is being ‘repeated all across the nation’ according to Walter Russell Mead.

… It’s as well-written a summary of a pension crisis story as you’re likely to get, and this is a story that’s being repeated all across the nation. Then, if you haven’t already, have a look at how much you or your loved ones are relying on generous promises made by state bureaucrats to fund your retirement—and start asking some hard questions.

◊◊◊  Most NYC High School Grads Need Remedial Help Before Entering CUNY Community Colleges (CBS New York)

Officials told CBS 2′s Kramer that nearly 80 percent of those who graduate from city high schools arrived at City University’s community college system without having mastered the skills to do college-level work.

In sheer numbers it means that nearly 11,000 kids who got diplomas from city high schools needed remedial courses to re-learn the basics.

◊◊◊  New York teacher evaluations are a “’grand and costly experiment’ with limited benefits”.

N.Y. schools’ teacher-eval costs outpace federal grants

ALBANY — New York’s small-city, suburban and rural school districts expect to spend an average of $155,355 this year to implement the state’s new teacher and principal evaluation plans, a report Thursday from the state School Boards Association found.

The one-year costs outpace the four-year federal grant provided for funding the program by nearly $55,000, according to an analysis of 80 school districts outside the state’s “Big Five.”

“Our analysis … shows that the cost of this state initiative falls heavily on school districts,” said Timothy Kremer, the association’s executive director. “This seriously jeopardizes school districts’ ability to meet other state and federal requirements and properly serve students.”

The evaluation system is a requirement for receiving funds from President Barack Obama’s Race to the Top initiative. In 2010, New York was awarded $700 million in Race to the Top grants. About half of the funding will go to local districts over four years to implement the evaluation system and other initiatives.

◊◊◊  20,000 illegal aliens apply for college financial aid under California’s new Dream Act.

More than 20,000 college-bound students are seeking state financial aid for the first time under California’s new Dream Act laws that allow them to get the help despite their immigration status.

While far from a complete picture, that number is the best indicator yet of how many students hope to benefit from a pair of laws that could radically change the college experience for a generation of students whose parents brought them to the U.S. illegally when they were young — the same group that has taken center stage in the national immigration reform debate.

February 4, 2013

Despite increased education spending, surging pension costs only allow New York schools to ‘tread water’

by Grace

The 4.4% increase in school spending proposed by New York Governor Andrew Cuomo is not enough according to some education advocates.

Cuomo’s budget plan for the fiscal year that starts April 1 includes a 3 percent increase — about $610 million — in education aid plus $203 million to offset high pension contribution costs. An additional $75 million would go toward initiatives highlighted in his State of the State address.

Proposed funding barely allows schools to “tread water”.

“The year-to-year costs in education just to tread water are more than the amount of money in the proposed budget,” said Billy Easton, executive director of the labor-backed advocacy group Alliance for Quality Education. “If we actually want to improve the schools — that’s not even addressed here.”

Governor Cuomo argues that the 8.6% increase in education funding over the last two years has been double the inflation rate.

“That is double the rate of inflation,” Cuomo said in Tuesday’s address. “That is four or five times the increase in home values during the same period of time and it’s during a period of time where student enrollment has gone down.”

Schools across the state report that steep rises in pension costs more than cancel out any increases in proposed funding.

New Paltz Superintendent Maria Rice said teachers’ retirement costs alone at the Ulster County district are growing by about $900,000, so the $333,500 increase won’t come close.

The district would get about $12.4 million, a 2.8 percent increase from last year, when including building aid. The county’s average is 2 percent.

Based on the aid, Rice projects the district will have to cut between $800,000 and $1 million to balance the budget, which is “luckily” less than last year’s gap, she said.

The district cut its pre-K program and increased class sizes this year. Next year, she said she’ll debate whether to cut Advanced Placement courses or eliminate an elementary foreign language program which she said has been successful.

Some schools are considering taking advantage of a new “pension-financing plan”.

The pension stabilization option would give local governments and school districts a lower, more predictable employer contribution rate over a period of 25 years or more, rather than high bills now and presumably lower ones later.

Not everyone believes this new scheme will work, with some calling it a “threat to pension solvency”.

The state’s largest public union is right. Gov. Andrew Cuomo’s proposal to “smooth” pensions for local governments and school districts is “a bait-and-switch scheme … that will allow public employers to underfund their pension obligations,” as the Civil Service Employees Association described it last week.

Kicking the can down the road
Instead of providing real mandate relief to remedy the unsustainable rise in pension costs, the governor is promoting a quick fix that will temporarily hide the problem until a few years down the road when it will resurface.  This has become a typical scenario among our politicians.

Related:

January 9, 2013

Quick Links – Top-paying jobs for community college graduates; no mandate relief in New York; high salary for high school principal; plus more

by Grace

◊◊◊ Top ten jobs for two-year graduates (Community College Spotlight)

The top job is an air traffic controller,with a median 2010 salary of $108,040.

ALBANY, N.Y. – Gov. Andrew Cuomo’s Mandate Relief Council voted down 51 of 65 requests for help from local governments and school districts Tuesday, approving 14 suggestions for review of state mandates for special education and two other school issues….

The Council also recommended further study of a request to drop the state mandate for school districts with fewer than 1,000 pupils to have internal auditors on staff; and a state Education Department rule that mandates students get a “minimum number of minutes per week (seat time), by grade level and subject area.”

Requests to reduce the crippling pension costs were among those that were rejected.

They rejected requests to reduce the mandate to transport private school students; to reform teacher tenure and “last in, first out” work rules; to change the Triborough Amendment to the Taylor Law that keeps automatic teacher pay raises in place after a contract has expired; and to reduce the cost of public employee and teacher pensions. The requests included letting school districts create pension reserve funds, but that was rejected because it was an expansion of district authority, not a state mandate.

Also rejected were local government requests regarding the Wicks public works contracting law, health insurance contributions, restrictions on new unfunded mandates, tax cap exemptions, legal services for the poor and the MTA commuter tax.

Staff of the panel said that the rejected requests were beyond the scope and the authority of the council to decide because they were matters of state law, covered by local union contracts, or otherwise not a qualified candidate for elimination or reform.

I believe a constitutional amendment is needed to reduce pension costs, one of the most costly state mandates.  If that’s the case, the Council could have made that recommendation.  You can see a copy of the full report at the Mandate Relief Council site.

New York’s highest-salaried school principal, James Ruck, who has led Harrison High since 2006, will earn $245,728 this year, setting a new standard for a building administrator in the nation’s hottest market for education leaders.

Ruck, 68, the former schools superintendent at Suffolk County’s Sachem Central schools, augments his Harrison pay with an estimated $131,352 a year in pension payments, pushing his annual income to more than $377,000. Ruck, of Northport, intends to step down from Harrison in June

About 1,000 students attend Harrison High School.


◊◊◊
  ‘Motivation, Not IQ, Matters Most for Learning New Math Skills’ (Time)

But IQ does matter in overall math achievement levels.

… While some element of math achievement may be linked to natural inborn intelligence, when it comes to developing skills during high school, motivation and math study habits are much more important than IQ, according to a new study…

To their surprise, the researches found that IQ does not predict new learning — in other words, intelligence as measured by the IQ test does not indicate how likely students are to pick up new concepts or accumulate new skills. While children with higher IQs did have higher test scores from the beginning of the study, how much newmaterial the kids learned over the years was not related to how smart they were, at least not once demographic factors were taken into account.

“Students with high IQ have high math achievement and students with low IQ have low math achievement,” Murayama says. “But IQ does not predict any growth in math achievement. It determines the starting point.”

December 28, 2012

Under New York 2% tax cap, protected pensions will cause even more cuts to student services

by Grace

In New York, public schools are struggling with rising pension costs and a 2% tax cap as they plan for next year’s budgets. As the situation becomes desperate, one official warns that school security may suffer. 

School districts face a daunting challenge as they begin drafting budgets for 2013-14: Rising pension costs alone could eat up most or all of their allowable tax-levy increase under the state’s tax-levy cap.

“It’s debilitating for us, terrible,” said Thomas DePrisco, a member of the Pearl River Board of Education.

Pension costs will increase nearly 40%, forcing cuts in student services.

District contributions to the pension system for teachers and administrators are expected to rise close to 40 percent next year. This increase could translate into hundreds of thousands of dollars for small districts and several million for larger districts, which will require raising the tax levy by 2 percent or 3 percent in most districts.

Since the state cap starts at 2 percent before adjustments, most districts will not be able to increase spending in other areas, from health insurance to curriculum materials, without making equivalent cuts to programs and staff.

Students are being punished.

“The numbers are punitive, a shocker,” said Kendall Egan, a member of the Rye school board and president of the Westchester-Putnam School Boards Association. “You’ve already filled up your cap. It’s hard to make your community understand that there is so much out of the control of a school board. We’ll be back to going line-by-line through our budgets, looking for all possible savings.”

Pension contributions will increase to about 16% of payroll costs.

Under state law, all school districts outside of New York City must contribute a percentage of their payroll each year to two pension systems, one for teachers and administrators, and one for support staff. The percentages are determined by the two systems’ past investment performances. Next year’s contributions are tied to the period between 2007-08 and 2011-12, when investment returns were down.

The New York State Teacher Retirement System recently notified districts that it expects to raise their 2013-14 contribution to between 15.5 percent and 16.5 percent of payroll, up from 11.8 percent of payroll this year. The employer contribution has varied between 6 and 9 percent of payroll in recent years.

The TRS fund, which pays pensions to retired teachers and administrators, has $88 billion in assets. It is paying benefits to almost 150,000 people, up from 100,000 in the year 2000. Its active membership — those who will receive future benefits — has increased from 225,000 people in 2000 to 277,273 this year.

Schools will start with a deficit.

The Valhalla school district expects to increase its Teacher Retirement System contribution by about $930,000 to more than $3 million, while its Employees Retirement System contribution will rise by about $91,000. These increases alone will require raising the district’s tax levy by about 2.5 percent.

“We start the budget planning process in a deficit and wonder how we’ll stay under the cap,” Superintendent Brenda Myers said.

Teachers’ pensions were protected under the property tax cap legislation but student services were not.

The property-tax cap, going into its second year, starts by limiting tax-levy increases to 2 percent, but the number can go up or down depending on several factors. Pension cost increases over 2 percent are exempt from the cap, which is little consolation for districts that are up against the cap anyway.

Politician wants to give teachers even more protection.

Assemblywoman Ellen Jaffee, D-Suffern, said she is considering proposing legislation that would exempt additional pension costs and perhaps tax certiorari payments from the cap.

“It could help stabilize the situation,” she said. “There are very real concerns about districts facing insolvency.”

‘rising pension and health care costs’ leading to ‘dangerous territory’

Ken Slentz, deputy state commissioner of education, said that rising pension and health care costs will result in people losing their jobs so districts can stay under the cap.

“Where are we headed?” he said. “Dangerous territory.”

Recent pension reform had little effect.

A key factor is that 86 percent of all teachers and administrators statewide are in Tier 4 of the pension system, meaning that they contribute 3 percent of their salary to the system for only 10 years and nothing thereafter. Tiers 5 and 6, created since 2009, require ongoing employee contributions but currently include only 8 percent of all members.

In a low blow that may have been meant to evoke fears related to the recent tragedy in Newtown, one official intimates that school security may suffer.

“The impact on our budgets is devastating,” Burrell said. “If we can’t raise tax levies, and taxes are already too high for many people, districts will have to make uncomfortable choices. Will districts have to choose between AP classes and security?”

Related:

November 6, 2012

Unrealistic assumptions will continue to cause New York teacher pension costs to rise

by Grace

This chart illustrates the teacher pension funding gap that has fallen upon the New York State taxpayers to close.

Unrealistically high rates of returns are assumed, but the actual performance comes in significantly lower.

Think of it this way: if NYSTRS had hit its 8 percent annual return target since the turn of the century, $100 in fund assets as of June 30, 2000, would have been worth $233 by June 30, 2011. The actual figure was $166. …

Meanwhile, benefit payments have continued increasing at an average rate of 8 percent a year, more than doubling during the same period, according to NYSTRS’ annual financial reports.  And this, in a nutshell, is why school districts’ pension costs have risen so much, from an all-time low of 0.43 percent of teacher salaries in 2002 (reflecting double-digit annual returns during the Wall Street boom) to 11.1 percent in 2012.

Other New York pension funds have made modest changes in an effort to be more realistic.

In a small step toward a more realistic standard, state Comptroller Thomas DiNapoli has lowered the rate-of-return assumption for the giant New York State and Local Retirement System to 7.5 percent, and New York City will soon go down to 7 percent, which is still high enough to have been compared by Mayor Bloomberg to an investment come-on from Bernie Madoff.

Meanwhile, the teachers’ pension fund board defends its higher assumed rate of return.

“The key question is whether or not an 8.0% rate of return assumption continues to be a prudent estimate going forward. We believe it does, and do not recommend changing it at this time. It has certainly been a good estimate for the 20 years it has been in place. Logic dictates that just as we did not increase our assumption in the face of fantastic returns in the 1990s (which followed great returns in the 1980s as well), we should not decrease it now after a poorly-returning decade.”

The taxpayer contribution for this year increased to about 12% of teacher salaries, and the fund warns school districts that “We anticipate continued future increases in the [rate] beyond this point.”  Unfortunately, they do not offer estimates of the increases, but the author sees a rise to 17%.

One way for school boards to get some relief from the soaring costs of  the pension mandate is to keep salary increases down.

… But while school districts complain that pensions are a state-mandated cost over which they have no control, they are not completely helpless – not as group, at any rate. A concerted effort by school boards to hold down salary increases could have a significant impact on long-term pension costs….

Using an improbably high discount rate is a related problem.
In addition to the assumed rate of return, the discount rate is another factor that affects taxpayer contributions to public pension plans.

… the discount rate is just an expression of the cost of future liabilities today. And the higher the assumed discount rate, the less money needs to be set aside now to cover benefits promised for the future….

Last week I wrote about the problem with public pension funds using a discount rate that is too high.

In the private sector, a guaranteed benefit must use risk-free returns in calculating future liability.  But for public pensions, the taxpayers are expected to meet the huge gap between overly optimistic promises and the reality of low investment returns.

As most experts explain, public pension funds should use lower discount rates to reduce the investment risk to taxpayers. This typically means that the discount rate should be based on risk-free returns, such as Treasurys. These discount rates would reveal that between half and three-quarters of all public pension debt is hidden by accounting gimmicks. If government pension plans were subject to the same reporting rules as private pension plans, their reported pension debt would nearly triple.

Do the math:
Median discount rate used by largest public pension funds - 8%
Current 10-year US Treasuries rate – 1.6%

October 26, 2012

A round-up of scary public pension stories

by Grace

This collection of stories about the public pension problem should get the attention of taxpayers and government employees relying on future pension payouts.  (Of course, these two groups are not mutually exclusive.)

Next School Crisis for Chicago: Pension Fund Is Running Dry (New York Times)

Illinois on the hook for $670 million more in teacher pensions for next budget (Chicago Tribune)

‘Exploding pension costs are the single biggest threat to local government’s ability to deliver needed services’ (Cost of College)

From the No Pension Bailout website:

State pension systems across the nation are dramatically underfunded.  Reasons vary, but in most cases state governments have failed to allocate sufficient money to their retirement systems. additionally states granted overly generous benefits to workers without proper regard for the cost of these benefits.

Recent calculations estimate unfunded pension liabilities to total roughly $2.5 trillion – creating state budget crises nationwide.  States are being forced to slash budgets for education, healthcare, and public safety to make room for the spiraling costs of pensions.  Some states are working to fix the problem, but others are not, instead content to wait for federal bailout of state pensions.  A bailout would force states with the resolve to fix their problems to subsidize those that prefer handouts – destroying state’s fiscal sovereignty and creating one of the largest transfers of wealth in the history of our country.

A problem with accounting methods used by state governments

State pension systems across the country are in a state of crisis. According to the Pew Center on the States, states estimated their unfunded pension liabilities at $757 billion in 2010.  Most pension experts, however, take issue with the standard actuarial methods used by most public pension plans, which lets state governments hide billions of dollars in pension debt. Under more reasonable accounting standards, states’ pension debt grows to more than $2.5 trillion.

Inflated discount rates hide true taxpayer liability

Economists Robert Novy-Marx and Joshua Rauh, for example, challenge the unrealistic investment targets and discount rates used by public pension systems to adjust their liabilities into today’s dollars. They found that the median discount rate used by the largest pension systems in the U.S. was 8 percent. This means that the pension funds anticipate earning 8 percent annual investment returns. Pension experts believe high discount rates encourage states to invest their pension funds in riskier assets in order to justify using inappropriately high discount rates.  In effect, using high discount rates allows government pension plans to hide hundreds of billions of dollars in pension debt from taxpayers.

These inflated discount rates have become so unreasonable that both the Governmental Accounting Standards Board and Moody’s Investors Service issued new rules in 2012 that require state governments to use more realistic assumptions. These new rules require governments to use discount rates closer to the yields from corporate and municipal bonds, which will provide a clearer look of pension finances. In Illinois, the new reporting rules will more than double the state’s officially-reported pension debt.

In the private sector, a guaranteed benefit must use risk-free returns in calculating future liability.  But for public pensions, the taxpayers are expected to meet the huge gap between overly optimistic promises and the reality of low investment returns.

As most experts explain, public pension funds should use lower discount rates to reduce the investment risk to taxpayers. This typically means that the discount rate should be based on risk-free returns, such as Treasurys. These discount rates would reveal that between half and three-quarters of all public pension debt is hidden by accounting gimmicks. If government pension plans were subject to the same reporting rules as private pension plans, their reported pension debt would nearly triple.

Do the math:
Median discount rate used by largest public pension funds - 8%
Current 10-year US Treasuries rate – 1.6%

Progressives Sour on Chicago Teachers (Via Meadia)

…[T]he city of Chicago most certainly can run out of money. Things like extra money for music and art teachers could be great ideas or could be bad ones depending on where it comes from. But it’s not as if Chicago Public Schools is sitting on some giant pile of money that administrations have just been refusing to use. On the contrary, it’s actually sitting on a large unfunded pension obligation. . .

In our local school district, pension costs are soaring to make up for unreasonably optimistic pension promises.

… pension costs have risen more than 50% over the last two years and now account for 7.2% of the total budget, up from 5.1% in 2010-11.  This has meant ongoing cuts in student services as taxes are diverted to pay for pensions.  The trend is up, and by 2015 pension costs are expected to eat up 35 percent of property tax collections.

September 18, 2012

The messy Chicago teachers’ strike

by Grace

The Chicago teachers’ strike has entered its second week after teachers decided they need more time to review the tentative contract.  Calling the strike illegal, Mayor Rahm Emanuel is asking the court to force the teachers back to the classrooms.

The major issues are teacher evaluations, job security, and a longer school day.  

Chicago public schools have problems.

… 99.7% of Chicago teachers are rated satisfactory while the graduation rate is just 60%, only 20% of eighth-graders are proficient in reading and less than 8% of 11th-graders are college-ready on state tests….

… The average Chicago public-school teacher is the best-paid in the country, making between $71,000 (the union’s calculation) and $76,000 (the city’s). And that’s not counting benefits and pensions, paid days off, summer vacation and more. Teachers in New York and Los Angeles earn slightly less, and then the list drops off dramatically, with Dallas and Miami paying around $53,000 on average.

Even with dismal academic results and with a seemingly generous contract offer of a 16% raise over four years, 47% of registered voters support the striking teachers while only 39% oppose it.  Among the reasons for the public’s backing:

General pro-union sentiment

Unions are still hallowed organizations in Chicago, and the teachers union holds a special place of honor in many households where children often grow up to join the same police, firefighter or trade unions as their parents and grandparents.

The union won the PR battle.

To win friends, the union has engaged in something of a publicity campaign, telling parents repeatedly about problems with schools and the barriers that have made it more difficult to serve their kids. They cite classrooms that are stifling hot without air conditioning, important books that are unavailable and supplies as basic as toilet paper that are sometimes in short supply.

“They’ve been keeping me informed about that for months and months,” Grant said.

It was a shrewd tactic, said Robert Bruno, professor of labor and employment relations at the University of Illinois at Chicago.

“This union figured out they couldn’t assume the public would be on their side so they went out and actively engaged in getting parent support,” Bruno said. “They worked like the devil to get it.”

Even though they may be unhappy with schools in general, parents tend to like the teachers they know.

… People generally like their kids’ teachers. Even those who may dislike the union like their teachers. They may agree with the notion of stronger assessments for teachers and perhaps also be against the union call for automatically rehiring those laid-off when vacancies do occur. But they like their teachers and so cast their lot with them.

It’s a dynamic at play whenever the under-performing Chicago system, which is beset by huge deficits, tries to close or consolidates schools. The school board usually gets its way but not before a very public uproar. Even parents at what are clearly low quality, poorly performing schools rise to protest. There’s a bond that blinds them to larger realities but ties them to that neighborhood building without any air conditioning.

Even after this strike is resolved, serious pension issues portend more education troubles ahead.  In Illinois, 71 cents of every new state education dollar goes to teachers’ retirement benefits, not to schools.  Earlier this year the state’s cedit rating was downgraded due to pension problems.

The teachers’ fund is one of the country’s worst-financed statewide pension systems, reporting that it is only 47 percent funded. And that’s if you buy the system’s rosy accounting assumptions, including that it will achieve 8.5 percent annual returns on its assets. This level is tied for the most aggressive investment assumption among state pension funds in the country, and the fund has had to get creative in an effort to meet it. Pensions & Investments magazine says it has the fourth-riskiest pension investment portfolio in the U.S., with less than 17 percent of its investments in fixed income and cash.
Illinois Is Pension Basket Case You Forgot About (Bloomberg)

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