School Choice Increases Teacher Retirement Options

 

I got a phone call yesterday from a retired teacher and union representative in Alabama, and I’d go as far as to say it was…[gulp]…pleasant.

The man was concerned about how Alabama charter schools, which will probably be approved this session, would impact the state’s teacher retirement system. He went on to explain that his group was most worried that charter school teachers would not have to pay into the system, and that his benefits would inevitably suffer. I kindly reminded him that it’s equally unfair to force teachers into retirement contracts, but refrained from making a fitting analogy to pyramid schemes in attempt to keep things amiable.

Our diametric views on the topic aside, the conversation highlighted an important point about teachers and their role in school choice. We in the education reform community have unfortunately polarized many of the conversation’s participants. For instance, reformists get so wrapped up in fighting for “the kids” and “parental choice” that we tend to forget about the most important element of any good school: The Teachers.

 

School Choice Benefits Teachers, Too

The idea that school choicers don’t care about teachers couldn’t be farther from the truth. There’s a charter school in New York seeing impressive results from paying its teachers $125,000, and KIPP has built a national brand around paying teachers more than local District schools. The Center for Education Reform reported last year that as charter teacher unionization decreases, performance-based bonuses and additional skill-appropriate compensation increase. This was a win/win for teachers, since they’d be dropping union dues from their monthly budgets at the same time they earned bonuses and raises.

It’s not just all about money, either. A study by the U.S. Department of Education a decade ago showed that visits to charter school classrooms “found students engaged, on task, and learning” from teachers who were “deeply aware that they are creating change, both for their students and also within the larger public school system.” If there’s one thing I’ve learned from working in education, it’s that no amount of money can make a teacher effective if she already feels ineffective. Charter schools have a knack for creating the energy and enthusiasm necessary for fueling reform at the classroom level.

There’s no better example of this enthusiasm in action than the teamwork taking place among charter teachers. Michael Petrilli and Amber Northern suggested last year that charter schools are already leading the charge in the team-leadership approach to teaching and school administration. They said:

“As with so many other innovations—blended learning, extended learning time, the smart use of data to guide instruction, etc.—the flexibility afforded by the charter model allows the concept of teacher leadership to go from idea to reality without untangling the Gordian knot of rules, regulations, contractual provisions and HR practices that have been accumulating in the traditional public schools for decades.”

Indeed, most charter teachers will tell you that they have more freedoms at their charter schools than comrades at local District schools. It’s just the nature of the game – public employees have substantially less autonomy in their systems than private employees.

The majesty of choice in education is that it applies to everyone. It’s not just about families having the liberty to attend a school outside their “zone,” and it’s not just about giving teachers the freedoms they need to impact kids the way only teachers know how. School choice also implies other teacher freedoms, including the right to determine how they want they want to plan their retirement.

 

The Pension Bubble

Let’s face it, U.S. pensions are doomed. In 2012, the Pew Center reported a $1.38 trillion gap between financial obligations to retirees and the assets to actually back them up. That’s “trillion,” with a “T,” like that other popular American number that never seems to stop climbing.

Mike Shedlock quoted an even higher discrepancy last year from Bridgewater Associates, which analyzed pension funds and concluded 85% of them will fail if returns average 4%. Well, guess what: the 30 Year Bond Rate was 3.5% when Shedlock wrote that, and he expected “negative returns for 7-10 years.” With the 30 Year Bond down to 2.7% in March 2015, hitting that 4% return mark will be even harder, and hitting the 9% mark required to actually meet the benefit obligations is out of the question.

Meanwhile, stocks are soaring, and any pension fund managers who ignored equities after February 2009 probably jumped out of their windows in 2013. That’s not to say those managers didn’t seek out high-performing equities, just that they’ve been unsuccessful at finding them. Pension managers are notorious for getting low returns at high fees, and in some of the riskiest sectors, such as hedge funds and venture capital.

There are alternatives to pension funds. There always have been. Most salaried employees have a 401k of some kind, which is matched by their employer to some extent. The main difference between a 401k (a “defined contribution plan”) and a pension (a “defined benefit plan”) is that the employee himself determines how much he contributes to a 401k per month, while government formulas would determine his contributions to a pension.

This wouldn’t be so bad if you knew your benefits would be outstanding in retirement, but that’s simply not the case anymore. And retirees aren’t the only ones getting hammered by the pension bubble. The formula really hurts active contributors as well. About 40 years ago, Uncle Sam promised today’s retirees the benefits they now enjoy based wholly on the assumption that you would be here to pay for them. Your pension benefits are prefaced on the same assumption.

My new union friend was concerned about the diminishing buy-in that the teacher retirement system once enjoyed by default. He’s worried that either he got duped into a system that is headed for disaster, or charter teachers are being duped out of a good deal. I got the impression that he really cares about younger teachers entering the workforce (not just his own benefits), so I talked him through the advantages of private 401k programs for teachers fresh out of college or Teach for America. What I didn’t tell him is that he may be the last generation to experience pensions as we know them.

Pension systems nationwide are severely underfunded, and have been for years. According to the National Council on Teacher Quality, this underfunding is even worse than on paper due to “unrealistic assumptions and projections about returns on investments.” The same report goes on to say that the expensive and inflexible teacher retirement systems of old are actually hurting the teaching profession today, because they ignore the mobility and instability inherent in a 21st Century educational workforce. The word “systemic” was used to describe the crisis brewing in our nation’s retirement system, a term that frightens economists the way “rust” frightens antique car buyers.

Unfortunately, the Teachers Retirement System of Alabama doesn’t beat the national averages. Its $8.2 billion unfunded pension liability ranked 16th highest in the nation, and to this day it is only about 66.5% funded. For context, a 90%+ asset-to-liability ratio is considered healthy. In an effort to staunch the wound, TRS has recently done the following:

• Raised teacher contributions (charging current teachers more)
• Reduced benefits for new teachers (pay more for less)
• Increased the retirement eligibility age (making teachers work longer)
• Expanded the final average salary calculation to 5 years (which usually lowers final benefit payments)
• Lowered the multiplier for determining pension benefits

Alabama already requires 10 years for employees to become vested in pensions, which is tied with 14 other states for the longest vesting period. This means that if you started working for an Alabama school district tomorrow, you couldn’t collect 100% of your own retirement money before March 2025.

Teachers should have a choice between saving for their own retirement or hopping into a retirement system headed toward insolvency. It’s not as if public pensions are printing off their own money, so compelling new teachers to join existing pension plans is strictly a way of paying for the system itself. In fact, although it would be a tremendously foolish choice, teachers should have the right to not save for retirement, period. After all, it’s their money, and a single teacher with no kids and a $40k salary is already paying 10% to the IRS.

 

State-by-State Overview

Below is a list of each state’s position on charter teacher retirement planning, tiered in order of how favorable that part of the law is to teachers in public charter schools. Some laws are more specific than others. The supporting data and research comes from the ever useful database at NAPCS.

 

Tier 1: Favorable (Full Employee Option)

• Arizona – Optional participation in the state’s retirement system, and optional participation in the state health and accident insurance coverage programs.

• California – All charter school employees can choose to participate in the relevant retirement systems.

• Delaware – Equal access to retirement systems, but not a requirement.

• Indiana – Optional participation.

• New Hampshire – Optional participation.

• New York – Optional participation.

• North Carolina – Optional participation.

• Oklahoma – Optional participation.

• Utah – Optional participation.

• Maine – Charter schools may establish their own retirement plan, or choose to set up a plan with the state system.

• Florida – Optional participation in the retirement system. Charter schools can opt to be organized as a public employer, which grants them equal access to the retirement system.

 

Tier 2: Acceptable (Some Employee Option)

• Louisiana – Optional participation, except for Type 4 charter employees (i.e. District-managed charters).

• South Carolina – Charter school teachers and personnel have optional and equal access to the state retirement system. However, the original staff at conversion charter schools remain employees of the district and must participate.

• Pennsylvania – All charter school employees must participate in the state retirement systems, unless:
  • …at the time of application the charter school has a retirement program that covers the employees.
  • …the employee is currently enrolled in another retirement program.

• Rhode Island – Charter schools are required to participate in the relevant employee retirement systems, except for Mayoral Academy Charter Schools, a special type of charter designed to attract proven management organizations. They provide the option to participate.

• Michigan – Participation in the state retirement system depends entirely on how one is employed.
  • If a person is employed by the charter’s governing board, he/she must participate in the state retirement system.
  • If a person is not employed by a charter board of directors (e.g. by an EMO/CMO), they are prohibited from participating in state’s retirement system.

 

Tier 3: Unfavorable or Unacceptable (Little to No Employee Option)

States generally or strictly requiring defined contribution plans (i.e. 401k, IRA, profit sharing, etc):

• District of Columbia – Employees transferring from a local district school to a charter school may elect to stay in the DC retirement system. Otherwise, charter employees do not have access to the system.

• Illinois – Certified teachers in Chicago must participate in the Chicago Teacher Pension Fund, and non-certified teachers are not allowed to participate. Certified teachers outside of Chicago must participate in the State Pension Fund, and again, non-certified teachers from not allowed to participate.

• Mississippi – Charter schools are prohibited from accessing relevant state retirement systems.

States generally or strictly requiring defined benefit plans (i.e. pensions):

• Georgia – While the law states optional and equal access to the state retirement system, a state attorney general opinion implies required participation in the state retirement system.

• Connecticut – Charter school teachers hired prior to July 1, 2010 have the option to participate in the state teacher retirement system, but those hired after July 1, 2010 must participate.

• Arkansas – Certified staff within open enrollment and conversion charter schools must participate.

• Washington – Charter schools are members of relevant state retirement and health care systems as long as the state department of retirement systems receives determinations from the Internal Revenue Service and the U.S. Department of Labor that such participation does not jeopardize the status of the state’s retirement systems.

• Alaska – Required participation.

• Colorado – Required participation.

• Hawaii – Required participation.

• Idaho – Required participation.

• Iowa – Required participation.

• Kansas – Required participation.

• Maryland – Required participation.

• Massachusetts – Required participation (MTRS).

• Minnesota – Required participation.

• Missouri – Required participation.

• Nevada – Required participation.

• New Jersey – Required participation.

• New Mexico – Required participation.

• Ohio – Required participation.

• Oregon – Required participation.

• Tennessee – Required participation.

• Texas – Required participation.

• Virginia – Required participation.

 

PS – One disadvantage to private school choice is that employees at a voucher school or a private academy receiving tax credit subsidized tuitions can’t take advantage of public employee retirement systems, so there is an awkward lack of choice in private schools when it comes to retirement options. Still, given my comments above, it’s probably best to avoid public retirement accounts, so private school teachers should consider themselves lucky for not being coaxed into the pension bubble.

 

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