very big problem

Teacher pension fund lost $9 billion last year while costs rose

In Albany this week, UFT President Michael Mulgrew floated a plan to save the city money by letting teachers retire earlier. But a new report on the health of the city’s teachers pension fund suggests that Mulgrew’s proposal would only compound the fund’s potentially crippling budget crunch.

The fund’s annual report, released last week, shows that it lost 29 percent of its value, more than $9 billion, last school year, even as the portion the city is required to pay reached unprecedented heights.

The mix of rising costs and declining value raises serious questions about how the city will be able to afford to pay the pensions it has promised in the future without major concessions by the teachers union.

The fund, called the Teachers Retirement System (TRS), is a collection of investments paid for with a combination of taxpayer dollars and teacher salaries. Every year a chunk of it is used to pay retired teachers and principals the pensions state law says they are owed.

picture-63Last year’s financial crisis sunk the fund to its lowest level in more than 15 years, effectively erasing all of the gains made in the past decade’s bull market, according to a database of TRS’s financial reports. Over that time span, the fund’s value, adjusted for inflation, has shrunk by more than $11 billion.

This leaves a $15 billion gap between what the fund expects to pay out in the next 30 or so years and what it will have saved by that time, according to the TRS’s preferred accounting method. Another way of calculating these “unfunded liabilities” used in the private sector puts the number even higher, at $27 billion.

“It’s not a crisis. It’s a long-run big problem: The pension system is far more costly than it ought to be,” said Charles Brecher of the Citizens Budget Commission, an independent group that advocates for changes in city and state finances.

Sources of the “big problem”

At the center of the mismatch between what is promised and what was saved is the basic structure of what is called a “defined benefit” pension. A typical defined benefit plan promises a certain annual payout to retirees, usually in the form of a percentage of the retiree’s final annual salary. In New York, these payouts are defined by law and are not adjusted to reflect how much a member contributes over time.

Nobody expects the amount a member contributes to fully fund his promised pension. The idea is that the difference will be made up through a combination of taxpayer dollars and market returns.

The problem is that since 2000 a slew of factors have made this gap between how much teachers put in and how much they take out larger than ever before. One reason is that salaries have gone up 43 percent in the past decade, hoisting up the final amount retirees can expect each year. Current teachers’ pay-ins, based on higher salaries, help a bit. But the effect is dampened by the fact that even as teacher salaries have gone up, the proportion of member contributions used to pay for the plan in each year has gone down. In 1999, teachers’ contributions made up 18 percent of the total. In 2009, they were only 6 percent.

Another gap-widening factor is the fact that, for the past decade, a state law has allowed the highest-paid teachers in the city to opt out of contributing to the pension altogether. The rule has changed with the start of a new pension system for employees entering work today.picture-65

In addition to raising salaries, the city has also granted a series of pension sweeteners in exchange for union concessions. In 2007, teachers with 25 years of service won the right to retire at age 55 with no penalty, a union victory that came in exchange for a touted performance-based pay deal.

The sweeteners reduced the retirement contributions for teachers and principals, putting more of the burden to pay for pensions onto the city. They also allowed per diem salary — money teachers make for taking on extra tasks like running after-school clubs and sports — to be counted in the overall final salary number. And, in 2008, a provision allowed teachers to retire early without being dinged in their pension earnings.

Together, the rising salaries and pension sweeteners have created a perfect storm: increasing costs just as the plan’s performance has plummeted in the down market. Although the TRS has not performed significantly worse than the market according to the new report, the annual rate of return it assumes — 8 percent — is high by most private standards. (To be fair, most public pension plans also use a number around 8 percent. Similar private sector plans assume a rate of around 4 percent.)

Assuming a steady and high rate of return leaves little room for error. Imagine that the fund fails to make 8 percent returns one year and instead breaks even. To recover the lost ground the next year, TRS will have to make last year’s 8 percent and this year’s, a total of 16 percent returns. The recession of the past two years has followed this pattern of compounding losses. As a result, the fund was so far behind last year that even the high market returns from earlier in the decade couldn’t make up for the losses.

picture-64All of this has left taxpayers to make up the burden. In the late 1990s, the amount the city put into the pension fund every year was around $500 million in today’s dollars. By 2009, the sum the city had to contribute ballooned to $2.2 billion. 

This amount is incredibly high, especially compared to the New York State Teachers Retirement System, which serves all teachers outside of New York City. Last year, the state contributed half as much to its teacher retirement system as New York City contributed to the TRS, even though there are twice as many retirees in the rest of the state as there are in the city.

Even the new Tier V pension plan, which increased all new teachers’ required contribution to the plan and doubled the amount of time before they can qualify to draw a pension, has not alleviated all costs. That’s because the Tier V law included a special provision for New York City’s teachers that no other plan received, allowing them to retire with a full pension at age 55 if they’ve taught for 27 years. Teachers in the rest of the state must wait until age 57 to retire with a full pension.

Though the city is not benefiting as much from Tier V as the rest of the state, Tier V reforms are still expected to save the city $19.1 million next year, according to Division of Budget estimates.

But E.J. McMahon, of the conservative-leaning Manhattan Institute, warns that Tier V will do little to close the TRS’s budget gap. Instead of making retirement benefits fundamentally sustainable, Tier V actually turns back the clock to before the recent decade of pension sweeteners, he argues. Tier V “does not deserve the label reform,” McMahon said.

Brecher doesn’t even think Tier V merits its name. “They call it that, but it’s not really a tier in the sense that it’s a big change in the benefit structure,” he said.

Grim prospects

Going forward, the city cannot alter any current TRS member’s benefits due to a state law that prohibits the public pensions from being “diminished [or] impaired.” Only a handful of states have this provision, which guarantees that pension reforms affect only future teachers.

One possible alternative for the future is a cash balance plan, which California and Nebraska have adopted for their employees. Cash balance plans blend features of the TRS model (the defined benefit plan) with features of private sector pensions, known as defined contribution plans, to spread out risk more evenly among employees and employers. Although cash balance plans were surrounded by controversy when they were first introduced, in recent years they have been gaining popularity in academic and public policy circles.

Another option is a straightforward defined contribution plan, like the 401k plans that are offered to private sector workers and even some CUNY and SUNY faculty. Such plans are subject to market fluctuations and are dependent on the quality of investment advisors, but some consider them less likely to see costs spiral out of control.

“Anything that has a defined benefit at the end of it … is complicated, more costly and subject to manipulation by the union through a legislature that doesn’t understand it,” McMahon said.

Any of these alternative pension plans could make their way into city teachers’ contract one day, but for now the UFT is publicly committed to at most tweaking the current system, as Mulgrew indicated before legislators yesterday.

“We believe in a defined-benefit plan,” said Dick Riley, a UFT spokesman, adding that he would not discuss contract negotiations with the media.

Whatever happens, making TRS sustainable is likely to require city teachers to give up some of the perks of their profession.

“It’s up to the union to decide whether they’re going to make some concessions on these benefits or take layoffs and both deprive kids of educational services or members of their jobs,” said Brecher of the Citizen’s Budget Commission. “That’s the trade-off.”

Kim Gittleson is a research assistant employed by Ken Hirsh, a GothamSchools funder and contributor.

Busing Ban

As school districts push for integration, decades-old federal rule could thwart them

PHOTO: RJ Sangosti/The Denver Post
Several districts across the country want to use federal money to pay for school buses as part of their desegregation plans. A federal spending restriction could get in the way.

In Florida, officials plan to use federal money to shuttle students across vast Miami-Dade County to new science-themed magnet programs in a bid to desegregate several schools.

In South Carolina, a tiny district west of Myrtle Beach intends to spend federal funds on free busing for families who enroll at two predominantly black schools, hoping that will draw in white and Hispanic students.

And in New York, state officials want to deploy federal school-improvement money to help integrate struggling schools, believing that may be the secret to their rebirth.

But each of these fledgling integration efforts — and similar ones across the country — could be imperiled by obscure budget provisions written during the anti-busing backlash of the 1970s, which prohibit using federal funding for student transportation aimed at racial desegregation. The rules have been embedded in every education spending bill since at least 1974, as Rep. Bobby Scott of Virginia pointed out in September when he tried unsuccessfully to remove the provisions from the latest appropriations bill.

The rules are “a relic of an ugly history when states and school districts across the nation resisted meaningful integration,” said Scott, the top Democrat on the House education committee, during a floor speech where he called the persistence of the rules “morally reprehensible.”

After Scott’s amendment to eliminate the provisions was blocked, advocates are now working behind the scenes to convince members of the Senate from both parties to strike the rules from the latest spending bill during negotiations. More than 40 integration advocates and experts have signed onto a letter to lawmakers calling for the anti-busing language to be removed, and members of that coalition plan to meet with lawmakers in the coming days.

Advocates are especially worried about funding for magnet programs, like those in Miami and the South Carolina district, which rely on special science or art offerings or rigorous academic courses to draw students of different races into the same school — a choice-based approach that has become the primary way districts now pursue desegregation.

This is the first year districts that receive federal magnet-school grants are allowed to spend some of that money on transportation, after Congress changed the rules as part of its education-law overhaul in 2015. Among the 32 districts that received a total of nearly $92 million in magnet grants this year, at least six plan to use some of that money for transportation, according to their applications.

Now, just as those funds are about to flow to busing — which many families insist upon before they will enroll their children in magnet schools across town — the decades-old spending restriction could cut them off, advocates warn.

That could create a major problem for districts like Miami-Dade County.

It hopes to attract students from across the district to three heavily black and Hispanic schools by launching magnet programs that focus on zoology, cybersecurity, and mobile-app development, according to its application. To pull that off, it requested $245,000 for buses next year since, as the application notes, the “most limiting factor” for many families is “the cost associated with transporting their child to the magnet school.”

The district in Lake City, South Carolina wants to pull new families from different neighborhoods into an elementary school and a middle school that suffer from sagging enrollment and intense poverty. Previous recruitment efforts that didn’t provide transportation amounted to “failed attempts,” the district said in its application.

However, if the anti-busing provisions are not removed from the next federal spending bill, they would cancel out the new rule allowing those districts to spend some of their magnet money on transportation (though districts could still use local funds to fill in the gap). As such, magnet-school representatives are pushing hard for lawmakers to remove the provisions during budget negotiations.

“We’re hoping this doesn’t see the light of day,” said John Laughner, legislative and communications manager at Magnet Schools of America, an association of magnets from across the country. He plans to discuss the issue with lawmakers next week.

Beyond magnet schools, other desegregation efforts could be undercut by the anti-busing provision, which was included in a spending bill for fiscal year 2018 that the House approved and one the Senate has yet to vote on.

At least one state — New York — listed socioeconomic and racial integration among the ways it could intervene in low-performing schools under the new federal education law. In addition, New York officials announced a grant program this week where up to 30 districts will receive federal money to develop integration plans.

Advocates fear the anti-busing rule could disrupt any of those plans that require transportation and aim to reduce racial segregation. (New York education officials said they did not want to speculate on the impact of a spending bill that hasn’t been approved.)

A Democratic Congressional aide who has studied the issue said the provision could even block federal funding for planning or public outreach around desegregation programs that involve busing, not just busing itself.

Either way, advocates say the provision could dissuade districts from using the new education law, the Every Student Succeeds Act, to pursue integration — even though research suggests that student achievement on tests and other measures improve when they attend less segregated schools.

“We shouldn’t have this,” said Philip Tegeler, a member of the National Coalition on School Diversity, which is leading the charge to remove the restriction. He added that the provision stemmed from mandatory desegregation busing of an earlier era: “It’s clearly an anachronism that doesn’t really fit any more with what states and districts are doing voluntarily.”

A U.S. education department spokeswoman said Secretary Betsy DeVos would be bound to enforce any funding prohibitions that Congress approves, though she noted that state and local funds are not subject to the same restrictions.

Negotiators from the House and Senate must still agree on a single spending bill, which would go before the full Congress for a vote. Until then, lawmakers have voted to temporarily extend 2017 spending levels through December. It’s possible Congress will pass another extension then, meaning a final deal — and a decision on the anti-busing language — may not arrive until early next year.

In the meantime, advocates are pressing lawmakers like Sen. Lamar Alexander, the Republican chairman of the Senate education committee who helped craft ESSA, with the argument that the anti-busing provision limits the flexibility and local control the law was meant to provide districts.

Margaret Atkinson, a spokeswoman for the senator, would not say whether he is open to removing the provision, but said he would continue working to ensure ESSA “is implemented as Congress intended.”

The anti-busing language — found in two sections of the current appropriation bills — prohibits using federal funds for transportation “to overcome racial imbalance” or “to carry out a plan of racial desegregation,” or forcing students to attend any school other than the one closest to home. (A separate education law contains a similar restriction, but ESSA exempted magnet schools from it.) The provisions emerged in the early 1970s, just after the Supreme Court ruled that busing students to schools outside their own racially isolated neighborhoods was an appropriate tool for school desegregation.

At the time, many white parents raged against what they called “forced busing.” In response, the U.S. House of Representatives passed at least one law annually from 1966 to 1977 meant to curb school integration, according to historian Jason Sokol, and in 1974 the full Congress voted in favor of an anti-busing amendment to an education bill. The restrictions in the current spending bills appear to have originated around the same time.

The attacks on busing reflect how crucial free transportation is to school desegregation, said Erica Frankenberg, a professor at Pennsylvania State University who studies segregation. Busing was included in guidelines outlining how districts should comply with desegregation requirements in the 1964 Civil Rights Act, and later upheld by the Supreme Court, she pointed out.

More recently, studies have shown that non-white parents are more likely to opt into magnet schools when they provide transportation, and that magnets that don’t offer busing are more likely to enroll students of a single race, Frankenberg said. Yet, many politicians remain reluctant to endorse busing for desegregation — which may reflect a deeper ambivalence, she added.

Resistance to busing, she said, “is a very politically acceptable way to be opposed to integration.”

Yes and No

In a first, New York officials reject 2 proposed charter schools, but sign off on 5 for New York City

PHOTO: Geoff Decker
Charter-school advocates staged a rally outside the state capitol building 2015.

New York’s top education policymakers voted Monday to approve five new charter schools in New York City – but, for the first time, rejected two proposed charters.

The moves by the state Board of Regents sent a mixed message on charter schools. While the Regents have approved more this year than at any point since 2013, the rejections suggest they won’t rubber stamp applications – even those, like the two shot down Monday, that have earned the state education department’s blessing.

Four of the approved schools will be based in the Bronx, and one in Staten Island. (Technically, Monday’s vote is preliminary and the board must finalize its decision at Tuesday’s full-board meeting.)

A new charter high school on Staten Island plans to enroll a significant number of students with disabilities — an area of great need in a borough where a quarter of students have some disability. Students will have the opportunity to graduate with as many as 60 college credits through a partnership with St. John’s University.

The Bronx charters include a new elementary school that will serve high-functioning students on the autism spectrum, an all-boys middle school inspired by an Obama-era program aimed at uplifting young men of color, and a high school for students who have fallen behind academically.

The final Bronx school is KIPP Freedom, slated to open in 2018, which will mark the first time the national network has opened a new school in New York City in six years.

“The community has tremendous support for the charter,” said Board of Regents Chancellor Betty Rosa about KIPP, who suggested the school could even help reduce segregation if sited in the right location.

The two schools the board rejected would have been located in districts in Mount Vernon, in Westchester County, and Homer, in upstate New York.

Board members raised concerns about the applications, including that their curriculums were not very innovative. They also worried that the schools would drain resources from their surrounding districts, potentially forcing them to cut extracurricular programs from traditional schools.

Regent Judith Johnson, who represents the Mount Vernon district, expressed concern that the school only planned to serve students grades 6-8, while the district is moving towards a model that keeps children in the same school from kindergarten through eighth grade. She suggested waiting to see how the district’s efforts pan out.

“I would suggest this is premature,” Johnson said. “I’m not going to support this at this time.”

The vote comes as top state officials have been skeptical of charter schools and policies regulating them.

At past meetings, Regents have wondered aloud whether the schools are serving their fair share of high-needs students. And Board of Regents Chancellor Betty Rosa and State Commissioner MaryEllen Elia have been on a warpath against a new policy that will allow some charter schools to certify their own teachers.

However, those concerns have not stopped the Regents from approving new charter schools. During a low point for approvals in 2015, when the state approved only four charters, few applications made it past the education department’s vetting process and to the board for final approval.

Since then, there has been a steady uptick in approvals. The board signed off on seven new schools last year, and is set to approve at least eight this year. (The board, which typically accepts applications in two or three rounds each year, approved three schools earlier this year.)

State education department officials on Monday also presented new ways to evaluate charter schools and decide whether they should remain open, based on proposals that the Board of Regents floated last month.

The additions to the state’s “Charter School Performance Framework” could include measures of student chronic absenteeism, the schools’ suspension rates, and the results of student and staff surveys. In previous meetings, Regents have also suggested surveying families who decide to leave charter schools.

Charter schools are already required to meet certain enrollment and retention targets, or to make “good faith efforts” to reach them. The state also considers the quality of a school’s curriculum and its outreach to families.

At Monday’s meeting, some Regents proposed adding yet another measure: whether charter schools are sharing innovative practices with the district schools.

“If the original intent [of charter schools] was to create opportunity for innovation,” said Regent Johnson, “we have to decide now, after those twenty plus years, did that happen?”