Access Quality Education: Policy News

Amidst recession, states confront mounting teacher pension costs

A recent study found that unfunded liabilities for the 125 state, local government and teacher pension funds across the country amount to $443 billion, an especially staggering figure as states grapple with steep budget shortfalls and declining tax revenues, and the funds themselves experience considerable losses. States’ fiscal crises have prompted policymakers and citizens to critically reevaluate retiree benefits schemes, and teacher pension plans have received particular scrutiny.

Public sector pension funds took major hits in the past year. Florida’s public employee benefits program is underfunded for the first time in 12 years, Maryland’s pension fund lost 20% of its value from 2009 to 2010, and California’s teacher pension fund lost a staggering $43.4 billion in the past year. In Ohio, where pension funds are required to cover current liabilities within thirty years, the State Teachers Retirement System “reported on July 1, 2008 that this would take 41.2 years…Its estimate as of July 1 of this year was ‘infinity.’” Officials in West Virginia say that the state’s pension and healthcare obligations for educators and state employees amount to a tab of $6,100 per resident.

As legislators search for cost-saving measures, they have turned their attention to teacher pension plans. Retiree benefits programs were considerably augmented during the 1990s economic boom, with states promising retired educators yearly pay hikes. Proponents of teacher pension systems defend frequent pay hikes on the grounds that generous retiree benefits programs work to attract qualified candidates and retain experienced educators. Research shows, however, that pension programs in fact create “perverse incentives” to retire early. In order to compensate for the loss of veteran educators, states permit retirees to return to the classroom through “double-dipping” loopholes. These provisions enable retirees to collect both salaries and pension payments, thus increasing the burden on taxpayers.

Pushing back the retirement age, reducing benefits and eliminating double-dipping” could result in substantial savings for states and districts. In Rhode Island, for example, lawmakers estimate that establishing a minimum “target” age for retirement at 62 will result in $59 million savings in the current fiscal year. Delaware’s state auditor found that government-sector retirees might receive as much as $17 million per year in state wages.

With this in mind, states (and city school systems) have proposed and enacted changes to public-sector retiree benefits programs. Several have passed or debated cuts in benefits for new hires. Other proposals would change eligibility, contribution, wage increase and/or “double-dipping” rules for older employees, including vested members in some cases. Some public employees in New Mexico must contribute more to their retirement funds according to a law that took effect on July 1.

Changes which impact vested rights of existing employees would contravene specific constitutional provisions in Alaska, Hawaii, Illinois, Michigan and New York. In states that lack specific guarantees for vested employees, defenders of the rights of vested employees are likely to argue that federal and state constitutional contract clause provisions prohibit any changes that would modify their entitlements. The issue of the legal rights of vested employees may be tested shortly in Rhode Island where unions plan to sue the state, arguing that recent legislation that would establish a minimum “target” age for retirement at 62 for all employees who are not eligible to retire before September 30, including both new hires and vested members, is unconstitutional. Unions plan to file a suit against the state this fall.