Bad News on a Rising Wind

The first blog in this series about the future of public education discussed population trends, declining birth rate, declining school enrollment, voter registration trends, and their effects on public schools.

This edition will cover the next bullet point in the list of issues critical to the future of public schools in NY, school pension costs; the ‘Pension Bomb’.

School pensions are a matter of burning interest and, in my opinion, are a clear but future danger to our public schools. Before launching into the pension discussion, here are some salient points:

• There are three major pension funds in New York State to which almost all school employees belong: the New York State Teachers Retirement Systems (NYSTRS), the New York State Employee Retirement System (ERS), and the New York City Teachers Retirement System. For purposes of this discussion, the data will reflect the NYSTRS (“TRS”), yet readers should understand that there is also the ERS pension fund supported by our tax dollars, and the NYC system which does not impact us directly.

• The state government, not local school districts, and not the teachers or their unions control teacher pensions.  Pension benefits and costs cannot be negotiated by or with school boards.

• State pensions are property rights under the constitution and cannot be reduced or eliminated once they have been earned through a combination of service years and age. Earned pensions are not subject to being reduced as a result of job performance or even criminality.

• I wish I had made career choices that would have earned me a pension as a teacher or school administrator.

TRS pension benefits and eligibility are not going to change significantly in the foreseeable future; here’s why:

• TRS has nearly a half million members (active and retired) with substantial economic as well as political power.

• TRS net assets and pensions are significant components of the NY economy; TRS’ nearly $90 Billion of net assets is larger than the total annual budgets of 42 state governments.

Annual TRS pension benefit payments from Albany contribute significantly to the economy of Long Island, with retirees in Suffolk and Nassau counties receiving a combined $1.27 Billion annually, the most in the state.  However, the largest number and second largest dollar amount ($1.14 Billion) of TRS pension benefit payments goes to retires living out of state. The Big Four Cities (Buffalo, Rochester, Syracuse, Yonkers) round out the next largest areas of pension benefit money distribution ($1.18 Billion) spread among retirees living in those regions on NY.  Total 2012 annual TRS benefits paid were $5.84 Billion.

This points to the biggest problem concerning the TRS (and ERS). School districts and BOCES outside of the Big Five Cities pay for their pension contributions through local property taxes. Homeowners and business owners on LI are at risk, financially, through our property taxes, for the performance of the TRS pension fund and its liabilities, statewide, including the Big Four Cities. However, homeowners and business owners in the Big Four Cities are not similarly at-risk with their real property, because there is no “school tax” in those cities.

Teacher pension costs in 2014 school budgets will be increasing nominally by 37.2 percent.  This will equate to an effective dollar increase of 38.64 percent for Wantagh, which could mean an increase of about $1.48 Million. That amount of the pension cost increase is prospectively more than double the total cost of Wantagh’s entire sports program.  Budget-wise, the current $3.8 Million teacher pension cost could go up to $5.3 Million.  Some of the increased pension costs are exempt from the so-called tax cap.

You may have heard that the Governor has proposed allowing school districts to pay a flat rate for pension costs over the next 30 years instead of paying this 37.2% increase.  his proposal is being studied by an Actuary hired by TRS, whose approval is required, along with the approvals of the Legislature and the State Comptroller.  In my opinion, this proposal is pure fiscal folly, and probably unconstitutional. Yet some school boards are actively considering this option.

Here are additional considerations:

• There are presently almost 200,000 active teachers over the age of 35.  The current annual rate of retirements is in the range of 6,000. However, the age distribution of active members reveals an effective annual rate of 9,952 retirements over the next 20 years.  This will create an accelerating actuarial funding demand on the TRS Fund.

• The average salary of all teachers in the state in 2012 was $72,947.

• The Final Average Salary (FAS) of teachers who retired in 2012 was $108,349.

• The average pension received by teachers retiring in 2012 was $82,898, and was 76.51 percent of FAS

• Assuming a 3 percent annual salary growth for all NY teachers (2 percent from Triborough “steps”, 1% negotiated raises on top of steps), in ten years the average New York teacher salary could be $98,000, with new retirees FAS reaching $145,612, with their new pensions averaging $111,408.

Neither the Wantagh School District nor the Wantagh taxpayers directly pay or pay specifically for the pensions of Wantagh retirees. All pension costs across the state are pooled, and all school districts, BOCES, and communitycColleges share the total costs in the form of state-calculated contributions. 

• Total unfunded pension costs divided by total projected salaries of all active (working) participants across the state yields the required contribution rate for all school districts and BOCES as a percentage of gross salary dollars each year.  Although the pensions received by Wantagh’s retirees do not directly impact Wantagh’s TRS pension contribution rate, the gross salaries of all of Wantagh’s active professional faculty and staff do directly impact the cost of Wantagh’s annual contribution (dollars owed) to the TRS.  As the statewide contribution rate goes to 16.25 percent of gross salary, then the higher your district’s salaries, the more dollars the pension contribution will cost taxpayers.

• The tax cap, coupled with declining enrollment projected out through 2020 for Wantagh, will result in fewer new teachers being hired during this period.  Declining enrollment implies declining numbers of teachers implies higher pension contribution rates as a percentage of the salaries of the teachers whose jobs survive this population cycle. Under such a scenario, as the number of people collecting pensions increases, the number of active members supporting those pensions will decrease, and it is possible that the entire equation could turn upside-down in ten years, meaning fewer active (working) members in the TRS than live retirees collecting pensions. In an upside-down pension equation, there is a point where, as the number of retirees (144,438 in 2012) increases and the number of active employees (277,273 in 2012) decreases, the total pension benefits being paid to retirees may exceed the salaries paid to the remaining active employees (The “Pension Bomb”).

How to summarize school pensions? This is a huge, complicated issue, and not one that is amenable to being easily changed.  TRS is an economic engine in our state and on our Island.  Its present structure, in the context of the future of public schools, may not be sustainable, or, it may jeopardize the sustainability of public schools as they presently exist.

The only local control your school board has in this regard is to control the salaries they negotiate with the local teachers union.

Finally, remember, pension costs are only one factor of many facing our public schools.

The author may be contacted for additional information at chriswendt117@gmail.com