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.

First Person

First Person: Why my education nonprofit is bucking the coastal trend and setting up shop in Oklahoma

PHOTO: Creative Commons

“Oklahoma?! Why are you expanding to Oklahoma?!”

The response when I told some people that Generation Citizen, the nonprofit I run, was expanding to central Texas and Oklahoma, quickly became predictable. They could understand Texas, probably because our headquarters will be in the blue-dot-in-sea-of-red Austin. But Oklahoma?

My answer: Generation Citizen is expanding to Oklahoma City because no one would expect us to expand to Oklahoma City.

Our nonprofit is dedicated to empowering young people to become engaged citizens by reviving civics education in schools. We help middle and high school students learn about local politics by guiding them as they take action on issues they care about, like funding for teen jobs or state resources for teenage moms.

I founded the organization after graduating from Brown University in Rhode Island in 2009. Since then, we’ve expanded our programming to Boston, New York City, and the San Francisco Bay Area. All are urban areas with wide swaths of low-income young people, unequal schools, and disparate power dynamics. Our work is needed in those areas.

At the same time, all of these areas have predominantly liberal populations. In fact, according to The Economist, they are among the 10 most liberal cities in the country.

Generation Citizen is a non-partisan organization. We do not wish to convince young people to support a particular candidate or party — we just want them to engage politically, period. But the fact that we are preparing low-income young people in liberal urban centers to become politically active complicates this narrative.

So despite the fact that we could work with many more students in our existing cities, we made a conscious decision to expand to a more politically diverse region. A city that had real Republicans.

As we started talking about expansion, I realized the extent to which the dialogue about political and geographic diversity was a rarity in national nonprofit circles. While several large education organizations, like Teach for America and City Year, have done an admirable job of in working in conservative and rural regions across the country, a lot of other organizations follow a more predictable path, sticking largely to cities on the east and west coasts and sometimes, if folks feel crazy, an Atlanta or Miami.

There is nothing wrong with these decisions (and we were originally following this trajectory). A big reason for the coastal-focused expansion strategy is the availability of financial resources. Nonprofits want to raise money locally to sustain themselves, and those cities are home to a lot of people and foundations who can fund nonprofits.

But a more problematic reason seems related to our increasing ideological self-segregation. Nonprofits lean toward expanding to places that are comfortable, places that their leaders visit, places where people tend to hold similar values and political views.

One of the fault lines in our democracy is our inability to talk to people who disagree with us (highlighted daily by this presidential election). And non-profits may be exacerbating this reality.

This schism actually became more apparent to me when our board of directors started having conversations about expansion. Oklahoma City had come to the top of my proposed list because of my personal and professional contacts there. But I quickly realized that no one on my board lived more than five miles from an ocean, and save a board member from Oklahoma, none had stepped foot in the state.

“Are we sure we want to expand there? Why not a gateway city?” (I still don’t know what a gateway city is.)

“We can hire a Republican to run the site, but they can’t be a Trump supporter.”

“Are we sure that we can raise enough money to operate there?”

It wasn’t just my board. Whenever I talked to friends about our plans, they’d offer the same resistance.

The stereotypes I heard were twofold: Oklahoma was full of bigoted conservatives, and it was an incredibly boring location. (The dullness narrative got an unquestionable boost this year when star basketball player Kevin Durant left the hometown Thunder. It became quite clear that a main rationale for his leaving the team was Oklahoma City itself.)

But as I met with folks about Generation Citizen’s work, I met citizen after citizen who was excited about our mission. The state is facing tremendous budget challenges, and its voter participation rates amongst the worst in the country. Given these realities, there seemed to be widespread recognition that a program like ours could actually be helpful.

I did not talk about national politics with most people I met. Indeed, we might disagree on whom to support. But we did agree on the importance of educating young people to be politically active, shared concerns about public school budget cuts, and bonded over excitement for the Thunder’s playoff chances.

Still, the actual expansion to Oklahoma will be a challenge for our organization. Despite our local ties, we are coming in from the outside, and we do have the perception of being a progressively minded organization. What will happen if one of our classes wants to advocate for open carry at schools in response to a shooting? How will my board handle working in a site where they wouldn’t ordinarily visit?

I am excited to tackle all of these challenges. And I would push other similarly sized non-profits to think about working in a more diverse set of areas. It is not possible to be a national organization and avoid entire swaths of the country. But more importantly, given these tenuous political times, it feels important to interact with people who may not hold our beliefs.

Nonprofits can’t fix our national dialogue alone. But by expanding where we work, we might help improve the conversation.

honor system

Meet Derek Voiles, the Morristown educator who is Tennessee’s newest Teacher of the Year

PHOTO: Tennessee Department of Education
Derek Voiles, Tennessee's 2016-17 Teacher of the Year

Derek Voiles, a seventh-grade English language arts teacher in Morristown, is Tennessee’s 2016-17 Teacher of the Year, the State Department of Education announced Thursday.

One of nine finalists for this year’s award, Voiles teaches at Lincoln Heights Middle in Hamblen County Schools in East Tennessee. He received the top teacher honor at a banquet in Nashville.

Voiles, who has been teaching for six years, has long shared his teaching practices publicly — on Twitter, through a blog he wrote with a colleague, and as a state ambassador for the Common Core standards. In recent years, according to a state news release, his classroom became a hub as teachers from across his district observed his teaching in hopes of replicating his practices, which often improved the performance of students far behind their peers.

“All students are capable of achieving great things, and all students deserve a teacher who believes this and will do whatever it takes to make it happen,” Voiles said in the release. He is also a doctoral candidate at East Tennessee State University.

Now, Voiles will gain an even wider stage, as Tennessee’s representative to the National Teacher of the Year program. He will also share insight from the classroom as part of committees and working groups with the Tennessee Department of Education.

All nine Teacher of the Year finalists, representing each of the state’s regions, will serve on the Commissioner Candice McQueen’s Teacher Advisory Council during the 2016-17 school year.

The department also recognized two division winners from Middle and West Tennessee. Cord Martin, a music education and enrichment teacher at Whitthorne Middle School in Maury County, was recognized for his innovative teaching strategies and connecting content to contemporary culture. Christy McManus, a fifth-grade English language arts and social studies teacher at Chester County Middle School in Henderson was honored for equipping her students with the end goal in mind: a college-ready twelfth grader.

Voiles follows Cathy Whitehead, a third-grade teacher from Chester County, who served as Tennessee’s 2015-16 Teacher of the Year. Whitehead teaches at West Chester Elementary School in Henderson in West Tennessee.