No free lunch

Study: Pension system shift could be costly in more ways than one

Converting the current pension plan for teachers and state employees to a defined contribution system could cost up to $15.9 billion over four decades, according to a new study.

And a replacement system likely would be more expensive for the state and school districts to operate if current levels of retiree benefits are maintained, according to the new study by the actuarial firm of Gabriel, Roeder, Smith & Co. It was presented to the Legislative Audit Committee Monday.

The 211-page report, one of three commissioned by a 2014 law, provides the first-ever detailed projections about the cost of converting the Public Employees’ Retirement Association and also gives new details about what it costs government employers to maintain current levels of retiree benefits as compared to other types of retirement plans.

The PERA system is primarily a defined-benefit plan, meaning retirees are paid monthly pensions based on years of work and an average of their three highest-salaried years. (PERA actually is called a “hybrid” plan because it also has a feature that allows people who leave the system before retirement to keep their contributions in PERA, earn interest on those and receive benefits when they do retire.)

Defined contribution plans are similar to 401(k) savings plans in that retirees receive benefits based on what they and their employers deposited into their plans, plus any investment earnings.

The PERA system’s pension obligations currently are only about 62 percent funded. The division that covers about more than 295,000 retired, active and inactive school employees is about 61 percent funded, while another division covering 30,000 Denver Public Schools members is 82 percent funded. Closing those gaps is expected to take 30 to 40 years in some cases.

That gap has sparked years of debate in the legislature, with many Republicans, worried about the unfunded liability, arguing that PERA should be converted to a defined contribution plan.

The problem is that vested PERA members and retirees have a legal right to current benefits so can’t be forced into a new system. “The state cannot eliminate the unfunded liability by moving new hires to an alternative plan, but must develop a plan to address the existing unfunded accrued liability,” the study concluded.

The Gabriel report provided the first estimates that have been made of what it would cost to switch PERA to a type of defined contribution plan. A scenario involving an accelerated pay-down of the unfunded liability from now through 2053 would cost $8.8 billion.

The study estimates it would cost $15.9 billion through 2053 if the pay-down wasn’t accelerated.

Another key aspect of the Gabriel study was a review of what it costs PERA employers to maintain the system’s current average retiree benefit, which provides an estimated 72 percent of preretirement salary for civil servants and teachers who enter the system at age 35 and work for 30 years. (PERA members are not eligible for Social Security.)

“This study found that the current PERA Hybrid Plan is more efficient and uses dollars more effectively than the other types of plans in use today,” the report concluded.

Leslie Thompson, the actuary who was the senior consultant on the project for Gabriel, told the committee, “There was no alternative plan that was as cost-effective at delivering the retirement benefit as PERA. … There is no alternative plan for which you could pay the same cost and get a higher benefit.”

Greg Smith, PERA executive director, said the Gabriel report “allows policymakers to see the efficiency of the plan we have in place. … What we learned from the report today is the most efficient way to address that is within the hybrid defined benefit plan.”

Smith said he believes the Gabriel study also demonstrates the advantages of PERA for employees such as teachers who leave the system after several years but allow their funds to remain within PERA to grow and be taken upon retirement.

“Our plan provides greater retirement security for even the short-term employee,” he said.

Some education reform groups have argued that pension systems like PERA don’t provide adequate incentives for young teachers (see story).

The PERA system was more than 100 percent funded as recently as the turn of the century, but its position has slipped because of legislative expansion of benefits and reduction of contributions early in the century. And stock markets drops in 2001 and 2008 damaged PERA’s investment portfolio.

The legislature raised employer contributions in the mid-2000s, and in 2010 lawmakers passed a comprehensive PERA overall that tightened benefits for new employees and reduced cost-of-living increases for retirees, among other changes.

Despite passage of that law, PERA has remained a popular target for Republican-sponsored bill in recent sessions, none of which have passed. The 2014 law that required the Gabriel study also commissioned a separate study of how to improve tracking of PERA’s financial health at intervals over the coming decades. (See this story for more details on the thinking behind the studies.)

And PERA is scheduled to issue a report at the end of the year on the impact of the 2010 reforms.

All of the studies will give the upcoming legislative session plenty of information to work with, although major pension charges may be unlikely, given that Democrats control the House and Republicans run the Senate and that 2016 is an election year.

Paying for school

Sweeping study proposes major changes to the way schools are funded in Michigan

Michigan needs to change the way it funds education so that schools get more money for students who need extra attention — such as those who live in poverty and those who don’t yet have a strong command of the English language.

That’s the top recommendation from a prominent group of educators, policymakers, and business leaders who have been studying Michigan’s school funding system for much of the past two years.

While many states use a complex formula that gives schools more money if they serve children facing extra challenges, Michigan has long used a system that distributes the same amount of money for virtually all students, regardless of their needs.

The state provides some extra funding for students with disabilities — but not nearly enough, according to a state study last year that found schools across Michigan are getting $700 million less a year than they need to serve those students.

The study released Wednesday recommends a major restructuring so that schools would be fully funded for special education programs and would get extra funds to provide resources to students who need extra help. With that money, schools could offer lower class sizes, add counselors and social workers, and give teachers more support, the report says.

The study was conducted by Augenblick, Palaich and Associates on behalf of the Michigan School Finance Research Collaborative.

The collaborative — including top business and education leaders across the state — came together in 2016 after an earlier “school adequacy study” was largely ignored by political leaders.

The earlier study, which was funded by the state legislature, recommended that the state significantly increase the amount of money it sends to schools per student.

The collaborative hopes this new more robust study, which clocks in at more than 300 data-packed pages, will have a greater impact.

Since this study used multiple methods to determine the right funding method for schools, it will be more difficult to ignore, the group hopes.

The study — paid for with $843,000 from major foundations and 18 county school districts — included interviews with hundreds of educators including district and charters school teachers to determine how much money schools need to more effectively do their jobs.

The study examined geographic cost differences in different parts of the state, labor cost differences, and other factors and determined that schools need approximately $9,590 each for students who don’t have special needs, including funds that would come from the state and federal governments.

The study recommends that schools get 35 percent more for students living in poverty, between 50 and 70 percent more for students who are learning English, 70 percent more for students with mild disabilities and 115 percent more for students with moderate disabilities.

Among other recommendations in the  report is that charter schools receive the same per-student funding as districts. Currently, the state’s funding system pays some districts more per student than others based largely on historic funding levels as opposed to current needs. Some districts — including most charter schools — are currently getting around $7,600 per child from the state while others get thousands of dollars more. Schools also get federal funding on top of that. 

It’s difficult to compare how much funding schools are getting now with the proposed $9,590 per student because schools get a mix state and federal dollars and the $9,590 doesn’t include things like transportation dollars.

The report suggests that the state use a new approach to student transportation in which transportation dollars are distributed differently, taking into account differences between urban and rural school districts.

The report did not put a price tag on the cost of implementing the recommendations. It also did not spell out how Michigan could come up with the extra money, instead outlining that conversation as a next step — and highlighting a potential pitfall that could arise.

“While outside of the scope of this current study, the study team feels it is important to highlight during the implementation of a new system that student and taxpayer equity will also need to be considered,” the study’s executive summary reads. “Ensuring that each district and charter has the ability to raise funds needed to meet all resource needs is critical to ensuring both an adequate and equitable school funding system.”

The findings were released Wednesday morning, with press conferences planned in Lansing, Grand Rapids, and in the Detroit area.

Read the full report here:

spending squeeze

Facing a state budget crunch, Gov. Cuomo proposes modest 3 percent education boost

Governor Andrew Cuomo delivers his executive budget address.

Facing budget pressure at home and from Washington, Gov. Andrew Cuomo proposed increasing school aid by 3 percent this year —  far less than what advocates and the state’s education policymakers had sought.

Cuomo put forward a $769 million increase in school aid during his executive budget address on Tuesday, less than half of the $1.6 billion sought by the state’s Board of Regents. In response, the state’s top education officials said they were “concerned,” and suggested that they would press lawmakers to negotiate for more education spending.

The governor’s modest increase in school funding comes amid a projected $4.4 billion state budget deficit, a federal tax overhaul expected to squeeze New York’s tax revenue, and the threat of further federal cuts.

Still, Cuomo, a Democrat who plans to run for reelection this fall and is considering a 2020 presidential bid, defended his spending plan as a boost for schools at a time of fiscal uncertainty.

“We have increased education more than any area in state government,” he said during his speech in Albany. “Period.”

He also floated a plan to have the state approve local districts’ budgets to ensure they are spending enough on high-poverty schools. And he set aside more money for prekindergarten, after-school programs, and “community schools” that provide social services to students and their families.

Now that Cuomo’s proposal is out he must negotiate a final budget for the 2019 fiscal year with lawmakers by April 1. While the Democratic-controlled assembly is likely to push for more school spending, the senate’s Republican leaders are calling for fiscal restraint and tax cuts.

What was the response?

Advocates and policymakers were alarmed by Cuomo’s proposed $769 million education bump — a 3 percent spending increase compared to last year’s 4.4 percent boost.

Last month, a coalition of statewide education organizations estimated that the state would need to increase spending by $1.5 billion just to maintain current education services. The group, which includes state teachers union and groups representing school boards and superintendents, called for a $2 billion increase.

In a statement Tuesday, Board of Regents Chancellor Betty Rosa and State Education Commissioner MaryEllen Elia noted that Cuomo’s proposal was less than half the amount they sought. They promised to work with lawmakers to ensure the final budget amount “will meet the needs of every student throughout our State.”

Anticipating such criticism, Cuomo noted in his speech that he has expanded education spending by nearly 35 percent since taking office. His proposal would bring total school aid to $26.4 billion — the largest portion of the state budget.

Still, that didn’t prevent pushback. A state assemblyman heckled Cuomo as the unveiled his education spending plan, suggesting it was not enough money.

“It’s never enough,” Cuomo shot back.

Will poorer schools get more funding?

Cuomo said he wants to fight “trickle-down education funding” and ensure that poor schools receive their fair share of cash.

To that end, Cuomo wants the state education department and his budget office to review local school district budget plans. The plan is aimed at larger school districts, including New York City, which Cuomo singled out in his speech.

“Right now we have no idea where the money is going,” Cuomo said on Tuesday. “We have a formula. We direct it to the poorer districts. But what did Buffalo do with it? What does New York City do with it?”

It’s unclear how the proposal would impact New York City, which already uses a funding formula designed to send more money to schools with needier students. But some education advocates were intrigued by Cuomo’s idea, which they said could be a way to expose and fight inequities in school funding across the state.

“Right now, school-level expenditure with consistent definitions is really a mystery,” said Ian Rosenblum, executive director of The Education Trust – New York. “It means that a lot of inequity can be swept under the rug.”

Cuomo officials also said that 73.1 percent of funding will be directed to high-needs districts in this year’s budget, which the state said was the highest share ever. Last year, they received 72 percent.

But advocates are more concerned with the state’s “foundation aid” formula, which funnels a greater share of funds to high-needs districts. The formula was created in response to a school funding lawsuit settled more than a decade ago; advocates say schools are still owed billions from the settlement.

Cuomo proposed boosting foundation aid this year by $338 million, a far cry from the $1.25 billion requested by the Board of Regents. Without more foundation aid, some advocates say Cuomo’s promise of greater funding equity rings hollow.

“Equity is you’re actually helping to lift up poor districts so that they can provide an equitable education,” said Billy Easton, executive director of the union-backed Alliance for Quality Education. “Not just that they’re receiving a larger share of a too-small pot.”

What does all of this mean for New York City schools?

New York City is not immune from Albany’s budget crunch.

The total increase proposed for the city — $247 million — falls about $150 million short of the mayor’s projections in November, according to the city’s Independent Budget Office.

It may also be difficult for the city to wrangle funding for big-ticket items. Mayor Bill de Blasio wants to expand his prekindergarten program to 3-year-old students, but he estimates that he will need $700 million from state and federal sources by 2021. (The governor proposed $15 million to expand pre-K seats across the state.)

How about charter schools?

Cuomo would boost spending for charter schools by 3 percent the same rate as for district schools. He also wants to provide more support for schools that rent private space, which is a major financial burden for some schools.

“Once again, Gov. Cuomo demonstrated his unwavering commitment to ensuring every student in our state has access to a great public education,” said James Merriman, CEO of the New York City Charter School Center.