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.

To and Through

Newark’s post-grad paradox: More students are entering college, but few earn degrees

PHOTO: Patrick Wall/Chalkbeat
Newark Mayor Ras Baraka wants 25 percent of residents to have college degrees by 2025, up from 19 percent today.

When it comes to college, Newark faces a good news-bad news paradox.

More students than ever are graduating high school and enrolling in college, according to a new report. Yet fewer than one in four Newark students earns a college degree within six years of graduating high school — leaving many with limited job prospects in a city where an estimated one-third of jobs require a four-year college degree.

Now, city officials are promising to build on the report. They want to ramp up the rigor of high-school classes and create more early-college programs to increase the odds of students entering college and leaving with a degree.  

“How do we teach our children to perform — to graduate?” Mayor Ras Baraka asked at a press conference Wednesday to mark the official release of the report of Newark students’ college outcomes. “We got them in the door,” he said of students who attend college. “Now how do we make them stay?”

The city’s plans, to which Superintendent Roger León is lending his support, reflect a growing recognition that simply getting students into college is not sufficient — and can even backfire if they drop out before graduation, leaving them with college debt but no degree.

Until recently, the charge given to high schools in Newark and across the country was to foster “college-going cultures.” And these efforts showed promising results: On average, 51 percent of Newark Public School students who graduated high school between 2011 and 2016 immediately enrolled in college, up from 39 percent who did so between 2004 and 2010, according to the report by the Newark City of Learning Collaborative, or NCLC, and Rutgers University-Newark’s School of Public Affairs and Administration.

But entering college didn’t guarantee its completion. Of those students who started college straight after high school, only 39 percent earned a degree within six years, the report found.

As a result, educators and policymakers have begun to think harder about how to help students “to and through” college — to ensure they actually earn degrees. Toward that end, Baraka and the NCLC — which includes roughly 40 colleges, schools, nonprofits, and corporations — has set a goal of 25 percent of Newark residents earning college degrees or comparable credentials by 2025.

Today, just 19 percent of Newark adults have associate degrees or higher — compared to 45 percent of adults across New Jersey and 40 percent nationally.

Superintendent León, who began overseeing the city’s schools on July 1, said his main strategy for supporting these efforts will be to expose students to challenging work early on.

“If we don’t do something dramatically in classrooms to improve instruction and make it rigorous,” León said after Wednesday’s event, then students are “getting into college but they’re not completing it.”

Source: “Post-Secondary Outcomes of Newark High School Graduates (2011-2016)” report. Note: The four-year rate is an average of the classes of 2011 to 2013. The six-year rate is from the class of 2011. Graphic: Sam Park/Chalkbeat

For starters, León said he wants high schools to offer more college-level classes. In the 2016-17 school year, just 21 percent of Newark students were enrolled in one or more Advanced Placement or International Baccalaureate classes — compared to 42 percent of students statewide.

He also vowed to raise the quality of instruction in the district’s traditional high schools. Only 14 percent of their graduates earn college degrees within six years, compared to 42 percent of graduates from the city’s selective magnet schools, the report found.

To do that, León said he will create specialized academies within the traditional schools modeled on the magnets, which have specialized themes such as science, technology, or the arts. The academies, which will partner with colleges, will most likely feature admissions criteria similar to those of magnet schools, which select students based on their academic and attendance records, León added.

And, for the first time, all ninth-grade students this academic year will take the Preliminary SAT, or PSAT, León said Wednesday. An additional 1,100 eighth-graders who passed at least one of their seventh-grade PARCC exams will also take the PSAT when it’s administered on Oct. 10.

Since 2016, the district has provided the PSAT to all 10th and 11th-grade students. But León said that giving the test to younger students will focus their attention on college and help identity those who are ready for advanced classes. The PSAT is designed to help students prepare for the SAT, which is used in college admissions, and to qualify for National Merit Scholarships.

The district, which was under state control for 22 years until February, is getting some assistance in its effort to improve students’ college outcomes.

For instance, KIPP, the national charter-school network with eight schools in Newark, is sharing its strategies for helping students choose the right college with guidance counselors at three district high schools.

And the higher-education institutions in the Newark City of Learning Collaborative, including Essex County College and Rutgers University-Newark, plan to create more “dual-enrollment” programs that allow high-school students to earn college credits, said NCLC Executive Director Reginald Lewis.

“We’re all going to do a better job,” Lewis said, “of making sure that once Newark residents get in our doors, that we help them persist.”

Time crunch

In victory for teachers union, Newark superintendent scraps longer hours for low-performing schools

PHOTO: Patrick Wall/Chalkbeat
Superintendent Roger León at Hawkins Street School, one of the schools that will lose its extended hours.

Newark’s new superintendent is eliminating a program that extended the hours of struggling schools, which the teachers union has long attacked as ineffective and unfair to educators.

Teachers at roughly 30 schools will no longer receive $3,000 annual stipends for the extra hours, a provision written into the current teachers contract, which extends to 2019. Instead, all 64 district schools will get extra funding for before and after-school programs, Superintendent Roger León said in an email to employees on Tuesday.

The changes will go into effect Monday, Sept. 10, resulting in new hours for the affected schools just days after the new school year began. The district is still working to adjust pickup times for students who are bused to school, according to León’s email. A few of the schools will phase out their extended hours later in the year, the email said.

“We will not continue to do the same things as before and be surprised when the results do not change,” León wrote, adding that cutting the extra hours would save the district $5 million.

In an interview with Chalkbeat Thursday, León said the move is intended to create more uniformity among schools and the services they provide. Now, all schools will get additional money to pay for programs outside of the regular school day, which schools can tailor to their individual needs, though students who are struggling academically will continue to receive “intensive” support, he said.

“Ultimately, the idea would be by October having completely different after-school and before-school programming that meets the needs of each respective school,” León said.

The extended time was first included in the teachers contract in 2012 as part of a larger improvement plan for the targeted schools, which was developed by Cami Anderson, Newark’s former state-appointed superintendent. The plan also designated some low-performing schools as “renew” schools, where teachers had to reapply for their positions and work longer hours.

Anderson also closed some schools and gave principals new hiring authority. Both actions left dozens of tenured teachers without positions, so Anderson created a fund to pay those teachers to perform support duties in schools. In 2014, that fund for “employees without placement” cost the district $35 million out of its nearly $1 billion budget, though by last year the fund had shrunk to $8 million for about 100 unassigned teachers, according to officials.

León said in Tuesday’s email that he was also eliminating the fund, which he said would save the district another $6 million. The teachers union president said he believed all the unassigned teachers now have placements, but the district did not respond to a request to confirm that.

León is also removing the “renew” and “turnaround” labels from low-performing schools, citing their “progress and student achievement,” according to the email.

“I applaud everyone’s efforts at renew or turnaround schools and acknowledge what has been accomplished,” he wrote.

Now that León has abolished his predecessors’ school-improvement program, he will be expected to create his own. Many schools remain mired in poor performance, even as the district overall has made strides in recent years.

When the teachers union agreed to the extended hours in its 2012 contract with the district, it was hailed nationally as a major breakthrough in efforts to revamp troubled schools. But even as the union agreed last year to keep the provision in its current contract, union officials have assailed the turnaround effort as a failure.

NTU President John Abeigon told Chalkbeat on Thursday that the program had been a “scam” and “nothing more than extended childcare.” He added that the stipend teachers received amounted to about $7 per hour for the extra time they worked.

In 2016, a district-commissioned survey of 787 teachers at schools with extended hours found that two-thirds of teachers at schools where the extra time was spent on student instruction said the time was valuable. But in a survey the union conducted in April, the 278 teachers who responded gave the extended hours low ratings for effectiveness in boosting student achievement.

Some teachers in the union survey praised the longer hours, saying their schools used them effectively to lengthen class periods, run after-school clubs, or allow teachers to plan lessons or review student data. But others said the extra time was squandered, leaving staff and students exhausted with little evidence of improved student outcomes to show for it. (Students’ pass rates on state tests stayed flat or declined at most “renew” schools in the first years of the program.)

The union also has complained that many teachers felt compelled to work the extra hours because those who refused to could be transferred to different schools. Under the terms of the original extended-day agreement, teachers were required to work an extra hour per day and attend trainings during the summer and some weekends.

In León’s email to employees, he said every extended-day school had set different work requirements and “none are consistent with the original design.” The longer days may also be contributing to high teacher turnover in those schools, he wrote, adding that principals of schools with regular hours told him they did not want to extend their hours.

Abeigon, the union president, applauded León’s decision to scrap the extra work hours.

“He came to the conclusion that we expected any true educator to reach: that the program was not working and was never going to work,” he said.

León said Thursday that he is now working on a new turnaround program. Once it’s ready, he promised to share the details with affected families before publicly announcing which schools are part of it — an effort to avoid the student protests that erupted when Anderson identified her “turnaround” schools.

He also said he was still considering whether he would ever close schools that fail to improve or to reverse their declining enrollments. Anderson’s decision to shutter nearly a dozen long-struggling schools continues to fuel resentment among her critics even years later.

“I think the whole idea of how much time does a school get to correct itself is a very important one and I’m going to need to be really reflective on it,” León said. “I’ve seen what closing schools does with people who do not feel that they were aware of it or a part of fixing it.”