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.

Newark Enrolls

Want to attend one of Newark’s coveted magnet schools? Get ready to take a test.

Newark students who hope to attend one of the district's six magnet schools will have to take a new exam in January.

Newark students will soon face a new hurdle when trying to snag seats at the city’s most popular high schools.

Next month, any student who wants into one of the city’s six magnet schools will have to take a new exam that gauges their academic prowess as well as their interest in each school’s theme.

“If you would like to go to any of those schools,” Superintendent Roger León told parents at a conference Wednesday, “you better get ready for the test to get in.”

The exam, which will be given to students on Jan. 11-12, has not yet been announced on the district’s enrollment site. In fact, the test itself is still being developed and logistical details, such as where students will take it, are still being determined, officials said.

In addition to the new test, each school will also begin interviewing applicants, León said — something only two magnet schools did last year, according to an admissions guide. It’s unclear whether the interviews will take place this admission cycle. If so, schools may have to schedule dozens or even hundreds of interviews in the coming weeks.

Meanwhile, enrollment for next school year began on Dec. 3 and continues through February — giving students and schools little time to prepare for the new requirements.

“I know as much as you know right now,” one principal said. “Obviously the superintendent is revamping some items, but he hasn’t really shared the details with everyone.”

The district-run magnet schools, which have themes such as science and American history, include some of the city’s most sought-after high schools. Last year, nearly 1,800 eighth-graders listed a magnet school first on their high-school applications even though the schools had space for only 971 students.

The magnets, which vastly outperform the district’s six traditional high schools, already screen applicants. They look at grades, state test scores, attendance records, and — in the case of Arts High School — an audition or visual-art portfolio, when deciding which students to let in.

But even with those screens, some admitted students are not prepared for the rigor of work at the magnets or lack a strong interest in their programs, León said.

“The idea is to make sure that students who choose to go to these schools are going to meet whatever are the demands of that school,” he told Chalkbeat. “It’s not that your parents have the right to choose for you to go.”

Even as he moves to make magnet schools more selective, León — who became superintendent in July — also hopes to make traditional schools more appealing to top students.

On Wednesday, he also announced plans to create gifted-and-talented programs at each of the traditional high schools. To qualify, students will also take the new magnet-school exam.

León did not go into detail about what the programs will entail. But he may be drawing from his previous experience as principal of University High School, a magnet school that advertises a gifted-and-talented program on its website. Students must test into the program, which includes a “rigorous curriculum” in English, math, and another language, according to the site.

“Students are going into magnets because they think that’s where they can get their high-performing education,” he said. “Now they’ll be given a reason to not do that.”

The traditional schools will also develop specialized “academies” to train students for various careers, including engineering, teaching, and health services. Each school will partner with a higher-education institution and a professional organization to develop those programs.

Many Newark schools have tried to offer vocational programs, but often struggle to find qualified teachers and meet the stringent requirements to receive federal funding. It’s unclear how the district will help them overcome those challenges, especially if the timeline is also aggressive.

Traditional schools, for their part, seem eager for any support they can get. Angela Mincy, principal of Barringer High School, said the school created an honors program last year in an effort to retain high-achieving students.

“If I don’t create an isolated experience for them, I will lose them,” she said in an interview last month, adding that the goal is to keep attracting more and more top students. “The hope is that one day, one honors track will become two will become three.”

With their selective admissions and college-oriented courses, the city’s magnet schools have long been seen as a refuge for high-achieving students who cannot afford private school. County-run vocational schools, which also screen applicants, are another popular option along with some charter high schools — though they often have few seats left over for students who did not attend their lower-grade schools.

The district’s traditional, or “comprehensive,” high schools are viewed by many families as schools of last resort. On nearly every academic measure — attendance rates, test scores, college enrollment and completion — the traditional schools lag far behind the magnets.

In a sense, this disparity is built into the system. Magnet schools are designed to enroll academically and artistically accomplished students. Traditional schools take the rest, including almost all students who are still learning English and the majority of those with disabilities.

Other cities have begun to rethink this practice of tracking students into separate schools according to ability — at least as measured by a single test. In New York City, where a debate has raged over admissions to the district’s coveted “specialized” high schools, the mayor has proposed scrapping the schools’ entrance exam. Instead, he said, they should reserve spots for the top students from every middle school.

Some Newark parents have floated a similar plan for the city’s most exclusive magnet school, Science Park High School. Instead, Superintendent León is pursuing the opposite approach — adding new entrance exams for all magnet schools. In other cities, exam schools tend to be highly segregated by race and class, favoring families with the wherewithal to help students prepare for the exams or pay for test prep.

León said he expects the new magnet exams will measure students’ reading and math proficiency, as well as their interest in each school’s particular focus, such as science or technology.

“The whole concept that anyone and everyone can get into the magnet high schools — that’s not why they were designed,” said León, who graduated from Science High School. “You actually have to qualify to get into those schools.”

Karen Gaylord, Science Park High School’s community engagement specialist, said some teachers and  parents may grumble about the new test because they haven’t had a chance to prepare students for it. But she noted that families had become “resigned” to entrance exams when magnet schools used them in the past.

She also said many people would welcome the admissions interviews as a way for students to highlight skills and interests that aren’t reflected on their transcripts. The question, she said, is how schools will carry out these changes on such a tight timeline.

“It feels like there are so many opportunities to get this right,” she said. “I’m just not sure we’re going to get them all in this year. The clock is ticking.”

Newark Enrolls

In Newark, universal enrollment was in danger. So charters started planning a separate system.

PHOTO: Patrick Wall/Chalkbeat
Newark students arriving at a district school on the first day of class.

For much of this year, the fate of Newark’s joint district-charter enrollment system was uncertain.

So even as charter leaders negotiated changes to the shared system with the district’s new superintendent, they began quietly developing a backup plan in case it fell apart, according to a charter-sector memo obtained by Chalkbeat.

Beginning this spring, the sector began exploring a charter-only enrollment system, the October memo shows. This fall, the sector ramped up its contingency planning: It hired the district’s recently departed enrollment director to draw up plans for a charter-only system.

Ultimately, their efforts proved unnecessary — at least for now. Last month, after prodding from the superintendent, the Newark school board agreed to retain the joint enrollment system for at least another year.

Still, the behind-the-scenes planning shows how seriously some charter leaders took the threat that the five-year-old enrollment system, called Newark Enrolls, could unravel. And it illustrates their fear of returning to what many charter proponents consider the bad old days, when each charter school had to convince families to apply to it separately because no universal application form existed.

Michele Mason, executive director of the Newark Charter School Fund, an advocacy and school-support group, said the sector was simply doing it “due diligence” in case negotiations with the district over Newark Enrolls broke down. She added that the sector developed a plan for how to create a charter-only enrollment system, but did not actually build one.

“We’re trying very hard to keep one system because we believe that’s in the best interest of kids and families,” Mason said. “But things could change here in Newark, and somebody could change their mind on one system, so we were just committed to not being caught flat-footed.”

The citywide enrollment system, originally called “One Newark,” has been divisive since it launched in 2014. It upended the tradition of families registering in person at their neighborhood school or entering admissions lotteries at individual charter schools. Instead, they could list up to eight district or charter schools on a single application before being matched to one school.

Early on, the new computerized system failed to match some students with any school and sent some siblings to schools in opposite ends of the city. Meanwhile, charter critics saw it as a scheme to divert students from the district into charter schools.

In 2016, the city school board passed a resolution to dismantle the system. But the move was mainly symbolic because the district was still under state control. Then, in February, the state ended its 22-year-long takeover and handed control back to the school board. Suddenly, the future of Newark Enrolls was in doubt.

Around that time, a few board members undertook a review of the enrollment system, which included talking to charter leaders. The charter leaders were left with the impression that some board members wanted separate district and charter enrollment systems, according to the charter memo.

At that point, sector began developing “contingency plans” for a charter-only system, the memo says. The idea was that if families could not longer apply to district and charter schools through a single system, they at least would not have to apply to each charter school separately.

Charter leaders’ fears grew in late June when the district’s new board-selected superintendent, Roger León, forced out dozens of administrators and top officials — including two who oversaw enrollment, Kate Fletcher and Gabrielle Ramos-Solomon. The board blocked their firing but both eventually resigned, leaving the enrollment office without a leader.

Around the time of León’s leadership shakeup, the Newark Charter School Fund hired a “research group” to study the computer program the district uses to match students with schools “so it can be replicated if needed,” according to the memo, which did not name the group.

Then tensions appeared to ease. In July, León assured charter leaders that he would protect the joint enrollment system. The two sides began negotiating the terms of an annual agreement that spells out how the system should operate.

Worried about the lack of leadership in the enrollment office and potential staff reductions, charter leaders pushed for a provision in the agreement that says the district must maintain “the quality and quantity of personnel necessary” to operate Newark Enrolls. The district accepted that change then proposed its own — an end to the practice of sending charter schools extra students to offset those who leave over the summer — which became a major sticking point. (The final agreement does not explicitly ban or allow the practice.)

Amid those talks, the charter sector hired Fletcher, the former district enrollment official, to develop a plan for “operationalizing” a charter-only enrollment system, according to the memo. That included contacting possible vendors and staffers to run the system, the memo says. (Fletcher did not respond to an email seeking comment.)

Eventually, district and charter leaders settled on the language of the agreement. At a board meeting on Nov. 12, Superintendent León made a forceful case for keeping the joint enrollment system, saying it eased the application process for parents and gave them more options. The board voted to approve it.

However, the vote was more a temporary truce than a permanent end to the battle over Newark Enrolls.

Board Member Leah Owens, who abstained from the vote, said during the meeting that the system was costly for the district to maintain and amounted to a district endorsement of charter schools. Board Member Reginald Bledsoe said he was only voting for the agreement because the district had not yet created an alternative enrollment system.

“We talked at great length with the community that we wouldn’t be moving forward with this system,” Bledsoe told the superintendent during the meeting. “When will this plan come to a halt?”