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.

Headlines

In smaller gun violence protests, hundreds of students walk out of NYC schools to mark Columbine anniversary

PHOTO: Drew Angerer
NEW YORK, NY - APRIL 20: Student activists rally against gun violence at Washington Square Park, near the campus of New York University, April 20, 2018 in New York City. On the anniversary of the 1999 Columbine High School mass shooting, student activists across the country are participating in school walkouts to demand action on gun reform. (Photo by Drew Angerer/Getty Images)

From Brooklyn to the Bronx, students left their classrooms Friday to protest gun violence in demonstrations that were smaller but no less than passionate than last month’s massive walkout.

This time around, school officials weren’t giving a free pass to students for skipping school to protest — the Department of Education said there could be repercussions and Chancellor Richard Carranza urged students to stay in class because “you don’t have to be out of school all day to make your voices known. You’ve already made your voices known.”

According to the Department of Education, attendance on Friday was 89.89 percent, down just slightly from Thursday’s attendance of 91.36 percent. But that number might not account for students who briefly left school to attend protests after the school day started.

The walkout was designed to protest gun violence and planned for the 19th anniversary of the Columbine school shooting.

Many of the demonstrators gathered in Washington Square Park for a “die-in.” But other students stayed close to home, such as the School for Global Leaders on the Lower East Side. Here are some photos and videos shared on Twitter that give a sense of the walkout’s scope in New York.

#NationalSchoolWalkout

Carranza discourages student participation in Friday’s gun violence walkout — which could come with consequences

PHOTO: Courtesy photo/P.S. 261
Students at P.S. 261 in Brooklyn walked out of class in March to honor the victims of the Parkland, Fla. shooting and call for stricter gun control laws.

Last month, 100,000 students streamed out of city classrooms to protest gun violence, demonstrations condoned by the mayor and education department officials.

Similar but scaled-down protests are being planned for Friday, but with a major difference — students are more likely to face consequences for walking out of their classes this time.

For the March 14 walkout, held on the one-month anniversary of the Parkland, Florida, school shooting that killed 17, city education department officials laid out clear rules meant to facilitate student participation. Anyone who left school for the scheduled protest but returned immediately afterward would not be marked absent.

This week, students who are not in school will be marked absent, according to the education department.

At his first town hall meeting with students, Chancellor Richard Carranza implored them not to walk out of class this week.

“I supported it in March,” he said. “This one — I don’t think it’s the same thing.”

Instead, Carranza said, students should focus on having conversations about the issue inside their schools. “You don’t have to be out of school all day to make your voices known. You’ve already made your voices known.”

The department’s revised approach comes as activists planning the day of action worry that focus on gun control policy is diminishing as the Parkland shooting recedes into the past. That shooting has inspired a sustained protest movement led largely by students, but other topics have pushed it out of headlines in recent weeks.

Indeed, advocates are expecting a smaller turnout this time around, with about a dozen New York City schools registered on the national organizing page — including Bard High School Early College Queens and Stuyvesant High School.

One of the biggest demonstrations is expected to be an afternoon rally at Washington Square park, but other schools are opting for a day of action within their own buildings — and some students say they are prioritizing other ways of making a difference.

“We will be hosting a lunch and learn and creating kindness cards,” Urban Assembly School for Criminal Justice junior Robina Afzal said in an email. “We don’t feel the walkouts are most effective. Instead we can stay in school and create a change.”

PHOTO: Courtesy photo/P.S. 261
Fifth-grade students at P.S. 261 in Brooklyn are planning to walk out of school on April 20, marking the anniversary of the Columbine school shooting. They will head to borough hall and deliver letters to their local U.S. representative calling for stricter gun control laws.

At M.S. 51 in Brooklyn, students will take part in a day of assemblies where they will write letters to elected officials to demand action on issues that are important to young people.

“We want to balance our walkout and take real action that might influence policy-makers, rather than making another powerful public statement,” according to a press release sent by the middle school students there.

P.S. 261 in Brooklyn is one of the few elementary schools expected to participate on Friday. The fifth grade students have assigned themselves organizing tasks, with separate working groups dedicated to poster-making, writing original freedom songs, and even a media team. They plan to march to Borough Hall, where students will stand in a circle, sing, and chant to draw attention to young lives lost to gun violence every day across the United States.

“I think we should do it outside of the school because more people can see us walking out, because this is very important,” said Bayan Clark, a fifth-grader who is helping to organize the event. “Kids get shot every single day and it’s not just in school. It’s also outside.”

Principal Jackie Allen said such social actions are woven into the school’s teaching and learning.

When Trayvon Martin was killed in Florida, students wore black armbands in solidarity with protesters who drew attention to racial profiling and bias. When President Trump proposed an immigration ban on majority-Muslim countries, they marched around their school and created posters to signal that everyone is welcome at P.S. 261.

Ever since the Parkland shooting, students have been tackling issues around gun violence, writing letters to local elected representatives and making connections to the Black Lives Matter movement.

“We try to make sure the curriculum is relevant,” Allen said. “What’s happening in the world, it does make our way into the classrooms and kids want to talk about it.”

“We want to reflect democratic values,” she said. “We want kids to take social action and develop social awareness.”