How rising teacher pension costs hurt school districts

This story about teacher pensions is part of the series Districts in Debt, which examines the hidden financial pressures challenging American schools.

COLORADO SPRINGS, Colo. — Glenn Gustafson was already bracing for a rough Valentine’s Day. Looming on his calendar was a sure-to-be-wrenching meeting to cut $10 million in spending from the Colorado Springs School District’s budget, a move largely forced by rapidly declining enrollment as families moved out of the district and singles moved in. Gustafson, the district’s CFO and — according to his wife — the “world’s only extroverted accountant,” had dubbed the meeting the “St. Valentine’s Day Massacre.”

And then, the week before the scheduled budget bloodshed, he attended a presentation by the director of the state’s pension system and got some unpleasant news. Gustafson learned that his district might have to slash an additional $890,000 next year, as part of the state’s latest attempt to make the system solvent by 2049.

That was on top of extra money that Colorado school districts like Gustafson’s have been forking over for pension costs as part of an earlier reform. Over the last decade, his district’s pension expenses have crept up to more than $35 million per year.

“At this point, it’s just piling logs,” he said. “It’s one more thing on top of everything else.”

Colorado’s public pension system is one of the most underfunded in the country, with a shortfall totaling an estimated $29 billion in 2017. About half of that comes from school district employee pensions. Since 2010, the state legislature has twice passed bills to shore up the pension system and keep it from bankruptcy. The reforms have required school districts and other local government agencies to contribute more of their budgets toward paying down the pension debt, while also obligating workers to make financial sacrifices and cutting benefits for current retirees. The most recent legislation, passed in 2018, required the state to chip in more money from its general fund.

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Combined with other steep cuts to education following the Great Recession, rising pension costs have led to an agonizing budget squeeze that has forced layoffs, salary freezes for teachers and the elimination of school programs across the state. And there’s no relief to come, as the requirements of the 2018 pension bill, approved in the final few minutes of the legislative session last May, start to kick in.

Colorado’s share-the-pain approach to pension reform is one that more states may turn to as they seek to prevent their pension funds from going bankrupt and leaving retirees holding the bag. Yet the attempt at solvency could further depress teacher pay, which is already so low that it has prompted recent teacher walkouts in a number of places around the country (including Pueblo and Denver), and crowd out money for things like school supplies and building repairs. With no simple solutions in sight, pension debt may be a millstone on many school district budgets and teacher salaries for decades to come.

“At the end of the day, it’s just this big item that needs to be paid,” said Cory Koedel, an associate professor of economics and public policy at the University of Missouri who studies public pensions. “If we didn’t have to pay all these pension debts, we could use it for other educational expenses.”

School districts squeezed

During the bull market of the 1990s, with pension funds’ big investment returns multiplying employer and employee contributions, Colorado joined many states in making benefits more generous. Then in 2008 the stock market tumbled, swallowing billions in pension investments around the country. Some states slashed their payments into the pension systems and relied on overly optimistic investment projections that masked the growing gaps in funding.

Traditional pensions differ from 401(k)-style retirement plans because they guarantee retirees a set amount of money annually for life. As of 2016, state pension systems were, on average, just 66 percent funded, according to an analysis by the Pew Charitable Trusts. While experts say a pension system that is even 80 percent funded can be considered healthy, only 12 states hit or exceeded that level in 2016.

“You’re still seeing just really unsustainable amounts of money being required to cover these systems,” said Sandi Jacobs, principal at Education Counsel, an education consulting group.

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In recent years, as more states have required employers to pitch in more to pension plans, costs to school districts have gone up. In 2004, school districts around the country were paying an average of $530 per pupil to teacher retirement benefits. By 2018, that figure had risen to $1,312.

At the same time, teacher salaries have stagnated nationwide, averaging $58,950 in the 2016-17 school year, compared to $59,924 in 1999-2000, after adjusting for inflation. Spending on instructional supplies dropped 10 percent per pupil between 2000 and 2013, while money for school facilities and equipment fell by 26 percent, according to one study.

In Colorado, the 2010 pension reform gradually phased in increases to the amount of money school districts had to contribute to pensions for each dollar spent on employee salaries, from 13.85 percent that year to more than 20 percent in 2018.

“It’s getting so expensive,” said Gustafson. He said he is already stretching the district’s $300 million budget to cover necessities and has a wish list of things he’d love to do with more money: Gut renovate some of the district’s “tired” buildings, install air conditioning in buildings that don’t have it and, most importantly, lift teacher salaries to ensure his district can retain people.

“We’re desperately worried about competitive salaries,” he said, noting that he has struggled to fill maintenance positions because he can’t pay enough to attract workers.

Educators in his district got some relief in 2017 for the first time in more than a decade, when voters approved a ballot measure granting voters a rare, significant cost-of-living raise.

The 2018 pension legislation required yet more money from school districts for pensions, though this time the increase was modest, from 20.15 percent to 20.4. But as Gustafson learned from the state pension director during that February meeting, the change came with a catch. In an effort to keep the state pension fund from falling short of projections, as happened after the 2010 reform, the state introduced an automatic trigger that will up the share to 20.9 percent if the fund seems off track of meeting its goal. The stock market decline in early 2018 is expected to trigger that increase, causing Gustafson and other CFOs across the state to go looking for their scalpels once again.

Such increases may seem relatively small — but they add up. That’s especially true when combined with other steep cuts to education in Colorado, where, statewide, voters have been resistant to raise taxes to plug holes in school budgets despite a booming economy.

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Dave Tecklenburg learned this the hard way when he became superintendent of the Lamar Re-2 school district in southeastern Colorado in 2011. Two years prior, the state legislature had passed a measure called the “negative factor” (later renamed the “budget stabilization factor” and sometimes referred to as the “BS factor” by educators), which spreads the state’s education budget shortfalls across all school districts in the state. Even though the economy has improved, the state can’t collect more tax revenue because of limits set by decades-old legislation. As things stand, school districts continue to get hundreds of millions less per year than they are due under a state funding formula.

Tecklenburg said that, in his first year, he was forced to cut $1 million from the district’s $17.5 million budget. He stopped buying textbooks, froze teacher salaries and eliminated 45 positions, or nearly 20 percent of the workforce.

“It was the toughest thing professionally I’ve ever had to deal with,” he said. While the negative factor was the biggest driver of the cuts, pension costs exacerbated the problem. “It’s just like your boss cuts your paycheck a little bit but you’re renting your house [and] the landlord raises your rent. It hits in both directions.”

Teachers feel the pinch

Whereas the 2010 pension changes hit school budgets the hardest, last year’s legislation targeted the pocketbooks of teachers and retirees, as well as the state government’s coffers. Under the 2018 reform, the state will kick in $225 million a year from its general fund, meaning less money for other services. Meanwhile, retirees will have to forgo cost-of-living increases for two years and then will receive smaller increases in future years. Teachers will have to contribute another 2 percent of their pay to pensions, or 10 percent total, by 2021. The retirement age for new teachers was also raised, from 58 to 64.

All of this has been a difficult pill to swallow for the state’s teachers, who are already among the lowest-paid educators in the nation when cost of living is taken into account.

“It means we’re going to have to cut back on something,” said Lisa Cleland, a special education teacher at Lamar’s Washington Elementary School. “I don’t know what, but we’ll figure it out.”

When Cleland turned down an engineering job at Boeing in the late ’80s to follow her passion for teaching, she knew she’d be giving up a nice salary. But with 10 years to go until she retires, Cleland earns just $43,000 and wonders if she’ll ever be able to buy a house to leave to her son.

“Thank goodness for a credit card once in a while because I need to go to the grocery store,” Cleland said as she sat in the school’s small breakroom with a group of colleagues on a cold February day. “I live paycheck to paycheck.”

“I think most teachers do,” said Kara Ratzlaff, a first-grade teacher at the 275-student school.

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Teachers in Colorado, along with roughly 40 percent of public school teachers nationwide, are not covered by Social Security, meaning they only have their pensions to fall back on. Even those who are dreading the additional money being taken out of their paychecks said they were relieved that the pension fund was being saved from insolvency.

“In the long run, when I retire, I suppose it will be there,” said Ratzlaff, who is 49 and plans on working until she turns 65. “But it’s hard right now.”

The Colorado Education Association, the state’s teachers union, pushed back unsuccessfully against the financial hikes on teachers. But it did score one big victory: persuading the legislature not to extend the option of a 401(k)-style plan to teachers, as it did for all other public employees. The union argued that the guaranteed benefits that the current pension plan provides are among the few perks available to teachers and that eliminating them would drive people from the profession.

At least 15 states have already altered their pensions to include 401(k)-style plans, known as defined contribution plans. Some states have given employees the option of choosing between traditional and 401(k)-style plans or have developed hybrid plans. Alaska has gone the furthest, moving all newly hired public employees into defined contribution plans, which means that the taxpayers bear none of the investment risk. Such a move creates its own set of problems, though, because it means that new employees aren’t contributing money to the old plans — which need to continue to make payments to current and near-future retirees. And, critics argue, the defined contribution plans will provide teachers with worse benefits.

Given the size of Colorado’s pension shortfall, Gustafson thinks the action taken by the legislature was necessary, even if his district will be helping to pay for it for years to come. He also says retiree benefits grew overly generous in the ’90s, and it made sense to trim some from current pensions too.

But as he sat listening to the presentation on the state pension fund, his mind wandered to the future, well past his own retirement. What will happen 30 years from now, he asked the fund’s director, if the state’s pension system is solvent once again? Will there finally be some relief for school districts like his?

He says he didn’t get an answer.

This story about teacher pensions was produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Sign up for the Hechinger newsletter.