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How are teacher pension benefits funded? Under traditional plans, the full cost of career teachers' benefits far exceeds the contributions designated for them. The gap between the two has three pieces, which may (with some license) be mnemonically tagged the three R's of pension funding: "redistribution," "return," and "risk." First, some contributions made for the benefits of short-term teachers are "redistributed" to fund the benefits of career teachers. Second, pension plans assume rosy "returns" on their investments, which push costs onto future teachers and taxpayers. Finally, the "risk" inherent in providing guaranteed pensions carries other costs, tangible and intangible, notably including the nontrivial risk of insolvency, which would dramatically raise mandated contributions and endanger future teacher benefits. I quantify these three components of the gap between benefits and contributions using the same metric as annual contributions. Illustrating with the California plan, I find the full cost of a career teacher's annual accumulation of benefits can be as high as 46.6% of earnings, nearly triple the corresponding contributions of 17.5%. To understand this gap, which fiscally affects all areas of education policy, researchers and practitioners may find it helpful to think of the three R's of pension funding: "redistribution," "return," and "risk."

The ongoing crisis in teacher pension funding has led states to consider various reforms in plan design to replace the traditional benefit formulas, based on years of service and final average salary (FAS). One such design is a cash balance (CB) plan, long deployed in the private sector, and increasingly considered, but rarely yet adopted, for teachers. Such plans are structured with individual 401(k)-type retirement accounts, but with guaranteed returns. In this paper I examine how the nation's first CB plan for teachers, in Kansas, has played out for system costs, and the level and distribution of individual benefits, compared with the FAS plan it replaced. My key findings are: (1) employer-funded benefits were modestly reduced, despite the surface appearance of more generous employer contribution matches; (2) more importantly, the cost of the pension guarantee, which is off-the-books under standard actuarial accounting, was reduced quite substantially. In addition, benefits are more equitably distributed between short-term teachers and career teachers than under the back-loaded structure of benefits characteristic of FAS plans. The key to the plan's cost reduction is that the guaranteed return approximates a low-risk market return, considerably lower than the assumed return on risky assets.

We propose an economic reformulation of contribution policy integrating: (1) formalization of sustainability as the steady-state contribution rate, incorporating both the expected return on risky assets and a low-risk discount rate for liabilities; (2) derivation of contribution adjustment policies required for convergence toward the target funded ratio and contribution rate; and (3) a stylized optimization framework for simultaneous determination of the target portfolio return and funded ratio. This analysis provides new theoretical insights into the basis for pre-funding vs. pay-as-you-go, resting on the convexity of the long-run risk–return relationship, and also potentially practical guidelines for contribution policy. [ABSTRACT FROM AUTHOR]

In this brief, we examine an important but obscure form of state spending on K-12 education-state subsidies of school district pension costs. In 2018, this exceeded $19 billion across 23 states. To put that amount into perspective, 2018 federal spending on Title I programs was $15.8 billion. This revenue stream is often ignored in analyses of state aid for K-12 and its distribution across districts. Until recently, accounting standards did not require pension plans to report these implicit subsidies to the school districts, so they did not typically know the size of their subsidy. In some important cases, it was missing from state totals for education aid. In the first comprehensive tabulation of these data, we show that this subsidy can be as much as $2,400 per pupil, as it is in Connecticut. In Illinois, it comprises an additional 56% of state spending on K-12 on top of all formula and categorical aid.

When policy advocates debate how best to ensure equity in public education funding, the topic of teacher pension reform rarely comes up. But, in fact, pensions represent a very large and fast-growing source of education spending, much of it distributed in ways that are, in a number of states, anything but equitable. When states subsidize teacher pensions directly, rather than expecting local school systems to fund those pensions themselves, affluent districts tend to benefit the most.

Generational inequity in pension funding is highly sensitive to the lax policies of 80% funding targets and high assumed returns to investment. I develop a simple, powerful relationship between steady-state (SS) inequity in contributions--the percent of extra contributions to fund prior cohorts--and the SS unfunded ratio. I then show how the SS unfunded ratio is governed by x% funding targets and the gap between assumed and true returns. The SS degree of inequity is over 60% under an 80% funding target and over 50% with a one-point gap between assumed and true returns. (JEL H75), I. INTRODUCTION Employer costs for state and local pensions have doubled as a percent of payroll in the last decade, from 7.7% in 2004 to 15.4% in 2015.' The rise [...]

District costs for teachers' health insurance are, on average, higher then employer costs for private-sector professionals. How much of this is attributable to collective bargaining? This article examines the question using data from the National Compensation Survey (NCS) of the Bureau of Labor Statistics (BLS) and the state of Wisconsin. In addition, the impact of collective bargaining on employer costs is decomposed into the impact on total premiums and the employer's share of those premiums.

Teacher benefits, once a sleepy question primarily of interest to actuaries, have become a flash point in the education debate. With individual states on the hook for tens or hundreds of millions in unfunded pension and health insurance obligations, state leaders are trying to determine the severity of the situation and the appropriate response. In this forum, Robert Costrell of the University of Arkansas and Mike Podgursky of the University of Missouri argue that the situation is critical, but offer an opportunity for overdue reform, while Christian Weller of the University of Massachusetts-Boston argues that measured steps will put teacher pensions on sound footing. (Contains 2 figures.)

Teacher pensions consume a substantial portion of school budgets. If relatively generous pensions help attract effective teachers, the expense might be justified. But new evidence suggests that current pension systems, by concentrating benefits on teachers who spend their entire careers in a single state and penalizing mobile teachers, may exacerbate the challenge of attracting to teaching young workers, who change jobs and move more often than did previous generations. The design of teacher pension plans is a timely concern: like other public pension plans, those for teachers are becoming more costly. Employer contributions to pension funds tack on a larger percentage of earnings for public school teachers than for private-sector managers and professionals, and this gap is widening. Those data do not yet reflect the impact of the stock market decline since 2007: the drop in the value of pension funds means further increases in employer contributions will be required to fund promised benefits. As fiscal concerns force states to reevaluate the costs of teacher pension plans, officials might also consider the plans' consequences for teacher quality. In this article, the authors focus on the distribution of pension benefits among teachers of varying career lengths and the penalties for those who switch systems. They examine pension formulas in six state plans and develop measures of the redistribution of pension wealth from teachers who separate early to those who separate later. They compare existing defined benefit (DB) teacher pension systems to fiscally equivalent systems that treat all teachers equally and find that the former often redistribute about half the pension wealth of an entering cohort of teachers to those who separate in their mid-50s from those who leave the system earlier. The authors then show that this back loading produces very large losses in pension wealth for mobile teachers. Compared to a teacher who has worked 30 years in a single state system, a teacher who has put in the same years but split them between two systems will often lose well over one-half of her pension wealth. It is difficult to justify such a system of rewards and penalties on grounds related to fairness or teacher quality. (Contains 2 figures and 1 table.)

The authors analyze the Arkansas teacher pension plan and empirically gauge the behavioral response to incentives embedded in that plan and to possible reforms. The pattern of pension wealth accrual creates sharp incentives to work until eligible for early or normal retirement, often in one's early fifties, and to separate shortly thereafter. We estimate the effect of pension wealth accrual on teacher separation decisions using a new longitudinal data set of Arkansas teachers and find a significant impact. We then simulate the response to eliminating early retirement and raising the service requirement for normal retirement. We also simulate a shift to a constant accrual retirement plan. The response to both reforms is complex, as some would leave earlier and others stay longer. A constant accrual plan smoothes the pattern of retirement behavior as individuals tailor decisions to their own preferences instead of those built into the pension formula.

While it is generally understood that defined benefit pension systems concentrate benefits on career teachers and impose costs on mobile teachers, there has been very little analysis of the magnitude of these effects. The authors develop a measure of implicit redistribution of pension wealth among teachers at varying ages of separation. Compared with a neutral system, we find that often about half of an entering cohort's net pension wealth is redistributed to teachers who separate in their fifties from those who separate earlier, and we also identify some variation across six state systems. This implies large costs for interstate mobility. We estimate that teachers who split a thirty-year career between two pension plans often lose over half their net pension wealth compared with teachers who complete a career in a single system. Plan options that permit purchases of service years mitigate few or none of these losses. It is difficult to explain these patterns of costs and benefits on efficiency grounds. More likely explanations include the relative influence of senior versus junior educators in interest group politics and a coordination problem between states.

Do school vouchers save the taxpayer money, or do they add to taxpayer burdens? Which groups of taxpayers are most affected, and do they gain or lose? What is the financial impact on public school districts? Usually, these questions are debated in the abstract. Now it is possible to get more concrete answers from the nation's longest-running school voucher initiative, the Milwaukee Parental Choice Program (MPCP) in Wisconsin. The fiscal impact of that program has been a matter of dispute. According to school choice supporters, such as Marquette University professor and former Milwaukee Public Schools (MPS) superintendent Howard Fuller, MPCP saves the taxpayers considerable cash, as the voucher is smaller than per-pupil spending by MPS. But Wisconsin state senator Russ Decker, a leading opponent of vouchers, has argued that the program gives money to children who would attend private schools anyway. Wisconsin's Legislative Fiscal Bureau, which conducts budget-related analyses for state legislators, has provided fodder to both sides of the Milwaukee voucher debate with periodic estimates of the financial impact of eliminating the program based on a wide range of assumptions regarding changes in public school enrollments. What has been the net fiscal impact of MPCP? Who has benefited and who has taken a hit as the program has grown? How has MPCP affected taxpayers statewide? Milwaukee taxpayers? In this analysis, the author shows that under most plausible scenarios the program has saved taxpayers money annually since 2000, with estimated savings reaching $31.9 million in 2008. The beneficiaries have been Wisconsin state taxpayers and property taxpayers outside of Milwaukee. Property taxpayers in Milwaukee, however, have seen their taxes go up, the result of legislative decisions on the MPCP funding formula made in the program's earliest days. (Contains 4 figures and 1 table.)

This article examines the pattern of incentives for work versus retirement in six state teacher pension systems. We do this by examining the annual accrual of pension wealth from an additional year of work over a teacher's career. Accrual of wealth is highly nonlinear and heavily loaded at arbitrary years that would normally be considered mid-career. One typical pattern exhibits low accrual in early years, accelerating in the mid- to late fifties, followed by dramatic decline or even negative returns in years that are relatively young for retirement. Key factors in the defined benefit formulas that drive such patterns are identified along with likely consequences for employee behavior. The authors examine efficiency and equity consequences of these systems as well as options for reform.

Pensions have long been an important part of compensation for teachers in public schools. However, the incentive structures of teacher pension systems are not widely understood, even though they can have powerful effects on the composition of the teaching force and on public finance. In their research, the authors have found that teacher pension systems have two strong incentives--a pull and a push. Teachers typically earn relatively little in the way of pension benefits until they reach their early fifties, when much larger benefits start to accrue. The system therefore pulls teachers to "put in their time" until then, whether or not they are well suited to the profession. Beyond that point, the pension system quickly begins to punish teachers for staying on the job too long, pushing them out the door at a relatively young age, often in their mid-fifties, even if they are still effective teachers. These "pull-push" incentives are embedded in the patterns of pension wealth accumulation over teachers' careers, patterns that feature dramatic peaks, cliffs, and valleys that can greatly distort work decisions for no compelling public-policy purpose. As teacher retiree benefit costs spiral upward, it is important to begin asking what effect these systems have on recruitment and retention. In this article, the authors analyze the incentives embedded in teacher pension systems by examining the pattern of pension wealth accumulation over a teacher's career. (Contains 1 figure.)

Standards-based reform is a strategy that includes specifying what is to be learned, devising tests to measure learning, and establishing consequences of performance for students and schools. Popular support remains strong for standards-based reform, according to national polling data as well as local data in the states implementing this strategy. However, opposition has emerged in several states, in the run-up to full implementation of standards-based reforms. Objections fall into different categories. One source of discord concerns the content of what should be learned. This article presents the authors' theoretical and empirical analysis and review of standards in practice. The authors focus on disputes over testing and cutoff scores based on unresolved disagreements over content standards. The theoretical analysis shows that some problems alleged by critics of standards-based reform are not particularly compelling, notably those based implicitly on the logic of pooling and those concerning incentives for high-achieving students. But it also points to a trade-off between incentives for those lesser achieving students who will be stimulated to meet high standards and those low-achieving students who will be discouraged. Based on their knowledge of reform efforts in California, Massachusetts, and other states, and the theoretical and empirical research on standards, the authors identify four key obstacles that can stand in the way of higher educational standards: (1) opposition arising from concerns about the distribution of student achievement; (2) problems in defining standards and assessing students' progress toward those standards; (3) the need to align the incentives of all participants in public education; and (4) equity concerns created by the large gap in school resources that currently exists among students from various socioeconomic groups in some states. Comments by Herbert J. Walberg, Meredith Phillips, and Tiffani Chin are included. (Contains 5 figures, 4 tables, and 98 notes.)

The high-profile battle in Wisconsin over collective bargaining on public-sector benefits, as well as lower-profile battles in Ohio and Massachusetts, was to a great extent about health insurance costs for [...]

Teacher pensions consume a substantial portion of school budgets. If relatively generous pensions help attract effective teachers, the expense might be justified. But new evidence suggests that current pension systems, [...]

The ongoing global financial crisis is forcing many employers, from General Motors to local general stores, to take a hard look at the costs of the compensation packages they offer [...]

Ms. Baker is a hypothetical Ohio school teacher, age 49 with 24 years of service. She's had a good run, but is ready for a change; her heart's not in [...]

Checked: 'Quality Counts,' Education Week, January 6, 2005 'The Funding Gap,' Education Trust, Fall 2004. This is a tale of two rankings. They represent the best of states--and the worst [...]