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Teacher pension liabilities for all 50 states now total almost $1 trillion, almost triple the cost of what state officials have on their balance sheets, an unfunded public burden that could bankrupt state budgets including education programs, according to a new study released on April 13, 2010 by the Manhattan Institute and the Foundation for Educational Choice.
In a new report entitled, “Underfunded Teacher Pension Plans: It’s Worse Than You Think,” authors Josh Barro and Stuart Buck reveal the major disparity between what states report and the true value of unfunded liabilities for teacher pensions. States put the price tag for teacher pension liabilities at $332 billion. The study shows that when private-sector style discounting is employed the red ink is actually $933 billion.
“States are already caving under the pressures of the recession and this is bad news for governors and state legislatures,” said Robert Enlow, president and CEO of the Foundation for Educational Choice. “Every dollar in the red ink column for pensions is one less dollar that is used to educate children.”
The Manhattan Institute/Foundation for Educational Choice report is the first to focus on the fact that states and cities aggressively “discount” or underestimate the cost of paying teachers’ retirement benefits in the future. The most underfunded pension programs are in West Virginia, Illinois, Oklahoma, Indiana, and Kansas.
Barro and Buck released their study today at the National Press Club in Washington. They recommend reforms that states should adopt to prevent the gap from widening beyond repair, including accounting honestly for the current costs of future benefits. Under current laws, states and cities can estimate the funds needed to meet future pension obligations on higher-than-expected returns on stock investments. This allows sponsors to cut their contribution rates. Public pension funds also are able to set aside fewer assets in their accounts to cover pension payouts.
“This report makes clear that it will be even more difficult than previously thought for states and school districts to honor pension benefit promises to teachers—without putting actual classroom services at risk" says Howard Husock, vice president of policy research at the Manhattan Institute. "Taxpayers and beneficiaries alike need to know the extent of these unfunded liabilities, however—and this report is an important contribution to that understanding.”
Going forward, states can prevent future unfunded liabilities by shifting to defined-contribution retirement plans (especially on behalf of new and young employees) or considering hybrid options like cash balance plans and TIAA-CREF, which has provided savings for employees of public colleges and universities for decades. Current teachers are legally entitled to the future benefits owed to them, and states must pay these costs over time at taxpayer expense. However, there needs to be more accountability when promising benefits to future workers—although higher wages are visible and in the present, the promise of future retirement benefits is also a very real cost of hiring teachers.
Highlights of the study include:
• All 59 pension funds studied face shortfalls.
• California, the most populous state, has the largest unfunded teacher pension liability: almost $100 billion.
• The worst funded plan is West Virginia’s, which we estimate to be only 31 percent funded.
• The four states whose plans have the next-worst funding gaps are Illinois, Oklahoma, Indiana, and Kansas; are all less than 40 percent funded.
• Five plans are 75 percent funded or better: teacher-dedicated plans in the District of Columbia, New York State, and Washington State and state employee retirement systems in North Carolina and Tennessee that include teachers.
The study can be accessed online at http://www.manhattan-institute.org/html/cr_61.htm
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