The pension crisis that’s been sweeping through the U.S. is certainly no secret, but many aren’t aware of just how bad things have gotten. States are struggling to come up with solutions to the budget gaps that exist in their public pension funds, including those affecting their education systems. States that are attempting fixes can’t find agreement on the best way to handle the teacher pension crisis.
California is currently dealing with unfunded liabilities in its education systems, which are sinking fast under rapidly rising pension costs Meanwhile, Kentucky lawmakers attempted to deal with their state’s future unfunded liabilities by sneaking a major change to teacher pension funds into an unrelated bill, but all they managed to do was spark a strike among educators in the state. Just about the only thing they do agree on is that there isn’t enough money to go around.
California: a case study in the teacher pension crisis
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The San Francisco Chronicle warned late last week that California’s aging population is weighing heavily on its public pension programs and outlined the massive budget deficits in the state’s school systems. The San Diego Unified School District alone faces a $124 million deficit in 2019, even after slicing millions of dollars off its budget, and it’s far from the only school district in the state to face such a massive spending gap.
A sign of just how serious the teacher pension crisis is that California isn’t even facing a budget crunch at the state level. In fact, according to the Chronicle, state funding has improved, while local school district budgets have gotten worse, and soaring pension costs are fingered as one of the main culprits. In the coming years, more and more areas of the public sector are being weighed down as Baby Boomers retire, causing a severe imbalance between the money paid out to the growing number of retirees and the money being paid in by teachers who are currently working.
Playing kick the can
Over the years, lawmakers just kept kicking the can down the road, choosing not to worry about the upcoming crisis because it was decades away, but unfortunately for some states and school districts, the end of the road is suddenly looming just ahead.
California is hardly the only state experiencing a crisis in its public pension funds, but as the most-populated state in the U.S., it should come as no surprise that it is one of the first states to be forced to deal with the crisis. A study conducted by the Pew Charitable Trusts revealed a deficit of about $1.4 trillion in all public employee pension funds nationwide.
According to Pew, some states boosted pension benefits in past years without planning for a way to pay for them, and courts are now finding them liable for those increased payments, whether or not there is cash to pay them. A report from the Legislative Analyst’s Office indicated that California alone had a pension deficit of $97 billion just for teachers and other employees of the state’s school districts.
Kentucky deals with its own teacher pension crisis
Unfortunately, the Golden State seems to be flush with funding problems but anemic when it comes to solutions. Still, that isn’t keeping other states from trying to fix the teacher pension crisis before their situation becomes as dire as California’s seems to be. Some local governments are already on the brink of collapse. For example, Harvey, Illinois was forced to lay off 40 police and fire employees in a major budget squeeze, and according to the Chicago Tribune, the Harvey Police Pension Fund claims that the city is behind on its payments to the tune of more than $7 million.
Kentucky school districts were facing a similar crunch as some feared a massive increase in pension costs that would wipe them out. Gov. Matt Bevin vetoed lawmakers’ attempt to cap pension cost increases at the local level, but the state legislature overrode that veto. According to the Courier Journal, Louisville would have been on the hook for an additional $38 million in pension payments, which would have put public safety and services at risk by causing widespread layoffs throughout the city. However, with the cap, the city’s pension costs will only increase by approximately $9.25 million.
Unfortunately, this solution is just anther way of kicking the can down the road by delaying the implementation of any real solution. Still, attempts at finding a solution are still being made, even though no one can agree on an acceptable permanent solution.
Desperate for a solution to the teacher pension crisis
Kentucky lawmakers have gotten so desperate for a solution to the teacher pension crisis that the state is now dealing with a lawsuit that was filed after they snuck changes to the state’s pension laws into an unrelated sewage bill that was passed recently. Kentucky teachers have long had defined benefit pension plans, but the new law aims to change those plans into a hybrid cash-balance plan.
Kentucky Attorney General Andy Beshear filed a lawsuit in an attempt to get the pension reform thrown out because it was not put up for comment because it was included in the sewage bill. According to the Courier Journal, lawmakers quickly transformed the sewage bill into a law governing the state’s public pension plans—after the previous version of it as a wastewater bill had been read three times on three days, as is required by the state constitution. According to the newspaper, Beshear described the bill as “a secret backroom deal.”
The state’s teachers oppose the reform because in addition to placing new hires in a hybrid plan, it also reduces the number of sick days they can use toward their retirement. Teachers in multiple districts around the state went on strike earlier this month over the pension reform plan.
“Hybrid” plans touted as an answer for teacher pension crisis
Kentucky isn’t the only state to attempt to place teachers on a hybrid plan in response to the teacher pension crisis. The National Association of State Retirement Administrators told CNN that about one state per year is adding a hybrid plan for public workers, including not only teachers but also local, county and state employees. Such hybrid plans effectively shift the risk of investing from the states themselves to their employees. Instead of retirement payments being fixed, they will depend on the amount of returns on the investments made by the funds.
Public pension fans have been struggling since the last recession, with many having yet to make up the losses experienced during the down years. Bloomberg warned earlier this month that some large states could become insolvent within the next five years as their unsustainable public pension plans eat away at their budgets. The media outlet expects the next “phase” of reform in public pensions to be triggered by the next decline in the stock market and warned that at least one state could be out of cash in the next few years.
It’s still too early to know whether hybrid plans will ultimately prove to be the answer lawmakers are looking for in the teacher pension crisis, but clearly, something needs to be done before state and/ or city governments end up in bankruptcy like Detroit.