State Education Budgets Fail to Keep Up with Pension Costs

State education budgets have been lagging behind the cost of paying for teachers’ pensions even as the percentage of state education budgets going to pay for pension costs has nearly doubled to 14.4% in 2018 from 7.5% in 2001, according to a report from nonprofit group the Equable Institute.

The report said that teacher retirement systems were at the peak of their funding health in 2001, but that, since then, the pension plans have collectively fallen hundreds of billions of dollars behind. At the same time, increases in education spending generally have not kept up with the increased costs created by teacher pension funding shortfalls.

Equable Institute said it used information reported to the National Association of State Budget Officers to calculate states’ K-12 spending and used funding data reported by the statewide retirement systems covering classroom teachers to calculate a state’s pension spending.

“The result is that less education money is available today for teacher salaries and classroom spending than there would be if teacher pension funds had been better managed over the past two decades,” the report said.

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The problem, according to Equable Institute, isn’t that teachers’ retirement benefits are too generous or costly—the report notes that several states have well-managed and well-funded retirement systems with stable costs. It blamed the rising share of education funding costs going toward pensions on apathy concerning growing shortfalls in pension funding combined with accounting practices that assume teacher pensions costs should be paid only from education budgets.

“Rising pension costs are not necessarily an inherent problem with pension plans themselves but are the result of fiscal challenges associated with paying off hundreds of billions in pension debt,” the report said. “Changes to education budgets are highly contingent on state politics, but almost uniformly have not been sufficiently adapted to changes in pension costs.”

Required contributions to teacher pension funds could be paid directly by the state out of legislatively managed funds, or they could be paid by a local employer such as a school district, the report said. It said that although some states use both methods for different portions of pension costs, the money used almost always comes from funds intended to be spent on education. It added that very few states use general fund dollars for teacher pension costs.

“In practice, this budgeting approach can pit the interests of student programs and teacher salaries against teacher pension funding,” according to the report. “But it doesn’t have to be this way. Education budgets could be automatically expanded as teacher pension costs grow, or teacher pension debt costs could be paid out of general funds.”

The report warned that unless there is a change, additional contributions to state or local retirement systems will mean less money for education purposes.

“Solving for this challenge means adapting today’s pension plans for the 21st century, adopting more rigorous policies at the state level that require fully funding pension plans,” the report said, “and ensuring that the dollars required for these changes are provided without drawing from existing education budgets, as that would just exacerbate the hidden funding cut.”