NewsNovember 4, 2019

Report: Public Pension Funding, Education Not Mutually Exclusive

Report says argument that state pension funding eats into education is false.

Reported by Michael Katz

A new report from National Conference on Public Employee Retirement Systems (NCPERS) challenges the argument that pension costs eat into public education funding. The organization said the idea that governments can’t afford both pensions and education is a “false dilemma.”

According to the report, pension contributions account for a relatively small part of state and local revenues, and can’t be blamed for crowding out public education funding. It said state and local government pension contributions accounted for just 4.1% of state revenue, compared to 28.3% of revenue going to education.

“There’s a lot of polarizing rhetoric out there that presents pensions and education as an either-or proposition for state and local governments,” Hank Kim, executive director of NCPERS, said in a release. But the report says that this isn’t the case.

The 72-page report examines state and local finances to see whether they can afford both pensions and education.

“Pension contributions are such a small part of state and local revenues that they cannot possibly crowd out a major state and local function, namely public education,” the report said. “Yet those who would like to see public defined-benefit pensions converted into 401(k)- type defined-contribution plans argue that state and local governments cannot afford both, and that pensions are crowding out funding for education.”

Based on data from the US Census Bureau, Census of Governments, and Bureau of Economic Analysis, the study looked at trends in expenditures on pensions and education during the last 25 years. It found that education financing has been growing at a much faster pace than have public pensions costs. It also said states have invested more in their education systems, which are often protected during fiscal shortfalls because of education clauses in state constitutions.

“Yet faster growth in education financing compared with that of pensions does not mean that education funding is adequate,” said the report. “State Supreme Court rulings in numerous states show that spending on education is inadequate and inequitable.”

The report said that although pension costs don’t push aside education funding, there is a “squeeze” on state and local budgets to fund public education and other important public services, such as health care and public safety.

“The squeeze occurs because state and local budgets are out of sync with the economy,” said the report. “Today, the purposeful role that state and local taxes play in the allocation of resources is obscured by frequent acts of tax cuts and tax increases driven by political ideology.”

The NCPERS report said that in good economic times states have cut progressive and stable taxes, such as income and property taxes. They then filled the resulting budget gaps with what the report calls “regressive and risky revenue schemes,” such as excise taxes, casinos and lotteries. “This shift in revenue sources has rendered tax systems increasingly regressive.”

The report said that a regressive tax system becomes out of sync with the economy, especially when income inequality is rising. It said that when a tax system isn’t calibrated to the economy, it won’t grow — even if the economy grows.

“A good tax system should not require frequent changes. It should be stable in bad economic times and grow in good economic times,” said the report. “A regressive tax system cannot meet the needs of a prosperous, civilized society.”