There is no silver bullet to solve America’s hidden education funding cuts. State and local leaders in dozens of states have avoided making the right decisions for years because they have been focused on the near-term. But the few states that did decide after the financial crisis to make hard choices and put their public retirement systems on a path to long-term sustainability, are all in a better position going into the COVID-19 pandemic than those who ignored the fragility built into their systems.
While every state’s solution to reducing hidden education funding cuts is going to be a bit different, there are a few key concepts that every state should consider.
• Increase education spending generally
Funding for K–12 education is one of the largest budget items for states because it is one of the most critical roles that governments have taken on over the past century. And while there are numerous ways that public education can be improved without just throwing more money at it, the national trend in education spending does show complete stagnation over the past two decades after we adjust for inflation. If pension costs were going to be held constant, then at a minimum, states could reduce their hidden cuts by simply increasing the dollars provided to school districts (both in aggregate and on a per student basis).
• Match education funding increases to pension cost increases
A simple improvement to the status quo in almost every state would be to adopt a budget policy that ensures for every dollar that teacher pension costs increase, the state increases its education funding by the same amount. The formula could be set up in various ways, but should have the same goal of making sure that per student state funding does not decrease because teacher pension dollars go up.
• Stop asking school districts to pay for pension debt
A straightforward budgetary change that would bring transparency to hidden education funding cuts would be for states to stop requiring that school districts and other K–12 employers make contributions to help pay down unfunded teacher pension liabilities.
Pension contributions are made up of two parts: (1) the “normal cost” for pension benefits earned by active teachers during the current fiscal year; and (2) “unfunded liability amortization payments” which are simply the debt payments into the pension fund to help backfill funding shortfalls. In practice, school districts have little to no say in how a pension fund is managed, or how it sets assumptions like investment return targets. Such decisions are influenced and directed at the state level. Given all of that, a budgeting process improvement would be for the state-level budget to make any payments required to amortize teacher pension funding shortfalls, perhaps with normal costs being fully covered by school districts.
A simple rule could look like what Maryland has adopted, where the state pays down unfunded liabilities, and school district employers pay the normal cost for teachers on their payroll.
• Shift pension debt payments out of education budgets
The most effective way to eliminate hidden education funding cuts once and for all is to move all pension debt payments out of K–12 budgeting discussions. To do this, first a state would have to divide responsibility for normal costs and unfunded liability amortization payments. The normal costs would continue being paid out of state and local K–12 funding allocations. (However the state decides to split up these normal costs doesn’t matter—it could be all at the state level, all at the school district level, or a split between the two). The state’s general fund would accept responsibility for all payments needed to eliminate unfunded teacher pension liabilities.
A budgetary shift of this kind would mean moving billions of dollars of liabilities from education budgets to a state’s general fund. Doing so would likely require some kind of shift in tax revenue flows, resource allocations, and school finance policy generally. The payoff for that heavy lifting would be full transparency at the state level of what is being spent to pay down pension debt, while keeping all normal pension costs that are a part of any compensation expense with K–12 employers.
• Phase-in additional costs created by the COVID-19 pandemic
There are certainly going to be additional teacher pension costs created by the on-going pandemic — see our COVID-19 FAQ for more. Left on their own, these additional pension costs combined with reduced state and local education budgets will only create more hidden education funding cuts. There is a way to avoid this: phase-in the necessary cost increases.
First, states will have to wait until the end of their fiscal years to figure out how much financial damage has been done. For many states, that will be in June, August, or September 2020. Then, pension accountants will determine how much money is needed to fix fragile teacher pension funds during the fall of 2020 and spring of 2021. Only starting summer 2021 will the first bills be due to pay for the pension fund shortfalls created by the COVID-19 pandemic.
Second, state leaders and pension boards should adjust their funding policies to assume less risk, be less fragile in the face of future financial shocks, and be better designed for long-term sustainability. Doing this will likely require recognizing that there are even more unfunded liabilities for teacher pension plans than are currently being accounted for.
Then, once states have a proper accounting of their post-COVID-19 crash pension debt, they can put together a payment plan that will get it paid down in its entirety over the next 20 to 25 years (the Society of Actuaries has recommended 25 years or less). These payment plans can also include gradual contribution increases over the next several years so that the additional money isn’t needed all at once.
These adjustments will allow states to balance their commitments to people today and public retirees tomorrow. Phasing in the cost increases will also give the economy time to recover and make the fiscal pain more manageable.
Visit “America’s Hidden Education Funding Cuts” for more on how teacher pension costs have been eroding education budgets over the past two decades.