The coronavirus pandemic is pummeling investment markets and will cause teacher pension costs to spike next year, fiscal analysts predict. That will put even greater strain on the already dwindling amount of money school districts will have to spend on other priorities such as teacher pay.
Public pension funds, heavily tethered to the stock market and woefully underfunded, have lost in value close to $1 trillion, or 21 percent this fiscal year, according to a recent Moody’s report.
That means states and districts will likely have to contribute significantly more money next fiscal year to continue paying out retirement benefits to a rapidly aging teaching force and prevent their pension plans from collapsing. That could ultimately impact districts’ credit ratings, which affects their ability to take out loans to pay for essential things such as technology and facilities.
”...Without a dramatic bounce back of investment markets, 2020 pension investment losses will mark a significant turning point where the downside exposure of some state and local governments’ credit quality to pension risk comes to fruition because of already heightened liabilities and lower capacity to defer costs,” the report said.
State legislators and district administrators face several dire choices in the coming months: states can attempt to spread the increased costs out over the next few years, further risking insolvency; take the money out of the state’s general budget, leaving less money for districts to spend; ask districts to shoulder the costs; or ask current teachers to contribute more to their retirement costs, leaving them with less take-home pay.
“There’s a ticking time bomb built into their pension formulas,” said Robert Costrell, a school finance researcher at the University of Arkansas. “This will eventually travel downhill to districts.”
Thomas Aaron, a senior Moody’s analyst and the author of the report, said many states, including Illinois and New Jersey, have little flexibility in smoothing out pension costs the same way they did in the last recession because pension funds now have so little cash flow.
Districts are already bracing for a precipitous drop in state K-12 aid next year because of the shutdown of large swaths of the economy which has sent sales tax revenue into a tailspin.
The $13.5 billion federal stimulus fund passed last month will barely put a dent into that loss, many analysts now predict. It’s likely that states will use the stimulus money to help cover increased pension costs, as they did with the 2009 stimulus package.
“With the economic story going on in the U.S. and around the world...the capacity to grow revenues to accommodate higher pension costs is reduced,” Aaron said. “The fact that this is happening concurrently is going to force some difficult budget decisions for many states.”
States in 2018 spent more than $19 billion on pensions, a 47 percent increase in just four years, according to Costrell. It’s partly why many states and districts have been unable in recent years to give teachers a pay raise, leading to large scale protests and weeks-long strikes.
In recent years, several states, including California, Florida, and Illinois, have considered splitting costs with districts, a move that’s upset administrators.
States’ attempts to change who pays into pension plans, who receives benefits, and reduce the “generosity” of the plans, commonly referred to as social contracts, have met fierce backlash.
Chad Aldeman, a senior associate partner for Bellwether Education Partners, predicts that the increased costs will spur more efforts by legislators to change pension plans next year.
“Given all the pressure that’s going on, a bunch of states, including Kentucky, have already been talking about this,” Aldeman said. “There will be similar discussions in other places when they’re handed that bill.”
State legislators have been reluctant to raise taxes in order to pay down pension plans. That’s why many states started investing in things such as the real estate, hedge funds, and private equity in the 1980s in hopes that returns will be high, keeping contribution rates low.
Before the pandemic, teacher pensions were about 70 percent funded by the returns on investments. That has now dipped to around 50 percent funded, Costrell estimates.
In recent weeks, administrators have started to fret in private conversations about the looming pension obligation next year.
5/There are many cascading effects of a downturn: for instance actuarial adjustment could lead to higher pension obligations, further constricting district budgets. A further concern is potential skyrocketing health care costs, especially if district self-insured.
— Michael Magee (@mcmageejr) April 9, 2020
In California, where skyrocketing pension costs have been partly blamed for rounds of district layoffs and a teacher’s strike in Los Angeles last year, the state’s teacher retirement system, which has not yet reported its loss, attempted to assuage the K-12 sector. (The state’s California Public Employees’ Retirement System, which covers other state employees, lost $69 billion in value last month.)
“The [teacher retirement systems’] investment portfolio is broadly diversified to withstand periods of turbulence,” CalSTRS spokeswoman Vanessa Garcia said to the Sacramento Bee. “We have a risk mitigating strategies asset class that provides diversification to the portfolio and protection against equity market downturns.”
But experts in the field say states should’ve learned from the last recession.
“I think pension plans should have been de-risking over the last few decades, because teachers and workers are aging, and states are paying off more benefits compared to who’s paying into the system,” Aldeman said. “They should have been tailoring accordingly, but they did the opposite.”