Beware the Cost of Teacher Benefits

Last Month, Illinois passed a new school funding formula that would dramatically alter the state’s education finance system, and gave much-needed funding to the nation’s third largest school district, Chicago Public Schools. The bill’s dramatic road to passage was marked by the current school year starting while state money was held back, a fight over whether Chicago was receiving a bailout or fair funding, shifting local property tax limits and last-minute concessions, including a $75 million dollar private school choice program, unexpected in the decidedly blue state.

Illinois, which has the nation’s largest funding gaps between its wealthy and poor districts, will now direct more state funding towards poorer districts. But no Illinois district will receive more than the cash-strapped Chicago Public Schools, which will get desperately needed $450 million windfall.

One would think such a large infusion of funds would allow the district to invest in schools and classrooms, but the bulk will instead go towards the district’s pension problem. Its pension liabilities are enormous – partly due to the district’s exclusion from state pension contributions, and partly due to the city’s foolish decisions regarding “pension pickups,” in which the city (instead of the teachers themselves) paid the bulk of teachers’ individual retirement contributions.

Illinois – where pensions make up 25 percent of the state budget, six times the national average – may be the standard bearer for state pension liability problems, but Chicago is its capital. Of the $450 million for the district, $221 million in new state funds will go to Chicago teachers’ pensions. Another $125 million from new Chicago property tax hikes will also go to pensions, which comes atop a recent $543 million tax increase to pay for, you guessed it, public sector pensions, this time for city police and firefighters.

Chicago’s eye-popping pension problems pose a significant challenge for its public schools because they take up an increasing share of the district’s overall funding. This makes money for teacher salaries or other direct investments in classrooms all the more scarce. Further, pensions are not even the only factor here, as other benefits costs, like those for health insurance, have also been increasing for Chicago and the nation.

These swelling benefits costs are evident in the district’s reported spending on teacher compensation over time. According to the National Center for Education Statistics’ data, in 2004, 20 percent of the district’s teachers’ total compensation went to benefits, including both pensions and health insurance. In 2009, the percentage rose to 25.5. In 2014, the last year of available data, it approached 38 percent, meaning for every three dollars in salary, Chicago Public Schools spent nearly two on benefits.

Chicago may have dramatically outsized benefits costs, but it’s hardly alone. The costs for Los Angeles Unified School District, the nation’s second largest school district, are also ballooning. Last week, the district’s chief financial officer reported these costs, driven by pension and healthcare payments, are steadily taking over total district funding. In 2001, benefits spending made up a tenth of total funds, rising to just under a quarter by 2011. In 2021, benefits will take up a third of available funds, and half by 2031. Let that sink in for a moment: Over 30 years, Los Angeles’ benefits spending will grow from one dollar in ten to one dollar in two.

These two districts may be “canaries in the coal mine” of district spending, as data indicate that benefits costs are rising across the nation. The graph below plots the average instructional staff compensation from 1991 through 2014. This is typically the largest line item in district budgets, and is a useful vantage for evaluating rising benefits costs.

Chart on Average Instructional Staff Compensation, 1991-2014 NAT MALKUS/NATIONAL CENTER FOR EDUCATION STATISTICS COMMON CORE OF DATA

While real total compensation rises moderately over this period, average salaries are relatively flat, at roughly $57,000. Benefits spending remains relatively flat until about 2003, when it made up about 21 percent of total compensation, but then rises steadily. From 2003 to 2014, benefits spending rose from $14,000 to over $21,000, taking up an average of 28 percent of total compensation. Across the nation, districts are not seeing the same degree of difficulties as LA and Chicago, but many are heading in the same direction.

Growing benefits costs put the squeeze on districts because they take more and more money for relatively unproductive uses. It’s not that pension obligations should be dismissed (though some changes are due), or that teachers don’t deserve health benefits; the problem is that these increasing costs aren’t productive. Pension dollars largely go to retirees, not to attract new teachers. Health care isn’t a new perk, it’s just getting more expensive. So while districts see their spending on teacher compensation rising, the numbers that attract teachers – salaries – are staying flat.

Of course, this is more of a problem for school systems than individual teachers. A given teacher still gets a raise with additional years of service. So the fact that average salaries have not gone up does not mean individual teachers are not getting raises—the raises are just smaller than they might have otherwise been.

On the system level, rising benefits costs are a bigger hindrance. Improving teacher quality is widely considered one of the best levers to improve outcomes, and pay is key to attracting the best candidates. According to a recent report, among Organization for Economic Cooperation and Development countries, the U.S. has the largest pay gaps between teachers and other workers with similar amounts of education. If districts’ increases in total compensation keeps getting eaten up by benefits costs, salaries will remain flat, as will efforts to attract talent to enter the teaching profession.

Districts can take steps to limit the growing burden of benefits, but none of them are easy. One is moving away from pensions toward more sustainable options, such as 401k plans that are both more sustainable and often better for teachers. Some can take steps, like Los Angeles is considering, to minimize their health care costs; though getting traction on that front is a challenge for the country, not just LA. Perhaps least popular of all, they can follow Chicago’s example and raise taxes. Faced with such tough choices, many districts will be prone to kick the can down the road to avoid them. However, states and districts would do well to address this mounting challenge now – or face increasing costs with less and less to show for it.