How state pension subsidies undermine equity 

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In some states, teacher pension subsidies significantly widen the gap between rich and poor school districts. 

 

When policy advocates debate how best to ensure equity in public education funding, they tend to focus on a single question: How much aid should states give to cash-strapped school districts? Rarely does the topic of teacher pension reform come up. But, in fact, pensions represent a very large and fast-growing source of education spending, much of it distributed in ways that are, in a number of states, anything but equitable. Specifically, when the state government pays district pension costs, this can have a massive distortionary effect on the distribution of state education dollars, threatening to undermine (and, in at least one state, completely negating) other efforts to achieve equity between rich and poor school districts. We’ve found in our own research that although state pension subsidies receive limited public scrutiny, they’re a major source of inequity in school finance. 

The problem with pensions 

Roughly 90% of all K-12 funding comes from local and state sources. At the local level, property taxes make up the main source of revenue and, because some communities have much more property wealth than others, that can create wide variations in school district revenues. In many cases — as in New York City, Boston, and other thriving urban districts that have a lot of commercial and industrial property wealth — property tax revenues provide relatively high per-pupil funding for the district’s students, including those who come from low-income neighborhoods. In many other cases, though, they favor students from high-income suburbs over those from low-income rural districts and cities in economic decline. 

The Urban Institute (Chingos & Blagg, 2017) recently conducted an analysis of funding across districts within each state, comparing the per-pupil average for poor students with the average for their nonpoor peers. In 22 states, the study showed, funding levels from local sources were more or less the same for poor and nonpoor pupils (less than a $300 difference). But in 19 states, per-pupil funding from local sources was $300 to $1,000 lower for poor students, and in the remaining eight states, local revenues per pupil were substantially lower ($1,000 to $3,460 per year) for poor students. (Hawaii, which is a single district, was not included in the study.)  

However, state-level funding, at least when it comes to general aid for districts, is almost always progressive: States tend to give more money to poor districts, both to remedy inequities in local revenues and to augment funding for children from low-income backgrounds. In most states, this offsets — or more than offsets — funding gaps at the district level, but in a few states it does not. The largest disparity found by the Urban Institute is in Illinois, where, after both local and state revenues are taken into account, per-pupil funding for the average poor student is close to $900 per year lower than for nonpoor students. 

The picture gets more complicated, though, when it comes to teachers’ pensions. In the majority of states, teachers and their districts are responsible for all pension contributions. Local school districts receive general aid from the state, which is apportioned via a progressive spending formula, and from that pot of money they make their required contribution to the pension plan. But in 18 states, the state makes some or all of the pension payment directly, contributing an amount equal to a certain percentage of each teacher’s salary. These direct pension payments can add up to a large portion of the given state’s overall education budget. This year, for example, Illinois will contribute $4.5 billion to the Teachers’ Retirement System (TRS), the pension fund covering the 80% of Illinois teachers who teach outside of Chicago (TRS, 2017). To put this in context, the state spends almost as much money on non-Chicago teachers’ pensions as it spends on general aid to those same districts.  

The ways in which pension contributions are distributed can have implications for equity.  

As recent research has found, the ways in which pension contributions are distributed can have implications for equity (Griffin-Johnson et al., 2012; Marchitello, 2017). When the state makes pension payments on behalf of school districts, it may distribute those funds inequitably, and the distribution tends to favor districts with high property wealth and low student poverty. Wealthy suburban school districts often pay their teachers significantly more than less affluent districts are able to do. So if the state funds pensions based on a percentage of each salary, it pays a higher dollar amount for teachers in the wealthy school district. 

In our own studies, we’ve drilled down deeper into the ways in which pension subsidies function. All previous work on this topic has had to rely on researchers’ assumptions about pension costs, as a share of payroll, because pension funds such as Illinois TRS did not publish district-level data. This has now changed. New accounting rules force pension funds to account publicly for the amount of subsidy that districts receive through state pension payments, revealing more of the details of where the money goes. 

Take, for example, the teachers Ms. Poor and Ms. Rich. They are identical in almost every way. They both have 10 years of teaching experience and have master’s degrees from the same university. They each teach 2nd grade and have 20 students in their class. The only difference is that Ms. Poor works in a less affluent school district than Ms. Rich, and while Ms. Poor makes $50,000 per year, Ms. Rich makes $70,000.  

Let’s assume the state pays 10% into the pension fund for each teacher. That means the state pays $5,000 into the retirement fund for Ms. Poor and $7,000 for Ms. Rich. If we divide each sum by 20 — the number of students in the class — we see the state is paying $350 per pupil for Ms. Rich’s students, but just $250 per pupil for Ms. Poor’s students. (Of course, this is just a hypothetical. In real life, class sizes would likely be higher in Ms. Poor’s classroom, making the per-pupil funding even less equitable.) 

 

                                                             Ms. Poor                                                Ms. Rich 

Salary                                                 $50,000                                                $70,000 

State contribution percentage      10%                                                         10% 

State contribution                            $5,000                                                  $7,000 

Number of students                          20                                                          20 

State funding per pupil                   $250                                                     $350 

  

Take this $100 difference per pupil and multiply it by the 400 students in each school, and the difference grows to $40,000; if each district has 20,000 students, the difference grows to $2 million. In effect, the more affluent school district is getting a $2-million larger subsidy from the state. Because this extra funding is based on teacher salaries, which are often based on local wealth, it amounts to a regressive form of state spending. 

State budgets are not limitless; as state obligations for pensions increase, they strain progressive state aid for other educational and social programs. In short, direct pension subsidies for Ms. Rich result in less money for Ms. Poor’s students.      

Trade-offs 

A skeptic might say, “Sure, the state pays more for the pensions of the wealthy school district, but the district can’t spend that money on students or staff or resources or anything other than pensions, so this subsidy can’t really be compared to general state aid.” 

This skeptic is right that the rich district cannot choose how to spend the extra pension dollars contributed on its behalf by the state. But consider the counterfactual: What would happen if the state didn’t make pension payments on behalf of school districts and, instead, required those districts to fund pensions themselves, out of their general state aid? Suppose further that the amount of state money that is currently paid to the pension fund is instead funneled to the districts through the general state aid formula. 

State budgets are not limitless; as state obligations for pensions increase, they put a strain on progressive state aid for other educational and social programs.  

Remember, general state aid tends to be distributed progressively — rich districts get less and poor districts get more. If rich districts have to fund teachers’ pensions themselves, using money from their relatively small pot of state aid, then they will likely think twice before choosing to pay such high salaries to their teachers; this policy alternative will exert a downward pressure on teacher salaries. At the same time, poorer districts, given their more generous allotment of state funding, will have more leeway to raise teachers’ salaries. Overall, then, per-pupil spending disparities between high-spending and low-spending school districts will be reduced, as will teacher salary gaps.  

Such trade-offs are never easy to make, and wealthier districts will no doubt protest any effort to end these state pension subsidies. But if states truly wish to offset the inequities that result from property tax-based funding of local schools, then those trade-offs will be unavoidable.  

Thanks to new requirements from the Government Accounting Standards Board, we can now calculate more precisely the level of regressivity in state pension payments, which will allow us to quantify the extent to which state pension payments undermine equity. In the meantime, we have identified 18 states that make some or all of teacher pension payments on behalf of school districts. Until now, these funds have been left out of conversations on school finance. It is time for that to change.   

References 

Chingos, M. & Blagg, K. (2017). School funding: Do poor kids get their fare share? Washington, DC: The Urban Institute. http://apps.urban.org/features/school-funding-do-poor-kids-get-fair-share 

Griffin-Johnson, A., Dabrowski, T., Hitt, C., & Sroka Rickert, D. (2012). Playing favorites: Education pension spending favors wealthy, suburban schools. Chicago, IL: Illinois Policy Institute. www.illinoispolicy.org/reports/playing-favorites-education-pension-spending-favors-wealthy-suburban-schools 

Marchitello, M. (2017). Illinois’ teacher pension plans deepen school funding inequities. Washington, DC: Bellwether Education Partners.  

Teachers’ Retirement System of the State of Illinois. (2017). TRS finalizes $4.47 billion state contribution for fiscal year 2019. Springfield, IL: Author.  www.trsil.org/news-and-events/FY19_Contribution_Rate_Finalized 

 

Citation: Shuls, J.V., Hitt, C., & Costrell, R.M. (2019). How state pension subsidies undermine equityPhi Delta Kappan, 100 (8), 37-41. 

 

 

JAMES V. SHULS (shulsj@umsl.edu; @shulsie) is an assistant professor of educational leadership and policy studies at the University of Missouri, St. Louis.
COLLIN HITT (chitt47@siumed.edu) is an assistant professor of medical education at the Southern Illinois University School of Medicine, Springfield.
ROBERT M. COSTRELL (costrell@uark.ed) is a professor of education reform and economics at the University of Arkansas, Fayetteville.

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