K-12 state spending on retirement costs ballooned by at least 123% between 2001 and 2021, an increase driven mainly by growing pension debt, according to a report released Wednesday by Equable Institute, a bipartisan nonprofit that provides public pension education and research.
In 2001, only 17% of retirement costs serviced pension debt. But in 2021, that share had jumped to 69%, a 414% increase. That's because unfunded liabilities for teacher pension plans — or money that should be in teacher retirement systems, but isn't — has increased over the last two decades. What was an $86.32 billion shortfall in 2001 for teacher and public school employee retirement systems grew nearly tenfold to $816.71 billion in 2022.
Retirement costs due to increasing pension debt are expected to continue increasing as retirement costs grow faster than K-12 spending nationally, according to the report. "There is cause to be concerned," Anthony Randazzo, executive director of Equable Institute, said in a webinar on Tuesday. "It is somewhat inevitable that we are going to have more hidden funding cuts going forward."
The report characterizes state funding going toward pension debt as a "hidden education funding cut," considering it is money not going toward additional retirement benefits or compensation, but rather to pay a debt accumulated by the state.
This cost is "weighing down public schools," said Randazzo. It has the potential to eat into money that could fund teacher salaries and retention, reduced class sizes, and academic recovery for students, according to the report.
"If a school district has growing retirement costs, it is going to have less money available for being able to pay higher salaries, so there is clearly some effect of some kind on teacher salaries from the growing cost of teacher pension benefits," said Randazzo. "There's a universe where that would be OK if it meant that increasing spending on benefits was increasing the value of benefits."
But that is not the case, he said.."As a matter of fact, the value of their pensions is declining," Randazzo said.
In the past, finance experts have suggested district leaders:
- Illustrate the impact by documenting what districts can't fund because of pension costs.
- Make raises non-pensionable during a recession, when the value of most retirement accounts drop.
- Share concerns with policymakers.
- Create long-term budget forecasts to measure how changing pension contribution rates would affect the budget.
- Seek local funding, like education foundation donations or tax increases, to cover pension costs.