Educator Pensions: Impacting K-12 Funding Around the Country

Rising costs are eating away at teacher pensions and K-12 funding across the country 

paper with a graph showing stock growth in foreground with a paper with columns of numbers in the backgroundTeacher pensions — like other professional pension programs — are significant expenses for states and school systems around the country. Now, some experts fear that their growing costs are threatening the stability of the benefit’s future, while eating away at larger portions of public education budgets.

A new report from the Equable Institute found that rising teacher pension costs are slowly eating up a larger  share of education budgets around the country. According to the report, after adjusting for inflation, teacher pension costs have roughly tripled over the last two decades, rising from $21.8 billion in 2001 to $63.7 billion in 2021.

Rapidly growing teacher pension debt has caused retirement costs to triple as a share of state and local education budgets since 2001, leaving less money to support classrooms, teachers, and students. These are America’s Hidden Education Funding Cuts

The report summarizes the issue and its deepening impact on K-12 education funding:

Teacher pension costs have grown significantly faster than K-12 education spending over the past two decades, driven by teacher pension unfunded liabilities. These rising costs have necessitated larger contributions from states and local school districts’ budgets to fund retirement benefits. As a result, teacher retirement costs have consumed an increasing share of total K-12 education funding, siphoning off money that could be spent on important resources and programs to improve educational outcomes for students and provide better supports for teachers.

Teacher retirement costs are on the rise nationally

According to the Equable Institute report, since 2001, total teacher retirement costs as a share of state and local K–12 spending has increased 322%. State and local spending going to teacher retirement costs since 2001 is particularly troublesome, as shown in the chart below.

The Equable Institute notes that the primary reason for the growth in these “hidden cuts” is that retirement costs nationally are growing at a much faster rate than K–12 spending. And the main reason that retirement costs are rising is a growth in unfunded liabilities — also known as “pension debt.” In fact, pension debt now accounts for two-thirds of all teacher retirement spending.

\The Equable Institute reports that:

Between 2001 and 2022, teacher pension plans went from having effectively no pension debt to around $816 billion, shown in the figure below. This, in turn, has required an increase in contributions to pay down that pension debt. Formally these are called unfunded liability amortization payments, but it is easier to think of them as pension debt costs

Normal costs refer to the amount of money needed to fund pensions for teachers today, in real-time. These costs have remained relatively stable over the last two decades. However, because many states have underfunded their teacher pension plans, pension debt costs have grown 422% in the same time period, shown in the figure below.

Rising pension costs threaten K-12 budgets

Local governments nationally account for a majority of K-12 public school funding. This reigns true in Maryland where counties are crucial partners in funding the state’s K-12 education systems. Between 2002 and 2020, the average national share of K–12 resources provided by local governments was 67.6%. 

The report digs into what this means for K-12 funding:

In the context of $1.1 trillion in state and local K–12 spending, that 5.53% cut represents tens of billions in resources that could have otherwise been allocated to improving education equity, compensating educators appropriately, hiring support staff, or financing IEPs for disabled students.

At a national level, hidden cuts to K–12 spending are growing at a notably fast rate. No matter how you slice the data, over the past two decades, retirement costs have been consuming between two to three times the K–12 education resources that they used to.

Maryland’s situation

In Maryland, retirement costs as a share of state and local funding has increased by 54% since 2002 — a generally modest change compared to other states. Retirement costs per student rose from $689.91 in 2002 to $1346.44 in 2020.

Potential improvements

The report authors suggest the following as potential improvements for the growing teacher pension problem, noting that each state’s approach will need to be specific to its public education and budgeting systems:

1. Improve Transparency: Across the board, there is a transparency problem when it comes to the effect of retirement costs on education funding. States can implement reporting standards that reflect these effects so creeping hidden funding cuts can be addressed before they become untenable or damaging to teachers and students. One possible approach:

  • A general annual report tracking each dollar of K–12 spending, including shares going to retirement costs. Legislatures could determine the most appropriate measurement of education spending in their state, and require an annual report that compares this with the change in teacher retirement costs, whether paid by the state and/or school districts. This is particularly important for states with funding formulas integrating local control of education resources, as any pension debt costs that get pushed down to districts can inhibit their ability to allocate those funds to improving educational outcomes and appropriate pay for educators.

2. Use the General Fund for Pension Debt Instead of Education Dollars: Traditionally, pension payments are just considered part of the cost of providing retirement benefits, which is a form of compensation. However, there is very little that school districts can do to manage pension plans or avoid the development of unfunded liabilities. It would be more appropriate for the state to pay for any costs of unfunded liabilities directly — and ideally use general fund dollars and not money otherwise earmarked for K–12. A few specific approaches could be:

  • Provide one-time, supplemental contributions to a teacher pension plan to pay down unfunded liabilities using budget surplus dollars and/or money from rainy day funds.
  • Adopt a rule that school districts only need to pay for normal costs of retirement benefits.

3. Ensure Education Funding Grows at Least at the Rate of Retirement Costs: State governments can work to ensure that hidden funding cuts do not get worse by reviewing annual retirement costs each year and ensuring that they are not growing any faster than the combined state and local K–12 budgets. States should also review:

  • Whether growing retirement costs for school districts are exacerbating education inequities.
  • Whether state retirement payments (non-employer contributions) on behalf of school districts, which are effectively a kind of pension subsidy, are inequitably distributed.

4. Improve Pension Funding Policies: All states should continuously work toward achieving a resilient funded status for their defined benefit plans. The specific challenges to solve and solutions for them vary considerably from state to state. Each state has to look holistically at the current and potential future effects of pension debt costs and design targeted policy accordingly. While there are no one-size- fits-all solutions, policymakers could draw inspiration from a set of policy ideas for four specific states in a series of papers called “The Pension Debt Challenge for Equity in Education.”

Read the full report.

Learn more about education funding in Maryland.