THE OHIO EDUCATION GADFLY: SPECIAL EDITION

A Special Edition of News and Analysis from the Thomas B. Fordham Institute
September 20, 2007

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Billions by the bucket full: How much can school kids afford for teacher retirees?

Ohio taxpayers and school children have been dealt another dose of bad news with the revelation that almost $10 billion in expected health-care costs for retired teachers could be added to the already staggering $19 billion in liabilities of the State Teachers Retirement System.

While the State Teachers Retirement System (STRS) already provides a health-care program for retirees, legislation (H.B. 315) pending before the Ohio General Assembly would obligate the system to assume liabilities for the program and fund health-care benefits in the same way that STRS is supposed to fund the pension liability. The effect would be to add at least $9.8 billion--the STRS's figure--in health-care costs to its obligations.

According to a Thomas B. Fordham Institute report issued in June (the most recent valuation), the system's unfunded liability for pensions alone already stood at $19.4 billion.

Money to cover these added costs would have to come straight out of the budgets of hard-pressed local school districts and/or the paychecks of their hard-pressed teachers. To hold districts and teachers harmless would mean saddling taxpayers with enormous additional burdens. Under the current pension-health system, school districts pay 14 percent of an employee's salary into the system while employees add another 10 percent. Under the legislation, working teachers and schools districts would each pay 2.5 percent more within five years. But there's no guarantee that these larger contributions would cover future costs any more than current contributions will cover future pension checks.

The proposed legislation makes an already bad situation worse because nothing in the bill looks at the underlying problems facing STRS. The system costs too much. It's overly generous in that it highly subsidizes expensive health-care premiums for retired teachers until Medicare kicks in at 65 and it encourages teachers to retire at 55 or 57 when the average American is working to 65 or 67. The proposal is also counter to private-sector moves to reduce health-care costs and it emphasizes how much more generous the fringe-benefit package is for public school teachers than for many other professions. In fact, the number of private-sector employers offering retiree health benefits dropped from 20 percent in 1997 to 13 percent in 2002, according to research published recently in the Journal of Economic Perspectives.

Robert Costrell, professor of education reform and economics at the University of Arkansas, and Michael Podgursky, professor of economics at the University of Missouri, wrote the Fordham report, issued in June, and entitled Golden Peaks and Perilous Cliffs: Rethinking Ohio's Teacher Pension System.

"Ohio is one of the few states to fund its optional retiree health-insurance program through its pension system. Given that STRS members retire well below the age for Medicare eligibility (65), there is a gap of many years to be covered by this expensive program," Costrell and Podgursky wrote in the report. Even worse, spiraling retiree health-care costs, paid by working and future teachers, are likely to drive down their wages. And, if offering health-care entices even more teachers to retire early, then both health-care costs and future pension liabilities will increase even faster.

The new health-care proposal makes the Fordham Institute's concerns even more alarming. The STRS unfunded pension liability already far exceeds that of the state's other four public pension systems combined, despite the fact that STRS's membership is little more than one-third of those systems. The Fordham Institute report pointed out that unfunded liabilities have skyrocketed even though employee and district contributions have more than doubled since 1945 because teachers retire earlier, live longer, and draw pensions far longer than most other American workers.

Without an overhaul, the system's expense will hurt efforts to attract and retain the high-quality teachers that are the keys to strengthening education in Ohio. The report offered some concepts that Ohio should consider in restructuring the STRS system from the ground up, including:

1. Transparency. The accrual of benefits should be simple and clear. There should be no opportunities for gaming the system.
   
2. Sustainability. The pension system should be self-funding. The system should not be subject to the pattern of benefit enhancements when the stock market is up, followed by funding shortfalls and contribution hikes when the market turns sour. Benefits should be tied to contributions.
   
3. Move away from defined-benefits. Ohio should move quickly toward a defined-contribution or cash-balance system.

Ohio's legislature showed foresight in creating embryonic defined-contribution and cash-balance type pension programs. However, STRS efforts have focused on patching the broken defined-benefits system. If Ohio built on its earlier reform efforts, it could lead the nation toward a teacher pension system that better serves both its fiscal and educational needs.

Access Golden Peaks and Perilous Cliffs: Rethinking Ohio's Teacher Pension System here.

By Michael B. Lafferty; Terry Ryan

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