Follow the Money
July 29, 2018
Last week we laid out the key problems with California
(and San Francisco) public education. The primary problem is that educational
outcomes are unacceptably poor, particularly among the neediest students. A
secondary problem is that teachers – especially younger teachers – face a
similarly tough work situation as teachers in many other states. We also noted
that some people say our public schools need reform, while others say we have
failed to fund public schools adequately, and both sides are right.
Now we analyze root causes. This week we look at funding.
Next week we will look at school reform.
Although our focus is California, it is useful to start
by comparing US spending to other nations, which you can find here
(or Google “OECD public spending on education”). Compared to our peers (as of
2014, latest data available), the US is middle of the pack at 3.2% of GDP spent
on “primary to post-secondary” education. (This is not quite the K-12 range we
want to consider, as it misses kindergarten and captures college, but it is
close enough for our purposes.) Many countries spend more, but some spend less
and there is no clear correlation among countries regarding spending and
outcomes.
Okay, so that’s how the US compares worldwide. How does
California compare to other states? There is terrific data here
(or Google “EdSource States in Motion”). The key facts are as follows:
1. Before
Prop 13 passed in 1978, back when California schools were among the best in the
nation, California’s K-12 expenditures as a share of total state personal
income dropped from over 4% (close to the national average) to roughly 3% (near
the bottom), where it has remained since. Similar results are found comparing
per student funding adjusted for the high cost of living in California.
2. Over
the same time period, California’s childhood poverty rate rose from well below
the national average to somewhat above the national average, suggesting that
our student base probably became harder to educate. (A key wonky point is that
this childhood poverty rate does not reflect the higher cost of living in
California, i.e. it is not double-counting point #1 above.)
So the funding argument goes like this: Before Prop 13
California had excellent educational results and funded schools adequately.
Then after Prop 13 we de-funded the schools at the same time that a more
diverse student population required more resources, and student outcomes
dropped precipitously, especially for our neediest students. Hence, the problem
(and the solution) is the level of funding.
This argument is correct insofar as it goes. But nothing
in the argument addresses the need or potential for reform. Remember, the US
spends an average amount on education for subpar results, and there are
countries that spend the same amount or less for better results (e.g. Canada,
Germany and Japan). We will address the issue of school reform in detail next
week, but we can start to tease it out by turning to a key piece of school
budgets we have so far overlooked: pensions (and healthcare benefits).
All of the numbers above count education expenses only as
the cash is spent. That might seem sensible, but consider this: What if part of
how someone is compensated (and by “someone” read “teachers”) is with promises
that they will be paid more money in the future? In that case you must expense
the promises when those promises are made, and raise sufficient taxes when
those promises are made so that when it’s time to make good on the promises
all the cash needed is there. If you don’t do that, then for many years it
looks like you’re spending less money than you really are. Then one day it’s
time to pay the cash for all those promises, and the next generation foots the
bill the last generation rang up.
That, in a nutshell, is the situation in California’s
school system. More money needs to be raised now and for many more years to
come to pay the promises made for teacher pensions (and healthcare benefits) over
the last generation, particularly during
the Gray Davis administration.
(Before we dive into the numbers, one might ask whether
California’s education spending really fell so much relative to the national
average if we adjust for pensions promised to teachers. That question is too complicated
to analyze here, but because most
other states were similarly irresponsible, I believe adjusting for
pension promises shouldn’t significantly alter the comparison of California to
other states.)
The California State Teachers’ Retirement System (CalSTRS)
runs the pension system for all California public teachers, including San
Francisco. As of June 30, 2017, by their calculation, the unfunded
pension liability was $107.3 billion, up from $22.5
billion ten years earlier, making it only 62.6% funded. (Retiree
healthcare benefits add another $24 billion to the unfunded liability,
according to the Legislative Analyst’s Office.)
Unfortunately, although CalSTRS recently lowered the long-term investment
return assumption to 7%, a more realistic rate is probably closer to 4%, which
means the true value of the liability is significantly higher.
In 2013, the state legislature put in place a set of
measures to start filling this gigantic hole, which you can read about in this
outstanding article. (Or Google “Ed100 Lesson 3.11.”) Teacher
contributions have increased from 8% of salary to 10.25%, while district and
state funding (i.e. taxpayer contributions) will be increasing steadily for
years. People in education policy call it the silent
recession: more money is going to pay for past promises, leaving
less for current services. For example, the latest budget assumptions for San
Francisco Unified School District (SFUSD) has the employer contribution rate to
CalSTRS rising from 14.43% to 18.13% over the next two years. (See page 31 of
the SFUSD
Second Interim Report for FY 2017-2018.) These changes mean that a
greater share of each dollar of taxes will go to fund past promises, leaving
less to educate today’s kids. Even on current assumptions, these changes may
not be enough, as explained in this
excellent story. (Or Google “CALmatters teacher pension debt.”) And
if I’m right that the current liability is understated (because it should be
discounted at a lower rate than 7%), then much more money than is currently
forecast will eventually be needed to fill the hole.
Another key point is that the structure of teacher salary
and pension benefits (shown in the graphs) misaligns incentives.
Source: https://ed100.org/lessons/pensions;
assumes the teacher hired at age 29, works without interruption until age 65,
draws a pension until age 86
A teacher’s
salary level and pension benefits are based solely on tenure instead of merit
(being a great teacher) or difficulty (teaching needier students). And once teachers
have been teaching continuously for a long time they are highly reliant on
reaching beyond 26-27 years of teaching, both because that is when they earn most
of their pension benefits and because unlike most workers they do not accrue
future social security benefits during their career. The teacher’s union is therefore
motivated to fight for teacher tenure above all else, taking away the promotion
and firing authority a principal needs to ensure a school functions well for everyone.
The numbers show that we have insufficiently funded our
schools for many years. At the same time, there is a powerful argument that it
is necessary to reform our schools to ensure that any increased funding we need
to provide is put to good use. Next week we will examine the case for school
reform.
