California Public Education, Part Two

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.