Does the Economic Crisis Endanger Teacher Pensions?

My phone rings and computer pings, questions: are our pensions in jeopardy?  The inquiries are probably the result of two posts that have been making the rounds,

One post, from the Reason Foundation entitled “New York City’s Pension Debt Could Push It to Bankruptcy (May, 2019)” and the other from the Marron Institute at NYU entitled “The New York City Teachers’ Retirement System Fiscal Issues and Risks (March, 2020)”

Whether its COVID-19 or teacher pensions you always have to ask the source of the information. There are a range of sites that “assess” organizations. Mediabiasfactcheck identifies the Reason Foundation as, “…often publishes factual information that utilizes loaded words (wording that attempts to influence an audience by using appeal to emotion or stereotypes) to favor conservative causes,”

The Reason Foundation is an American libertarian think tank…. its largest donors are the David H. Koch Charitable Foundation ($1,522,212) and the Sarah Scaife Foundation ($2,016,000), The Koch brothers are vigorous opponents of unions and climate change deniers.

We can dismiss the “bankruptcy” claims.

New York City did approach bankruptcy in 1975, the city, unknown to all but the insiders, was in serious financial straits and flirted with bankruptcy. I was the kid on the UFT contract negotiating team. Over the summer we met every few days, exchanged bargaining demands; seemingly we were edging closer to a settlement. Days before the opening of school the city laid off 15,000 teachers as well as tens of thousands of other city workers.  The city was tittering on the edge of bankruptcy. The Teachers’ Retirement System (TRS) loaned the city millions to pay off bonds and averted bankruptcy; an Emergency Financial Control Board was created that monitored city spending, the loans were repaid and within five years all the laid off teachers were offered jobs.

Nowadays city finances are transparent, with a City Council and a Comptroller closely monitoring all city expenses and revenues.

A number of years ago Detroit did declare bankruptcy and a court approved a reduction in municipal pensions that was sustained in higher courts.

Public employee pensions in New York State are protected by the state constitution.

 After July first, nineteen hundred forty, membership in any pension or retirement system of the state or of a civil division thereof shall be a contractual relationship, the benefits of which shall not be diminished or impaired.  

City pensions are not in jeopardy.

The NYU Marron Institute study is more interesting.

After teachers strikes in 1967 and 1968, in my view, Mayor Lindsay decided to use the “crisis,” the strike, to weaken the union and, to the extent possible, turn over the schools to pacify communities and avert urban unrest, the riots, that were roiling the nation (Read a lengthier discussion here)

Lindsay, a liberal Republican, yes, there was such an animal, set his sights on a presidential run, and, to win back UFT members, the UFT, Lindsay and Governor Rockefeller agreed to change the archaic pension law and created Tier 1, a far, far more generous plan.

(Read a 1964 pension book produced the UFT here; a teacher retiring at 60 years of age and 35 years of service would receive an annual pension of $2500).

Thank Dave Wittes, the father of Tier 1

Lindsay’s run died in the 1972 Florida primary and the legislature began to whittle away at the pension, due to the constitutional provision, only prospectively.

Currently about 25% of teachers are in Tier 6.

In 1970 Congress passed what we refer to as the Tax Deferred Annuity (TDA). Teachers may designate a percentage of their salary, and defer taxation until after retirement, and TRS will invest the funds, the member has a wide range of investment options. As teachers near retirement they can move their TDA funds to an option that guarantees an annual 7% return. The TDA is not a pension, not guaranteed by the constitution and the percent return is set by the legislature.

The NYU Marron study primarily deals with the fiscal impact of the 7% moving forward.

Is it sustainable over time?

The study praises the TRS and the city,

TRS has a strong funding policy that the city historically has adhered to. It pays down unfunded liabilities quickly, primarily because it amortizes investment gains and losses over a closed 15-year period in level-dollar amounts, which is a more aggressive approach than most plans use. This means that the plan faces little risk of deep underfunding if the city continues to pay contributions in this manner. The city’s strong funding discipline coupled with TRS’s conservative amortization method ensures that the TRS-funded status will keep improving if the return assumption is met. However, the tradeoff is that the city faces significant risk that contributions could rise substantially and could be volatile.

 The study takes a deep dive, many charts and graphs, and does an analysis of a how a reduction in the guaranteed return to 5% and 2.5% would impact the viability of the system. The study concludes,

 The analysis in this report does not suggest there is any imminent danger to TRS. However, our simulations suggest that the combination of the TDA guarantee and investment-return volatility mean the risk of severe underfunding—a funded ratio below 40 percent in our measure—sometime in the next 30 years is about 28 percent under a 7 percent expected investment return assumption. This risk rises to 41 percent under an investment scenario that includes 15 years of low expected returns before the expected return rises to 7 percent. Whether these risks are too great or not concerning is for policymakers to decide, but they need to be aware of them and either explicitly affirm the status quo or work to reduce risk.

I am not a pension expert and cannot draw conclusions about the accuracy of the study. Tom Brown, a TRS Board member, in his next column in the UFT newspaper will be responding to the “claims.”

BTW, I am also asked whether the crisis could result in a “pension buyout,” allowing teachers to retire an earlier age and/or with fewer years of service. It is unlikely.

Watch FDR’s First Inaugural Speech, “The Only Thing We Have to Fear”

Stay Safe

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