The hidden cost of K-12 pay raises

The hidden cost of K-12 pay raises
The newly-approved K-12 teacher salary increases could add billions over the next 25 years to public pension obligations paid for by Washington taxpayers, though the preliminary estimates by the State Actuary’s Office could ultimately prove to be on the high end. Created by Kstudio - Freepik.com

While local school districts struggle to find ways to pay for recently approved teacher salary increases, the full cost to Washington taxpayers is still yet to be realized. Spokane Public Schools have announced plans to reduce staffing in order to cover the 13.3 percent average pay increases, and there is talk of additional state funding to some districts.

However, the new teacher contracts might also end up costing Washington taxpayers billions over the next 25 years in new public pension obligations, according to a preliminary estimate conducted by the Office of the Actuary.

As a caveat, agency officials warn against jumping to conclusions based on the numbers, and government reform advocates say the costs are unlikely to be higher than estimated.

Washington Policy Center Government Reform Director Jason Mercier told Lens that the focus on district costs for new teacher salaries only examines the local taxpayer impact. “What hasn’t got reported is there is still a statewide taxpayer obligation for pensions. Factored into the pension cost, that bill is going to come into the state of Washington.”

Tasked with determining the state’s contribution to the public pension systems, the Actuary’s latest pension valuation, released in June months prior to the new teacher contract, assumed a general salary increase of 3.5 percent.

Right now, the Actuary’s Office doesn’t have enough data to determine what the actual overall increase will be. In an email, Deputy Actuary Lisa Won wrote: “the actual compensation changes matter since, for example, salary increases for higher paid and longer service teachers affect the costs of the system differently than salary increases for lower paid and shorter service teachers.

“If actual salary increases are higher than our assumptions, we expect contribution rates to increase as well as total costs to TRS (Teachers Retirement System),” she added.

That’s an assumption the Actuary’s Office used for a “high-level” scenario analysis showing what Washington taxpayers could owe in new pension obligations for the TRS and the School Employees’ Retirement System (SERS) with a 15 percent pay increase.

If that turns out to be the case, taxpayers will have to fork out an additional $277 million in the 2019-21 biennium. That added debt would increase to $393 million in 2021-24.

In total, it would add $3.5 billion in pension obligations over the next 25 years. If the general pay increase were instead 10 percent, the 25-year total would be half that.

However, Won stressed that “until we have actual salary data from across the state, we won’t have accurate information on the actual impacts.”

Already, Washington has $12 billion in unfunded liabilities for its retirement plans. Of that amount, $4.7 billion is from the TRS plans.

Mercier says the overall pay increase is unlikely to be higher than the 15 percent estimate. Nevertheless, it’s another added cost to taxpayers around the state, he added.

“The pension is a contractual obligation,” he said. “In agreeing to these contracts they (school districts) can’t afford and blowing past the 3.5 (percent) contribution, they put taxpayers on the hook.”

During a Sept. 20 interview with TVW’s Austin Jenkins, Senate Ways and Means Ranking Minority Member John Braun (R-20) characterized  the districts struggling to balance their budgets despite enormous funding growth by the state “a shortfall in financial management,” adding that more than half of the state’s operating budget already goes toward basic education.

“We need to hold them (school districts) accountable or we need to take control of negotiating at the state level,” he said. “It’s got to be one or the other. My personal bias is no local levies. I think we ought to put all the pressure on the state to properly fund education. I understand that’s not realistic, but I think we should push back as hard as possible.”

The Actuary Office analysis was released just days after the Select Committee on Pension Policy met in Olympia. The Pension Funding Council also met recently; the council sets economic assumptions and contribution rates for pension systems.

The Actuary’s Office expects to receive teacher salary increase data in December.

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