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The Los Angeles Teacher Strike Has a Huge Problem: Pensions

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The Los Angeles Teacher Strike Has a Huge Problem: Pensions

Washington Examiner January 18, 2019
Public SectorPension ReformThe Role of Unions
EducationPre K-12

Los Angeles’ 31,000 teachers are finishing up their first week on strike with no end in sight. This is in spite of the fact that both the teachers’ union and the school district, the nation’s second-largest, want to spend more money. The sticking point is that the district can’t financially afford or legally spend as much as the union demands.

The United Teachers of Los Angeles and the Los Angeles Unified School District both want teachers to be paid more, class sizes to be reduced, and more support staff hired. But these items are expensive and run headlong into the fiscal wall created by big employee benefit promises to retirees. Pensions and retiree healthcare commitments now threaten the district with insolvency if it accedes to the union position.

In this respect, the LA teacher strike is just the latest and most prominent example of retirement costs "crowding out" other priorities in school districts and local governments around the country.

Rising legacy costs are at the root of many of the issues being contested by the strike. Since the district must spend more on promises to retirees, it can’t afford to spend as much on teachers and staff in the here and now.

The LA teacher strike is just the latest and most prominent example of retirement costs "crowding out" other priorities in school districts and local governments...

This is why LA teacher salaries, while high by national standards and middling by California standards, are modest considering the cost of living in LA. It explains why some class sizes are larger. It explains why many schools have had to operate with fewer nurses, librarians, and support staff.

Consider that state legislation to address underfunding at the California State Teachers’ Retirement System has forced employer contribution rates to steadily increase from 8.25 percent in 2013 to 19.1 percent next year.

Pension contribution rates are also rising for nonteaching employees who belong to the California Public Employees’ Retirement System. Meanwhile, retiree healthcare costs will rise from $306 million this year to $450 million in 2023 to address a $15.2 billion unfunded liability.

The result is that the compensation package for teachers and other district employees is back-loaded into retirement. Everyone gets less here and now, but those who spend their entire careers in the district are handsomely rewarded. For instance, the district pays roughly 18.5 percent of a teacher’s salary for retirement benefits.

As a result, Nat Malkus of the American Enterprise Institute forecasts that in just two years, district spending on retirement benefits will devour a third of its budget.

The problem is compounded by the fact that increasing salaries (the union asked for 6.5 percent raise plus back pay, and the district has offered a 6 percent raise) will drive pension liabilities even higher down the line.

To cap it off, every day of the strike is costing the district millions of dollars because California funds schools on the basis of daily student attendance.

In the face of these realities, the union says the district is bluffing and has the money. It points to some $2 billion in reserves the district has on hand. But spending down the reserves might be illegal and not pass muster with Los Angeles County Office of Education, which supervises school district finances.

At bottom, the fight in LA is about how money is being spent. The truth is that more money is and will be spent on California schools. It’s just that the money is going to pay past promises rather than current salaries, more staff, and resources for students.

That's an affliction that is hardly unique to Los Angeles or to California. To escape the legacy cost squeeze, the union is betting that the state will bail out the district if things don’t add up. Other school districts and local governments are hoping for the same.

All that said, whether all the new spending on LA’s schools will rebound to their improved performance, and better prospects for the 600,000 kids they serve, also remains to be seen.

This piece originally appeared at the Washington Examiner

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Daniel DiSalvo is a senior fellow at the Manhattan Institute, an associate professor of political science at the City College Of New York (CUNY), and author of Government Against Itself: Public Union Power and Its Consequences (2015). Follow him on Twitter here.

Photo by David McNew / Getty Images
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