How much money is enough, Mr. Von Korff

During the shutdown, I wrote furiously to legislators and the Governor, urging them them to provide more revenues to education.    I appreciate the careful consideration given to these letters and emails by many, of course.  But near the end, one of the key legislators in the education fray wrote, as if frustrated with my pleas, "Mr. Von Korff, how much of an increase would be enough."   It felt as though I was being told, no matter how much we send you, it's never enough?  

My answer is more complicated than the legislators want to hear.     My answer is that the amount of money we need depends a lot on the legislators themselves.  One of the great problems in St. Paul and Washington, D.C. is that legislators don't seem to make a connection between the policy bills and mandates  they pass and the answer to the question "how much is enough."   Over the last ten years, the governor's office and the legislature has piled on new responsibilities and mandates for local school districts.   And, the State has created a costly structure of labor policies, benefits, licensing, and prohibitions that together speak loudly:  "let's make public education more expensive in Minnesota."   Many of these policies have good reasons behind them, but St. Paul doesn't have enough discipline and policy coherence to cost out these policies and connect them to revenues.

In the last decade, total special education costs in the State of Minnesota has skyrocketed.    These costs are driven by intentional, and well-meaning,  policies in the executive and legislative branch designed to provide more and more services, and more costly services, in special education.    But never do these policies come with money needed to pay for the new policies attached to them.   Nobody estimates the implementation costs, let alone, passes funding legislation.   The result has been that the annual deficit in special education in Minnesota, the difference between total spending and total revenues for special education, has risen from about $350 million per year to about $740 million projected for 2013.
 

This year, the Republicans tried to dial back the amount of revenues provided to special education, but they refused to advance legislation that would help local districts reduces special education costs.   And so I say to the esteemed legislative leadership:   "The answer to your question, how much is enough, is partly in your hands.  In St. Cloud, we are doing everything we can -- everything the law allows -- to keep our costs down, and the deficit in special education funding  has risen from $5 million to about $9 million."  We'd like the State to wipe out our special education deficit.   We need legislative authority to control costs.   And, we need the legislature to fund what it forces us to spend.

This year, advocates for school districts urged the legislature to repeal the bargaining penalty, which penalizes districts and taxpayers if their school board refuses to increase labor costs faster than state revenues rise.     If the bargaining penalty repeal is one of those policy items that Dayton forces the legislature to remove from the education bill, that will substantially increase the cost of public education next year, because many school boards simply will not risk paying that penalty, even if they have to pay out higher labor costs many times greater than the penalty itself. If the legislature wants to penalize local districts that refuse to increase compensation more than they can afford, then it ought to have the courage to pay the cost of that policy.   

Last year, the legislature raised the assessments against school districts for state employee retirement benefits, an assessment that will increase our costs by $1 million over the next four years here in St. Cloud.  But not a dime of revenues was provided to cover these increases.  

These are three examples of the connection between what folks in St. Paul do on the policy side and the cost of education.   One of the remarkable facts of state governance is that our state legislature writes policy bills and school financing bills virtually without making any serious effort to hold hearings on the answer to the question that the legislator asked me:  "how much should it cost to deliver the education we need in Minnesota."    Some time look at the hearing schedule of the education committees.  You will see precious little on the hearing schedule seeking to answer this fundamental question.

This year, the Governor convened a committee to discuss education finance reform.   But the committee didn't study what public education should cost, it studied possible changes in who gets the money we already have.   The question of what it costs to do what the legislature requires was basically removed from the table.   Nobody wants to know the answer any more, because frankly, they already know that the answer they get won't be popular.  The State of Minnesota is forcing school districts to spend 1.5 billion per biennium more in special education alone than total federal and state revenues combined.    If we tried to solve this problem by reducing the mandate, a long line of advocates for the disabled would, understandably, descend on the State Capitol and demand protection of these important initiatives.  If we tried to solve this problem by increasing revenues, a group of legislators would say that they promised the tea party crowd that they won't raise taxes.   Its easy to keep the no new taxes pledge if you wash your hands of the real problem: providing revenues to fund the good things that you want to take credit for.

Minnesota's school finance "system" is no longer a system. It consists of a set of mandates and policy prohibitions completely disconnected from costs and revenues.   It is symptomatic of this total disconnect between the cost of programs and the revenues that we collect, that school districts have now become the official banker for the State of Minnesota, essentially lending the State billions of dollars to do what the Constitution was designed to prohibit:  to spend more than we collect in revenues.

Exploding State Health Care Costs Threaten K-12 Education

This is a great time to share ones increasing concern that our national and state leaders are failing to develop a sound strategy to prevent rising state health care costs from destroying the nation's public school system. This week the media has appropriately turned its attention upon the crisis in medical costs that is creating financial chaos in state budgets across the country. State Governors from both parties have been urging the Congress and President to do something before the growing costs in the medical assistance program forces significant shifts in state budgetary priorities. According to theWashington Post, medical assistance programs overall costs are predicted to increase by nearly 7 percent in fiscal 2010, and the states' share of Medicaid spending is projected to increase nationally by $25 billion in 2011. At the same time, in Minnesota, a group of health care providers, calling itself Minnesota's Health Care Imperative has issued a report urging the governor and legislature to address the emerging health care financial crisis.

We've been warned in Minnesota that this crisis was upon us. The bipartisan 2009 budget trends commission reported:

Growing at an average annual rate of 8.5 percent, state payments for direct health care services are the fastest growing segment of the state’s budget and consume a greater share of available resources each year. State health care programs face many of the same cost pressures that exist in the private health care market, including medical inflation and increased utilization of services spurred in large part by the development of new medical technologies, services, and pharmaceuticals to treat illnesses. In addition, because eligibility criteria for state health care programs are specified in statute, the state accommodates higher enrollment whenever the number of persons eligible for care increase (for example, when the economy weakens).

Minnesota has much to be proud of in its health care system. According to the Kaiser Family foundation that partly results from the fact that we have 13 percent living in poverty, as compared to national average of 20 percent. Whatever the cause, our rate of uninsured is 9% as compared to the 17% national average and only 6% of our children are uninsured, as opposed to 10% national average.

But we face some huge challenges as recently reported by Minnesota's Health Care Imperative, issued by Minnesota health care providers. Minnesota's average cost per medical assistance is the fourth-highest in the United States (behind NJ, NY and RI) and is 49 percent higher than the national average. "Disabled and elderly patients consume the vast majority of resources, while children require the least support both nationally and within Minnesota. The disproportion is made the more striking when we realize that children account for roughly half of Medicaid enrollment. Per-enrollee spending on the elderly and disabled can be 6 to 9 times higher than on children."

Minnesota's spending on the disabled is 77% higher than national average. Our spending rate on the elderly is 28% higher than the national average. Other adults 18% and children 27% higher than the national average. Minnesota's Health and Human Services budget is projected to grow by 28 percent from 2010 to 2012. ... Minnesotans utilize health care at a rate significantly above benchmarks. In many areas of the state, Medicaid is significantly more “generous” than in other states, particularly for certain populations such as the disabled who have more options in Minnesota than elsewhere. While Minnesota’s Medicaid-covered population rate is somewhat lower than average, our spend per covered enrollee, according to available data, is significantly higher

In addition, federal stimulus dollars have artificially and temporarily supported a higher rate of spending than we can sustain without significant new revenues. In 2010, the federal government covered 57% of medical assistance spending, but that support will drop to to 50% in 2012.

This crisis did not come upon us suddenly. In 1995, the office of Minnesota planning, in a report called "Within our Means," warned of an impending demographic crisis and budgetary crisis that would occur in 2010 when the baby boom generation reached 65. The report explained that State revenues were artificially and temporarily high as result of the high rate of growth during the then Clinton Presidency, and that the State was spending at a pace that was not sustainable over long term trends. The report warned:

“If there is a time to solve the state’s fiscal problems, it is now. The economy has been strong. The percentage of Minnesotans of working age is still growing and will reach an all-time high in 2010, before beginning a long-term decline. Over the next 15 years, the combined proportion of children and elderly — the age groups most dependent on support from others — will be less than at any time since 1950. From now to the year 2010, the state will have a maximum percentage of people in their peak earning years. After 2010, solutions will be more difficult, as the percentage of Minnesotans of working age begins to decline.”

Fourteen years later, the 2009 Budget Trends Commission page 3, reported "Unfortunately, as a consequence of the relative strength of Minnesota’s economy throughout the late 1990s, this call for action was fundamentally ignored." The legislature and governor treated Minnesota's surplus as if it were permanent. They implemented significant structural downward adjustments in taxes while permitting structural upward adjustments in spending.

The basic problem is that we now face a rising dependency ratio, the ratio of persons who are dependent on others as compared to the persons who are economically productive, and thus are capable of supporting the dependent -- children, disabled adults and retired seniors. As this dependency ratio increases, it will become more and more important for the persons in the work force to be productive. They will have to be better educated, equipped with technology that make them more productive, and capable of using their education to utilize technology. While the dependency ratio is starting to rise, the number of children is actually growing. Over the next twenty years, the number of children in schools will grow. That growth will simply be outpaced by growth in the number of dependent seniors. If we allow health care to drive down our investments in education, we will ensure emergence of a catastrophic crisis a generation hence.

The only long term strategy that makes sense, then, is to assure that investments in education remain strong, and of course, to assure that these investments are efficiently and wisely used.

Unfunded Step Pay System Will Destroy Public Education

I've been running a series on cost drivers in public education. On Sunday, I finished a series of posts on health insurance costs. I argued that the skyrocketing cost of health care costs, and especially health insurance, makes it impossible for public education to stay sustainable, if school districts attempt to hold employees, or even some of them, from increased health insurance premium increases.

Today, I want to post about another cost driver that deserves careful review -- the system of step increases which reward education professionals for longevity of service. The step system is part of what is known as the "single salary schedule," which rewards all teachers the same, based upon longevity (steps) and training (lanes).

The system of step increases, and the single salary schedule system of which it is a part, permeates public education across the country. When introduced, it was designed to address some major issues with previous compensation systems. Proponents believed that it would prevent gender inequities that had previously existed in public education. In some states and some districts, there was a perception as well that without a pay schedule, raises might be distributed as a form of patronage, distributing the best pay increase to the friends or favorites of school leadership. Without a systematic pay system, there is always a danger in a politically driven system that pay will not be distributed based on merit, but rather on political support inside or outside the organization. Also, proponents of step-based pay schedules believed that a fixed schedule would attract more qualified persons to the profession. Since teacher pay had been historically low as compared to some other professions, the idea of a moral commitment to regular pay increases found in a schedule might keep teachers from leaving education.

Debate about the single salary schedule, and especially steps, has two aspects, a policy aspect and a financial aspect. The single salary schedule has been under increasing attack on many fronts, these days. For example, a report "Teacher Compensation and Teacher Quality," by the Committee on Economic Development argues that:

The so-called “single salary schedule” which structures how most teachers are paid is too rigid, resulting in perennial shortages of teachers in some subjects. It rewards teacher characteristics (years of experience and academic credentials) that are not strongly linked to student learning, and it ignores measures of teacher effectiveness in the classroom. Recent research documents how teacher resources are misallocated across schools (to the detriment of the most at-risk students), a misallocation that results in part from the lack of monetary incentives for teachers to take on the toughest assignments.

Today's post, however doesn't take a stand on these pay- policy issues. I want instead to take a look at the arithmetic of steps, and how that relates to the structural issues that confront us in school finance. Is the State of Minnesota providing sufficient revenue to sustain step-based salary schedules across the State? If not, is it realistic for legislators to wish away or will away the step system by starving it to death economically? If the step system disappeared, is it realistic to believe that what replaces it would really be any cheaper, and if it were cheaper, would that be a good thing in the long run?

The arithmetic of steps works just fine, when the State provides enough money to school districts to cover the cost of two years worth of step increases, any health insurance cost increases absorbed by the district, plus some salary schedule improvement to provide increases to teachers who earn no step increase because no step movement is provided at their position on the salary schedule. But when state funding increases are not sufficient to do that, the step structure can lead to friction between labor and management, and often to significant reductions in programs, increases in class size, or other financial retrenchments. For this reason, its important for policy makers to understand the arithmetic of the step system as it exists in Minnesota school districts.

Before I do that, however, I want to pause to point out that this issue of labor costs is not the most significant financial challenge that faces school districts. I say this, because my posts are discussing labor costs arithmetic right now, and I don't want to leave the wrong impression. By far the greatest financial challenge that is driving school districts towards financial destruction is the bankrupt special education funding system. In FY 1999 and 2000, the difference between state mandated special education spending and revenues to pay for that spending was about 350 million per year. The Department of Education is projecting that based on current trends, that difference--that shortfall in funding for mandated spending compared to state and federally provided revenues--will rise to over $700 million per year by FY 2013, or $1.4 billion for the biennium that begins with 2013. During that same period, total state and federal mandated special education spending in the state of Minnesota (not counting the $5000 in regular funding provided for all students, including students with disabilities) will more than double to two-billion dollars. Yet to date, no Republican nor Democrat has introduced any legislation designed to address this problem, nor has the Dayton administration even mentioned it as a problem. If this unfunded mandate were funded, many school districts across the state, including our own, could eliminate their operating referenda completely, and actually be better off. So let's not lose site of a sense of proportionality. I'm talking about steps today, but the elephant in the room, is the mandate-deficit that nobody wants to fix.

So with that sermon, back to the arithmetic of the step system. Here is a short summary of the issues that confront us when revenue increases from the State are non-existent or at the low end.

In the years that the State fails to provide adequate revenues to fund step increases, financial chaos results.

Step systems still create a class of employees who receive no increases from the single salary schedule: Under almost all step systems there are employees who are at a step level that doesn't provide an increase. In our own school district here in St. Cloud, almost half of the steps on our grid provide for no salary increase. The step movement is concentrated in the first 7 or 8 years of longevity, and in the following years, there are numerous years in which an employee receives no step increase. The total cost of step increases is relatively high, but not all employees receive the benefit of that cost. As a result, at bargaining time, there is tremendous pressure on the labor representatives of teacher to provide step increases plus an upward increase in the entire salary schedule so that all members receive some form of increase.

The number of "empty steps" and their distribution varies from district to district. In some districts most, or all, teachers in the range of steps (that is 12, 20 or more) get step increases, but the amount of any one step increase may be reduced because there are more steps to pay. The amount of the step increase in some districts may be higher at some steps than others. In the St. Cloud District, our first 7 or 8 steps are all filled in. But in later years, there are a number of "empty steps" where the teacher receives no step increase at all. The District's cost of the first 7 or 8 steps is much higher, then, than the following years, because the schedule is designed to move teachers rapidly upward at the beginning, meaning that there is less step money available in later years.

Step systems create a perceived automatic cost increase that suggest to employees that when management delivers only step increases, employees have experienced a pay freeze. This freeze, which is called a soft-freeze, denies many employees a pay increase, because they are in a step free zone of the pay schedule, as I stated above. Employees perceive the step increase as nothing more than what they were expecting all along, and they have a great deal of difficulty understanding why the District is suffering financially when they personally did not get a raise.

In some school districts, step increases occur after the contract term is complete, during bargaining. If the State has not provided sufficient funds to pay those step increases, the district is losing money even before bargaining has begun.

Minnesota legislators and the governor need to come to grips with the arithmetic of step increases. They should begin by getting financial information on the actual cost of the system as it exists in Minnesota. They would be fooling themselves to think that step increases are going to disappear as if by magic and that somehow raises are just going to go away permanently, without an adequate replacement. But if legislators refuse to fund the cost of step increases, and if school districts continue to pay them, public education is destined to die a slow and painful death.

Excess Cost-Aid proration
Lane Improvement Costs
Increased TRA Costs Imposed on Districts
Health insurance, Part I
Health insurance, Part II
Health Insurance, Part III

Bridging the Communication Gap on Employer Provided Insurance

I've been writing a series on the cost drivers in public education. I took a detour, however, over the last few posts to discuss SF 0056, the hard freeze bill being considered by the Minnesota Senate. Now, I want to return to the health insurance topic, where I left off. Before I get to the meat of the topic, however, I'd like to put the issue in context. As we discuss the cost of employer provided benefits in public education, one finds a tremendous communication gap in how we look at employer provided health insurance, depending in part on whether we have it at all, or whether we pay for it directly out of our wages.

The development of our nation's employer-based health insurance system may be traced to the period of 1929 through 1955. Between 1940 and 1950, the number of Americans with private health insurance increased from 20.6 million to 142.3 million. During this time, it became increasingly common for school districts to provide full health insurance coverage for teachers, but in doing that, they were adopting practices common amongst private employers of that day. Teachers entering the profession became accustomed to the idea that one of the financial benefits of becoming a teacher would be health insurance provided entirely at the cost of their school district. It is foolish to blame them for this expectation. They entered a profession that professed to provide strong health insurance coverage as a key component of compensation.

School boards recognized that they could provide this benefit at a reasonable cost, a benefit that was, and is, completely tax sheltered. Some districts may have felt, as well, that they could provide a deserved benefit that would not be added to the publicly discussed teacher salary. We cannot enter the public policy discussion about health benefits for professional educators without giving this fact its due: if you became a teacher thirty years ago, everyone understood that part of what you were receiving in your profession was high quality health insurance.

However, in recent decades, health insurance premium costs began to rise significantly. As health costs, and the cost of employer provided insurance rose, employers began to feel that they had to cost-share with their employees. That created equity issues among employees with families and families. Single covered workers argued that they should not have to cost-share as to premiums, because they do the same job as their family-covered peers. Why should they receive a benefit worth less, or costing less? And that explains why, in many public and private employer plans, the employer provides free single coverage, but requires its family covered employees to cost share.

The reasons that health insurance premiums have been increasing are quite complex, but one of the major cost drivers is that health care is growing significantly as a share of the private and public budget. This growth in the percentage of what we all spend on health care has challenged public and private employer's ability to provide the same coverage, as before at least without making corresponding reductions in wages or salary. Here's a chart I took off of a New York Times article from a couple of years ago. As the table show, health care costs in the United States have been mushrooming since 1970. This growth trend continued apace after 2004.

Percentage of Gross Domestic Product Spent on Health Care

	1970	2004
US	7%	15.3%
Canada	7%	9.9%
Germany	6.2%	10.6%
United Kingdom	4.5%	8.1%

The cost of health insurance premiums has consequently grown way faster than other parts of the family budget. From 1988 to 2004, health insurance premiums rose at about 11 percent per year, many times higher than the rate of inflation. Employers, many of them, responded by restricting coverage, raising co-payments, imposing larger and larger premium cost-sharing, or in some cases eliminating coverage altogether. However, high quality coverage remains a standard benefit for education professionals and other public employees. I'm not writing about something my readers don't understand, of course. We are all living through the cost challenges of the health care system.

Now this provision of health insurance to public employees creates tension and jealousy when we discuss the compensation for education professionals. I often hear from constituents who think that public employees get special treatment. Partly, that's because there is a large-employer small employer divide in the provision of health insurance that the average citizen doesn't usually understand. See Rand Corporation Report. According to the Rand Corporation in 2004, about 2/3 of American companies offered insurance to their employees, but the size of the employer is a major factor in whether insurance is provided. Only about 24% of companies with 50 or fewer employees provided group health insurance, whereas most companies with greater than 50 employees did provide that coverage. Partly, it reflects the ability of public employees to protect themselves more effectively because they are organized. Partly, it reflects a shared belief that there was an unwritten understanding that quality health insurance was one of the compensating benefits for accepting the challenges of the teaching profession.

If we are going to have a realistic policy discussion about the challenges that face us in public education finance, and if we are to bridge the communication gap, we must ever keep in mind the clash between the rising cost of health care, on the one hand, and the expectation in the profession that protection against those costs was a part of the employment covenant. I'll discuss more about this in the next post.

Pay Freeze is not about whether teachers are overpaid--its about fiscal sanity

The other day, I had a discussion with two colleagues regarding Senate File 0056, which freezes public school employee salary and benefits for the next two years. My two colleagues began to argue. The first said that the bill is insulting to teachers, because teachers are underpaid. The second said that the bill is necessary, and that teachers are paid pretty well, considering the financial condition of school districts. The first said that without the right to strike, teachers would fall vastly further behind financially and that suspending the right to strike, or freezing wages is unthinkable. As we talked, my two friends kept coming back to the debate over whether teachers are getting paid enough, or whether they are paid too much.

I look at this issue quite differently. I don't think that teachers are overpaid, but I support the freeze, because it puts children first. I think that teachers provide as much value every day, and more, as do certainly lawyers, stock brokers or, say, actuaries and accountants. This question, in my mind has nothing to do with whether teachers are overpaid, or underpaid. Its about whether we should increase their pay when our revenues aren't increasing. Its about whether public education can survive, if we continually fund teacher pay increases by making program cuts.

The education finance system in Minnesota is fundamentally broken. Some of you say, well that is because the State hasn't increased funding enough. But that is only half-right. To fix our education finance system, we need a reliable source of revenue, without ever-growing unfunded mandates, true, but we also need the ability to control costs so that they balance with revenues. The evidence shows that when the State increases school funding significantly, school employee compensation goes up far faster. When Pawlenty and the legislature increased the funding formula by 8 percent, that is 4 percent per year, all over the State of Minnesota, school districts were increasing compensation at a far higher rate. When Pawlenty and the legislature increased the general funding formula by 3 percent (two percent and one percent) all over the State, school districts were increasing compensation and a significantly higher rate. And, during the last two years, when funding was frozen, school districts still granted substantial increases in compensation. Surely, it must be clear, that this is the road to permanent financial ruin.

The truth of the matter is that our school bargaining system is so out of whack, that school districts are making cuts to fund compensation increases when the legislature provides exceptionally large increases, and they are making cuts to fund compensation increases when they receive no revenue increases at all. Some folks say this is about local control, but its not. Its about a dysfunctional system in which the entire education community across the State has lost the capacity to balance school district budgets. To fix this problem, I believe, we need to take a time out, freeze pay, examine how we got here, and how we are going to bring the school finance system in balance. The outcome of a repaired system will not disregard the need to pay teachers well. If it ignored that requirement, it would still be fundamentally broken.

The system is so far broken, that the public education community has lost the ability even openly to discuss the true nature of our problems. We readily discuss the lack of revenue, the unfunded mandates, the forced spending on special education and other programs that exceeds the revenues provided by the State. That is an important part of the financial catastrophe that is Minnesota's school finance system. But we refuse to talk openly about the other part of the problem, which is compensation increases that persistently outpace our revenues. We need a time out to take a deep breath, look at what we have been doing across the State, and fix this problem systemically.

The public education community has adopted a number of devices to deceive ourselves as to the true extent of the financial imbalance in our system. One subtle deception is that school advocates have invented a special inflation measure, called the "price of government" index. The price of government index measures the inflation in government costs--primarily the increase in government employee compensation. According to the advocates of this measure, we should not measure our cost increases by looking at the traditional CPI --Consumer Price Index. Instead, we are supposed to use the price of government index, which shows that the State is not increasing our revenues as fast as the price of government. But this is just another way of saying that we are raising compensation costs faster than the true rate of inflation.

Another device we have begun to use to deceive ourselves in Minnesota, is to change the way that we measure the calculated percentage increase in our compensation packages. Several years ago, the Minnesota School Boards Association changed the way that these percentages are calculated to make the cost increase lower than it really was. Under the new formula, if you divide the new compensation cost by the original compensation cost, the true percentage increase is higher than the percentage that the MSBA reports. When you systemically understate increase costs in this way, how can you even come to grips with the causes of your financial problems?

Many school districts have taken to separating the cuts that they make from their settlements. One way of doing this is to cut lots of teachers in April, but say that many will be called back in September. Then, in between April and September, if the school district settles its contract for more than it can afford, it isn't as clear to the public why half of the teachers "temporarily" laid off never came back. In this way, nobody ever focuses on the amount of the cuts that are coming from compensation increases, and the amount that are coming from revenue shortfalls. And, in the last four years of the Pawlenty administration, there has been a whole lot of both: compensation increases beyond our means, and a gross insufficiency in state revenue increases to cover our legitimate increasing costs. The two together, a lack of proportion in compensation costs, and a failure to provide reasonable funding increases, have combined to throw school districts into financial chaos.

As we discuss these issues, and try to confront them head on, we simply cannot solve them by pretending the issue is whether teachers are overpaid or underpaid. Teachers are not overpaid in my opinion, but that's not the issue. The issue is whether the industry that funds their paychecks, public education, can survive if it is constantly making cuts, year after year, to fund compensation increases that it cannot afford. Teachers earn their pay. Administrators earn their pay. Their work is hard, and they work dang hard. People who think that this issue is about whether public educators are overpaid are just plain wrong. The issue is about running public education based on simple principles of financial sustainability. If we want to pay our employees more, and I believe that is a good thing to do, then we cannot accomplish it by cutting school libraries, eviscerating our textbook supplies, cutting needed programs and raising class size. Once you go down that road, the cutting never ends, and the compensation problems never get solved. The more cuts you make, the less the public wants to support their schools.

If we want the legislature to fund public education adequately, I believe we must begin by creating a structure that assures long term financial stability in the balance between costs and revenues. The proposed pay freeze gives us a needed time out, a reprieve, during which we can all work together to put public education on a new path to sustainability.

Some people argue that, well, the governor must veto a pay freeze, out of loyalty to labor. That would be a tragedy for the Governor, for public education, and for children. If public education goes through another four years, like the last four years, we will be on the brink of moral and fiscal bankruptcy. Whoever allows the cycle of crippling cuts to continue, is going to carry as well the political price of being responsible for school closing, increasing class sizes, massive teacher and staff layoffs, and a reduction in educational quality. The Governor would be better off to stick to his guns on revenues, and insist that education receive sufficient funding, and buy that adequate funding, by signing a the proposed pay freeze. That's what both parties will do, if they put children first.

Who should foot the multi-million dollar bill for increased public pension contributions?

This year, the legislature increased the rate of local school districts' contributions for public employee pension plans by one-half percent of compensation for each of the next four years. In our district, that represents an increase of $250,000, each year, until in four years, our new unfunded pension contribution costs will reach $1,000,000. Where should this money come from? When I discuss this issue, I'm amazed that almost everyone has a visceral answer to this question, as if it were simple. The state increased the rate of the District's contribution, so logically, the District should pay the contribution, right?

The problem is that the District doesn't have a printing press for money. So, saying that the District should pay, doesn't really help at all. When the State of Minnesota increases a mandated spending level for the District, there are several choices:

• (a) the increased cost could be paid by the children of parents who send them to public school, in the form of reduced programs--increased class sizes, lower textbook budgets, or other reductions,
  
• (b) the increased cost could be factored into our compensation budget: the District could say, look, we only have so much money for compensation costs, if we have to raise our spending here, we have to lower it there, so the employees indirectly pay the cost of their pensions. This is generally how we handle all compensation costs. In times when TRA contribution costs go down, it frees up more money for other forms of compensation; in times when they go up, it reduces our ability to pay other compensation costs;
  
• (c) the increased cost could be paid by a local levy (if the State were to give us one), and absorbed by the local taxpayers in a locally imposed property tax, and
  
• (d) the State could provide increased revenues out of the State general fund, on the theory that, by golly, if the State is going to make us spend more for a State managed retirement program, then the payments are a state obligation, and should be paid out of state revenues.

I have to begin by saying that my view is that it makes absolutely no sense for the cost of a state pension plan to be carried by children in schools. This question, as unpleasant as it may be, is going to repeat itself over and over again, in the next quarter century. Our current pension obligations, especially in the public arena, haven't taken the change in the dependency ratio into account. As more and more of us retire, in comparison to the number of productive workers, we are going to have to decide again and again, whether we pay the cost of increased dependency by reducing our investment in children. This is something I touched on in a prior post.

I think its worth pausing, before we answer the question "who should pay," to look at the genesis of public pension plans for educators and other public employees.

Public pension programs in Minnesota are close to a century old, and they thus predate federal social security. You can find a history of the teachers retirement fund on the web by clicking here. TRA history you will find at this link begins with this entry:

A precursor to TRA was established in 1915, as the first statewide plan providing retirement benefits for Minnesota public school teachers. Both St Paul and Minneapolis had established City teacher retirement funds in 1909. Contributions to the 1915 fund were $5 to $10 per year, with benefits of around $100 paid per month. The minimum vesting requirement for a monthly benefit was 20 years, with no minimum age requirement. The 1915 Fund, also referred to as the Pioneer Teachers Retirement Fund, was liquidated during the Great Depression but payment of prorated benefits continued from the State General Fund.

Several of the employee retirement funds were locally created, by cities or local school districts. But the largest of our retirement funds were created by the State: the payment rules are set by the state; the investments are managed by the State; the rates of contributions are managed by the State, and the State takes responsibility to monitor and audit the investments and payments to make sure that the payments and contributions are managed effectively. The obligation--the actual legal responsibility to pay lies with the State of Minnesota. The St. Cloud School District has not promised to pay its employees a pension: the promise is made, and the benefits set, by the State of Minnesota.

When the social security act was first passed, it did not include State or local employees. Social security is a form of modified "defined benefit" plan which is designed to pay a benefit that is based on earnings history. (Social security differs from a true defined benefit plan, because the promise to pay the defined benefit is not based upon a contract with the government, but rather upon a legislative promise.) Social security imposes a tax on the employer and on the employee: the funds, however, go into the government treasury, with a separate accounting, called a trust fund, but is not really a trust fund. The money is not held in trust; it is not separately invested; there is no lock-box filled with bonds and treasury bills representing the social security trust.

Because social security is funded by taxes on employer and employee, the authors of the social security act were, at first, reluctant to require that state and local employees would be subject to mandatory coverage: one primary reason was a constitutional concern, that the federal government might not have the power to impose taxes on governmental employers, and that concern has raised special issues as to federal taxation of the State itself, as opposed to local entities. If school district and local government employees were going to have a retirement fund, then, states or local districts would have to take the responsibility. Back in the days when social security was first founded, teachers salaries were pretty minimal, and without State pensions, it would have been pretty difficult to attract qualified people into the profession.

However, eventually, states and the federal government came to an accommodation which would allow states to put their employees into social security program with consent of the State itself. But the existing state programs had significantly different benefits rules, and so they had to find some way to get the two programs to work together. The result in Minnesota was a coordination of benefits agreement which put teachers in social security and in TRA, but created a complex set of offsets to prevent duplication of benefits.

The Social Security Administration's website says:

Most employees have Social Security protection because their states and the Social Security Administration entered into special agreements called “Section 218 agreements.” Others are covered by a federal law passed in July 1991 when Social Security was extended to state and local employees who were not covered by an agreement and were not members of their agency’s public pension system.

The result of these changes in social security were to make coverage available to state and local public employees, as I have said. Minnesota eventually entered into the coordinated system which makes teachers part of the social security system and the TRA or PERA retirement systems, with the benefits and contributions "coordinated" in a way that is designed to prevent double coverage. The way in which the two systems work together, in terms of contributions, benefits, and retirement or disability eligibility is a topic I'm not at all qualified to explain.

Now TRA is a defined benefit plan, but the contributions are place in a real trust fund, and the money held by the fund is invested in bonds or other market instruments by the State Board of Investment. For some detailed information about the system, you can click here.

Now when I talk to business folks about TRA, one of the first things they want to tell me is that the business world has moved away from defined benefit plans. Most of us in the private sector, they say, have pensions that promise only to pay the actual return on the funds that have actually been invested in our 401(k), IRA, or other account. But that is not entirely correct, is it, because folks in the private employment system have social security, which is, after all, a defined benefit plan. The real difference is the supplemental part--the part beyond social security, and there we have a substantial difference, for sure. When your 401(K) takes a loss, you take the loss, not the government or your employer. If your funds were invested unwisely, you can be wiped out, even.

The advantage of a defined benefit plan like the TRA or PERA is the definite security of a promised benefit, but that security is also its biggest problem from a public policy standpoint. With a defined benefit plan it is really impossible to predict that the money invested in the trust fund will produce a rate of return sufficient to produce the promised benefits. If the funds are invested aggressively, they can realize an excellent return in good times, but the fund can take a huge loss in really bad times. So the essence of a State defined benefit retirement fund is that the State makes a promise to pay a fixed pension on retirement, provided that the employee earns enough years of service. That means that it is possible that the earnings of the investments in the trust fund may be insufficient to cover the total of the promised benefits accruing in a particular year.

After the huge market declines that occurred in 2007-2008, the State's defined benefit plans were adjudged actuarially insufficient to provide the benefits that were to accrue in the future. We can grouse and sputter and complain about that fact, but its a fact nonetheless. After a great deal of controversy, the governor and legislature responded last year by increasing the rate of contribution at the rate of 1/2 percent of compensation each year for both employers and employees. But, as usual, the State made no provision in funding for local districts to cover the increased cost.

Hence my question--who should have to pay the shortfall?

The answer, in my view, is that the State of Minnesota created the obligation--the State of Minnesota should have either solved the problem with reduced benefits (for non-vested participants) or it should have met its obligations out of the general fund. The decision to pass the problem along to local school districts was irresponsible, because it represented a significant new unfunded mandate. School districts don't have an extra pot of money, or extra revenue source,s to cover these increased contributions. And, the legislature provided no increased revenues to school districts in the general fund formula, and it created a larger deficit in special education. In my view, as difficult as it may be in these tough times, the legislature should step up to the plate and assume the increased costs, because it is the State of Minnesota's obligation.

Failing that, then we are left with the choice between taking the million dollars from children, through reduced programs or increased class size, or we can subtract it from the funds that we have available to compensate staff. Generally, when we calculate the revenues that we have available for staff compensation, we add salary plus the cost of benefits (including social security, health insurance and retirement costs). We charge all of those costs against total compensation. If we follow that course, then the increased TRA and PERA costs would indirectly result in reduction in the funds available for other forms of compensation. That's a painful solution, and its painful to discuss. But the other course, taking the money out of programs for children in school seems all the more painful.