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Robert M. Costrell

Robert M. Costrell, Josh McGee.

Our goal in this paper, presented at the 2020 Brookings Municipal Finance Conference, is to better understand teacher pension funding dynamics with a focus on sustainability and intergenerational equity.  The origin of this paper is our analysis of the funding policy recommended in a highly publicized paper first presented at the 2019 Brookings Municipal Finance Conference (Lenney, Lutz, and Sheiner, 2019a; 2019b).  That proposed policy aims to alleviate rising pension payments that crowd-out classroom expenditures and teacher salaries by abandoning the attempt to pay down pension debt.  While the problem of crowd-out is real, we show that, with uncertain investment returns, the recommended policy would carry significant risk of pension fund insolvency and a jump in contributions to the pay-go rate, which is much higher than current rates. We close by proposing a policy evaluation framework that better incorporates risk and the intertemporal tradeoffs between current contributions and likely future outcomes.  We illustrate throughout with data from the California Teachers Retirement System (CalSTRS).

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Robert M. Costrell.

It has long been argued that cash balance (CB) pension plans offer a more equitable distribution of benefits than traditional final-average-salary (FAS) plans for teachers, particularly between short-termers and career teachers.   However, it has also been understood that the impetus for reform would come from fiscal distress, rather than a concern for equity.  In this paper I examine how the nation’s first CB plan for teachers, in Kansas, adopted under such conditions, has played out for system costs, and the level and distribution of individual benefits, compared to the FAS plan it replaced.  My key findings are:  (1) employer-funded benefits were modestly reduced, despite the surface appearance of somewhat generous employer matches; (2) more importantly, the cost of the pension guarantee, which is off-the-books under standard actuarial accounting, was reduced quite substantially.  Thus, although much of the distributional benefit originally put forth did materialize, the primary gain for states considering reform may well be the reduction in the cost of risk-bearing.  Indeed, I argue that these results are intrinsically linked:  it is CB’s near-elimination of back-loading that simultaneously cuts the implicit cost of risk. 

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