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Ballooning pension costs mean LAUSD and other California school districts are headed for cuts, Stanford study says

Sarah Favot | October 12, 2017

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Source: Stanford Institute for Economic Policy Research

Pension payouts are growing so fast that California’s school districts are being forced to lay off staff and close schools, a Stanford professor and author of a new study says.

LA Unified will have to cut spending by about 3 percent in 12 years in order to pay for the ballooning cost of its retirees’ pensions, according to the study. And it’s not alone. School districts, municipalities, and the state will have to contribute more to their retired employees’ pensions, which are “crowding out” money spent on services like teachers, librarians, and healthcare workers, former Democratic Assemblyman Joe Nation found in the recently released 200-page report called “Pension Math: Public Pension Spending and Service Crowd Out in California, 2003-2030.” Nation is a professor of public policy at Stanford University.

“Pension costs have crowded out and will likely to continue to crowd out resources needed for public assistance, welfare, recreation and libraries, health, public works, other social services, and in some cases, public safety,” Nation wrote.

In an interview, Nation said some school districts have started cutting back spending already by closing and consolidating schools, trimming programs, and not filling vacant positions.

“If 85 or 80 percent of their expenditures are on people, it’s hard to do anything but cut that largest share of the pie. That’s the challenge that they have,” he said.

LA Unified was one of the three school districts Nation studied in his report. The others were Mill Valley in a wealthy area of Marin County and Visalia Unified, a high-poverty community in the Central Valley.

By 2029-30, Nation estimates that 12 percent to 13 percent of LA Unified’s operating budget will be spent on pensions.

But LA Unified’s own projections show that by 2031-32, 22.4 percent of available funds will be spent on pensions.

Nation noted that about 6 percent of the district’s 2002-03 operating budget — $320 million — was spent on pensions. This year the district spent nearly 9 percent of its $7.5 billion budget on pensions, or $613 million. Nation projects that cost will rise to $1.3 billion by 2029-30.

Nation said other than layoffs and shutting schools, school districts just don’t have much control over how they can pay down the pension debt. That’s because school districts are funded by the state based on a set formula, and their pension contribution rates for CalSTRS, which covers retired teachers, and CalPERS, which covers other retired public employees, are set by the Legislature.

“The conclusion is that LA Unified looks like others out there,” Nation said. He said it’s not a good news or bad news story. “This is a challenge story for everybody across the state.”

Nation said its unclear how much state funding will grow — especially if there is another recession, as Gov. Jerry Brown has warned.

“The real danger for school districts is that if we have some kind of recession … then those schools will face reductions in state support at the same time they’re going to have to increase those pension contributions. That’s a real danger.”

Nation’s analysis did not include retiree healthcare benefits, known as Other Postemployment Benefits. School districts have more control over which healthcare benefits they will offer and how they will pay for them. LA Unified, which offers one of the most generous healthcare benefits packages in the state for its retirees, has opted to not set money aside to pay for this. It is estimated LA Unified has an unfunded liability of $13.6 billion. Healthcare benefits are part of the current negotiations with LA’s teachers union, UTLA.

At a study session on the district’s budget in August, LA Unified’s financial team explained to the school board that by 2031-32, nearly half of LA Unified’s budget will be spent on retirees’ healthcare and pensions.

Source: LA Unified

Nation said LA Unified officials should be vocal advocates with the state Legislature to allow the district to have some flexibility.

“If I were a business officer at LAUSD, I would be very active with CalSTRS and CalPERS. I would push them to allow me to exercise other options that would reduce my ongoing liabilities.”

This story has been updated to clarify contribution rates for CalSTRS and CalPERS are set by the Legislature.

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