In case it hasn’t already become clear, the challenges of the current 2016-2017 fiscal year are not the end of OUSD’s financial woes. Among the biggest of the looming issues: benefits and ballooning pension costs.
Robust benefits and the opportunity to participate in the State’s defined benefit pension systems can help OUSD attract talent and are an important investment in the people serving our children. Nevertheless, OUSD has limited resources – and expenditures for employee benefits come from the same pool of funds as base salaries and books. Over the next several years, increasing pension costs in particular will require increasingly difficult trade-offs, in part because of factors outside of OUSD’s control.
Current Expenditures on Benefits & Retirement
OUSD offers very generous health and welfare benefits. For example, OUSD pays the complete cost of health, dental, and vision insurance for the entire family of each employee. Compared to other similar districts, OUSD benefit costs are 50% more per full time equivalent employee. (See slide 110 of the ERS report from June 2016.)
Nearly all OUSD employees also participate in one of two state pension systems: California’s State Teachers Retirement System (CalSTRS) for teachers, principals, and others with a teaching credential, and California’s Public Employee Retirement System (CalPERS) for everyone else (e.g. buildings and grounds, noon duty staff, office administrative staff).
This school year, OUSD is contributing to 12.58% to CalSTRS and 13.89% to CalPERS for eligible employees. (Employees themselves also contribute a mandatory amount: 9.2% or 10.25% for CalSTRS depending on hire date, and 6% for CalPERS). This all adds up: in 2015-2016 OUSD spent $30.4 million total on contributions to CalSTRS and CalPERS – 6% of the General Fund.
What’s Coming [Cue Ominous Music]
Unfortunately, both CalSTRS and CalPERS don’t have enough funds to cover payments to future retirees. This is a result of years of overly optimistic projections on investment returns that have not materialized and show no signs of doing so soon. So, both have mandated that employers (such as school districts) steadily increase their contributions each year, to 19.5% for STRS and 28.2% for PERS by 2021. In other words, over a 10-year period, the district’s pension contributions rates will double.
For OUSD, this means that next year, at least $10 million more of the general fund will go to pensions. By 2021, if total salaries are the same as in 2015-2016, it will be a total of $26 million more than today – 11% of the general fund. If total salaries continue to go up, then the benefits contribution also goes up. And remember, the current year budget cuts aimed to reduce expenses by $11 million.
These required pension contributions will likely constrain the district from spending money on anything else, including field trips, classroom supplies, extra services for high-need students, technology, and raises, which is unfortunate because our teachers remain underpaid compared to the average across Alameda County school districts .
A Perfect Storm
CalSTRS and CalPERS contributions are climbing at precisely the same time that state funding is expected to plateau – a recipe for financial disaster for districts across the state. The recent California Schools magazine published by the California School Board Association had a piece on this issue with this sobering infographic:
Even wealthy districts like Piedmont are worried. Former Piedmont Unified School Board President Richard W. Raushenbush recently wrote a clear and compelling – but largely overlooked – opinion piece, published in the East Bay Times:
School districts spend about 60 percent of their budgets on teacher and staff compensation, so a 10 percent increase in retirement contributions means roughly 6 percent of the entire budget has to be reallocated from educating children to paying off underfunded pension plans.
Oakland is in an especially difficult position. David Crane, formerly with the California Governor’s Office, recently wrote a brutal analysis of San Jose, which has a “Positive” rating for its finances. In it, he notes:
Worse off are “Qualified” certification districts, which host more than 1 million students, including in LA, San Diego and Oakland. They expect they may not meet financial obligations for the current or next two fiscal years — and that’s after already shortchanging students and teachers.
In other words: this year’s budget cuts were just the beginning. Despite painful cuts this spring for both schools and central office, OUSD is expecting to dip into its state-required 2% reserve to end the 2016-2017 fiscal year in the black. To balance next year’s books, OUSD will need to cut enough to cover previously-committed salary raises, make the higher required pension contributions, AND restore the reserve.
Clearly, district leadership will need to make some tough decisions ASAP, including: restructuring central office and making better use of District facilities and assets. We also need to push for state-level changes that will help cities and students across California. These are some big rocks, and the only way they are going to move is if we push together.
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