The New York City Budget and the Great Recession: Education

During the Bloomberg Administration, no public service has received a greater increase in funding, received more attention, and been the source of more conflict than the New York City public schools.  As I noted in this post on Room Eight (down for the moment with technical difficulties), with spreadsheet attached, funding for the schools increased enormously from FY 2002, the last pre-Bloomberg budget, to FY 2008, just before the recession fully hit. 

http://www.r8ny.com/blog/larry_littlefield/census_bureau_education_finance_data_recent_trends.html

 That funding had also increased enormously from FY 1997, when the city’s share of state aid was at a low, to FY 2002 thanks to pressure from the Campaign for Fiscal Equity Lawsuit.  As a result the city’s schools, which had historically been underfunded, were highly funded on a per-student basis in FY2008 – and very highly funded if one looked at spending on instructional employees (ie. teachers) alone.

Since the start of the recession city spending has continued to grow faster than inflation, as discussed in the prior post.  Total spending by the Department of Education increased more than overall city spending during the FY 2008 to FY 2011 period, and less from FY 2011 to FY 2014, due mostly to the influence of the federal stimulus package and its expiration.  For the entire FY 2008 to FY 2014 period, if the Mayor’s budget proposal were adopted, overall city spending will have increased 20.7%, and inflation will have gone up 11.9%, but Department of Education spending will have grown by 23.6%.  More than average.  Personal Services spending, which excludes the fast growing Medicaid and debt service categories, will have gone up 11.8% overall, slightly less than inflation, and 12.1% for the Department of Education, slightly more.  But wages and salaries at the Department of Education, which affects how many teachers and other workers may be hired and how much they may be paid, would have actually fallen 2.5% from FY 2008 to FY 2014.  So why is that?

Well you don’t have to guess why if you read what I have written here since the start of 2008.   Let’s tally up the damage.  The State of New York passed major pension enrichments for public employees in 1995 and 2000, with many smaller ones in between, claiming that these could cost nothing because the 1990s stock market bubble would pay for it all.  And setting nothing aside to pay for them.  This happened in many places in the U.S. in those years, but in New York unfunded retroactive pension enhancements continued be added long after the stock market bubble deflated. 

The last big one was in early 2008, when years were knocked off the full retirement age and required service time for NYC teachers – and presumably pension payouts were hiked for those who stay later.  This too was described as free, even though the city’s pension contributions had already been soaring for years due to the cost of the previous deals.  It was shocking and unjust, a slap in the face for everyone who had argued for higher school funding and better paid teachers to improve the schools. 

As a consequence of this and previous deals, taxpayer pension contributions for the NYC Department of Education increased 27.8% from FY 2008 to FY 2011, increasing from 21.4% of payroll to 26.7% of payroll, and soaking up much of the benefit of the education portion of the federal stimulus package.  Taxpayer pension funding will have increased another 17.3% from FY 2011 to the FY 2014 budget proposal, rising to 32.8% of payroll and adding to the fiscal crisis caused by the reduction in federal and state support.  For the entire period taxpayer pension contributions at the Department of Education will have increased about 50.0%, or $1 billion.

Worse, it is not enough.  As this report showed, even after the Federal Reserve took action to inflate stock prices and bond values by cutting interest rates to rock bottom levels, the New York City Teacher’s Retirement Fund was only 62.9% funded in FY 2011.  

Locally-Administered Pension Plans: 2007-2011

 The San Diego County pension fund, which is in crisis, was 81.5% funded using the same assumptions; the New York State teacher’s retirement fund, which covers New York’s teachers outside of New York City, has been described as 100.0% funded (although Governor Cuomo’s pension raid would change that).  But even this analysis assumes high returns from these lofty asset values, a very dishonest assumption as this discussion in The Economist essay shows.

http://www.economist.com/blogs/buttonwood/2013/01/investing

So pension contributions for New York City teachers (and other NYC employees) will have to go much higher, perhaps another $1 billion per year just for schools – though neither the city nor the unions nor the City Comptroller nor the State Comptroller nor the City Actuary are likely to admit this.  Until stock values fall back to something like real value relative to the income stocks are producing (the income available to pay pension benefits) and interest rates rebound to more normal levels.

Updating the model I used when I did my calculations of what the pensions should have cost, I find that the pensions those teachers recently retired or now approaching retirement were promised when they were hired – the original, unenhanced, Tier IV 30/62 pension plan – would have cost 12.5% of payroll for teachers who worked exactly 30 years and retired at age 62.  The teachers would have paid 3.0% of that, leaving taxpayers with a 9.5% cost.  That’s with a 5.8% return, and the current 2.3% inflation rate.  The cost for those teachers whose careers relative to retirement benefits were less favorable to them, and more favorable to the taxpayer, than working exactly 30 years and retiring exactly at age 62, would have cost less than 12.5%.  This estimate assumes the 12.5% of payroll was deposited in the fund each and every year of a teacher’s career, allowing the 5.8% investment return on it to compound.

According to my calculations, the pension cost for a teacher who worked 25 years and retired at 55 in mid-2008, after all the retroactive pension deals, would have been 24.0% of payroll if that amount had been deposited each and every year of their careers.  Most of that would have been funded by taxpayers, as the employee contribution of 3.0% of payroll would have stopped in 2000, and in this case the teacher would have left before even the 1.85% of payroll contribution required for 25/55 became applicable.  No buy backs of past years were required, so even those who have retired since have contributed little more – just 1.85% of their pay from 2008 until the time they retire. 

This is a repeat of the retroactive 25/55 deal under Mayor Lindsay in the late 1960s, a deal that caused pension contributions to soar and the schools to be gutted in the 1970s.  Only this 25/55 was even more rich and costly:  the teachers’ own pension contributions are less, expected lifespans are longer, and a partial upward inflation adjustment is included. 

The inflation of the 1970s saved the city by reducing the value of the pensions relative to the wages of the taxpayers who paid for them.  It also reduced the wages of NYC teachers who were still working until they were the lowest paid in the metro area, a status they held until Mayor Bloomberg increased their cash pay 20.0% in the early 2000s.  NYC teacher turnover was high in many of those years, particularly during the national teacher shortage of the late 1990s, as many of the best teachers – those the suburbs wanted to hire – left for jobs there as soon as they were no longer incompetent new recruits.  Leaving the less motivated and less competent behind for NYC’s children, along with a constant wave of new, often uncertified green recruits. Those were the good old days, according to some opposed to Mayor Bloomberg’s policies, and with his help they are going to come back. 

On top of the increase in the cost of pensions under the new 25/55, you have the increase in the cost of retiree health insurance, from three years before Medicare kicks in and picks up most of the burden, to ten years for those getting 25/55.  This is a far bigger expense than in the 1970s. 

For the City of New York overall, the cost of fringe benefits other than pensions, of which health insurance for retirees and employees is the most costly, is expected to have increased by 22.1% from FY 2008 to FY 2014, nearly double the 11.9% inflation rate for the period.  At the Department of Education, the cost of fringe benefits is projected to rise 37.7% during that period – most of that increase has already occurred.  Exclude the Department of Education, and the fringe benefit cost increase for all other city departments combined for FY 2008 to FY 2014 is expected to be just 11.3% — less than the increase in inflation.  The Department of Education’s employee and retiree fringe benefits costs are rising three times fast even though the DOE has fewer employees. Because it has more retirees.

Note that the level of Department of Education pension contributions under the Mayor’s new budget proposal, at 32.8% of payroll, is more than my estimated cost of 24.0% of payroll for the 25/55 retirement deal, with inflation adjustment and lower employee contributions, after all the deals.  Why is that? 

Because that is 24.0% of payroll if it is contributed each and every year throughout a career.  When pensions are retroactively enhanced, even for those soon to retire or even those already retired (in the case of the retroactive cost of living increase to past pensions), that money had not been contributed in the past, and did not earn investment returns in the past.  A huge hole is opened up as more money rushes out of the pension fund in benefit payments, with severe consequences.  For one thing, if investment assets are sold off (net) to pay benefits, all the future dividends and interest payments those assets would have earned are lost.  The rate of return on nothing is nothing.

And that is where we are.  Already the United Federation of Teachers has pushed through a deal to force future teachers to contribute far more to the pension fund than past teachers had to, slashing their take home pay.  Even though they will be contributing to an underfunded pension fund, with their higher contributions going to pay current beneficiaries and not to fund their own retirements. And the future pensions of new teachers have been cut (at least for now) compared with those who came before, despite those higher contributions.  This follows another UFT win, a 2005 contract that cut the wages of teachers hired after that date relative to those hired previously.

http://www.nytimes.com/2005/10/04/nyregion/04teach.html?pagewanted=all&_r=0

So in the end, the UFT and its political allies have determined, irrevocably, where that huge increase in education funding by city taxpayers is going to go. With Mayor Bloomberg going along.  Not to more teachers and thus lower class sizes. Not to higher paid teachers and particularly new teachers, to attract more qualified and motivated workers to teaching.  To richer and earlier retirements for those cashing in and moving out.  Paid for in part by lower wages and benefits for future teachers – future UFT members.  Who will expect to get far lower pensions than recent and soon to be retired teachers had been promised to begin with.  Although after a career spent resenting that fact and calibrating their effort accordingly, they might get their pensions retroactively enhanced too.  Tier VI is about funding pensions less, not less in pensions, because of the power of the unions.

So in the end, what did the city’s children get for the huge increase in funding for the city’s schools?  Recently, three of the four leading Democratic candidates for Mayor said that the schools have gotten worse under Mayor Bloomberg, despite that huge increase in funding.  Worse than they had been at a time when the courts held, as part of the Campaign for Fiscal Equity Lawsuit held they were so bad that they were unconstitutional, and ordered an increase in funding that was far less than the one that actually occurred.  Many education advocates seem to agree, from what I read. 

And so does the UFT, though they don’t celebrate providing less for more in public. According to a recent union report, teacher attrition is once again rising, repeating the same problem as in the 1990s despite far higher spending.  

http://www.uft.org/insight/teacher-attrition-after-recession-driven-lull

“The influx of more new teachers increased the speed of the revolving door into the teaching profession, but did not stabilize the teaching workforce and did nothing to improve teaching quality in high-need schools.”

And why are teachers leaving?  According to the table provided by the UFT, the number who retired increased from 1,940 in FY 2008 to about 2,700 in FY 2012.  Well, when you allow teachers to retire five to seven years earlier, what do you expect?  Presumably this figure will keep growing, as those who had hoped to keep working in other jobs while drawing a pension find those other jobs, their pensions presumably increased by staying past their new lower retirement age. 

The number of teachers who resigned before retirement decreased from 4,500 in FY 2008 to 2,600 in FY 2012, but it increased in the past two years according to the UFT. “First, we looked at new teachers, those hired over the last five years. The Department of Education hired 3,818 teachers in 2011–12, which was almost 600 more than it hired in the previous year. But of those new hires, 354, or 9.4%, quit even before their first year was up. This compares with previous first-year quit rates of 7.8%.”  Might those new teachers have found out how much extra was being taken out of their paycheck, and how much less their promised pensions would be?  The difference is huge. 

According to the UFT “for students, that means the odds of having a novice teacher are high. For schools, it means that more and more of the faculty are new to the profession and on their way out. Is this at odds with the goal of building a highly effective teaching force? Ask anyone — parent, principal, student or teacher. You bet it is.”   What they should have ended with is we win, the kids lose, it’s irrevocable, screw you.  Except that in addition to increased benefits they want rationalization.  Want it bad. They don’t want to hear about this, and believe they have the right not to hear about it and to pretend to decry the consequences. Believe me.

When the UFT complains about “budget cuts” for education, here is what they are saying to the people of New York City. Better give us even more money or else, because that past money for increased pensions doesn’t count!  Go ahead and raise income or property taxes (public employee pensions are exempt from state and local income taxes and NYC teachers and live outside the city) or gut other services more!  Otherwise you’ll get the even worse education system you deserve!  Frankly, everyone should find that offensive given the current level of funding.  The best thing the next Mayor could do is send the city’s per student and per 20 students spending on education, overall and for instructional employees, along with the national average and the average for the suburbs and New Jersey, to every parent, teacher, and taxpayer on a postcard. 

Before I conclude, a couple of more education notes from the budget documents.  Debt service spending at the Department of Education nearly doubled from FY2008 to FY 2012, despite historically low interest rates (and let’s just pray the City of New York did not float variable rate bonds at this time).  In part, this is due to money borrowed for spending the city had no choice but to undertake, to correct the consequences of decades of underfunding school maintenance.  But to the extent that some of it was to increase school seat capacity, I wish the city had pursued any and all other means to use existing space more intensively instead.  Double shifts.  Year round schooling with variable schedules.   Very small classes in teachers’ living rooms.  Incentives to ride a city bus or subway to schools with excess capacity elsewhere in the city.  But people wanted more capacity, and we will be paying for it at a long time.  Hopefully at no higher interest rate than we are paying now.

In addition, Department of Education spending on Other Than Personal Services (OTPS) spending soared by 41.4% from FY 2008 to FY 2014, a gain of about $2 billion.   For all other city agencies combined, OTPS spending – which includes construction contracts to maintain infrastructure and social services contracts for the needy – fell 0.7% from FY 2008 to FY2014 in the face of 11.9% inflation, due mostly to a 6.7% decrease from FY 2011 to FY 2014.  So where is all this Department of Education OTPS money going?

Here is what I might have hoped.  Back in the early 1990s, I stopped by my local public elementary school and asked if I could get a copy of the curriculum.  I naively expected to find a lot of detail about what the children should be learning in every grade, from addition, subtraction and telling time to fractions and decimals, from a limited number of one- and two-syllable words to higher levels of vocabulary, from basic punctuation to more detailed grammar.  I figured that with such a guide, if the teacher my children would be assigned to didn’t do the job, I could pitch in and make up for it.

The local principal said I would be disappointed in the curriculum, and I was.  It was nothing more than a series of platitudes with nothing in it.  I later found out from neighbors about some of the other things going on the school.  A teachers who, after the UFT won a contract that prohibited principals from even examining teaching materials, decided to stop teaching math.  Another who didn’t show up lots of the time, and so was made a little used “special subjects” teacher.  There was a new principal, but the old one had owed his job to politics and was an incompetent tyrant. 

And I got some advice.  My kids attended Catholic School through 8th grade.  Remember, again, these are the good old days that are coming back.  And this time, with the Catholic schools — caught between an inability to adequately pay teachers, the inability of working class parents to pay more, and the exhaustion of endowments built up in the good old days – no longer able to serve the non-affluent.  Any city parent had better have another Plan B.

With the advent of the internet, what I would hoped the OTPS money is going for is to put a curriculum, with far more detail than could put in a book, on the online for every parent’s use.  Along with perhaps You-Tube lessons and computerized projects by the city’s best teachers, with a variety of teaching styles and methods, along with private non-profit providers such as Khan Academy.  So as the city schools re-collapse city parents who are able, individually or collectively, would have lots of electronic assistance in teaching their own children, with or without baby sitting services provided by the DOE.  That’s a bad future, and a very bad future for those whose parents did not go to college and their children.  But far better than the worst imaginable, which would have parents whose kids did not get into “special deal” schools where an actual education was on offer, being forced to flee the city once again.

If that is where the money is going – to computerized education — the start-up phase of the project will end, the benefits will become available, the cost will fall to maintenance levels, and the rest of the money can be shifted to more pressing needs – like higher pension contributions – without too much further damage.   That is what I hope. 

But not what I expect.  What I expect is that the soaring OTPS money is for school bus companies and private school payments for special education children.

I’m about to do something I swore off as pointless after the shock of that 2008 pension deal – waste my time by saying what the next Mayor should do about the UFT contract, and the teacher pension plan (and really all city labor contracts and pension plans). 

The UFT contract expired first among city labor agreements, in 2008, and word is being spread that NYC teachers did not get the wage increases at double the inflation rate that the other unions got.  But that is not how I remember it.  Just as the previous UFT contract had been the first to expire, it had been the first to come into effect.  That deal was cut before the Great Recession, when Mayor Bloomberg was considering running for President and seeking support (or at least to avoid opposition) and included those big increases.  That’s when NYC teachers got them.  Then the other unions used the UFT increase as the “pattern” to gain similar increases from arbitrators — after the Recession re-energized the perpetual fiscal crisis.  If my recollection is correct, then someone has spread a deception to – among other places – the New York Times.

But regardless, UFT teachers and other represented employees have not received a raise, other than the automatic raises they gain every year as they gain seniority, for five years.  They want a retroactive wage increase in excess of inflation dating back to 2008, paid for by – well that isn’t their problem and they expect the politicians they support to accept blame for the consequences, or to come with a lie that attributes them to “circumstances beyond our control.”

By my view is that NYC teachers have already gotten a huge raise – in richer pensions.  The cost of that raise was inflated by all the years it was claimed it would cost nothing, when no money was set aside.  Before they get any increase in their cash wages (which would also increase the pensions of those who retire), the NYC teacher pension plan has to be restored to health.  Restored to health using the realistic expectation of future returns according to The Economist post linked above.  We have no choice.  Based on court interpretations, the section of the New York State Constitution that says state residents are entitled to an education lacks the all-important “and we’re not kidding” clause, but the section that says that pensions take priority over everything else no matter what is absolute.

Basically, total NYC taxpayer pension contributions have to be increased to equal total pension plan benefit payments, and then increased each year as total benefit payments increase.  That way, the higher pension contributions of new employees would actually go for their own retirement.  And any actual cash (ie not phony paper) earnings on existing investments (dividends and interest), such that they are, could be reinvested in the funds to grow them out of the hole.  No investments would have to be sold off to pay current benefits.  If stock prices correct to or below fair value (See Shiller), no problem, because the pension fund (net) would not be selling.  It would be buying at lower prices, and thus getting higher future returns on the new money.

Now all the pension actuaries whose deceptions got us into this mess would say less could be contributed today.  And later they will then say even more, vastly, drastically more, has to be contributed.  Just as they have over and over for 15 years, because they are paid to do so.  Causing even more devastating losses in public services – in a future they are paid not to care about.  But if the city were to do as I suggested, that disaster at least could be avoided.

And after the pension funds were restored to health?  No raises until all the services that have been taken away from city residents to pay for those pension deals were restored.  Fairness!

And after the restoration? The city should go back over the pension rules and union contracts all the way back to the 1960s, to see how the total career compensation, adjusted for inflation, has varied between workers hired in different years under different contracts and pension rules.  And seek to even it out.  Fairness!

No raises for those cashing in and moving out under the new 25/55 pension plan until other employees, including (especially) new employees, first have their cash pay increased enough to offset all the difference in their pension contributions and future benefits, their cash pay, their vacations — everything.  Through a more rapid ascent to close to maximum pay in the first decade or so of their careers (not in higher final pay which would inflate their own pensions).  Some employees benefitted from “screw the newbie, flee to Florida” pension deals in the past?  Their cash pay would continue to be frozen, and drop relative inflation, so the city could afford to pay the losers more in cash while they were working, to make up for it.  Of course, those teachers who didn’t sign on for 25/55 would be eligible for raises as well.

And then?  No raises for those working in the easiest schools with the easiest to teach children until the city could first afford to pay more to those who try to teach more difficult children in the most difficult schools.  Fairness!

The highest bonus pay would kick in during the fourth year teaching in perhaps the toughest 25% of the schools. The wait until the fourth year would ensure that bonuses would not be paid to new recruits soon to leave, and those just showing up to pretend to teach poor children for a year to pad their pensions.   The bonus levels would step down as the schools get easier to work in, until none were paid to those with the easiest half of the assignments.  How high should the bonuses be, and now long should those in easier schools have to wait until they get raises?  High enough and long enough that as many teachers are trying to get into schools with troubled and disadvantaged children as are trying to get out of them.

The city should take the same approach with ALL the pension plans, and ALL the union contracts.  It’s about time someone started talking about social justice with regard to what has happened who isn’t on the payroll of those who have sought and obtained advantages, directly or indirectly.  Including the public employee unions.

But that isn’t what is going to happen.  So now, here is a relevant discussion of what will actually happen.

Under the pension “reform” just signed, the Mayor of the City of New York gained the right to hand out retroactive pension increases for city employees without any input from the City Council, the Governor, the State Legislature, anybody. In deals with the unions.   Such as deals for political support, or to keep Mayoral control of the schools.  This rule can be found in S06735 as adopted by the NYS Assembly on March 15 2012.    ARTICLE 25:  BENEFIT ENHANCEMENTS.  Section 1321.

S  1321. ELECTION OF BENEFIT ENHANCEMENTS. A. THE CITY OF NEW YORK MAY ELECT TO PROVIDE ITS EMPLOYEES THE BENEFIT ENHANCEMENTS PROVIDED FOR IN SECTION THIRTEEN HUNDRED TWENTY-TWO OF THIS ARTICLE. A SEPARATE ELECTION TO PROVIDE BENEFIT ENHANCEMENTS PURSUANT TO SUBDIVISION A OF THIS SECTION MUST BE MADE FOR EACH SPECIFIC COLLECTIVE BARGAINING ORGANIZATION, RECOGNIZED OR  CERTIFIED PURSUANT TO ARTICLE FOURTEEN OF THE CIVIL SERVICE LAW.  SUCH ELECTION MAY BE MADE AT THE SOLE DISCRETION OF THE MAYOR OF THE CITY OF NEW YORK TO THE RETIREMENT SYSTEMS UPON RECEIPT OF A REQUEST FROM THE COLLECTIVE BARGAINING  ORGANIZATION, RECOGNIZED OR CERTIFIED PURSUANT TO ARTICLE FOURTEEN OF THE CIVIL SERVICE LAW TO REPRESENT  SUCH ELIGIBLE EMPLOYEES. 

The law also says the employees themselves would have to pay for the cost of such enhancements in higher employee pension contributions.  No problem. They could just hire the same actuaries to say, for a fee, that the cost of the enhancement would be zero.  And they years later, when it wasn’t, the employees would be off the hook.  “Circumstances beyond our control again.”  As long as the benefits to insiders and the consequences for everyone else are separated by a few years (at the price of inflating the harm of those consequences) they have nothing to do with each other, right?

The candidates for Mayor are making all kinds of promises to the serfs.  But when they negotiate campaign contributions, signature collection for ballot access, endorsements, and the continuation of Mayoral control with those actually matter, what do you think they are taking about?  Raises, pension enhancements – and higher taxes, gutted services, and drastic reductions in pay and benefits for future employees “due to circumstances beyond or control.”

That is certainly true for DeBlasio, running as the (public employee) union man, and Liu, who claimed in a report that teacher pensions only cost 6.8% of payroll (in big print in the front) but would somehow cost 20.0% or more (under optimistic assumptions) until the year 2040 even so (in fine print in the back).  And true for Thompson, who was City Comptroller and charged with maintaining the integrity of the pension funds when the 2008 pension deal went down. He said nothing as others claimed it would cost nothing, and had, as a solution to the underfunding problem, more pension fund investments in hedge funds, with their overpaid managers.  

Quinn?  She has been endorsed by private-sector unions so far.  But after that term limit deal, you can’t rule anything out.  And selling out the financial/real estate executive class may not bring much of a better deal for the serfs than selling out to the political/union class.

Republican Lhota?  Wasn’t he Giuliani’s budget director when the former Mayor cut the deal to allow city employees with more than 10 year’s seniority to eliminate their own pension contributions permanently, in exchange for the city cutting taxpayer contributions temporarily, so Rudy would have some extra money to spread around during his aborted Senate campaign?  I think he was!  And what an awful deal that was for the rest of us, now and forever.  

The best we can hope for is that Mayoral control will end, and the fiction that most of New York City’s children will ever have decent schools along with it, so the next Mayor can focus their attention on services that might actually be improved, and parents can be honestly directed to pursue other alternatives.  

The next few posts will be shorter, or should be, because the labor relations issues are similar – though only the UFT got such a big pension increase so long after the stock market bubble deflated.  At least I’ll try.

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