Taxpayers across the U.S. owe public school teacher retirement accounts about $933 billion, nearly triple the amount reported by the plans themselves, according to a Manhattan Institute for Policy Research study.
The $332 billion funding shortfall estimated by teacher retirement funds is low because it includes an “aggressive” 8% assumption on future investment earnings, according to the study. It also doesn't reflect the full cost of stock market losses suffered in the past two years, the New York-based research organization said.
The report, covering 59 plans for 13 million working and retired educators, found that California had the largest unfunded teacher pension liability at almost $100 billion, more than the $42.6 billion reported by the system in January. It's the third study in less than two months to suggest that pension costs of about $1 trillion threaten to overwhelm state and local budgets already crimped by declining tax revenue.
“The insufficiency of assets in state teacher pension funds is massive and unsustainable” and will have to be remedied with higher tax revenues and cost savings, said the institute, which advocates market-oriented policies. States that delay acting on funding gaps “will see them grow only larger over time, and they will do near-term damage to their credit ratings.”
The 2-year-old recession has left two-thirds of U.S. public retirement systems with assets worth less than 80% of future obligations, a level the Government Accountability Office has said is acceptable, the Center for State and Local Government Excellence said this month. Underfunded pensions were cited by credit evaluators in recent months for bond or rating-outlook downgrades in Illinois, Ohio and the city of Los Angeles.
The Manhattan Institute study said five teacher plans were at least 75% funded: New York State, Washington State and District of Columbia educator-dedicated systems and North Carolina and Tennessee state employee plans that include teachers. The worst was West Virginia's at 31% funded.
The institute used an investment return assumption of 6.06%, which federal law requires private corporations to use, to calculate teacher-retirement funding. That compares with assumptions of about 7.75% to 8.25% that the public plans used, it said.
The lower investment return increased liabilities by $484 billion, according to the report. The gap grew an additional $116 billion when the institute used current market values of assets to reflect losses in the 2008 and 2009 stock market declines.
The institute recommended abandoning traditional defined benefit pensions for new teachers in favor of 401(k)-style defined contribution plans. It also urged public systems to adopt the same standards used by private companies.