Wednesday, February 15, 2006

The Ticking Actuarial Time Bomb

The editorial board of USA Today doesn't think that poor test scores, incompetent teachers, or out-of-control students are the biggest threats to public education but something else altogether:
Until last week, Los Angeles school officials had thought their unfunded health care obligation for retirees was $5 billion. Then they scrubbed the numbers. The new estimate: $10 billion. That's bad news for taxpayers who will foot the bill and for children whose education will be limited by the cost.

At least Los Angeles' school leaders are trying to calculate their future debts. Most school districts have no idea what they owe retired or soon-to-retire teachers. Instead, nearly all plod along with annual budgets, signing labor agreements that ignore exploding long-term liabilities.

Thanks to generous contracts negotiated years ago, when health care costs were largely an afterthought, tens of thousands of teachers about to retire have been promised lifetime benefits for themselves and spouses, something available to very few of the taxpayers who pay the cost.

As health care costs soar, these contracts represent financial time bombs. They will leave schools with less money to hire teachers, less money for raises — less money for everything. The health care squeeze is "the single most important issue facing districts nationwide," Tom Henry, a financial adviser to California schools, told USA TODAY.

New federal accounting rules are forcing them to do just that — ensuring that thousands of communities will receive the kind of news Los Angeles is getting.

School boards will pretend they are shocked: Who knew? The teachers' unions will claim they did nothing wrong. Politicians and taxpayers will demand accountability.

Unless or until there's a national solution to soaring health care costs (don't hold your breath), maintaining high quality of schools will involve taxpayers digging deeper, teachers being willing to make concessions, or possibly districts following the lead of companies that have filed for bankruptcy protection to shed pension obligations.

The teachers argue that in many cases, health care deals were offered in lieu of salary increases. They have a point, but the teachers are not blameless. Many contracts were negotiated with school boards elected with union backing.

In some school districts, teachers might have to start or increase medical co-pays. In others, they'll have to lose their district-provided coverage when they turn 65 and become eligible for Medicare.

Doing nothing threatens to send many school districts into what Henry describes as "a death spiral." Already, health care benefits are smacking against budgets. Los Angeles sets aside $1,000 of its $5,500-per-student budget to cover health care costs for current and retired teachers. To cover the newly estimated $10 billion liability would require $2,087 per student.

The health care situation facing school systems mirrors the squeeze facing public and private employers more generally, as well as the financial strains on Social Security and Medicare as the baby boomers retire.

In all these cases, the sooner action is taken to bring promised benefits in line with revenue, the less painful the solution will have to be. That's a lesson schools can teach the rest of the nation.
Our school district here in California's "Imperial" Valley has never given classroom teachers lifetime health insurance, though they will pay partial premiums until retirees reach their 65th birthday. This seems a good compromise, but recent changes in the collective bargaining agreement have taken away those guarantees and they may be negotiated away at any time.
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