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Out of Control Policy Blog Archives: 8.25.13–8.31.13

Oregon In Need Of Common Sense Pension Reforms

The Oregon pension system is a mess.

The Oregon Public Employee Retirement System (PERS) is currently facing a $14 billion unfunded liability, assuming the most optimistic investment return of 8% over thirty years. In July, the board overseeing PERS finally agreed to reduce the assumed return rate to 7.75% after years of sub-7% investment returns, a decision to be put up for a formal vote in September, which will drive up the unfunded liability even further. With this assumption, Oregon taxpayers will either need to spend $150 million more a year on pensions and/or make substantive reforms.

There are three primary pension programs within PERS, based on when an employee was hired. Employees hired before 1996 participate in the Tier 1 pension program. Employees hired between 1996 and August 28, 2003 participate in the Tier 2 program. Employees hired on or after August 29, 2003 participate in the Oregon Public Service Retirement Plan (OPSRP). These are defined benefit plans currently funded only by employer contributions. Each program operates with different retirement ages, pension calculation formulas, and definitions of final average salary.

Formulas generally take the form of “final average salary” (FAS) x retirement factor (1.5-2.0% depending on the plan) x years of credit service. In Oregon, what constitutes FAS for the purposes of pension calculations isn’t what common sense would lead you to believe. Tier 1 and 2 employees, in a practice colloquially known as “spiking,” soon-to-be-retirees can pile on unused vacation and sick pay and other payments to inflate the FAS, thereby increasing the pensions the retiree will receive for life. One estimate puts the cost of spiking to taxpayers at $129 million every two years.

Prior to 2004, Tier 1 and Tier 2 programs were funded through member contributions and employer contributions, which were deposited in fixed or variable accounts. The PERS sets employer contribution rates every two years; Oregon law requires that employees participating in PERS must contribute six percent of their salary to PERS. Historically, most Oregon public employees get their member contributions “picked-up” by their employer. In other words, they haven’t had to contribute anything. In 1994, Oregon voters approved Ballot Measure 8 to end the pension pickup; two years later, the Oregon Supreme Court deemed the Ballot Measure unconstitutional.

Tier 1 and Tier 2 participants had their retirement accounts in the controversial Money Match program. In the Money Match program, the employer and employee contributions were converted into an annuity invested by PERS. For Tier 1 employees, the annuity was tied to a fixed earnings rate of 8%, regardless of whether or not the returns ever came close to 8%. Tier 2 employees, in contrast, had their retirement accounts tied to actual investment returns. Employees participating in the Money Match program in the late 90s and early 2000s were able to retire with bloated pensions thanks to the booming economy of the 1990s. Between 1998 and 2003, over 15% of retirees (~3400 out of 22,138) received pensions higher than their final salaries.

In 2004, PERS created the Individual Account Program (IAP), a defined contribution component that Tier 1, Tier 2, and OPSRP employees now participate in. Tier 1 and Tier 2 employees who once paid into fixed or variable accounts now pay into the IAP. The IAP is designed to allow employees to either accept lump sums upon retirement or monthly payments. The IAP is funded entirely through six percent member contributions and investments of the fund by PERS. In reality, only 30% of public employees actually pay the 6%; taxpayers foot the bill for the other 70% of workers because public employees have consistently secured “pickup” agreements in labor negotiations. One 2013 bill that sought to end this practice, SB 754, died during the last legislative session. The “pickup” of the 6% contribution is estimated to cost taxpayers hundreds of millions of dollars a year.

The pension system has been generous: 947 retired public employees currently receive pensions in excess of $100,000, including 736 who are receiving getting paid more for being retired than they ever made on the job. There are also 3,240 retirees currently receiving between $75,000 and $100,000 a year, including over 2,000 who are also getting paid more for being retired than they ever made on the job. Just last year, another 170 employees retired with pension benefits exceeding their final salary.

In 2012, the average Oregon public sector employee retired at age 61 with a pension of $29,000. Taken together with generous COLAs, through which retirees receive annual increases to their pensions, and Social Security benefits, the average public employee in Oregon makes nearly as much retired as the median household income of Oregonians who are still plugging away at a private sector job, which, between 2007 and 2011 was $49,850.

Oregon public employees contribute far less to their pensions than public employees in Washington and Idaho. Ongoing research from Portland State University has compared the retirement benefits (pensions and Social Security) of teachers, police officers, and accountants in the three states.

Earlier this year, researchers assumed the employees made $66,000 in their final year of working, with 25-30 years of employment, for a total retirement benefit, including Social Security, of $1 million. According to these assumptions, for every $1 million Oregon public employees will receive in retirement benefits, they will have only personally contributed $160,000 of it. Since 70% of Oregon employees don’t contribute to their Oregon pension at all, the $160,000 is entirely accounted for by Social Security contributions. In contrast, public employees in Idaho and Washington receiving similar benefits would have personally contributed $370,000 to $560,000 for every $1 million in benefits. In other words, public employees in neighboring Idaho and Washington pay over two to three times as much towards their pensions as Oregon public employees do.

The rising unfunded liabilities, unsustainable benefits, and historically low employee contributions have prompted Oregon Governor Kitzhaber to push for pension reform. Chief among Governor Kitzhaber’s pension reform ideas for the 2013 legislative sessions were:  1) reduce or end the pension “pickup” of employee contributions to their pensions, and 2) reform the current cost-of-living adjustments (COLA) that increase annual pensions.

However, political pressure from the Governor's own Democratic Party made reform of pickups an impossibility. This past legislative session did see a small reform in Senate Bill 822, which adjusted the annual COLA. Prior to the law, pensioners automatically received a 2% COLA on their pension earnings. Beginning in August 2014, pensioners will receive a 2% COLA on the first $20,000 of their pension. They will receive 1.5% COLA for benefits between $20,000 and $40,000; 1% on a benefit between $40,000 and $60,000 and .25% on benefits above $60,000. For example, those making between $20,000 and $40,000 will receive a $400 COLA on the first $20,000 of their pension total and an additional 1.5% of total above $20,000. The bill is estimated to save $400 million over the next two years. However, with the expected September lowering of the 30-year 8% PERS investment return assumption, $300 million of these savings will be offset, resulting in a more modest $100 million savings to taxpayers.

Governor Kitzhaber wanted to go further and crafted an unpalatable “grand bargain” that combined pension reform and tax increases. Further reductions of the COLA were to come with a package worth $200 million in revenue. Part of this revenue would have included $55 million in taxes on alcohol and tobacco and $65 million increases in corporate taxes. Fortunately, this idea didn't get anywhere. Democrats balked at further cuts and Republicans were unwilling to accept tax increases.

Oregonians are currently awaiting an announcement from Governor John Kitzhaber about whether or not there will be a special legislative session to tackle pension reform in Oregon.  Even less certain is if anyone will be proposing any good ideas. Simple common sense changes such as limiting “final average salary” to actual salaries and ending the practice of pickups could save Oregon taxpayers hundreds of millions of dollars, while giving legislators slightly more time to get serious about pension reform and eliminating the unfunded liability.

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Missouri Schools Need Tenure Reform and Weighted Student Formula

In a recent publication by the Show-Me Institute, based in St. Louis, Missouri, authors James Shuls and Kacie Barnes share the results of a survey completed by 192 of the state's superintendents on their opinions of teacher tenure. As shown in the Show-Me Institute study, 73 percent of respondents said that it was somewhat to very difficult to remove a low-performing tenured teacher. Also, 60 percent of respondents said that they would support teacher tenure reform depending on the specifics and 32 percent said that they would support teacher reform either privately or publically.

The desire to have greater autonomy over hiring and firing is not singular to Missouri. Nationwide school districts have been adopting a policy tool that - in addition to empowering parents through school choice and more equitably funding students - gives those closest to students greater decision rights over how to staff schools to best serve students.

Known by many districts as weighted student formula, this policy tool in its purest form includes key ingredients that give school principals the autonomy that they need to best meet the needs of students enrolled at their school:

  • Principals have autonomy over school budgets;
  • Principals have autonomy over hiring and firing and;
  • School districts have relief from collective bargaining agreements and union contracts.

These key tenets empower school principals to hold the teachers that they employ accountable for performance in educating their students. And as studies have shown, the degree of teacher quality is essential to student achievement.

Stanford economist Eric Hanushek has documented that the difference between a good teacher and a bad teacher can be as much as a year's worth of learning.  Similarly, in his 2012 state of the union address President Obama cited a 2011 study by National Bureau of Economic Research (NBER) economists, stating that students with highly effective teachers were "more likely to attend college, attend higher-ranked colleges, earn higher salaries, live in higher [socioeconomic status] neighborhoods, and save for retirement."

Collective bargaining and tenure grants teachers job security based on an arbitrary number of years that they are employed, not by their performance. Whereas weighted student formula ideally gives principals the authority to hold teachers accountable for their performance, measured by student outcomes. In turn for that autonomy, principals are also held accountable for student performance by the school board.

However, in practice in many weighted student formula programs, school-level autonomy continues to be constrained by teacher tenure and collective bargaining rules. One of the key differences between autonomy within a school district and similar autonomy that charter school leaders enjoy is the degree to which the school principal has true autonomy to make staffing decisions at the school level.

Oakland Unified School District (CA), Baltimore City School District (MD), and Denver Public School District (CO) each have developed their own variation of weighted student formula - some with greater principal autonomy over staffing than others.

Oakland has reached many benchmarks in their adoption of weighted student formula, including increasing the share of the district's education budget that is used flexibly by principals. However, principals are still bound by a lengthy labor agreement between the Oakland Education Association and the district.

In an American Institute for Research (AIR) study, 12 of 22 respondents in Oakland mentioned collective bargaining agreements as a constraint on autonomy. As one Oakland principal commented, "Sometimes it feels like we have all the responsibility but we actually don't have any of the freedom... because if you can't choose who you're going to hire... then some of your budgetary autonomy actually goes away."

A March 2013, study by the National Council on Teacher Quality further describes how Oakland's labor practices constrain principal autonomy:

More than any other type of authority, principals report wanting more say over staffing in their buildings. Oakland's current bargaining agreement with its teachers union, Oakland Education Association (OEA), limits principal authority by requiring seniority to be the first consideration. Among those internal candidates that meet the credentialing and experience bar, the contract dictates that the teacher with the most district seniority is placed in the position. This approach does not allow principals a say in the placement of teachers at their schools.


On the other hand, Denver and Baltimore have more discretion over hiring staff than most urban school districts.


In Denver, teachers do not change teaching jobs based on seniority or "bumping rights" like most school districts in California. Denver has an "open market" teacher hiring process where principals can interview multiple candidates and make decisions about which teachers will best fit with their schools.


Baltimore principals also enjoy more autonomy over staffing after the Maryland State School Board ruled that the "substantive aspects of teacher assignment are under the discretion of the superintendent," and does not have to be negotiated through collective bargaining.


Baltimore's hiring process works through mutual consent between a principal and a teacher - giving district principals full authority to staff their schools and makes teacher assignments seniority neutral. Also, according to a National Council on Teacher Equality (NCTQ) study the district is one of few nationwide that have eliminated forced placements of teachers. This means that Baltimore's principals are not obligated to accept teachers who want to transfer into their schools, or whom the central office needs to place.   


Policies that allow principals to have more autonomy over hiring on the front end, help mitigate some of the unintended consequences of guaranteed tenure-where at least teachers and principals are entering into a voluntary and mutually agreeable working relationship. However, to the extent that tenure laws are in place they hinder efforts to give principals more autonomy to spend school budgets on the most effective staffing relationships.


Across the nation, several school districts have already taken advantage of weighted student formula and others are exploring the policy's potential. Missouri school district superintendents have already voiced their desire to have a greater level of autonomy over staffing decisions. By implementing weighted student formula, Missouri's school districts can achieve greater staffing autonomy while also giving school principals greater autonomy over their school's budget, funding students more equitably, and empowering parents to select the best school to meet their child's individual needs. Weighted student formula and tenure reform could work hand in hand in Missouri to give school leaders more control to use public resources to better meet the needs of students.


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An Opportunity for Charter School Expansion in Chicago

Abandoned buildings litter the city of Chicago, especially in the lower income South and West sides. Countless houses, apartment buildings, and even churches lie vacant, serving as unsightly reminders of economic distress and providing safe havens for criminal activity.

Perhaps the most tragic yet promising facet of this mass desertion, however, is the recent wave of school closures. In May, The Chicago Board of Education voted to close 50 of the city's public schools-the largest number of simultaneous school closures in the country's history--citing the underutilization of many schools, as well as a financial need for consolidation, as the chief causes of their decision.

While concerns of plummeting property values and increased unemployment abound in the wake of these school closings, charter school advocates have reason to remain optimistic.

Chicago has seen significant demand for charter schools in recent years. Andrew Broy of the Illinois Charter Schools estimates that 19,000 students are currently on the charter school waiting list. In the past, there has been insufficient space to accommodate nascent charter schools, and therefore an insufficient number of charter schools to accommodate the ever-increasing student demand.

Former CPS Interim CEO Terry Mazany underscored this shortfall when he suggested to the Chicago Sun Times that "the city's public schools have such a backlog of charter schools in need of buildings that the system should declare a one-year moratorium on new charter operators."

The recent school closures provide a compelling solution to this problem. Ample school vacancies coupled with significant numbers of displaced students create the optimal climate for charter school growth.

Chicago Public Schools have begun to show support for this expansion. In fact, CPS recently posted a 52-page document requesting that charter schools apply to operate in the city. Beginning in the 2014-15 and 2015-16 school years, the district hopes that charters will open in 11 neighborhoods plagued by chronic overcrowding.

Beyond just alleviating overcrowding, an increase in the number of charter schools could vastly improve the quality of education in Chicago. For example, Stanford's Center for Research on Education Outcomes' 2013 National Charter School Study provides a side-by-side comparison of traditional public school performance and charter school performance in Chicago that highlights the overwhelming superiority of a charter school education. On the elementary school level, Chicago charter school students achieve greater overall gains in reading and math. Further, the study reports that from 2008-12, 4 out of 5 charter schools outperformed traditional public schools in math and English-an average of two additional weeks' growth in reading and one additional month's growth in math for charter school students.

The student outcomes for low-income and minority students are even more impressive, particularly for African-American and Latino students. The average Latino charter school student in Chicago, for instance, gains more learning in one year than the average white student. The educational gains that charter schools offer Latino and African-American students would be especially beneficial in Chicago, as they comprise a significant portion of the students served by the 50 now-shuttered schools.

Charter schools should seize the opportunity to expand while they can, before the newly vacant schools are overrun by crime, demolished, or otherwise repurposed. 


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Teachers' Pensions Rob Students, Taxpayers

In 2012, California passed Proposition 30, which chiefly included a $7 billion tax increase intended to generate funds for education. These funds, however, will likely never reach the classroom. Instead, they will be used to fund bloated teacher pensions.

The structure of the California State Teachers Retirement System is to blame. As David Crane puts it in a Bloomberg article, "California teachers are unconditionally guaranteed lifetime pensions by their school districts. Everything works out fine if Calstrs, as the retirement system is known, earns the investment returns it forecasts and from which upfront contributions are derived. But if they fall short, school districts must make up the difference."

In short, when the state retirement system fails to generate enough revenue to fund teacher pensions, school districts (and therefore students) must suffer.

This issue is once again rearing its head after the state's nonpartisan Legislative Analyst's Office issued a report that cited a $73 billion shortfall in state teachers' retirement plans. Calstrs incurred such a massive budget shortage because it has earned a mere 60 percent of its forecasted investment return since 1999.

How does Calstrs plan to deal with what LAO Senior Fiscal and Policy Analyst Ryan Miller calls "perhaps California's most significant long-term fiscal challenge"?

While a specific funding proposal is not slated to be enacted until the end of the 2014 legislative session, Calstrs explained in a report to the California legislature that they require increased governmental contributions into the system for the next three decades, starting at $4.5 billion for the 2014-15 fiscal year and gradually increasing over time. Further, this request cannot be deferred, because for every year that a contribution is deferred the contribution amount increases by 7.5 percent.

This money is likely to come through increased contributions on the state or district level, specifically in the form of Prop 30 funds. The LAO report notes that reducing future teachers' benefits in an attempt to accrue funds is "unlikely to be a major funding solution." The report explains that the group of future teachers who would be eligible for benefit reductions (i.e. those teachers not locked into 2012 pension legislation) will remain for numerous years too small a group for cuts in their benefits to have any significant impact on the pension gap. According the LAO increased employee contributions to their pensions would also "only address a small part of the unfunded liability."

The most probable course of action will be additional payments from states and districts. Because neither the 2012-13 nor the 2013-14 budgets contain any provisions for additional pension funding, however, tax dollars will have to be redirected from other programs. The funds generated by Prop 30 may become a prime example of this type of reallocation. Under California law, schools receive the first 40 cents of every dollar of state revenue. The state forecasts that the tax increases implemented by Prop 30 will generate $7 billion, meaning that $3 billion extra dollars will flow to schools each year. This money will likely never reach the classroom, however. Instead, school districts will be forced to use it to fund teacher pensions, though it will only account for a mere two-thirds of Calstrs' annual $4.5 billion request. Even if Prop 30 funds are not specifically tied to pensions, these obligations continue to encroach on school districts' general operating funds as districts spend more and more of their yearly per-pupil funds on long-term pension obligations. Therefore, it is inevitable that new tax revenue from Prop 30 will support the broken pension system.

By upholding the status quo on pensions, politicians are driving yet another nail in the coffin of the American public education system. 

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UTLA Still Blocks Teacher Evaluations: Charges LAUSD with Violating Union Contract


United Teachers Los Angeles has filed an unfair labor practice charge against LAUSD, claiming the district altered the terms of the recently amended teacher evaluation system without the union's consent.

 This change is the result of a 2011 lawsuit filed against LAUSD and Superintendent John Deasy that charged LA Unified with violating a state law requiring student test scores to be factored into teacher evaluations. The judge ultimately upheld this charge, setting a deadline for LAUSD and UTLA to develop a new teacher evaluation system that adheres to state law. In January, after dozens of negotiating sessions, both parties ratified an amended evaluation system that includes both more thorough classroom observation and the use of standardized test scores to aid in setting performance benchmarks.

 UTLA has backtracked, however, claiming that the district altered the terms of the new evaluation system after the union-district negotiations. Warren Fletcher, the president of UTLA, charged that "The ink was barely dry, and the district said it was making a bunch of changes. It changes the (classroom) observation protocol and also creates requirements for our lesson plans."

 While the union frames its allegations against LAUSD as dissatisfaction with a lack of consultation by the district about certain changes to the system, union rhetoric suggests that UTLA fundamentally opposes the new system as a whole. For example, a recently released "toolkit" on the UTLA website that advises teachers how to respond when they come up for evaluation suggests that the union disapproves of any objective measure of teacher performance. The most contentious of these measures is the inclusion of student test scores, weighted at up to 30 percent, in determining teacher evaluation ratings. Though about 30 states require the use of student test scores in teacher evaluations (some accounting for up to 50 percent of a teacher's rating) UTLA continues to deny the effectiveness of such empirical analysis.

 "It has consistently been the position of UTLA that applying cookie-cutter rules and procedures to the teacher evaluation process is counterproductive for both teachers and administrators," a letter from the UTLA "toolkit" states. "It is unfortunate that central Beaudry management is attempting to unilaterally implement these changes in the evaluation process. We all share the goal of an evaluation system where the work and judgment of professional educators is honored."

 LA Unified filed a response with the Public Employment Relations Board on August 15th, refuting UTLA's allegations and requesting that it dismiss the complaint. The issue remains unresolved, however, forcing students to return to schools where many teachers fear transparency and fight to delay the implementation of a legally compliant evaluation system. 




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In Blocking the Merger Between US Airways and American Airlines, Department of Justice Shows It Doesn't Understand Aviation

Like nearly everyone else knowledgeable about aviation, I was astounded by the Justice Department’s attempt to forbid the merger of American and US Airways. And after reading all 56 pages of the DOJ brief, I was appalled at its hubris and lack of understanding of the dynamics of commercial aviation. I’m also still trying to figure out why the Attorneys General of six states signed onto this disgraceful exercise.

Let me begin at the macro level. What has been unfolding for the 35 years since the Airline Deregulation Act of 1978 is a painful discovery process as numerous airline companies have tried to develop viable business models (unconstrained by government route selection and price controls). Many new companies entered and failed, and the least nimble of what we now call “legacy” carriers went under (Braniff, Eastern, National, Pan Am, TWA, etc.). In the past decade the surviving legacies all went through bankruptcy proceedings and joined global alliances, but still had difficulty competing with the likes of Southwest, JetBlue, Spirit, Allegiant, and others with radically different (and profitable!) business models.

Clearly this says that the “legacy” sector should be shrinking, and the recent mergers of the survivors (Delta with Northwest and United with Continental, neither opposed by DOJ) seemed to be stopping the bleeding, thanks to less willy-nilly expansion and more careful pricing. The last best hope for American and US Airways is to do likewise—despite DOJ. 

The Department of Justice’s concerns about diminished competition are focused narrowly on the legacy sector, as if Southwest and the others didn’t exist and weren’t growing and profitable. Southwest, thanks in part to its acquisition of Airtran (also unchallenged by DOJ) and its moves into major markets such as Atlanta, Denver, Chicago, and New York, has become, in reality, the fourth network carrier (after Delta, United, and the post-merger American). Instead of operating strictly point-to-point, Southwest’s share of connecting traffic is now up to 28% and its average route is 21% longer than 10 years ago. 

And in the several weeks since the DOJ filed its antitrust case, both Allegiant and Spirit have announced many new routes. Allegiant will now serve 99 US destinations (most of them the kinds of underserved airports that the legacies have largely abandoned), while Spirit has penetrated such major hubs as Dallas/Ft. Worth, Denver, Minneapolis/St. Paul, and Chicago O’Hare. (If you want to read a well-informed critique of the specifics of DOJ’s case, check out Cranky Flier’s two-part assessment.)

As for the impact on airports, why the Republican AGs of Florida and Texas would seek to torpedo American’s best hope for long-term survival and growth is beyond me. Transportation Weekly suggests populist concerns about possibly reduced flights between Washington National and smaller cities in states like these if the merger goes through. But if the merger is killed, and American must struggle against megacarriers Delta and United, then it is major American hubs like DFW and Miami that are at risk of cutbacks. The former American stand-alone plan, based on the kind of large-scale expansion that has failed the legacy carriers, was rejected by all of the airlines’ creditors (as well as its employees) as highly likely to fail, yet DOJ’s brief presents it as a viable alternative.

I am not qualified to present a legal opinion on the strength or weakness of DOJ’s case, but my aviation background says that this case deserves to be rejected by the courts. It is based on a static model of commercial aviation, which DOJ thinks it can restructure with positive results for air travelers. Yet DOJ’s way of looking at aviation would never have predicted the rise of Allegiant and Spirit, with their radically different ultra-LCC business models. If there is any role for antitrust in a deregulated airline industry, it is to keep entry open to entrepreneurs and venture capitalists with potentially better business models—not to try to micromanage the shape of the industry.

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