California’s School Districts Are Spending More and More on Retirees

Just like many of its cities, California’s school districts are facing increased pressure from employee retirement costs. Most large school districts participate in the California Public Employees’ Retirement System, as well as the California State Teachers’ Retirement System. Both pension systems are in the process of ramping up the contribution rates they charge to school districts as they attempt to pay down unfunded liabilities while adopting more realistic projected rates of return on their investment portfolios.

For CalPERS, school district contribution rates have risen from 11.8 percent in the 2015-16 fiscal year to 15.5 percent currently and are projected to reach 22.7 percent in fiscal 2020-21. Similarly, for CalSTRS, rates are ramping up from 10.7 percent two years ago, to 14.4 percent now and to 19.1 percent in 2020-21. After that, CalSTRS rate hikes will be capped due to increased state support, but CalPERS rates are expected to continue climbing.

School districts can’t do much about these increases, which are mandated at the state level. The only way to reduce pension contributions is to reduce staff. Although layoffs may make sense for districts facing declining enrollment or trimming administrative staff, they can also jeopardize educational outcomes.

While California’s school districts have little control over pension costs, boards do have the power to alter retiree health benefits, known as Other Post-Employment Benefits in government finance parlance.

OPEB plan provisions vary widely across school districts, as do annual costs and unfunded liabilities. At one extreme is Los Angeles Unified School District, which provides the same health coverage for employees and retirees — with neither group paying premiums for their insurance. The opposite situation prevails at Oakland Unified School District, where retirees must pay their entire health insurance premiums.

Other districts lie somewhere in between. Some pay a portion of retirees’ premiums. The benefits package may be limited to just medical, or may also include dental and vision. Other districts offer retirees a fixed premium subsidy, leaving them to pay the difference necessary to purchase the insurance plans of their choice.

These different retiree health benefit policies drive differences in costs and liabilities. LAUSD reported a $13.5 billion OPEB liability in 2016, in contrast to zero for Oakland. Because districts vary in size and use different assumptions to compute their OPEB liabilities, they can best be compared by looking at annual retiree cost per student — as measured by Average Daily Attendance.

The metric clearly separates high-cost school districts like LAUSD ($525 per student) and San Francisco Unified ($686) from low-cost districts like San Diego Unified ($29) and Corona-Norco Unified ($26). Among large Orange County school districts, Capistrano and Irvine Unified (both at $81 per student) compare favorably to Garden Grove Unified ($112) and Santa Ana Unified ($209).

OPEBs are often a larger issue in California schools because of early retirement ages. When Medicare kicks in at age 65, the school districts’ costs drop considerably. A district can cover post-65 retirees by purchasing relatively inexpensive Medicare wrapper policies. By contrast, providers charge very high premiums to districts for retirees between the ages of 50 and 64.

School districts can limit retiree health care costs by delaying their eligibility for benefits. Younger retirees are usually healthy enough to take other jobs that offer insurance; while others may be eligible for subsidies through Covered California. School districts can also try to retain employees longer, although older employees typically have higher salaries.

Whether they trim benefits or keep employees longer, California school boards need to control the costs of retirement benefits so they can channel that funding into classrooms. Pension contributions are continuing to rise and will eat up money that should go toward educating students. School district leaders have an obligation to look at this line item and address it.

This column first appeared in the Orange County Register.