Charter Schools and Legacy Costs

Last updated on: April 21, 2015 at 11:28 am by Jane the Actuary

Charter Schools and Legacy Costs 2015-04-21T11:28:17-06:00 Jane the Actuary

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Many years ago, in studying for actuarial exams, I recall a reading on public pensions, which argued that fully funding (or even funding at all) such pensions was unnecessary because, unlike private plans, a public entity would never “go out of business” or even see a decrease in its overall size, so that legacy costs, such as shrinking employers such as General Motors face(d), were a non-issue. Any given state might not grow at the same pace as any other state, but no state was going to actually shrink, or, at any rate, not to the degree that it’s pension obligations would be unsupportable on a pay-as-you-go basis.

And, of course, we know that that’s exactly what did happen with Detroit. Even disregarding the mismanagement of their pension funds, and, well, everything else, any degree of underfunding in their pensions became magnified by the fact that a city of 700,000 was supporting pension obligations accrued when the city was twice as large.

And the schools? The Detroit Public School system is a separate legal entity from the city of Detroit, and it’s their turn to restructure their debts now. According to today’s Detroit News, Michigan’s Gov. Snyder is preparing a plan to restructure the school system into an “old” entity with the debt, and a “new” entity with the actual ongoing operations. Unlike the prior city bankruptcy, the debt wouldn’t be cancelled; rather, the state would kick in more funds, and the whole system would be restructured with an entirely different “charter school-like” legal structure.

And why are Detroit’s schools so heavily in debt? That’s a long story, and the recent articles don’t give too much background, but, getting back to pensions/legacy costs, there’s this, from an earlier report,

The school district’s budget calls for about $100 million in payments to [the pension fund for teachers] — nearly 1 in every 7 dollars the district spends annually.

And in what respect are these “legacy costs”? According to this article (yeah, I posted these on facebook a while back), DPS’s enrollment dropped from 150,000 to 47,000 in the course of ten years. Why such a nosedive? True, there’s been an exodus of inhabitants from the city, in general. But, beyond that, in 1994, Michigan instituted a system of charter schools and “schools of choice” that dramatically changed the educational landscape. Kids in Detroit now have a multitude of options — not only with charter schools, but neighboring school districts have opened their doors to Detroit schoolchildren (collecting the state per-student funding, which more than covers the receiving school’s marginal costs whenever they’d otherwise have an empty seat). According to charterschools.org, 55% of school-aged students in Detroit, or 59,000 students, were enrolled in charter schools in 2013-2014, compared to 48,000 in the DPS system. (Students attending parochial or non-DPS public schools seem to be wholly excluded from this figure.)

What does this mean?

On the one hand, I’m all for parochial schools, and other sorts of school choice. But at the same time, even a proponent of Schools of Choice has to recognize that the difficulties that the DPS had faced in any case, are magnified by the enrollment implosion. They retain the least motivated students (or, that is, the children of the least-motivated parents). And even under ideal management, they’d still struggle to downsize their workforce at the right pace, and to close schools effectively — and, even when they do so, they still have to manage the empty buildings.

And pensions? Certainly I think that public pensions should be defined contribution or, at any rate, multi-employer (that is, like certain union plans, managed by the employees collectively), with the state or local employer paying in during the employee’s working lifetime. But, failing that, they are the poster child for why unfunded or underfunded pensions are just asking for trouble.

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