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Funding our schools: Employee benefits

The leadership of the General Assembly likes to claim credit for annually increasing the K-12 public education budget in North Carolina. Those dollar increases, however, are really fool’s gold in most years. The actual funding that can be used to help educate students has declined most years, and I will explain why.

All full-time state employees, including all school district employees, must participate in the State Health Plan (or waive the health coverage) and must participate in the Teachers’ and State Employees’ Retirement System. The costs of those fixed, mandatory employee benefits, instead of being captured in a separate section in the state budget, are assigned to each state agency’s budget based on their staff numbers and payroll costs. The costs of those benefits for the vast majority of school district employees are captured in the K-12 public schools section of the state budget.

The cost per employee for the State Health Plan for 2015-16 is $5,479 per employee, and must be paid from the same source of funds that the employee is paid. Therefore for school districts, since the majority of our employees are paid from state funds, the majority of those costs are paid for from our state allotted funds. Local-funded and federal-funded employees’ health care premiums are paid for from local and federal funds. Since 2008, the health care premium for state employees has increased 34 percent, which is actually much lower than the general increase in health care costs, but which has significantly reduced the purchasing power of educational services in our state budget. Over 90 percent of our total state funding is used to employ teachers and other support staffing.

The retirement system funding is worse. For 2015-16, for every dollar that we pay a full-time school district employee in salary, we also have to pay 15.32 cents (15.32 percent) into the Retirement System. For a beginning teacher, that is $5,362 per year, and for average experience teachers, that is over $6,900 per year. For state-funded employees, that 15.32 percent matching cost must come from our state-allotted funds. That matching cost has increased every year since 2002-03, from 3.03 percent to the current 15.32 percent.

While our Retirement System is one of the best funded in the country, and we need to keep it that way, requiring us to pay those constantly increasing and unavoidable matching costs from our state-allotted funds makes it look like we are getting more funding while in actuality our funding available to put into educating students is diminishing.

I realize that these matching employee benefits costs are costs of providing public education in North Carolina.  And based on the low salaries paid to teachers and school administrators, they are important costs to attract and retain educators. However, including these costs in the state agency budgets gives the wrong impression to the general public about funds available to provide direct services. These are really just fixed costs of providing all government services and should be accounted for in the state budget in their own separate section or department.  Then the public could see a true picture of the funding level changes for providing the specific types of government services (e.g. K-12 education, community colleges, university system, health and human services, law enforcement, prisons, transportation, parks and recreation, etc.).

If that was done, nearly every year in recent memory the state funding for K-12 education that is available for direct services has decreased, several years substantially.

As in all states, the cost of providing a defined benefit pension plan (the retirement system) for state employees has become a major budget problem, one that is very difficult to fix. All current employees are hired into that pension plan with a promise of a future benefit if they meet service requirements (30 years) or a combination of age and lesser service requirements. It would be unconscionable, if not illegal, to take that away from current employees and retirees.

Changing new hires to a defined contribution pension plan with an employer match, similar to many traditional 401(k) plans in private industry, has budgetary problems as well. The significant turnover percentage of teachers, recently as much as 50 percent within their first five years, is providing funding to the retirement system (15.32 percent or more of salary every year) for employees that will never reach the service and/or age requirements to draw a benefit. Taking that funding away and putting it into a defined contribution plan reduces funding to the defined benefit plan and guarantees more benefits to those who work fewer years as state employees.  It is a Catch 22 for which nobody has come up with a good cost-effective solution, at least in the short-term. However, in the long-term, changing new hires to a defined contribution plan would save the state money, probably significant amounts of money.

In summary, two things need to happen with state-paid matching employee benefits:

First, they need to be accounted for in the state budget in a separate section and not allocated to each agency’s budget, so that the public can see the real changes in funding for direct state services.

Second, somebody smarter than me needs to figure out how to keep funding the defined benefit pension plan for current state employees and retirees while reducing long-term pension costs in the overall state budget.

If no better ideas are forthcoming, we just need to change new hires to a defined contribution plan and absorb the higher pension costs for 10 or so years knowing that long-term costs will decrease. With the right design and promotion, a defined contribution pension plan should be a better recruiting tool for college graduates than our current defined benefit pension plan.

Here are the links to the articles in this series on funding our schools:

The direct causes of funding pressure on districts

Investing in leadership

Recommendations for funding for teaching assistants

Tensions around class size

Kerry Crutchfield

Kerry Crutchfield has been the budget director for the Winston-Salem/Forsyth County Schools since 1981.