legislative wrap-up

Pension study bill may set stage for future PERA debates

Criticism of the state pension system was muted during the 2014 legislative session, but lawmakers quietly passed what potentially could be one of the more significant pension bills in four years.

The future of the Public Employees’ Retirement Association (PERA) is of vital interest to the state’s teachers and school administrators, all of whom are covered by the system and who make up about 65 percent of PERA’s nearly 200,000 members.

It’s also of concern to school districts, which are paying an ever-increasing percentage of their payrolls to PERA.

Senate Bill 14-214 doesn’t make any changes in PERA – it just launches three pension studies. But the results of those reviews could set the stage for legislative decisions starting in 2016.

Public employee pensions have been the focus of growing concern in recent years, especially since the 2008 recession decimated the value of pension fund portfolios. PERA’s liabilities, for instance, are only about 65 percent funded. (Get national background in this brief from the Pew Center on the Pew Charitable Trusts.)

A 2010 law that passed with bipartisan support made important changes to PERA, including less generous age and service requirements for employees hired after the law was passed. The law also allowed reduction of cost of living increases for current retirees, a provision that drew a lawsuit. That case is pending before the Colorado Supreme Court (see story).

The 2010 law didn’t ease concerns about PERA on the part of some Republican lawmakers, who in recent sessions repeatedly proposed bills to change the PERA retirement age, tweak calculation of benefits, convert PERA to a defined contribution system, change the membership of the PERA board and target highly paid retirees (like former governors). None of those measures passed, and only two such bills were introduced this session.

What the 2014 bill would do

SB 14-214 will set in motion three PERA studies, the latter two of which are of particular interest to K-12 employees. The studies would:

  • Provide a more detailed look at the total compensation of state employees, including pension costs
  • Evaluate the costs and effects of switching PERA to a defined contribution system from the current defined benefit system
  • Determine methods for tracking the financial health of PERA at intervals over the next 30 years

Supporters of the bill hope the results of the studies, particularly the second and third ones, will provide information that will calm the ideological and somewhat circular arguments over PERA.

“Having the data to shut down those debates could be useful,” said Sen. Pat Steadman, D-Denver and vice-chair of the Joint Budget Committee. That panel’s six members sponsored SB 14-214.

Steadman said the third part of the study “is going to be the piece that’s the most interesting and that makes a potentially interesting 2016 session.”

The 2010 PERA reform law (Senate Bill 10-001) was designed to make the system fully funded in 30 years, based on a variety of assumptions about investment rate of return, contributions, retirement payouts and many other factors. But the problem has been there’s no way to gauge how the law is working along the way, leading to unproductive “sky is falling” vs. “stay the course” arguments that aren’t based on data.

Henry Sobanet, director Office of State Planning and Budgeting / File photo
Henry Sobanet, director Office of State Planning and Budgeting / File photo

State budget director Henry Sobanet notes that there have been “all kinds of pension questions” ever since the 2010 law that can’t really be answered.

“Take for example this idea of the rate of return,” referring to the predicted return on system investments.

The PERA board has been assuming an average 8 percent return over 30 years, a figure that some, including Republican state Treasurer Walker Stapleton, have criticized as unrealistic by some. The board recently lowered the assumption to 7.5 percent.

The problem, Sobanet notes, is “you really don’t know until 30 years from now” if the rate of return assumption was correct.

“Isn’t it more important to think about what we could do along the way to know if we’re off” in the effort to make the system solvent, he said.

The idea behind the third study is to come up with methods for assessing what’s happening at shorter intervals. “I think what this will do is give us a more explainable insight into whether the [2010] model is working,” Sobanet said. “I think we can do more to show people why we think it’s on track.”

Referring to all three studies, Sobanet added, “I just don’t think it’s productive to have these discussions theoretically. We should have some numbers associated with this.”

PERA a touchy issue

Suggestions for changing the pension system can raise anxieties quickly, as shown by the pending lawsuit and by the passionate testimony from retirees almost every time a PERA bill is heard in a legislative committee.

Given that, Sobanet is careful in discussing the studies, noting that his boss, Gov. John Hickenlooper, “supports PERA, and he also supports defending Senate Bill 1.”

Sobanet continued, “This is a data investigation. We’re not proposing changes to PERA.”

PERA background

The school division is the largest of PERA’s six divisions, with more than 115,000 members. The separate DPS division has about 14,000 members. (The DPS pension system was merged into PERA a few years ago, but the assets and benefits are kept separate.)

The pension system has about $43 billion in net assets, and its liabilities were 63.2 percent funded at the end of 2012. The 2013 PERA financial report is expected to be released in late June. (See 2012 report here.)

School districts contribute a base 10.15 percent of payroll to PERA, plus an additional 6.4 percent in supplemental payments, some of which is money that otherwise would have gone to employees as salary. Employees contribute 8 percent of pay. DPS, which is a separate division, has a variable contribution schedule that can be as high as 20.15 percent.

Those supplemental payments, known by the acronyms SAED and AED, are scheduled to rise to a total of 11 percent by 2018.

school finance

Memphis charters could soon qualify for free rent in district-owned buildings

PHOTO: Courtesy of Vision Prep
Building maintenance is a challenge for charter schools in Memphis that pay rent to Shelby County Schools, including Vision Preparatory Charter School pictured here in spring 2017.

In a sea change, some Memphis charters could soon use district buildings without paying rent, though which would qualify is yet to be determined.

The proposal is the latest from the committee of charter and district leaders tasked with working through thorny issues between the sectors, which often have a tense relationship because they are competing for students. Shelby County Schools board members will discuss the recommendation at its meeting tomorrow evening and vote next Tuesday.

The group is also recommending that Shelby County Schools sell its unused buildings to charter schools if the buildings are in good enough condition. Of the 10 vacant district-owned buildings, four would qualify.

The proposed policy would go a long way in clarifying charter school access to public facilities and speeding up Shelby County Schools’ shedding of excess buildings, an issue that has become more acutely felt as enrollment declines.

2016 map: Half of Memphis schools closed since 2012 stand empty

Charter schools authorized by Shelby County Schools make up about a fourth of the district, the most in the state, but only five of the 51 schools use district space. The rest rent private space or, in a few cases, own their buildings.

One barrier to using district space: Until recently, district officials required charter schools to pay rent because not all schools agreed to pay an “authorizer fee” meant to defray the costs the district incurs in overseeing charters. But now that a new state law requires charter schools to pay 3 percent of their state and local dollars to their authorizers starting next year, the district is under less pressure to recoup costs.

The prospect of a change is exciting to Tom Benton, the founder of Vision Prep, one of the five schools currently operating in district space. The school has been spending $79,000 a year to rent its southwest Memphis building, while also footing the bill for maintenance, utilities, some insurance, and any capital improvements it wants to make.

Benton said there are better uses for taxpayer dollars.

“That money could have bought us a new roof,” Benton said from his office, which is one of several parts of the school that have flooded during recent rainfalls. He recently promoted a part-time building engineer to full-time to deal with the issue.

“This is a public school with public school children,” he said. “We feel like those dollars should follow the child.”

It’s unclear whether Vision Prep will get to operate rent-free. The proposal does not guarantee free rent, only make it available, and it does not specify which charter schools will qualify.

Brad Leon, chief of strategy and performance management, said the district could weigh where the school wants to locate, performance on state tests, and whether the school offers specific programs, such as STEM or Montessori. Those specifications would ultimately be up to the school board, Leon said.

With a charter comes the search for school space. Here’s how one Memphis operator is doing it.

How school districts handle space requests by charter schools says a lot about their relationship with the publicly funded, privately managed schools. In New York City, former Mayor Michael Bloomberg, a charter schools advocate, handed out excess space at no cost — a policy that his successor, the current mayor Bill de Blasio, campaigned on altering. (Legislation has stopped him from making major changes.)

Other urban districts with a large number of charters, including Chicago and Indianapolis, negotiate nominal rents — often just $1 — for charter schools. Those cities have robust charter sectors and, importantly, district leaders who accept that charter schools are going to serve a large number of local students.

Shelby County Schools officials have a more complicated relationship with the city’s growing charter sector. They are actively vying to prevent more students from leaving the district for charter schools. And they resent being required by law to allow the 29 Memphis schools in the state-run Achievement School District, which takes over low-performing schools and mostly turns them into charters, to operate in their buildings rent-free.

Tennessee has helped charter schools with space in other ways. It requires districts to post a list of vacant or underused properties that could be used by charter schools, although it lets districts ultimately decide what to do with the buildings.

The state has shown willingness to help charter schools with facility expenses. The same state law that ushered in the authorizer fee also launched a $6 million grant program to reimburse charter schools for capital projects, rent, or purchasing buildings — if the school has a high academic growth score. Benton said Vision Prep has applied to the grant program to offset the school’s costs.


Memphis just gained an important ally in its legal battle with Tennessee over school funding

The board for Metropolitan Nashville Public Schools voted Tuesday to become a co-plaintiff in Shelby County Schools' funding lawsuit against the state of Tennessee.

For more than two years, a funding lawsuit by Memphis school leaders has been winding through the state’s legal system.

Now, as the litigation inches closer to a court date next year, Shelby County Schools has gained a powerful ally in its battle with Tennessee over the adequacy of funding for its schools and students.

The board for Metropolitan Nashville Public Schools voted unanimously Tuesday to become a co-plaintiff in the case.

The decision ends almost three years of talk from Nashville about going to court.

In 2015 at the urging of then-director Jesse Register, the district’s board opted for conversation over litigation with Gov. Bill Haslam’s administration about how to improve education funding in Tennessee.

But Register moved on, and the board’s dissatisfaction grew as the percentage of state funding for the district’s budget shrank. Adding to their frustration, Haslam backed off last year from an enhanced funding formula approved in 2007 during the administration of his predecessor, Phil Bredesen.

“We’ve just come to grips with the harsh reality that we are a chronically underfunded school system,” said Will Pinkston, a board member who has urged legal action.

Nashville’s decision is welcome news for Memphis. A statement Wednesday from the state’s largest district called the lawsuit “the most important civil rights litigation in Tennessee in the last 30 years.”

“When you have the two largest school districts in Tennessee on the same side, I think it’s very powerful,” added former board chairman Chris Caldwell, who has championed the lawsuit in behalf of Shelby County Schools.

Both boards are working with Tennessee-based Baker Donelson, one of the South’s largest and oldest law firms. It has offices in both cities.

“We believe that our original case had a strong message about the inadequacy of education funding in Tennessee,” said Lori Patterson, lead attorney in the case from Memphis. “We believe that having the second largest district in the state join the suit and make the same claims only makes the message stronger.”

Gov. Bill Haslam

Haslam’s administration declined to comment Wednesday about the new development, but has stood by Tennessee’s funding model. In a 2016 response to the Shelby County lawsuit, the state said its formula known as the Basic Education Plan, or BEP, provides adequate funding under state law.

But Shelby County, in its 2015 suit, argues that not only does the state not adequately fund K-12 schools, it doesn’t fully fund its own formula. And the formula, it charges, “fails to take into account the actual costs of funding an education,” especially for the many poor students in Memphis. To provide an adequate education, the lawsuit says the district needs more resources to pay for everything from math and reading tutors to guidance counselors and social workers.

States often get sued over funding for schools — and frequently lose those cases. In Tennessee, state courts heard three such cases from the late 1980s to the early 2000s, siding with local districts every time. Those suits keyed in on built-in inequities in the state’s funding formula that cause some districts to get more money than others.

This time, the argument is about adequacy. What is the true cost of educating today’s students, especially in the shift to more rigorous academic standards?

Tennessee is also the defendant in a separate funding lawsuit filed in 2015 by seven southeast Tennessee school districts including Hamilton County Schools in Chattanooga.

Pinkston said Nashville opted to join the Memphis suit because its arguments are most applicable to the state’s second largest district. “Our student populations are very similar in terms of high socioeconomic needs,” he said.