The High Cost of Traditional Teacher Compensation: Moody’s Pension Deficit Calculations May Force a Reckoning

One of the least-considered aspects of the defined-benefit pension deficits that have made traditional teacher compensation far too expensive to keep around is the fact that the full costs of the retirement plans to taxpayers and children are still not dealt with in a fully honest way. Because pension systems often use inflated rates of returns on their investments (often around eight percent, even as actual rates of return of stocks on the Standard & Poor’s 500 index was only around four percent during the last decade), pension deficits are often reported as being lower than they actually are. This deliberate hiding of real costs, along with unrealized losses on investments, and methods of valuing assets that wouldn’t be used by private sector pensions, often mans that states and districts are not fully reckoning with the true costs of pensions. Add in the so-called “smoothing”, or adjustments used to keep the volatility pensions experience with investments from wrecking havoc on budgets, and essentially the $1.1 trillion in pension deficits and unfunded retired teacher healthcare liabilities estimated by Dropout Nation may actually be greater than realized.

Which is why school reformers, along with cost-cutting governors and legislators, should pay attention to a report released last year by Moody’s Investor Service, one of the big three bond rating agencies. As part of its effort to bring more transparency to the credit-worthiness of state and local governments — as well as address complaints that it and its counterparts, Fitch and S&P, were too lax in monitoring credit-worthiness of Fannie Mae and private-sector players during the run-up to the nation’s current fiscal woes — Moody’s announced that it would adjust how it calculates defined-benefit pension deficits that governments (including school districts) actually bear. The key step starts with ditching the often-inflated rates of returns on investments set by pensions and instead valuing the assets based on the interest rate of high-grade long term corporate bonds (about 5.5 percent, or more than two percentage points lower than rates if return assumed by pension operators); such a move, in turn, would give taxpayers (and government bond investors) a better sense of the real size of pension deficits.

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