Market-Based Compensation Reform in K-12
Education
Education Leadership Conference
Southern Methodist University
Nov. 4, 2011
Michael Podgursky
Department of Economics
University of Missouri – Columbia
Fellow, GWBI / SMU
PodgurskyM@missouri.edu
1
• 2007-08 Public K-12 $ 304b salaries,
$103b benefits
• 90% of instructional spending
• “… human resources are key to organizational
success or failure. It is perhaps going too far to say that
excellent HR policies are sufficient for success. But
success with poor HR policies is probably impossible,
and the effects of improved HR success are potentially
enormous.”
• (Baron and Kreps, 1999, emphasis in original).
2
Overview
• Are current teacher compensation policies
the most efficient way to recruit, retain,
and motivate high quality professionals for
public schools?
– Quantity versus quality (staffing ratios)
– Rigid pay structures (single salary schedule)
– Retirement benefit systems
3
Teacher Quality/Compensation
Quantity-Quality Tradeoff
4
Student Enrollment, Teacher and Non-Teacher Employment
In Public Schools: 1980 - 2007
160.0
Nonteachers
Annual average real spending per student growth = 2.3%
150.0
140.0
Teachers
130.0
$53,537
120.0
Student
Enrollment
110.0
$43,722
100.0
$79,128
90.0
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
5
Staff to Student Ratios: US Public Schools, Fall 2007
6
Source: NCES. Digest of Education Statistics. 2009
Falling Student-Teacher Ratios
U.S., Missouri and Texas, 1991-2005
18.0
17.5
17.0
16.5
US
Axis Title
16.0
15.5
15.0
TX
14.5
14.0
13.5
MO
13.0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
NCES. Digest of Education Statistics, various years
2002
2003
2004
2005
7
The Structure of Current
Compensation
• Single Salary Schedule
– Rigid by
• Teaching field
• Schools within a district
• Teaching effectiveness
• “You Can’t Repeal the Law of Supply
and Demand”
8
Columbia, MO teachers
9
Monthly Salary Based on the Standard 10-Month Contract.
Texas
Years of
Experience
Credited
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20 & Over
Monthly Salary
Annual Salary
(10 month contract)
2,732
2,791
2,849
2,908
3,032
3,156
3,280
3,395
3,504
3,607
3,704
3,796
3,884
3,965
4,043
4,116
4,186
4,251
4,313
4,372
4,427
27,320
27,910
28,490
29,080
30,320
31,560
32,800
33,950
35,040
36,070
37,040
37,960
38,840
39,650
40,430
41,160
41,860
42,510
43,130
43,720
44,270
http://www.tea.state.tx.us/index2.aspx?id=2147485382
10
11
12
Weak relationship between experience
and teacher effectiveness
(first few years only)
No relationship between teacher MA and effectiveness
13
Rigidities by Field
14
Could Not Fill
Very
Difficult
Somewhat
Difficult
Easy
Source: NCES. Schools and Staffing Surveys, various years
15
16
Recruitment Difficulties by School Poverty, 2003-04
17
18
19
20
21
22
The Structure of Current
Compensation
• Single Salary Schedule
– Rigid by
• Teaching field
• Schools within a district
– Exposure to novice teachers within district positively
related to student poverty (Podgursky, 2007)
• Teaching effectiveness
– Wide variation in teacher effectiveness within districts
and schools
23
10 20 30 40
0
0
05
10203040
10152025
Percent Student Poverty and Percent Novice Teachers:
Elementary Schools in Nine Largest Missouri School Districts, 2005-06
20
40
60
80
100
20
40
60
80
100
20
40
60
80
100
pct eligible for free or reduced price lunch pct eligible for free or reduced price lunch pct eligible for free or reduced price lunch
Fitted values
Fitted values
0 5
0 5
5
0
onepctfte
10152025
onepctfte
10 15 20
Fitted values
10 15
onepctfte
5
10
15
20
25
20
40
60
80
100
0
10
20
30
pct eligible for free or reduced price lunch pct eligible for free or reduced price lunch pct eligible for free or reduced price lunch
Fitted values
onepctfte
Fitted values
10 15 20
onepctfte
0 5
0 2 4 6 8
Fitted values
0 2 4 6 8
onepctfte
10
15
20
25
0
10
20
30
0
20
40
60
80
pct eligible for free or reduced price lunch pct eligible for free or reduced price lunch pct eligible for free or reduced price lunch
onepctfte
Fitted values
onepctfte
Fitted values
onepctfte
Fitted values
24
The Structure of Current
Compensation
• Single Salary Schedule
– Rigid by
• Teaching field
• Schools within a district
– Exposure to novice teachers within district and student
poverty
• Teaching effectiveness
– Wide variation in teacher effectiveness within
districts and schools
– Aaronson, Daniel., Lisa Barrow, and William Sander. (2007) Teachers and
Student Achievement in the Chicago Public High Schools. Journal of Labor
Economics 25 (1), 95-135.
25
By Teacher
Quality…
26
Total Compensation = Current
+ Deferred Compensation
27
Labor Market Effects of Teacher Pensions
(Final Average Salary DB pensions)
A. Backloading of benefits
B. “Pull” (to an arbitrary age) and “Push” educators out of
the workforce at relatively young ages
C. Massive penalties for mobility (22,000 miles of pension
borders)
D. Distortion in market for administrators
28
29
(non) Sustainability
R. Novy-Marx and J. Rauh. 2009. “Liability and Risks of
State-Sponsored Pension Plans.” Journal of Economic
Perspectives. 23 (4), 191-210
Government Accounting Standards Board. 2010. GASB
Expresses Preliminary Views on How to Improve Its
Pension Standards. (June)
30
Typical DB teacher pension
Annual
Pension = S x FAS x r(S,A)
S = service years
FAS = final average salary
r(S,A) = replacement factor
Age and /or service criteria for regular retirement
31
Lots of moving parts …
Table 1: Key Features of Selected State Defined Benefit Teacher Pension Plans
Ohio
Arkansas
California
Massachusetts
Missouri
Texas
In Social
Security
No
Yes
No
No
No
Varies by district
Vesting (years)
5
5
5
10
5
5
Retirement Eligibility
("normal" or "early")
"normal":
Age=65; or YOS=30
"early":
Age=60; or
Age=55 if YOS =25
"normal":
Age = 60; or
YOS= 28
"early":
YOS=25
Age = 55; or
Age = 50 if YOS = 30
Age = 55; or
Service = 20
"normal":
Age=60; or YOS=30; or
Age+YOS=80
"early":
Age=55; or YOS=25
"normal"
Age=65; or
Age+YOS=80 & Age=60
"early"
Age = 55; or YOS = 30; or
Age+YOS=80
Contribution Rates
District 14%1
Teacher 10%
Employer 14%
Teacher 6%2
Employer 8.25%
State 4.52%3
Teacher 8%4
State 15.6%5
Teacher 11%6
District 12.5%
Teacher 12.5%
State 7.98%7
Teacher 6.9%8
Multiplier
(percent per year of
service)
Years 1-30: 2.2%
Year 31 only: 2.5%
Year 32 only: 2.6%, …
For YOS ≥ 35,
add 9% to total
2.15% + $900
Linear segments:
1.1% at age 50
1.4% at age 55
2.0% at age 60
2.4% at age 63
For YOS ≥ 30, add 0.2% to
factor, to max of 2.4%
Linear:
0.1% at age 41 to
2.5% at age 65
For YOS ≥ 30,
add 2% × (YOS-24)
Max replacement = 80%
"normal", or Age=55:
2.5%, YOS ≤ 30,
2.55%, YOS > 30
"early": 25≤YOS<30:
2.20%, YOS=25
rising linearly to
2.40%, YOS=29
2.3%
COLA formula
3%, simple
3%, simple
2%, simple, plus floor of
80% initial purchasing
power
3%, simple,
on first $12,000
CPI, compound, up to 1.80
maximum factor
None in statute
(periodic, retroactive)
Note: YOS = "Years of Service." Sources: NASRA (2008), individual state CAFR's and pension handbooks.
1 Includes 1% for retiree health insurance.
2 Contributory members only. Average is 4.80%, including non-contributory.
3 Includes 2.5% for 80% floor on initial purchasing power (see COLA).
4 Includes 2% for a supplemental defined contribution plan (see CALSTRS Member Handbook, 2007-08).
5 Calculated from FY07 state appropriation (Commonwealth Actuarial Valuation Report, January 1, 2007).
6 For all teachers hired since 2000.
7 Includes 1.4% for retiree health insurance
8 Includes 0.5% for retiree health insurance
s
32
• In order to understand incentive effects
need to understand accrual (accumulation)
of pension wealth
33
• Pension wealth: Present Value of
Stream of Future Benefits
• “cash value” of pension stream
• Market for annuities
IRA
Annuity
• PW takes account of size of annuity and
expected number of years it is collected
• Note: aggregate PW for educators = total
liabilities of plan
34
Costrell and Podgursky (2011)
35
Missouri
pull
Costrell and Podgursky (2008)
push out
36
37
Arkansas
Annual Accrual of Pension Wealth as a Percent of Salary
Source: Costrell and Podgursky (2007)
38
California
Source: Costrell and Podgursky (2007)
39
Massachusetts
Source: Costrell and Podgursky (2007)
40
Ohio
Source: Costrell and Podgursky (2007)
41
Texas
Source: Costrell and Podgursky (2007)
42
Ohio
Deferred income as percent of salary, Ohio: Entry ages 22, 25, 30
Net Addition to Pension Wealth from an Additional Year of Teaching
400%
350%
300%
250%
30
200%
25
22
150%
100%
percent of salary
50%
0%
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
- 50%
- 100%
age at separation
(Addition to pension wealth is net of interest on prior wealth and net of employee contribution. Assumptions: see Figure 1.
)
43
Do these spikes affect teacher
retirement decisions?
– Yes
•
•
•
•
Furgeson, Strauss, Vogt (2006) - PA
Brown (2008) - CA
Ni and Podgursky (2011) – MO
Costrell and McGee (2010)- AR
Mobility Decisions?
Yes
• Koedel, Grissom, Ni, Podgursky (2011)
44
Teacher Retirements by Years of Teaching Experience:
1993 and 2008 Retirees (Missouri)
Source: Ni, Podgursky, and Ehlert (2009)
45
Effects on Teacher Turnover
Source: Ni, Podgursky, Ehlert, 2009
46
Experience and Age of Teacher Retirees: 1993, 2002, and 2007
(Missouri )
1993
27.1
2002
27.6
2007
26.4
28
29
28
Mean Age
Median Age
58.7
55.7
56.5
59
55
56
N
875
1612
1648
Mean
Experience
Median
Experience
Trend toward later retirement in other sectors and other industrial nations:
Gendell ( 2008)
Burtless, (2008)
Source: Ni, Podgursky, Ehlert, 2009
47
Penalties for Mobility
Female Teacher
Enters at 25
Continuous Work
Salary Schedule of State Capitol
Other assumptions, see
Costrell & Podgursky (2009)
48
49
Actual PW accrual (30)
Cash Balance, smooth accrual
Actual PW accrual (15-15)
Source: Costrell and Podgursky (2009)
50
30
15-15
Source: Costrell and Podgursky (2009)
51
Source: Costrell and Podgursky (2009)
52
Costrell and Podgursky (2010)
53
Projections of Public School K-12 Enrollment: 2005 to 2017
Source: U.S. Department of Education. National Center for Education Statistics.
http://www.nces.ed.gov/programs/projections/projections2017/sec1c.asp
54
Effects on Markets for School Leaders
Source: Koedel, Grissom, Ni, Podgursky (2011)
55
Figure 4: Applicant Pools for Four Hypothetical Schools on Pension Border
Kansas Q1
A
Missouri Q2
B
C
D
22,000+ miles of pension borders
56
Conclusions
1. HR Training for School Leaders
o
o
Compensation Design
Evaluation
2. Greater Labor Market Transparency
o
o
Interstate teacher/administrator mobility
Relative pay and compensation
3. “Regulatory space” for HR Experimentation
o All aspects of compensation
o Charter schools
4. Evaluation
57
Selected References
•
•
•
•
•
M.Podgursky. “Teacher Compensation and Collective Bargaining.” in R. Hanushek,
S. Machin, and L. Woessman (eds). Handbook of the Economics of Education . Vol.
3.
http://web.missouri.edu/~podgurskym/Econ_4345/syl_articles/Podgursky_Teacher_c
omp_EoE_final.pdf
R. Costrell and M. Podgursky. 2009. “Peaks, Cliffs, and Valleys: The Peculiar
Incentives of Teacher Retirement Systems and their Consequences for School
Staffing.” Education Finance and Policy.
http://web.missouri.edu/~podgurskym/articles/files/costrell_podgursky_EFP_2009.pdf
R. Costrell and M. Podgursky 2010 "Golden Handcuffs" Education Next 10 (1)
(Winter), 60-66 http://educationnext.org/files/ednext_20101_60.pdf
C.Koedel, J. Grissom, S. Ni, M. Podgursky 2011. “Pension-Induced Rigidities in the
Labor Market for New Teachers.” http://economics.missouri.edu/workingpapers/2011/WP1115_koedel_podgursky_ni.pdf
A. Olberg and M. Podgursky. 2011. Charting a New Course to Retirement: How
Charter Schools Handle Teacher Pensions. Washington DC: Fordham Institute.
http://web.missouri.edu/%7Epodgurskym/articles/files/Charter_School_Pensions_FIN
AL.pdf
58