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Market-Based Compensation Reform in K-12 Education Education Leadership Conference Southern Methodist University Nov. 4, 2011 Michael Podgursky Department.

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Presentation on theme: "Market-Based Compensation Reform in K-12 Education Education Leadership Conference Southern Methodist University Nov. 4, 2011 Michael Podgursky Department."— Presentation transcript:

1 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 1

2 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).

3 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

4 4 Teacher Quality/Compensation Quantity-Quality Tradeoff

5 5 Student Enrollment, Teacher and Non-Teacher Employment In Public Schools: Annual average real spending per student growth = 2.3% $43,722 $53,537 $79,128

6 6 Staff to Student Ratios: US Public Schools, Fall 2007 Source: NCES. Digest of Education Statistics. 2009

7 Falling Student-Teacher Ratios U.S., Missouri and Texas, NCES. Digest of Education Statistics, various years

8 The Structure of Current Compensation Single Salary Schedule –Rigid by Teaching field Schools within a district Teaching effectiveness You Cant Repeal the Law of Supply and Demand 8

9 9 Columbia, MO teachers

10 10 Years of Experience Credited Monthly Salary Annual Salary (10 month contract) 02,73227,320 12,79127,910 22,84928,490 32,90829,080 43,03230,320 53,15631,560 63,28032,800 73,39533,950 83,50435,040 93,60736, ,70437, ,79637, ,88438, ,96539, ,04340, ,11641, ,18641, ,25142, ,31343, ,37243, & Over4,42744,270 Monthly Salary Based on the Standard 10-Month Contract. Texas

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13 13 Weak relationship between experience and teacher effectiveness (first few years only) No relationship between teacher MA and effectiveness

14 Rigidities by Field 14

15 15 Easy Somewhat Difficult Very Difficult Could Not Fill Source: NCES. Schools and Staffing Surveys, various years

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17 17 Recruitment Difficulties by School Poverty,

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23 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

24 24 Percent Student Poverty and Percent Novice Teachers: Elementary Schools in Nine Largest Missouri School Districts,

25 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),

26 26 By Teacher Quality…

27 Total Compensation = Current + Deferred Compensation 27

28 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

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30 30 (non) Sustainability R. Novy-Marx and J. Rauh Liability and Risks of State-Sponsored Pension Plans. Journal of Economic Perspectives. 23 (4), Government Accounting Standards Board GASB Expresses Preliminary Views on How to Improve Its Pension Standards. (June)

31 31 Annual Pension = S x FAS x r(S,A) S = service years FAS = final average salary r(S,A) = replacement factor Typical DB teacher pension Age and /or service criteria for regular retirement

32 32 OhioArkansasCaliforniaMassachusettsMissouriTexas In Social Security NoYesNo Varies by district Vesting (years) 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 RatesDistrict 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% + $900Linear segments: 1.1% at age % at age % at age % 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": 25YOS<30: 2.20%, YOS=25 rising linearly to 2.40%, YOS=29 2.3% COLA formula3%, 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) Table 1: Key Features of Selected State Defined Benefit Teacher Pension Plans s 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, ). 5 Calculated from FY07 state appropriation (Commonwealth Actuarial Valuation Report, January 1, 2007). 6 For all teachers hired since Includes 1.4% for retiree health insurance 8 Includes 0.5% for retiree health insurance Lots of moving parts …

33 In order to understand incentive effects need to understand accrual (accumulation) of pension wealth 33

34 Pension wealth: Present Value of Stream of Future Benefits cash value of pension stream Market for annuities 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 Annuity IRA

35 35 Costrell and Podgursky (2011)

36 36 Costrell and Podgursky (2008) pull push out Missouri

37 37

38 38 Source: Costrell and Podgursky (2007) Arkansas Annual Accrual of Pension Wealth as a Percent of Salary

39 39 Source: Costrell and Podgursky (2007) California

40 40 Source: Costrell and Podgursky (2007) Massachusetts

41 41 Source: Costrell and Podgursky (2007) Ohio

42 42 Source: Costrell and Podgursky (2007) Texas

43 43 Ohio

44 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

45 45 Teacher Retirements by Years of Teaching Experience: 1993 and 2008 Retirees (Missouri) Source: Ni, Podgursky, and Ehlert (2009)

46 46 Effects on Teacher Turnover Source: Ni, Podgursky, Ehlert, 2009

47 Mean Experience Median Experience Mean Age Median Age N Experience and Age of Teacher Retirees: 1993, 2002, and 2007 (Missouri ) Trend toward later retirement in other sectors and other industrial nations: Gendell ( 2008) Burtless, (2008) Source: Ni, Podgursky, Ehlert, 2009

48 48 Penalties for Mobility Female Teacher Enters at 25 Continuous Work Salary Schedule of State Capitol Other assumptions, see Costrell & Podgursky (2009)

49 49

50 50 Cash Balance, smooth accrual Actual PW accrual (30) Source: Costrell and Podgursky (2009) Actual PW accrual (15-15)

51 51 Source: Costrell and Podgursky (2009)

52 52 Source: Costrell and Podgursky (2009)

53 53 Costrell and Podgursky (2010)

54 54 Projections of Public School K-12 Enrollment: 2005 to 2017 Source: U.S. Department of Education. National Center for Education Statistics.

55 55 Source: Koedel, Grissom, Ni, Podgursky (2011) Effects on Markets for School Leaders

56 56 22,000+ miles of pension borders

57 Conclusions 1.HR Training for School Leaders o Compensation Design o Evaluation 2.Greater Labor Market Transparency o Interstate teacher/administrator mobility o Relative pay and compensation 3. Regulatory space for HR Experimentation o All aspects of compensation o Charter schools 4.Evaluation 57

58 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. omp_EoE_final.pdf omp_EoE_final.pdf R. Costrell and M. Podgursky Peaks, Cliffs, and Valleys: The Peculiar Incentives of Teacher Retirement Systems and their Consequences for School Staffing. Education Finance and Policy. R. Costrell and M. Podgursky 2010 "Golden Handcuffs" Education Next 10 (1) (Winter), Handcuffshttp://educationnext.org/files/ednext_20101_60.pdf C.Koedel, J. Grissom, S. Ni, M. Podgursky Pension-Induced Rigidities in the Labor Market for New Teachers. papers/2011/WP1115_koedel_podgursky_ni.pdfhttp://economics.missouri.edu/working- papers/2011/WP1115_koedel_podgursky_ni.pdf A. Olberg and M. Podgursky Charting a New Course to Retirement: How Charter Schools Handle Teacher Pensions. Washington DC: Fordham Institute. AL.pdf AL.pdf 58


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