Market-Based Compensation Reform in K-12 Education Education Leadership Conference Southern...

Market-Based Compensation Reform in K-12 Education

Education Leadership ConferenceSouthern Methodist UniversityNov. 4, 2011

Michael PodgurskyDepartment of EconomicsUniversity of Missouri – ColumbiaFellow, GWBI / [email protected]

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• 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).

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

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4

Teacher Quality/CompensationQuantity-Quality Tradeoff

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

90.0

100.0

110.0

120.0

130.0

140.0

150.0

160.0

Teachers

Student Enrollment

Nonteachers

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Student Enrollment, Teacher and Non-Teacher EmploymentIn Public Schools: 1980 - 2007

Annual average real spendingperstudent growth = 2.3%

$43,722

$53,537

$79,128

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Staff to Student Ratios: US Public Schools, Fall 2007

Source: NCES. Digest of Education Statistics. 2009

Falling Student-Teacher RatiosU.S., Missouri and Texas, 1991-2005

71991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

17.0

17.5

18.0

Axis Title

US

TX

MO

NCES. Digest of Education Statistics, various years

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”

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Columbia, MO teachers

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Years ofExperience

CreditedMonthly Salary

Annual Salary(10 month contract)

0 2,732 27,3201 2,791 27,9102 2,849 28,4903 2,908 29,0804 3,032 30,3205 3,156 31,5606 3,280 32,8007 3,395 33,9508 3,504 35,0409 3,607 36,070

10 3,704 37,04011 3,796 37,96012 3,884 38,84013 3,965 39,65014 4,043 40,43015 4,116 41,16016 4,186 41,86017 4,251 42,51018 4,313 43,13019 4,372 43,720

20 & Over 4,427 44,270

Monthly Salary Based on the Standard 10-Month Contract. Texas

http://www.tea.state.tx.us/index2.aspx?id=2147485382

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Weak relationship between experience and teacher effectiveness(first few years only)

No relationship between teacher MA and effectiveness

Rigidities by Field

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15

Easy

SomewhatDifficult

Very Difficult

Could Not Fill

Source: NCES. Schools and Staffing Surveys, various years

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Recruitment Difficulties by School Poverty, 2003-04



• 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

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Percent Student Poverty and Percent Novice Teachers:Elementary Schools in Nine Largest Missouri School Districts, 2005-06

01

02

03

04

0

20 40 60 80 100pct eligible for free or reduced price lunch

onepctfte Fitted values

05

101

5202

5



01

02

03

04

0



05

10

15



05

10

15

20



05

101

5202

5

0 10 20 30pct eligible for free or reduced price lunch


02

46

8



02

46

8


onepctfte Fitted values0

51

01

52

0





• 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.

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By Teacher Quality…

Total Compensation = Current + Deferred Compensation

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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

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(non) Sustainability

R. Novy-Marx and J. Rauh. 2009. “Liability and Risks of State-Sponsored Pension Plans.” Journal of EconomicPerspectives. 23 (4), 191-210

Government Accounting Standards Board. 2010. GASB Expresses Preliminary Views on How to Improve Its Pension Standards. (June)

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Annual Pension = S x FAS x r(S,A)

S = service yearsFAS = final average salaryr(S,A) = replacement factor

Typical DB teacher pension

Age and /or service criteria for regular retirement

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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; orAge=55 if YOS =25

"normal":Age = 60; orYOS= 28"early":YOS=25

Age = 55; orAge = 50 if YOS = 30

Age = 55; orService = 20

"normal":Age=60; or YOS=30; or Age+YOS=80"early":Age=55; or YOS=25

"normal"Age=65; orAge+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 501.4% at age 552.0% at age 602.4% at age 63For YOS ≥ 30, add 0.2% to factor, to max of 2.4%

Linear: 0.1% at age 41 to2.5% at age 65For 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=25rising linearly to2.40%, 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)

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, 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 insurance8 Includes 0.5% for retiree health insurance

Lots of moving parts …

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

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• 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

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AnnuityIRA

35Costrell and Podgursky (2011)


pull push out

Missouri

38Source: Costrell and Podgursky (2007)

Arkansas

Annual Accrual of Pension Wealth as a Percent of Salary


California


Massachusetts


Ohio


Texas

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- 100%

- 50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

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

percent of salary

age at separation (Addition to pension wealth is net of interest on prior wealth and net of employee contribution. Assumptions: see Figure 1. )

Deferred income as percent of salary, Ohio: Entry ages 22, 25, 30

Net Addition to Pension Wealth from an Additional Year of Teaching

25 22

30

Ohio

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)

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Teacher Retirements by Years of Teaching Experience:1993 and 2008 Retirees (Missouri)

Source: Ni, Podgursky, and Ehlert (2009)

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Effects on Teacher Turnover

Source: Ni, Podgursky, Ehlert, 2009

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1993 2002 2007Mean Experience

27.1 27.6 26.4

Median Experience 28 29 28Mean Age 58.7 55.7 56.5Median Age 59 55 56

N 875 1612 1648

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

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Penalties for Mobility

Female TeacherEnters at 25Continuous WorkSalary Schedule of State CapitolOther assumptions, see

Costrell & Podgursky (2009)

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Cash Balance, smooth accrual

Actual PW accrual (30)

Source: Costrell and Podgursky (2009)

Actual PW accrual (15-15)


30

15-15

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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

http://www.nces.ed.gov/programs/projections/projections2017/sec1c.asp

55Source: Koedel, Grissom, Ni, Podgursky (2011)

Effects on Markets for School Leaders

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Figure 4: Applicant Pools for Four Hypothetical Schools on Pension Border A B

C D

Kansas Q1 Missouri Q2

22,000+ miles of pension borders

Conclusions1. HR Training for School Leaders

o Compensation Designo Evaluation

2. Greater Labor Market Transparencyo Interstate teacher/administrator mobility o Relative pay and compensation

3. “Regulatory space” for HR Experimentationo All aspects of compensationo Charter schools

4. Evaluation

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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_comp_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/working-papers/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_FINAL.pdf

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http://web.missouri.edu/~podgurskym/Econ_4345/syl_articles/Podgursky_Teacher_comp_EoE_final.pdf



http://web.missouri.edu/~podgurskym/articles/files/costrell_podgursky_EFP_2009.pdf

http://educationnext.org/files/ednext_20101_60.pdf




http://economics.missouri.edu/working-papers/2011/WP1115_koedel_podgursky_ni.pdf

http://economics.missouri.edu/working-papers/2011/WP1115_koedel_podgursky_ni.pdf

http://web.missouri.edu/~podgurskym/articles/files/Charter_School_Pensions_FINAL.pdf



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