APS – Administration’s Position on the Unfunded Pension Liability – As Stated in Court

I have reviewed the transcript of the hearing held last December on the method used by APS to reduce “local revenues” by the amount of the unfunded pension liability which resulted in a $2.8 million lower payment to Charter Schools for FY13. The Judge has ruled that the methodology used by APS was not consistent with the GA Statutes, however the case has been appealed by APS and so the funds continue to be withheld.

The following is some background on how the issue arose:

  1. The problems started back in the 70’s or 80’s when the teachers in the Atlanta City General Employees Pension Plan moved to the Teacher Retirement System (TRS).
  2. TRS required that the transfer of the teachers to their system be “fully funded”. As a result, a substantial amount of the pension assets were transferred to TRS and, at that point, APS’s share of the City Pension Plan was woefully underfunded.
  3. Since at least 2002, APS has made payments ranging from $39-46 million on an annual basis.
  4. The total unfunded pension amounts to approximately $532 million and APS has scheduled payments over the next 14 years ranging from $44 million in the early years to $80 million in 2027.

In a word, it’s a mess left over from the failure of prior Board’s of Education to fix the problem when it arose. Accordingly, since the problem was detected, APS benefited by spending more than it otherwise would have if the proper amounts had been allocated to the unfunded pension from the beginning.

It is instructive to look at the arguments posed by APS in support of their methodology as it presents their major concerns regarding available resources for direct APS students now and in the future. In summary, the arguments (with my comments in parenthesis and bold) are as follows:

  1. Everyone in the entire system (including Charter Schools) benefits from paying the amounts due. (Comment – The benefits cited by CFO Burbridge are not “direct benefits” but general benefits related to “reputational” and “adhering to Generally Accepted Accounting Principles”. In essence, a clear admission that Charter Schools did not “benefit” due to the underfunding. However, as noted above, APS clearly did benefit from the prior underfunding.)
  2. As the cost of paying the unfunded pension increases, the impact on direct APS students will increase and there will be a growing disparity between the funding of Charter School and direct APS students. (Comment – this argument was essentially demolished by the Charter School counsel who pointed out that there is already a substantial “disparity” in funding due to SPLOST revenues and Federal revenues that are not shared with the Charter Schools.)
  3. If local taxes have to be increased to cover the cost of the unfunded pension, then Charter Schools will get a “windfall” as they will share in the increased tax revenues. (Comment – theoretically this would be true, but the assessment is based on several assumptions that were not specifically identified in the argument such as: (a) the tax base used in the argument remained static and there was no provision for an increase in property values over the next 14 years; (b) as the increase in property value was not considered, the assumption that property taxes would have to be raised in the future that result in a “windfall” for Charter Schools is unfounded; and (c) the total unfunded liability ($532 million) continues to be discussed even though the number is very outdated (actuarial valuation dates back to July 2011) and does not consider the pension plans investment performance for the last two years.)
  4. The funding “windfall” to the Charter Schools is an “absurd result” that was not intended by the Legislature when the Charter School funding formula was developed. (Comment – this is probably true, just as the Legislature probably did not consider that fiscally irresponsible Boards of Education would not pay for their liabilities as incurred and engage in “generational theft”.)
  5. The reduction in Charter School funding was “transparent” and could otherwise be accomplished by a direct expenditure charge to the Charter Schools similar to the charge for certain APS data processing capabilities the Charter Schools use. (Comment – I do not see how this line of reasoning holds up. I believe the Charter Schools have agreed to certain charges as they gain a benefit for doing so, but my sense is that it would be a difficult case to prove that the pension liability expenditure could be charged without their consent.)
  6. If 100% of the school system converted to Charter Schools, there would be no funding available to pay for the unfunded pension liability. (Comment – this is a strawman argument, but let’s assume that this were the case. If so, taxpayers would no longer have to fund a substantial portion of $49 million in APS School Administration, $77 million in APS Operations and Transportation and $46 million in APS General Administration. Give me that choice as a taxpayer and I guarantee you we will find a way to fund the pension liability.)
  7. If APS cannot use its methodology for allocating “local revenues”, Mr. Burbridge would strongly recommend against approving any new Charter Schools or renewing any existing Charters. (Comment – the Judge specifically asked if this “was a threat?” APS counsel said no, but I do not see how it could be construed as anything else.)
  8. Comment – while not noted in the hearing, the amount of annual unfunded pension liability is composed of two items – the cost for active employees (approximately 800 who are working to the direct benefit of APS) and the cost related to prior years underfunding.

As you can see, the whole situation is a mess and the end result is less funding for the school system. Is there a compromise solution that deals with the issues raised by APS and that still allows the Charter Schools to be fully funded in the near term? I think so, and will provide a suggestion in a future post.

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