The Fiscal Impact of the Milwaukee Parental Choice Program: 2010-2011 Update and Policy Options

Evaluates the net fiscal impact of the voucher program on state and local public funds in terms of spending on students and the distribution of the impact among property taxpayers in and outside of Milwaukee, state taxpayers, and Milwaukee public schools

The Fiscal Impact of the Milwaukee Parental Choice Program: 2009 Update

In February 2008, the School Choice Demonstration Project (SCDP) issued its first report on the fiscal impact of the Milwaukee Parental Choice Program (MPCP) on taxpayers in Milwaukee and the state of Wisconsin

Incentives and Equity Under Standards-Based Reform

The paper considers theoretical and empirical evidence on the impact of standards-based school reform. Our theoretical synthesis distinguishes between sorting and incentive effects of high standards, and spells out the potential tradeoffs and complementarities between enhancing efficiency and equity in student achievement. Differentiated credentials can be helpful in ameliorating tradeoffs, provided that distinct signals are clearly understood, especially between cognitive and non-cognitive skills. The paper reviews trends in state-level school accountability systems, and examines empirical evidence on the impact of increased standards and expectations on student achievement. Finally, the paper reviews some of the practical challenges facing the standards movement.

Assessing the Impact of Investment Shortfalls on Unfunded Pension Liabilities: The Allure of Neat, but Faulty Counterfactuals

In this paper I provide a methodological critique of the conventional method for assessing the impact of investment shortfalls and other contributors to unfunded pension liabilities, and offer a methodologically sound replacement with substantive policy implications. The conventional method – simply summing the annual actuarial gain/loss figures over time – provides a neat, additive decomposition of the sources of the rise in the Unfunded Accrued Liability (UAL). In doing so, however, it implicitly assumes that in the counterfactual exercise, amortization would adjust dollar-for-dollar with the interest on additional UAL. That is, even if the total (and average) shortfall from covering interest is substantial, the marginal shortfall is assumed to be zero. This is not how contribution shortfalls arise under funding formulas typically used by public plans in the United States. Using the actual funding formula in the counterfactual – with contribution shortfalls on the margin -- leads to much higher estimates of the UAL impact of investment shortfalls than the conventional method. The reason is that there are large interactions over time between investment shortfalls and marginal contribution shortfalls. The conventional counterfactual implicitly assumes away these interactions. The resulting additivity is alluring, but illusory. The conventional method also leads to untenable results on other UAL-drivers. Most striking is the implication that the cumulative UAL impact of pension obligation bonds (POB’s) is no different from the initial impact of receiving the proceeds, independent of the return (actual or assumed) on those proceeds. The underlying problem with the conventional framework is that it has emerged without careful attention to the counterfactual scenarios it is meant to address. This paper provides explicit and internally consistent counterfactuals to better understand the conventional method and its flaws, as well as the reasons for using instead the actual amortization formula in the counterfactual. Mathematical methods are used to illuminate the theoretical issues that lie behind any simulations. The analytical results are illustrated empirically with an adapted version of the actuarial history of the Connecticut State Teachers’ Retirement System (CSTRS), FY00-FY14. The example is instructive because it is a highly underfunded system, notable for its high (and unreduced) assumed rate of return (8.5 percent), as well as its use of $2 billion in POB proceeds to reduce the UAL in FY08, just before the market crash

Collective Bargaining and District Costs for Teacher Health Insurance: An Examination of the Data from the BLS and Wisconsin

District costs for teachers’ health insurance are, on average, higher than employer costs for private-sector professionals. How much of this is attributable to collective bargaining? This paper examines the question using data from the National Compensation Survey (NCS) of the Bureau of Labor Statistics (BLS) and the state of Wisconsin. In addition, the impact of collective bargaining on employer costs is decomposed into the impact on total premiums and the employer’s share of those premiums. The BLS data show that unionization is associated with higher total premiums, higher employer costs, and lower employee contributions in both the public and private sectors. This suggests that the high unionization rate among teachers plays a significant role in districts\u27 higher average cost. Varying strength of teachers unions across states also helps explain the wide variation in district costs. In states with strong unions, such as Wisconsin, prior to 2011, district insurance costs can be very expensive. It is in those states that the opportunities for district cost reduction are most promising. I examine newly available data from Wisconsin to quantify the impact of that state\u27s 2011 change in collective bargaining law, Act 10. I find a sharp reduction in district costs from lower-cost policies and higher teacher contributions: 13 to 19 percent in the first year after Act 10, and 18 to 23 percent after the second year, relative to projected district costs

The Fiscal Impact of the Milwaukee Parental Choice Program: 2010 – 2011 Update and Policy Options

In February 2008 and March 2009, the School Choice Demonstration Project (SCDP) issued its first report and subsequent update on the fiscal impact of the Milwaukee Parental Choice Program (MPCP) on taxpayers in Milwaukee and the state of Wisconsin. These reports covered the period 1993-2009, and addressed two distinct questions: 1. What is the net impact of the MPCP on state and local public funds? That is, what is the difference between the public funds expended on Wisconsin students, including MPCP students, and the amount that would have been spent without the MPCP? 2. How is the fiscal impact distributed among: a. Milwaukee property taxpayers b. property taxpayers outside of Milwaukee c. Wisconsin state taxpayers (e.g. those who pay state income and sales tax) d. Milwaukee Public Schools (MPS

The Fiscal Impact of the Milwaukee Parental Choice Program in Milwaukee and Wisconsin, 1993-2008

Throughout the history of publicly-funded voucher programs – enacted and proposed – the impact on taxpayers has been a recurring issue. As the nation’s longest-running program, the Milwaukee Parent Choice Program (MPCP) provides an important case study. The fiscal impact of Milwaukee’s program has evolved in very significant ways over its 18-year history, both in size, as the program grew, and in its allocation among different groups of taxpayers – Milwaukee property taxpayers, non-Milwaukee property taxpayers, and Wisconsin state taxpayers. This report closely examines the features of the MPCP funding formula, and its interaction with the state’s regular district funding formula over the program’s history to better understand the impact on taxpayers

Peaks, Cliffs, and Valleys: The Peculiar Incentives in Teacher Retirement Systems and Their Consequences for School Staffing

This article examines the pattern of incentives for work versus retirement in six state teacher pension systems. We do this by examining the annual accrual of pension wealth from an additional year of work over a teacher's career. Accrual of wealth is highly nonlinear and heavily loaded at arbitrary years that would normally be considered mid-career. One typical pattern exhibits low accrual in early years, accelerating in the mid- to late fifties, followed by dramatic decline or even negative returns in years that are relatively young for retirement. Key factors in the defined benefit formulas that drive such patterns are identified along with likely consequences for employee behavior. The authors examine efficiency and equity consequences of these systems as well as options for reform

Cross-Subsidization of Teacher Pension Costs: The Impact of Assumed Market Returns

It is well-known that public pension plans exhibit substantial cross-subsidies, both within cohorts, e.g. from early leavers to those who retire at the “sweet spot”, and across cohorts, through unfunded liabilities. However, the cross-subsidies within and across cohorts have never been provided in an integrated format. This paper provides such a framework, based on the gaps between normal cost rates for individuals and the uniform contribution rates for the cohort. Since the unfunded liabilities and associated cross-subsidies across cohorts derive from overly optimistic actuarial assumptions, we focus on the historically most important such assumption, the rate of return. We present two main findings. First, an overly optimistic assumed return understates the degree of redistribution within the cohort. Second, persisting with an overly optimistic assumed return leads to steady-state contribution rates that exceed the true normal cost (let alone the low-balled rate), i.e. cross-subsidies from the current cohort to past cohorts. Using the case of California, we show how that negative cross-subsidy can easily swamp all positive cross-subsidies within the cohort, as contributions exceed the value of benefits received by even the most favored individuals – those who retire at the “sweet spot.

Economics of Sustainable Public Pension Funding

In this paper we propose a new approach to sustainable public pension funding, as an alternative to: (i) traditional actuarial full-funding policies, on the one hand; and (ii) recent proposals aimed instead at stabilizing pension debt at current levels. Actuarial contribution policies aim to fund liabilities that are wrongly discounted at the expected rate of return on risky assets; and these policies promise to do so with amortization schedules that terminate in a precipitous future drop in contributions, which never materializes. Conversely, recent debt-stabilization proposals (Lenney, Lutz, and Sheiner, 2019a; 2019b) properly discount liabilities at a risk-free rate, but effectively untether contribution policy from those liabilities. Our analysis integrates properly discounted liabilities with investment strategies that may be risk-tolerant to some degree, in a policy framework that more transparently conveys the tradeoffs we face. We begin with the fundamental equations of motion for assets and liabilities – how these two sides of the ledger evolve with contributions, asset returns, and newly accrued liabilities. From these equations we formally derive the characteristics of steady-state pension funding – which we take as the definition of sustainability. We also derive the set of contribution adjustment parameters that smoothly achieve steady-state – a non-trivial exercise. The resulting contribution schedules differ conceptually from the traditional setup of normal cost plus amortization. Building on previous work (Costrell, 2018, Costrell and McGee, 2020), we examine the steady-state implications of differentiating between the assumed return on assets (r) and the discount rate on liabilities (d). We integrate these insights into a semi-formal social optimization framework to sketch out a contribution policy approach that conveys the tradeoffs between intergenerational burden-sharing, the pursuit of returns, and the cost of risk-bearing