Saturday, July 27, 2013

In another life, we must have been very good.

I talk with a number of retired teachers whose careers roughly approximated my own. I began teaching in 1966 and retired in 1999.

All the folks with whom I speak seem to agree that we taught in what we view as the "golden age" of education. American schools were the class of the world. Schools hired teachers and then let them teach. Teachers were encouraged to be creative in their work. Efforts were not being made to make the curriculum "teacher proof." When you called home about a problem, parents got busy and backed you up. Their first thought was not to hire a lawyer.

The pay wasn't great, but most taxpayers felt you did a good job for too little money. They tried to make the pay better and they succeeded.

Then there was the pension. We didn't think it was something unusual. When I started teaching more than half of American workers were covered by a pension plan at work. Tier I was easy to figure out. After 33 years of teaching I receive 66% of my final average salary.

Along with our pensions--my wife was a teacher, too--we receive Social Security payments each month. NY teachers may not be aware of it, but there are other states in which public employees--including teachers--cannot participate in the Social Security system. Their pension is their only "guaranteed" income. (The quotation marks are due to places such as Detroit.)

 I can't afford a yacht, but my wife and I can live comfortably and pay our bills. To many other Americans, that seems like a far off dream.

PBS ran a Frontline documentary in April titled Retirement Gamble. I just got around to watching it, and you can watch it on your computer by clicking on the link.

I already knew that America is in a retirement crisis. There have been several posts to this blog concerning how few Americans are covered by 401k plans at work (42%) and what lousy alternatives these plans are compared to traditional pensions.

What had not sunk in for me is how truly awful most 401k plans are and the reason why we will probably never get rid of them.

Remember, 401k plans were never expected to replace traditional pensions. They were created as a "perk" for highly-paid executives. However, these plans provided a loophole big enough to allow companies to ditch their traditional pension plans. And they did.

It really sounded like a win-win. The employer would match the employee contribution (up to a point), they were portable when the employee changed jobs, and the employee was told that they would be in charge of their own money.

And here's where things get a bit nefarious. The employee really can't pick any investment for their money in a 401k. They only get to pick among a few mutual funds chosen by the 401k administrator. Funds which, by the way, have almost certainly paid a fee to the 401k administrator to be part of the plan's choices.

Guess who those fees wind up being charged to. That's right, they come off the top before any earnings are distributed to the plan participants. And, of course, these funds are actively managed--as opposed to "index" funds--and the management companies take their management fees off the top as well.

Here's an interesting example: Suppose you invest your 401k money into a fund that earns an average of a 7% return over 50 years. Now suppose that this fund charges a 2% management fee each year. For every $100,000 in returns over the course of those 50 years, those fees will eat up $65,000. Oh the magic of compound interest!

That's right. As Jack Bogle, founder of Vanguard says: "You put up 100% of the capital. You took 100% of the risks, and you get about 30% of the returns!"

And that is why it's going to be almost impossible to get rid of the 401k. The financial services industry, which used to be about 7% of the economy but is now over 40%, sees all of these 401k fees as a cash cow. And they're still working on getting Social Security "privatized" so that they can do the same thing they've already done with 401k accounts!

Take a look at the film and you will understand why private sector workers are jealous of public sector pensions. They have every right to be angry. They have been royally screwed! Their anger, however, is misplaced. Instead of railing against those workers who still have traditional pensions, they should be demanding that we go back to the system of the "three-legged stool" which worked so well. The 3 legs were pension, Social Security and individual savings.

In a rational world, Americans would look at this situation and say: "Hey, every other wealthy country has figured out how to provide better retirement security than us. Congress, get off your butts and solve this problem!"

Unfortunately, the banks and other financial services have armies of lobbyists with campaign contributions in hand. How many lobbyists do 401k owners employ?

Saturday, July 20, 2013

Keep an eye on Detroit.

What in the world happened to Detroit?  Some would have us believe that once again those greedy public employees and their outlandish pay and benefits--enforced by their union thugs-- ruined an economy.

The real story is just a tad more nuanced. Here's the best one-paragraph explanation I've been able to find. It's from a story titled Detroit and bankruptcy: How a great American city endured decades of decay published in the Huffington Post.

"It took decades of decay to bring down the once-mighty industrial giant that put the world on wheels. The city grew to 1.8 million people in the 1950s, luring them with plentiful jobs that paid good wages to stamp out automobiles for sale across the globe. But like many American cities, Detroit's fall began late that decade as developers starting building suburbs. Then came the 1967 riots that accelerated the number of white residents who moved to the cities north of Eight Mile Road, considered the region's racial dividing line. At the same time, auto companies began opening plants in other cities, and the rise of autos imported from Japan started to cut the size of the U.S. auto industry. Detroit's property values fell, tax revenue dropped, police couldn't control a growing murder rate, and many middle-class blacks fled the city for safer suburbs with better schools. By 2009, the auto industry collapsed along with the economy as a whole, eventually pulling the city down with it. Government corruption under former Mayor Kwame Kilpatrick only made things worse. In the 2000 census, Detroit's population fell under 1 million in as the exodus continued. Today it's barely above 700,000."

As the population declined, the city's infrastructure remained 139 square miles in size. People didn't all move from the same neighborhoods, so all the streets still needed to be maintained. Sure, there were fewer people, but the growing number of abandoned structures created a need for more fire protection not less. More poverty translated to more crime. Hard to cut police personnel under those circumstances. And so it went.

It's tragic, but what importance does it have for retired teachers in WNY? Plenty!

Let's consider the retired public employees of Detroit. They've just been told that they may lose up to 90% of their pensions! But wait, Michigan has a clause in their state constitution which protects the pensions of public employees, just like New York. One legal theory holds that since Bankruptcy is a federal proceeding, federal bankruptcy law trumps state law--including the state's constitution--and the retirees must get in line and wait for their few cents on the dollar along with other creditors.

On the other hand, a Michigan judge has just held that it is a violation of the state constitution for a governmental body to apply for bankruptcy protection since it would lead to a reduction in public employee pensions in violation of the state constitution.

To make matters worse, here's the beginning of an article from today's NY Times titled Detroit Gap reveals industry dispute on pension math: "Until mid-June, there was one ray of hope in Detroit’s gathering storm: For all the city’s problems, its pension fund was in pretty good shape. If the city went under, its thousands of retired clerks, police officers, bus drivers and other workers would still be safe."

"Then came bad news. Seemingly out of nowhere, a $3.5 billion hole appeared in Detroit’s pension system, courtesy of calculations by a firm hired by the city’s emergency manager."

"....But Detroit’s pension revelation is nothing new to many people who run pension plans for a living, the math-and-statistics whizzes known as actuaries. For several years, little noticed in the rest of the world, their staid profession has been fighting over how to calculate the value, in today’s dollars, of pensions that will be paid in the future."

That's right, in the boring world of actuaries, there's a big fight on concerning the assumptions used to determine how "fully funded" a pension plan is. Imagine what would happen if tomorrow's headlines read "NY teacher retirement system not fully funded. Gazillion dollar unfunded liability discovered." Constitution or not, some very unpleasant stuff would hit the fan!

Could anything like Detroit happen in New York? Been paying attention to your local school district finances, particularly those in upstate NY? The state has cut back on aid to local schools at the same time that the tax cap has limited the ability of districts to raise local revenue. Districts have been laying off teachers while using their reserve funds to help avoid educational collapse.

Some districts have exhausted their reserve funds while others are only a year or two away. School administrators across the state have been warning of a coming educational and financial bankruptcy.

So let's keep an eye on what happens in Detroit. It just might have real implications for WNY retired teachers.

Wednesday, July 10, 2013

Bad teachers?

In my 33 years in the classroom, I have known some truly great teachers. I've also known teachers of average abilities. There have also been some that I would place in the "above average" and "below average" categories.

As with the medical or legal profession, not every teacher is a superstar. If someone is above average there must be those whose abilities are below average. That's the only way you get to have an "average."

But what about those teachers who just should not be in charge of a classroom? When I think back on my career, I can name some but, if I'm counting on the fingers of my right hand, I wind up with a leftover finger or two. I'm willing to bet that that's your experience too.

New York is a state in which a teacher can be terminated at any time during the first 3 years without a reason needed. Administrators have a full 3 years to determine where on the superstar-to-abomination continuum each probationary teacher falls.

Tenure simply means that termination must be for a reason, and that reason must be documented. That's hardly a guarantee of a job for life. And, given enrollment changes, elimination of programs, etc., even superstar teachers with tenure can find themselves without a job.

The current crop of education "reformers," however, would have us believe that our public schools have been invaded by a plague of locusts disguised as "bad teachers." If only we could get rid of those "bad teachers," our schools would once again have graduates who would rank right up there with the best in the world.

Just how many "bad teachers" do we have? Is it 5%, 10%, 15% of inservice teachers? What if it's 25%? Suppose we find a way to eliminate the worst-performing quartile of our teachers tomorrow, would our schools rival those of Finland? You and I both know that if the bottom 25% of teachers in our school district were replaced by teachers with the abilities of those in the top 75%, there would not be much difference in the performance of our students.

Yet we are being told that we need to spend precious resources preparing for and giving a mind-numbing array of tests to students in order to ferret out these "bad teachers."

Isn't it just possible that there is another cause for poor school performance? Two newspaper columns from the last few days seem to agree with this thought.

Donn Esmonde, writing in the Buffalo News, says that he loves the annual lists ranking public schools by performance. Why?

"...I like the rankings, which are based solely on test scores, for one reason – they confirm what education experts have said for decades: The biggest factor in how well kids do in school is not quality of teachers, variety of programs, class size, access to computers or how often pizza is served in the cafeteria. No, it’s socioeconomics."

Scott Waldman, education columnist for the Albany Times-Union, points out that the high-performing schools are "low needs" schools in which most homes have two parents who are college-educated. Most of the bottom-performers are "high needs" schools with large number of students who qualify for free or reduced-price lunches. According to Waldman: "The higher a school's concentration of poverty, the less likely a student is to graduate, according to recently released figures by the state Education Department."

"Study after study has shown that poverty has a tremendous effect on a child's schooling. Children in poverty are more likely to move frequently, to come to school hungry, to miss a large number of school days. These districts have a far higher percentage of special education students and students who speak languages other than English at home."

Let's put it another way. Suppose every school in America had exactly the same resources. We would expect that children of two-parent college-educated homes would still do better in school compared with children who lived in poverty.

In a rational world, we would try to even out the educational opportunities by sending more resources toward the poverty schools and less to the "low needs" schools?

Well, our educational system is a very irrational world. In our real world, who gets the best-equipped science labs, the fanciest auditoriums full of the finest equipment or the opportunity for the most and best field trips? Not the "high needs" kids!

Could it be that our educational problem is not an infestation of "bad teachers," but an educational system which takes the students who are most likely to do well in school and gives them additional resources while giving less resources to those with the greatest need?

Let's give the last word to Esmonde:

"I don’t want to diminish the good work that teachers do. But, for the most part, test scores are not about how good a particular school’s teachers are. Instead, they reflect the background of the kids they teach."

"Doubt it? Then imagine this: Take all the kids from, say, Buffalo’s Burgard High and send them to Williamsville East for a year. Take the Williamsville East kids and send them to Burgard for a year. You don’t have to be a school superintendent to guess what would happen: Test scores at Burgard would skyrocket, test scores at Williamsville would nosedive."

"It would not be because the Burgard teachers suddenly upped their game, or because the Williamsville teachers lost their touch. It would be about who is sitting at the desks."

"...There is no reason for suburban teachers to check the school rankings and feel smug. Just as there is no reason city teachers – of whom my wife is one, although not in a classroom – to feel defensive. But given what is at stake, I think there is every reason to understand what these test scores are really about."