Reflection

Owings, W. A., & Kaplan, L. S. (2019). American Public School Finance (3rd ed.). Taylor & Francis. https://bookshelf.vitalsource.com/books/9781351013772

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Chapter 12:Critical and Emerging School Finance Issues

FOCUS QUESTIONS

1 Explain the teacher health care benefits “crisis” and discuss the political and fiscal issues surrounding it.

2 Discuss the teacher “pension crisis” and identify the fiscal and political issues involved.

3 Summarize the ways that states can respond to the teacher health care benefits and pension crises.

4 Explain the student achievement and fiscal management outcomes of school choice programs when

states do not enact (and enforce) sufficiently clear and high performance expectations and oversight.

5 Present the research-based and labor market arguments regarding alternative approaches to teacher

compensation (including paying for graduate degrees, paying for teaching experience, performance pay,

knowledge- and skills-based pay, differentiated salary schedules, and career pathways).

The teacher health care benefits and pension “crises” are critical concerns. Ballooning health care costs have

created enormous gaps between educators’ promised benefits during their working and retirement years and

the significantly underfunded accounts to pay for them. How states and localities (and taxpayers) can make

good on their commitments to educators without undermining students’ education is of vital concern.

Emerging (but no less critical) matters involve school choice and teacher compensation. School choice

and its taxpayer-funded voucher programs depend on taxpayer dollars but do not ensure acceptable student

achievement or ethical fiscal stewardship. Similarly, present-day teacher compensation practices—such as

single salary scales—are not in line with 21st-century labor market expectations for professional employees.

Rather, teacher compensation alternatives—including performance pay (“merit”) plans, paying for knowledge

and skills, differentiated salary scales, and career pathways—are gaining increasing interest as ways to

increase teachers’ job satisfaction, attract more high-quality and effective educators, and raise student

achievement.

CRITICAL ISSUE: THE TEACHER HEALTH BENEFITS CRISIS

Education is an expensive enterprise, and most of the costs go for personnel. Yet while the economy has

recovered from the 2007–09 recession, the average teacher in 39 states earned less in 2016 than he or she

did in 2010, adjusted for inflation.1 And even as teachers have less money in their pockets, their health

insurance costs have increased more rapidly than the economy.

Traditionally, teachers accepted a “trade-off”—receiving relatively low salaries in exchange for relatively

generous benefits (including health care with low-to-no cost premiums while working and pensions with

subsidized health care after retirement). But today this compact is fraying. First, a substantial body of research

finds that rather than having “lavish benefits,”2 public school teachers and other government employees have

a total compensation and benefits package that is lower (or at least not higher) than comparable private sector

workers receive.3 Second, over the past decades, states and school districts have not met their responsibility

to fully fund this fiscal obligation.

Clearly, health care costs—including premiums, co-payments, and deductibles—are spiraling, and

teachers’ salaries are not keeping up with inflation. On average over the past decade, teacher salaries have

increased 1.4% a year as compared with increases of 4% for health insurance and 7.8% for retirement.4 In

fact, most teacher compensation increases go to pay for health insurance and unfunded pension liabilities

rather than increased salaries.5

Rising Health Insurance Costs

Teachers are paying more of their health insurance costs because states and local governments are paying

more for it. State and local governments paid 14.5% more in 2017 than in 2008 to cover a primary, secondary,

or special education teacher and his/her family, adjusted for inflation.6 Unlike private companies, public

schools cannot pass on higher costs of doing business—like an increased cost of electricity—to customers in

the form of higher prices. And the public sector faces constraints on raising taxes or issuing debt. As a result,

teachers (and other public sector employees) are being asked to share a larger part of their health care costs

with their employers. Roughly 16% of the cost in health care benefits is passed on to school district employees

through reductions in wages and salaries.7

In a 2017 Employer Health Benefits Survey, the Kaiser Family Foundation determined that the average

American employee’s family health coverage cost $18,764 annually, with employers and employees sharing

costs.8 Similarly, the Bureau of Labor Statistics (BLS), primary, secondary, and special education teachers paid

25.4% more in 2017 than in 2008 to insure themselves and their families, adjusted for inflation, more than

$7,000 annually, in family health insurance premiums.9 For early-career teachers, this amount can be

unmanageable. Yet despite the extra costs for family coverage, the data are unclear whether they receive more

in higher quantity or quality health services.10

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Restraining Health Care Costs

In addition to cost sharing, many states are curbing health care expenses by initiating new high-deductible and

consumer-driven health plans including PPOs/POS (preferred provider organization/point-of-service plans),

health management organizations (HMOs), and health savings accounts for its public service employees,

using a network of doctors and hospitals. These plans differ in network size, terms of use, and the degree of

“cost sharing” of premiums, deductibles, co-payments, out-of-pocket maximums, and other expenses shared

between employers and employees for medical services provided inside or outside the network. Frequently,

teacher unions play a key role in setting teachers’ health care costs, negotiating public employee health

benefits through the political process. In 2017, 34.7% of educators worked under union contracts.11

At kitchen tables everywhere, American teachers are deciding whether to choose high premiums (and

pay more every month for manageable health costs later) or high deductibles (and have more take-home pay

now but risk higher out-of-pocket costs later). Increasingly, they are doing the latter—or deciding whether

health insurance is even worth it.

CRITICAL ISSUE: THE TEACHER PENSION CRISIS

Most state pension funds are in debt. The underfunding of teacher pensions is serious, immediate, and

unsustainable. Many state retirement systems are falling short of their investment targets, without enough

money set aside to fund the pension promise they made to public employees. In 2018, teacher pensions made

up about $500 billion in unfunded liability.12

Retirement plans typically include both monetary payments and health care coverage. Although most

state and local governments promise this benefit to employees, few states or municipalities have reserved the

monies to honor this commitment.13 As a result, many states are either reducing or ending this benefit. For

this chapter, retirement health care costs are assumed to be included in the pension discussions.

A Pension Primer

Pensions are a form of payment, other than wages, disbursed at regular intervals for past service, age, injury,

or other reasons. Defined benefit (DB) pension plans are those in which an employee is paid a fixed amount at

regular intervals, usually monthly, following retirement. The retirement benefits are “defined” because the

employees and employers know the benefits ahead of time; what the retiree receives does not depend on

investment returns.

Defined benefits payments are calculated according to a formula that includes the years of service, the

final average salary earned at the time of retirement (typically calculated over the last three or five years of

employment), and a benefit multiplier. As Figure 12.1 indicates, a pension plan with a 2% multiplier for a

teacher with 25 years of service and a final average salary of $50,000 would receive an annual benefit of

$25,000. Similarly, in a system with a 1.5% multiplier, a teacher retiring with 20 years of service and a final

average salary of $60,000 would collect a $18,000 pension annually. The benefit’s generosity varies depending

on the state’s public pension system. Plans determine the number of years of service required to receive a

minimum pension (the “vesting” requirement) and the minimum age at which one becomes eligible to retire.

Upon retirement, retirees are guaranteed lifetime benefits. For educators in the public sector, the state agency

manages the portfolio and investment risk. Ninety percent of American public schools teachers have DB

plans.14

By comparison, defined contribution (DC) pension plans—such as a 401(k)—are a retirement savings plan, not

a pension.15 In a DC plan, the worker can contribute a certain amount

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Hybrid retirement plans combine aspects of a DB plan, a DC plan with an individual retirements savings

account, and Social Security (SS) enrollment.16 Generally, the separate DB and DC parts of the hybrid plan

generate a smaller benefit than they would in a stand-alone DB or DC plan, but when combined, their total

benefits may be comparable. Ten states have adopted hybrid retirement plans. Hybrid plans can provide better

retirement savings rates than a DB-only plan for early and mid-career workers who change jobs. Their costs

are more predictable for employers than DB-only plans, but they open employees to greater investment risk

than DB-only plans.17

Another alternative, cash balance plans (CB) combine many of the DB’s and DC’s best features. Each

member has an individual account to which both employers and employees contribute, but members cannot

choose how the money is invested. Annually, the plan awards employees a salary credit set at the fixed

percentage of salary and an investment return credit set at a relatively safe percentage. Since employees own

their CB accounts, at retirement they can take their entire balance with them as a lump-sum payment or

convert it to an annuity with guaranteed lifetime monthly payments. Because they reduce the number of

assumptions that policymakers must make to accurately project costs, CBs provide a more predictable cost

structure to states than traditional DB plans. Millions of private sector workers have cash balance retirement

plans, and several states are adopting them for their public sector employees.

By 2017’s end, teachers in 49 states had retirement plans with some DB features. Public retirement

systems in 26 states offered educators DB plans only. Retirement systems in 23 states and the District of

Columbia managed separate DB and DC plans, DB–DC hybrid plans, or “cash balancer” plans.18

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Recent History of the Pension Crisis

Today, public pensions needed a large infusion of new money. A brief look back helps explain why.19 After

World War II, defined benefit plans became popular. Teacher pay was low, and states could offer DB plans as a

form of deferred compensation to attract a capable teaching workforce. In the late 1990s and early 2000s,

pension fund assets grew along with rising stock prices. Feeling flush, legislators approved pension

enhancements without a reliable plan to pay for them. They also briefly substituted investment gains for a

portion of the normal annual contributions, reducing teacher retirement costs per hour as a share of their total

compensation package.

Since 1994, teacher retirement costs have more than doubled.20 Since then, two large stock market

crashes—the “dot.com” bust in the early 2000s and the Great Recession (2007–09)—have dramatically

changed the retirement portfolio picture. Poor investment returns (for DB and DC plans), unrealistic investment

assumptions about the rate and size of economic growth, badly timed or poorly considered benefit upgrades,

elected officials’ failure to make the financial contributions that they committed to do, and other causes led to

the current underfunding. In a fiscal bind, state legislators began to cut teacher pension benefits.

Federal rules have also impacted pensions. The Employment Retirement Income Security Act (ERISA,

1974) requires minimum funding standards for private sector retirement plans. These plans must undergo

annual auditing and disclosure of financial information, and plan sponsors accept fiduciary duties (and

penalties).21 Further, a series of mid-1980s laws and the Pension Protection Act of 2006 increased the

regulatory burden on private sector DB plans,22 persuading companies to switch from DB to DC plans to cut

costs, reducing their contribution to each employees’ pension almost in half.23 By contrast, public sector

plans—for teachers, police, and firefighters, for example—are not subject to the same strict regulatory laws as

private sector plans and have not seen the same dramatic shift from DB to DC plans.

Public pensions receive their money from three sources: employee contributions; employer (state or

local government from taxpayers) contributions; and investment returns. States vary in the rates (as a

percentage of salary, tax deferred) that teachers contribute to their pensions, ranging from 0% in Oregon and

Utah to an average of 15.4% for Missouri teachers.24 Teachers usually contribute an average 7% of their

salary to their plan annually25 (as compared to about 25% the public sector employees contribute to pension

fund revenues annually).26 Inconveniently, investment returns have not matched public pension benefit

managers’ rosy stock market predictions. For example, in 2016, the public pension benefit managers assumed

a median 7.5% return on investments, but the actual return was 1%, a 6.5 points gap that added $146 billion to

the pension debt.27 Table 12.1 shows the percentage of pension funding assets that states have available to

pay for their public sector pensions; 12 states having less than 60% of the needed funding. Only four states

have 90% or more of the needed funding. The disparity between predicted returns and actual revenues puts

teacher pensions at risk.

Paying for Teacher Retirement Plans

Under most retirement plans, rising employer contributions would mean better benefits. Not so for teachers.

Pension debt and the nature of defined benefit pension plans explain why.

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First, pension systems have two types of contributions: the cost needed to provide benefits (normal

cost) and the cost of paying down debt (amortization costs). The normal cost is what a pension plan projects it

needs now in contributions to pay future benefits. The amortization cost is the amount required to pay down

accrued debt. Typically, rising normal costs would reflect improved teacher benefits. But today, on average,

amortization costs make up the largest part of employer retirement expenses. In 2017, 38 states saw most of

employer contributions to teacher pensions going to paying unfunded liabilities, not for benefits due to working

teachers when they retire.28 In fact, states are cutting benefits. For every $100 states and districts paid in

salary, $12 goes toward pension debts and only $5 goes to current teacher benefits.29 Table 12.2 shows the

percentage of teacher pension contributions by state going toward pension debt. The national average is 63%.

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Next, DB pension plans—unlike DC plans—disconnect employer and employee contributions from the

actual delivered benefits. For example, workers with 401(k) plans receive increased benefits when their

employers contribute more money because 401(k) balances are tied directly to contributions. By contrast, in

DB plans, workers’ actual retirement benefits are unrelated to the amount contributed on his or her behalf.

Rather, benefits are calculated through formulas (designed largely by state legislators and accountants) based

on the worker’s salary, years or service, and age, unrelated to contribution rates that rise or fall depending on

how much the plan estimates it needs to save today to pay for benefits tomorrow. Consequently, increases in

employer retirement contributions in DB plans do not automatically become better benefits for retired teachers.

Further, pension benefits do not deliver equitable benefits to all teachers. Because teacher pension

plan benefits are “backloaded” to reward longevity, the promise of pension benefits accrue only for the

approximately 20% to 25% of teachers who stay educators in one state for their entire 25- to 30-year career.

Another 25% of teachers, those in mid-career, will qualify for a pension benefit; but their contributions and

interest are worth more than the pension for which they qualify, forfeiting thousands of dollars—or more—in

compensation.30

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About half of all new teachers leave the classroom before meeting the minimum requirements for

vesting or service.31 Overall, about 75% of teachers will be net losers from their pension plan. By contrast,

other public sector workers generally accumulate pension benefits more quickly. Police officers and firefighters

usually reach their break-even point at 18 years of service.32 Actual numbers and percentages vary by state.

According to teacher pension expert Chad Aldeman, teachers who defer salary gains now in exchange

for pension benefits later have bartered away years of lower income—lost income—in exchange for

“disproportionately large” retirement benefits that they only receive once their career ends. Teachers could

have used this discretionary money to buy a home or simply to augment their standard of living. Aldeman

hypothesizes that if their states had no pension debt, the average American teacher could receive an

immediate, permanent raise of 12%, or about $7,000 a year.33 Likewise, studies suggest that teachers may

prefer higher base salaries to deferred benefits, concluding that pension plans may be “over-saving” for

them.34 This amount also represents lost unrestricted money for school districts for teachers’ salaries or other

priorities.

How States Are Responding to the Pension Crisis

To reduce their roughly $37 billion yearly pension debt,35 states have reduced DB benefits or adjusted their

pension funding formulas to change the cost and value of teacher pensions. Reducing the formula multiplier

can mean lower monthly payments to retirees, sometimes amounting to thousands of dollars a year (or

hundreds of thousands over the retirement) for an individual teacher.36 Similarly, increasing the vesting

requirements makes it more difficult for teachers to become eligible for pension benefits. Teachers who do not

vest will not earn pensions and can only receive refunds on their original contributions, sometimes with

interest. States may increase or decrease pension benefits by changing when a teacher is able to collect

benefits. Raising the normal retirement age reduces the number of years that a teacher will be able to receive

benefits, lowering their total benefits and state costs. State legislators can also reduce cost-of-living

adjustments and change the amount of the required employee contributions; the higher the employee

contributions, the less the total net value of the teacher’s salary and their retirement compensation.

Additionally, states can offer a hybrid retirement system that combines a less generous DB pension, a

DC plan, and Social Security enrollment.37 Other state options include offering a “cash balance” plan,

restructuring pension debt, offering pension buy-outs (giving educators cash up front to encourage switching to

DC plans), issuing bonds, or finding other revenue sources. Likewise, states can reform educator pensions by

closing loopholes which spike final earning amounts, including tightening the practice of granting large pay

raises in the years immediately before retirement, reducing overly generous sick-leave policies, and narrowing

eligibility for high-cost public safety pension benefits. In addition, states can institute safeguards that prevent

politically expedient decisions to raid pension funds to backstop budget shortfalls elsewhere. Perhaps least

popular, states can raise taxes.

Using a positive approach, some states reduce retiree health costs by promoting wellness programs

and other preventive measures and by managing their benefit plans more cost efficiently. For instance, districts

can join other localities to bundle their plans under a single administrative umbrella.

Most state legislators prefer to wait and see, hoping their stock market returns will beat their assumptions and

grow their investments enough to pay off their debt (although no credible analyst believes this is likely in the

near future). States may select to do several options at the same time. But none are permanent solutions

unless linked with structural changes

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that close existing DB plans to new members. As experts see it, the ideal solution would pay down existing

debt, stop the state from amassing similar debt, and give all teachers adequate and secure retirement

savings.38

State cuts to pension benefits tend to fall disproportionately on new and future teachers. Fifty-eight

percent of teachers’ DB plans are not open to new employees.39 In more than 40 states, teachers placed into

different benefit tiers based on their hire date, face the same costs; yet from Day 1 of employment, newer

teachers pay more for less.40 And the disparities continue to grow. For example, while career teachers’

pension benefits dropped only 1% from 1982 to 2012, teachers hired in 2012 who remained for 10 years would

be eligible for an inflation-adjusted pension benefit worth 25% less than their more senior colleagues who

began teaching in 1982.41

Most teachers’ retirement benefits are not guaranteed. Nothing in federal law prevents employers from

cutting or ending health care benefits to its retirees, unless they have specifically written promises to keep

them.42 Although most states have “near iron-clad legal rules” protecting existing public sector workers from

pension benefit cuts,43 teachers can lose retirement benefits in difficult budget times. Several state pension

plans have reduced or ended cost-of-living adjustments for current public sector workers or retirees, and most

state courts have upheld these cuts.44

Solving the Teacher Pension Crisis

As currently structured, teacher pension plans are neither affordable nor sustainable.45 In attempts to cut

long-term obligations, states and local governments are under pressure to reduce benefits and lower educator

salary increases. Because every state has its own budgetary challenges, no “one-size-fits-all” solution will

resolve the public pension funding crisis. But without new policies that commit states to fully fund retirements

systems, other essential services—as well as unmet pension promises—will suffer.

Reforming public pensions is as much a political as an actuarial or technical exercise. Few states with

traditional DB pensions give educators and taxpayers adequate information on pension systems’ fiscal health,

offer projections on future contributions (and from whom) needed to pay off pension debt, or give teachers

accurate data on their personal retirement benefits.46 Ending the “magical thinking”—by pension managers

about the assumed rate of return on investments and by educators about their state’s public pension assets

and liabilities—will help education leaders and policy makers more effectively manage retirement policies (and

better plan for their own).

EMERGING ISSUE: SCHOOL CHOICE AND ACCOUNTABILITY

The education privatization movement—sometimes called school choice—wants to give parents more options

about how and where to educate their children, using taxpayer dollars to create charter schools and provide

voucher (and similar taxpayer-funded) programs to pay private school tuition. In 2018, 44 states and the

District of Columbia had charter schools;47 and 28 states and the District of Columbia had taxpayer-funded

voucher, tax credit scholarships (TCS), and/or education savings accounts (ESA) totaling a projected $2.3

billion for the

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2017–18 school year.48 The extent and type of school choice accountability for academic achievement and

fiscal management varies with state law.

Taxpayer dollars, directly or indirectly, are the lifeblood of school choice. But because research to date

shows a mixed, mostly negative impact of school choice options and their funding mechanisms on student

achievement, participating families and taxpayers may be short-changed.

Charter Schools Have Mixed Achievement Record

Since every state has its own charter school statutes and accountability laws, generalizing about charter

students’ achievement is problematic. Nonetheless, national research on charter schools’ effectiveness finds

wide state-by-state (and city-by-city) differences. Many charter students are not achieving as well (and some

worse) as their peers in traditional public schools (TPS),49 and privately run charters have high risk of fiscal

mismanagement.50 By comparison, certain individual charter schools and charter networks have shown

themselves to be very effective.51 Research also finds that charter schools often increase racial and

socioeconomic segregation.52

Likewise, research cannot confirm the benefits of taxpayer-funded school choice options such as

vouchers, tax credit scholarships, and educational savings accounts. Gains to student achievement and school

district performance from students using these monies are mixed, inconclusive, or unavailable.53 Several

voucher studies do show evidence of small improvements in high school graduation and college enrollment

rates by voucher students, but this has been a decades-long national trend;54 and the positive effects do not

translate to different contexts, populations, programs, grade levels, or subjects.55

Meanwhile, evidence for the effectiveness of TCS and ESA is limited because few states require

participating private schools to formally assess these students’ academic performance; and those few that do

seldom use the state achievement exam, making comparisons with similar students at public schools

difficult.56 In some states, TCS programs actually reduced students’ achievement on state tests.57 A 2017

Florida study touting the efficacy of TCS found that low-income TCS students attending private schools

enrolled in Florida colleges (almost all community colleges) at higher rates (15%) and had a slightly increased

likelihood (0.6%) of earning a college degree than similar students who were not TCS recipients.58 Critics

challenged the study’s methodology and misleading data presentation.59 At present, no state requires an ESA

program to link a private school’s continued participation in the program to ESA students’ academic

performance.60

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In short, evidence to date urges caution about implementing large-scale charter schools and voucher,

tax credit, and education scholarship account programs that involve almost no accountability or credible state

oversight for student achievement or managing public funds. Nonetheless, since 2005, New Orleans (NOLA)

charters’ performance are adding provisos to the larger debate about charter schools.

New Orleans Charter School Performance and Accountability

Prior to Hurricane Katrina in 2005, New Orleans’ public schools were failing and dysfunctional. Louisiana’s

National Assessment of Educational Progress (NAEP) scores were the second-lowest ranking in the nation,

and NOLA schools (2004–05) ranked 67th out of 68 Louisiana public school districts in math and reading test

scores.61 Fifty-six percent of high school students graduated.62 In 2004, the Federal Bureau of Investigation

(FBI) issued indictments against 11 people for criminal offenses related to district financial mismanagement.63

The cities’ schools had “nowhere to go but up.”64

After Katrina, the state took over almost all the city’s schools, eventually converting them into “college

prep,” “no excuses” charters run by non-profit charter management organizations. Autonomous and

accountable, the charters made decisions over all personnel matters, curriculum, instructional practices, and

spending; and the state maintained active oversight of schools’ academic outcomes through

performance-based contracts. Schools hired (mostly alternatively certified) and dismissed teachers and ended

teacher union contracts. Schools received funding based almost wholly on their student enrollment numbers.

Attendance zones ended; in principle, families could send their children to any school in the city.

In a widely praised 2005–14 study, Douglas Harris and Matthew Larsen, Tulane University investigators,

matched New Orleans students with a carefully selected comparison group of other Louisiana students,

schools, and districts, adjusting for demographic differences. Findings were large, positive, and statistically

significant. The reforms increased student achievement by 11–16 percentile points, upped the high school

graduation rate by 3–9 percentage points, and boosted the college entry rate by 8–15 percentage points (0.2 to

0.4 standard deviations), the college persistence rate by 4–7 points, and the college graduation rate by 3–5

percentage points. The reforms also improved all outcomes for African American and low-income students and

reduced educational inequities for high school and college measures.65 By state metrics, New Orleans

schools moved from an “F” grade pre-Katrina to a “C” grade in 2018.66 Part of the academic progress came

from closing the worst performing charters and expanding the successful ones.67

Despite the positive student outcomes, study authors caution about generalizing results. Given New

Orleans’ unique circumstances, they warn, these “substantial effects” are not likely to be replicated in most

other school districts. In their view, factors beyond market-based (school choice) reform—including student

population, new educators, rigorous school accountability for performance and state oversight that led to

closing poorly performing schools, and starting from the academic bottom—may have led to improved student

outcomes.68 Further, by 2018, data suggest that gains may be plateauing, with test scores appearing to flatten

or slightly decline since 2014.69 And NOLA schools still rank near the bottom in educational achievement.

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Study authors also conclude that academic improvements did not come cheap. The 13% funding boost

(an extra $1,358 per student)—in local, state, and philanthropic dollars—included increased spending on

administration relative to comparison groups that overlapped with the reforms.70

Equity concerns were also apparent. Low-income families faced hurdles in efforts to research and find a

good school for their children.71 Charter practices such as having “academic admission requirements,”

“counseling out” low achieving students, and using exclusionary discipline resulted in white children filling seats

at top-rated schools and mainly African American children enrolled at failing ones,72 creating city-wide concern

about students losing their opportunity to learn.73 In addition, incidental costs for transportation, child care, and

lack of football and band programs in certain schools appeared to sway many low-income families to choose

schools for reasons other than academic quality, actually increasing the achievement gap within the city.74 In

2010 and 2013, advocacy groups working with parents of special needs students filed complaints with the

Louisiana Department of Education, alleging that charters were denying these students enrollment and if

enrolled, not providing the needed and appropriate services.75 The case settled in 2014.76

Given all the research, what can we conclude about school choice? As David Leonhardt, New York

Times columnist, suggests, it’s time to think about school choice as a vehicle of education reform “in a more

nuanced, less absolutist way.”77 “Charter schools aren’t a magic bullet.”78 Complexities exist in markets,

government policies, and parents as consumers. All public schools, charter and traditional, and

taxpayer-funded means to attend private schools need clear expectations, performance-based accountability,

and rigorous oversight for academic outcomes and fiscal stewardship. Oversight includes providing

professional development to improve instructional and monetary practices and overhauling or shuttering the

worst performers. Finally, if we are to effectively educate all our children, it’s time to replace the rhetoric with

real evidence and accountability.

EMERGING ISSUE: TEACHER COMPENSATION

Most U.S. professionals receive compensation based on the labor market and their performance. Physicians,

nurses, attorneys, dentists, journalists, and college professors operate in an environment where how well they

do their jobs affects their salaries and benefits. This is true in both public and private sectors. Public school

teachers are the exception.

In most PK–12 school districts, teachers’ uniform salary schedules determine their compensation

(salary, benefits, extra pay, and pensions), with adjustments made for educational credentials (“lanes”) and

teaching experience (“steps”). Developed in the early to mid-20th century, teacher salary schedules reflect an

effort to reduce wage inequality stemming from favoritism, gender, race, and ethnicity in assigning

compensation. In the 2011–12 school year (the most current year available), an estimated 89% of public school

districts paid teachers according to uniform salary schedules.79 But this approach to compensation may not

offer the best incentive to attract, develop, and keep effective teachers.

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The Research on Salary Increases for Master’s Degrees and Experience

A substantial body of research investigating the relationship between teachers’ coursework and degrees

beyond a bachelor’s and their students’ academic achievement finds attaining a master’s degree correlates

with higher student achievement only for certain subjects (e.g., mathematics and science). It makes sense that

an Algebra II teacher with a master’s in math is more likely to get better student outcomes than an Algebra II

teacher with a master’s in educational leadership. But when measured across all teachers and all types of

degrees, the average master’s degree shows little correlation to student achievement.80 Nonetheless, of the

56.4% of all U.S. PK–12 teachers who hold a master’s degree or higher (up from 47.1% in 1987–88),81 about

10% of these credentials are in math or science.82 The master’s salary differential can be sizeable, earning an

extra $10,000 per year or more by the time the teacher reaches the top of the salary scale,83 regardless of

whether the degree is in the same subject the teacher is teaching.

From the available data, it is unclear how much of the “master’s-and-above” supplement actually

attracts or rewards effective teachers. Since a 2012 report noted it cost an estimated $14.8 billion, annually, to

pay teachers for earning advanced degrees,84 some urge school districts to stop this practice and instead, use

the money more flexibly to attract and keep effective teachers.85

By contrast, teaching experience does appear to positively impact student achievement. Unlike early,

less sophisticated research findings that teaching quality did not differ across experience levels (a newbie

teacher’s effectiveness appeared to be similar to a veteran teacher’s),86 advances in research methods and

data systems now allow investigators to conclude that teachers continue to “grow on the job”; and these gains

continue into their second and third decades of teaching.

A 2016 review of 30 U.S. studies (from 2003–16) in PK–12 public schools determined that teaching

experience is, on average, positively (and often significantly) associated with student achievement gains in

reading, mathematics (and in benefits beyond test scores, such as higher attendance and fewer disciplinary

referrals) throughout a teacher’s careers; and these positive effects reach beyond the classroom to the entire

school.87 Studies confirm that gains in teacher effectiveness are most steep in the teachers’ first few years,

and they remain significant into the teachers’ second, and often third, decades in their careers.88 This is

especially true when they teach in a supportive and collegial working environment and when they amass

experience in the same grade level, subject, or district.89 Of course, variations in teacher effectiveness exist at

every career stage. Not every experienced teacher is more effective and not every inexperienced teacher is

less effective, on average.

Additionally, teacher education and experience are an equity issue because the least experienced

teachers tend to be disproportionately concentrated in low-income, high-minority schools and schools enrolling

large populations of English language learners.90 Moreover, today’s teacher workforce is less experienced

than the teacher workforce in earlier decades,91 making placement of effective teachers even more of a

fairness concern.

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Alternative Approaches to Teacher Compensation

Today, education policy makers are looking at alternative approaches to teacher compensation to achieve key

policy goals: attract and retain quality teachers and improve and enhance their teaching skills once hired. A

broader, more flexible salary structure may be an idea whose time has come.

Alternative compensation may take the forms of performance pay, knowledge- and skill-based pay,

differentiated salary schedules, and career pathways. A closer look at each approach and related research can

help inform compensation policy decisions.

Performance (Merit) Pay

Performance pay—sometimes called merit pay or performance awards—usually means a system of employee

compensation that links salary to measures of work quality or goals such as increasing student achievement.

Advocates assert that paying educators more can enhance their effectiveness as well as attract and retain high

performers. Most often, districts’ performance pay can be either an annual salary increase (where the

performance-based compensation becomes a guaranteed part of the teacher’s base salary in all future years)

or an annual bonus (where a teacher receives the monetary award based on performance in a given year and

must be re-earned annually). Forty percent (51) of the 124 largest school districts in the country offer some

form of performance pay, usually tied to permanent salary increases.92

Research is inconclusive about whether teacher performance pay improves student outcomes.93 While

some studies have found positive (if modest) effects on student achievement,94 most studies have not.95

Findings greatly depend on how the program is structured and implemented in the school context.96 Moreover,

research indicates that performance pay is almost always force-fit upon existing compensation plans; and

piecemeal, short-term approaches are not likely to result in much effect on teacher motivation or student

achievement.97 Gaining accurate and reliable measures of teacher performance is challenging. Performance

pay also assumes that teachers can perform better if they have the “right” incentives, a questionable notion. A

more complete discussion of these studies’ limitations is available elsewhere.98

One notable 2017 study of ten school districts that received federal Teacher Incentive Fund (TIF) grants

tried to determine whether performance pay bonuses as part of a comprehensive reform system could lead to

increases in educator effectiveness and student achievement in high-needs schools. The study’s performance

pay plan (about $2,000 bonus for teachers and $4,000 for principals, annually if merited) linked measured

teacher observations by trained principals, feedback from the observations tied to professional development,

and student achievement scores. The largest bonuses went to teachers based on their students’ measured

achievement. All teachers were subject to the same education reforms, but teachers in treatment schools could

receive performance bonuses based on student outcomes whereas teachers in control schools could receive

stipends for taking on extra roles and responsibilities.99

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Results found that schools offering performance pay bonuses generated slightly higher achievement

test scores (1–2 percentile points) in reading and mathematics each year, the equivalent of four weeks of

additional learning annually. Teacher satisfaction with the program also increased over time. Notably, the

study’s investigators concluded that performance pay is not cost-effective over time because the costs outpace

the achievement. Rather, they calculated that providing differentiated pay for effective teachers to transfer to

high-needs schools becomes more cost-effective over time.100

Critics of performance pay affirm, among other things, that they lack teacher support; they discourage

teacher collaboration and harm school culture; teacher performance is difficult to monitor in reliable, valid, and

fair ways; and many unintended and harmful consequences result, such as encouraging teacher transfers from

low-performing schools or behaving opportunistically (“teaching to the test” or cheating).101 The National

Education Association (NEA) and the American Federation of Teachers (AFT) offer qualified support for

performance pay.102

Knowledge- and Skill-Based Pay Rewards

These incentive programs give teachers extra compensation for acquiring new learning and behaviors deemed

critical to school and district goals such as improved student outcomes. Qualifying for these rewards may

include completing teaching portfolios, obtaining dual certification, or earning a graduate degree in their taught

subject. Occasionally, these professional proficiencies are linked to external assessments that gauge teacher

competency (such as Praxis exams) or evaluate effective practices (such as earning National Board for

Professional Teaching Standards (NBPTS) certification).

Founded in 1987, NBPTS established standards for accomplished teachers in 25 certificate areas, PK

through grade 12, and awards professional certification to those who can demonstrate that their teaching

practices meet these standards. In 2018, more than 118,000 U.S. teachers in all 50 states and the District of

Columbia carried NBPTS certification.103 Board-certified teachers often receive higher salaries and overall

higher earnings that non-certified peers. As of June, 2018, 25 states awarded stipends ranging from $1,000 to

$6,000 annually to teachers holding NBPTS certification. Some states pay for teachers’ NBPTS certification

fees ($1,900), subject to annual legislative appropriations and eligibility caps. Almost every state counts

NBPTS certification as credits toward securing or renewing their state teaching license.104

Studies on National Board Certified Teachers (NBCTs) across the country tend to find that these

teachers are more effective than other teachers of similar experience in raising student achievement in

elementary and secondary schools.105 NBCTs’ students gain an estimated additional one to two months of

instruction annually (even more for high-needs students).106 Additionally, students of NBCTs show evidence of

deeper learning nearly three times more often than their peers in classrooms of non-NBCTs (74% versus

29%).107 NBCTs have also been found to impact the overall quality of teaching in schools where they work by

mentoring their colleagues.108 Board-certified teachers often become school leaders: 54% as team

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leaders, 36% as department chairs, and 15% as staff developers or instructional coaches.109 Most (91%)

NBCTs choose to remain in the classroom.110 Whether NBPTS produces better teachers or simply identifies

accomplished teachers is unclear.111

Differentiated Salary Schedules

Giving effective teachers more money than colleagues with similar years of experience to teach hard-to-staff

subjects or work in hard-to-staff schools is becoming more common. In a 50-state sample of the 100 biggest

school districts in the country and the largest districts in each state, differentiated pay is currently available in

124 districts of 145 school districts.112

Districts are twice as likely to offer extra compensation for teaching hard-to-staff subjects (i.e., STEM,

English as a Second Language, and special education) as they are for working in high-needs schools.113 Most

provide this additional compensation by awarding annual salary supplements (stipends), starting new hires in

these subject areas at a higher level on the salary schedule, or paying an increased base salary on a separate

salary schedule. Annual stipends can vary district to district, ranging from $100 to $20,000, annually. One-time

stipends may take the form of recruitment bonuses. For example, the Hawaii Department of Education gives a

one-time $10,000 recruitment bonus to special education teachers who agree to work in a special education

classroom for three years (paid over the three years).114 Additionally, districts may pay the moving or housing

expenses for newly hired teachers in critical subject areas; offer up to ten extra days of paid professional

development; provide incentives including loan forgiveness, mortgage assistance, or tuition reimbursement; or

leave the differential pay to the superintendent’s discretion.

Studies suggest that the teacher vacancies in hard-to-staff subjects or schools could benefit from

differentiating salaries along these dimensions.115 As discussed, some argue that boosting salaries for a small

subset of teachers would be more cost-effective than paying supplements to teachers earning master’s

degrees.116

Any changes in teachers’ pay structure requires their active collaboration in creating the plans,

identifying criteria for receiving awards, implementing the plan, and gathering data on whether the program is

promoting more effective teaching and learning. Both the AFT and the NEA do not oppose changes to the

salary scales but insist it must be done at the local level with teachers’ support and input.117 In locales where

teachers are union members, union involvement will ensure the plans conform with contracts. Likewise, state

and local level policy makers’ involvement will be needed to guarantee sufficient monies will be available over

time to support the program.

Career Pathways

As professionals, teachers need more than a “one-size-fits-all” career. Career pathways (sometimes called

career ladders or career lattice) provide teachers with multiple routes to new roles and responsibilities that best

fit their career interests. They earn additional pay as they increase their capacities and take on new roles that

contribute to improved student outcomes.118 Career pathways offer coherence to teachers’ career

development.

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Locally designed and negotiated career pathways may include placing highly effective teachers in

“hybrid” roles—providing “release time” or a part-time classroom schedule—that support teacher instructional

leadership activities during (and after) the school day. For example, expert teachers with release time can

model lessons, observe peers and give comprehensive or targeted feedback on their instruction, serve as

mentors for novice teachers, participate in peer assistance and review, or lead professional development. Or

they may train to become their schools’ data experts, analyzing and using data to improve instruction. Career

pathways establish clear criteria for eligibility to help interested teachers self-select (and be chosen for) these

roles. Both the NEA and the AFT endorse the teacher career pathways concept.119

Studies on teachers’ attitudes suggest that they want to grow as teachers and leaders and serve in

different capacities as educators over their career.120 Research suggests that teacher collaboration

encourages distributed leadership for teachers, enhancing their job satisfaction and retention.121 Collective

teacher leadership has also been shown to have a stronger influence on student achievement than individual

leadership.122 Yet since the mid-1980s, attempts to create and implement career pathways tend to fail. Two

reasons help explain why: (1) local leaders impose them on top of existing teacher career advancement

systems without adjusting the existing system, and (2) the lack of consistent funding.123

Addressing these weaknesses can lead to successful teacher career pathway programs. A 2016 review

of eight successful established career advancement initiatives identified factors that positively impact teacher

recruitment, retention, job satisfaction, and student achievement. These include providing: (1) more teacher

leadership opportunities with transparent eligibility criteria aligned with job description (including teaching

excellence), and an objective, valid, and reliable selection process; (2) opportunities for collaboration and

released time; (3) increased compensation (from $1,000 to $20,000 annual stipend based on role,

responsibilities, additional contract days, and annual funding); (4) peer coaching and peer evaluation; (5) job

embedded professional development (tied to the district’s evaluation model and instructional rubrics that

identify strengths and gaps); and (6) teacher voice in school leadership.124

Contextual factors needed to begin and sustain career pathways include: (1) school district readiness to

alter traditional relationships and establish a culture based on shared leadership; (2) leadership for vision and

implementation from state, district, and school-based leaders; (3) strong stakeholder (teacher, teacher

associations/unions, administrator, school board) involvement; (4) a positive school culture (based on

transparency and trust that encourages teacher growth and collaboration); and (5) ensuring long-term,

sustainable funding within existing budgets (often by swapping traditional non-classroom positions for

differentiated teacher roles and/or flattening the organizational structure).125 Both sets of factors produced

successes and challenges, especially funding continuity, that schools and districts must continually address

and overcome.

Typically, careers are marked by upward movement in responsibility, status, and earnings. Teaching’s

flat, or narrow career structure is not compatible with the modern workforce’s expectations. By 2020,

Generation Y (Gen Y) teachers (i.e., born between 1977 and 1995) are predicted to comprise 50% of the

teaching force.126 Research finds that nearly all (98%) of Gen Y teachers plan to stay in the education

profession for their careers, but only half wished to remain classroom teachers.127 Research further suggests

that Gen Y teachers often want their careers to function as personalized paths that fit their individual interests

and career development goals. They seek more control over their work situation; desire career-long

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professional growth; expect career advancement in experience, expertise, and compensation; and want new

challenges and opportunities to prevent burnout.128 If Gen Y teachers cannot find these features in their

workplace, they move on. The education profession needs to consider the costs of underutilizing teachers’

talents—both novices and veterans—and the human and fiscal costs of turnover, attrition, and loss of expertise

as they rethink their compensation plans.

CONCLUSION

Schools face increasingly varied and competing demands for limited fiscal resources. Local school districts

with rising human resources costs and severely underfunded accounts to pay for them face wrenching

decisions about how to best spend their inadequate education dollars for maximum return aligned with district

goals. If benefits and pension reform, school choice, and compensation innovations are to succeed, solutions

must be developed collaboratively with teachers and other education stakeholders and a focus on

accountability.

CASE STUDY

Your superintendent has asked you to compare your district’s salary scale and benefits schedule with that of

neighboring Hamilton County School District. You have decided to use the following hypothetical teacher’s

career path in making the comparison:

The 22-year-old single teacher comes to the district with a bachelor’s degree and no previous teaching

experience. At Year 5, the teacher completes a master’s degree and marries using Employee Plus 1 insurance.

At year 10, the couple adopts two children, taking Family insurance and using the Family plan until retirement.

The teacher earns an Education Specialist degree at year 20 and retires at year 33 (age 55 and at least 30

years of teaching experience to have no reduction in retirement benefits). Adding up the salary and stipends

and deducting the yearly insurance costs along this hypothetical career path nets the teacher in Hamilton

County the following:

$1,653,700 in base salary—plus

$172,000 in education stipends—minus

$132,500 in insurance premiums

NET = $1,693,200.

Compute the earnings minus insurance costs in your school system using this career path using this

year’s salary scale for each step (as we cannot assume what will happen over time with the scales).

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CHAPTER QUESTIONS/ASSIGNMENTS

1. What are the health care costs your school district is currently carrying for current employees and for

retirees? How does your school district apportion the health care expense between employer and employee?

What percentage does each pay?

2. In your school district, what are the differences in health insurance premiums, co-pays, and other

out-of-pocket expenses incurred between current employees and retirees? If differences exist between the two

plans, what rationale does your school district use to justify these?

3. How does your district’s health insurance costs and benefits compare with those of neighboring districts for

current employees? For retirees?

4. Review your school district’s salary schedule. What factors does the schedule appear to value? What does

it appear not to value? Explain your answer.

5. To what extent does your district consider student performance in teacher or administrator compensation?

What metrics does the district use as the indicator(s) of student performance?

6. How do any charter schools in your locality or region compare with the traditional public schools in terms of

student demographics, school size, teacher work environment, teacher compensation, classroom size,

instructional resources, parent involvement, and student achievement?

7. What taxpayer-funded vouchers, tax credit scholarships, and education savings accounts are available in

your state? What fiscal caps does your legislature place on each? What is the annual cost to your state of each

school choice funding vehicle?

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128 Coggshall, Behrstock-Sherratt, & Drill (2011, April).