Will Tax Reform Spur States to Embrace School Choice?
One of the unforeseen consequences of the Republican tax reform bill will be to increase pressure on state and local unions to soften their half-century opposition to school choice. To be sure, this would be a remarkable reversal for public labor. But the emerging incentive is a powerful one: The modest subsidy of public school alternatives is now the only way to both rescue government public pension plans — the cumulative underfunding of which has been estimated as high as $6 trillion — and thus keep promised benefits reasonably intact.
For decades, union leaders and their political allies have tacitly placed their hopes for salvaging troubled pensions on tax increases. The assumption was that, like it or not, voters would have to cover any shortfall. But, as MIT economist Robert Pozen has argued, the recent loss of deductibility for city and state taxes has severely limited that option. This especially relevant in blue states where adequate pension funding would require tax increases of anywhere from 14 percent in Connecticut to 26 percent in New Jersey.
Even before the tax overhaul was passed, state and local resistance to bailing out government pensions was already surfacing. For instance, last February Connecticut Gov. Dannel Malloy proposed to charge the state’s 169 towns an extra $400 million annually to bail out the teachers’ pension plan — one of America’s worst funded, according to the National Council on Teacher Quality. His own Democratic-controlled legislature refused to go along.
If taxpayers are averse to saving government pensions with higher levies, they are no more likely sacrifice essential services to pay them. According to a report by PublicCEO, California voters recently defeated a proposed one-fourth-cent sales tax increase — purportedly for road repair and other transit improvements — thanks to a widespread suspicion that the measure was really a “bait-and-switch” tactic to fund pensions.
Of course, public employees will argue that state legislatures are legally bound, constitutionally or contractually, to deliver on promised benefits, no matter the cost. But some judges have already begun ruling that pension payouts can, in fact, be adjusted to accommodate a government’s means. In a 2016 precedent-setting decision by California’s First District Court of Appeal, Justice James Richman upheld Marin County’s right to end pension vesting based on the overtime racked up in the last few years of work, a technique known as “spiking.”
In other states, such as Illinois, courts have thus far upheld the sanctity of previously legislated benefits. But how much have public employees really gained over the long run? The city of Chicago has been reduced to dealing with its growing pension problems by floating bonds that give investors first call on its sales tax revenues — a stop-gap measure that merely postpones the day of reckoning.
Given the political difficulty of funding pensions with either tax increases or service cuts, the public unions’ only hope for sustaining anything close to their current plans is by accepting the one government reform that would allow it: school choice.The per pupil cost of the average public school student ($12,760) is now much higher than parochial school, online academy, and homeschooling alternatives. As a result, modest choice programs involving relatively few students could easily generate the needed savings without raising taxes, cutting voter services, or forcing public employees to accept radically reduced benefits.
In a recent study of Connecticut for the Yankee Institute for Public Policy, Marty Lueken of the EdChoice Foundation and I gathered the most recent data on per-pupil costs and student census for every one of the Nutmeg state’s 169 school districts. We found that if just 10 percent of public school students had a yearly budget of $5,000 for private education — $1,000 more per year than the average tuition at Connecticut parochial schools — the annual savings of $385 million would fully fund state’s teacher pension plan.
But would government unions agree to such a policy, if it meant the slightest thinning of their teacher ranks?
Fortunately, the same flood of baby boomer retirements now threatening the solvency of pensions also means that any reduction in local district staffing could be accomplished naturally through attrition. The Learning Policy Institute has estimated a national shortage of at least 112,000 public school teachers for years to come.
Of course, one cannot expect the same union leaders who so strongly resisted school choice policies for decades suddenly to embrace them as a solution to their pension dilemma. But there is a telling consistency in renegotiated labor pacts for Atlanta, Detroit, Lexington, West Warwick, and other cities recently facing bankruptcy. Whatever their initial demands, current and retired public workers have consistently agreed to whatever concessions are necessary to preserve previously negotiated retirement benefits.
By capping the state and local tax deduction, the Republican tax bill makes state and local tax increases far more difficult. As a rest, the ever-growing number of government workers may be forced to conclude — however reluctantly — that a guaranteed pension is well worth a little school choice.
Dr. Andrews was executive director of the Yankee Institute for Public Policy from 1999 to 2009.