Is your teacher pension underfunded?

The answer is: yes, it is unbelievably underfunded.

But the real question should be: by how much? And how can you as a reporter figure that out?

A session at the Education Writers Association 2010 conference late Friday afternoon about state teacher pension funds gave reporters an idea of the problems and how best to access the information about covering what could be the most important financial problem facing U.S. schools.

Stuart Buck, a doctoral candidate at the University of Arkansas, and John Abraham of the American Federation of Teachers gave differing points of view on the pension mess.

Both urged reporters to track down their state pension plans' comprehensive annual financial reports and search for the actuarial sections that show how much money the pension system needs for future payouts and whether it sets aside enough money.
Buck, who wrote the report "Underfunded Teacher Pension Plans: It's Worse Than You Think," said the basic finding is states are under-reporting how bad it is.

By looking at the basic state reports, U.S. teacher pension funds are underfunded by $332 billion or at about 78 percent.

That is not the real story.

Most pension plans, he said, assume they will get an average interest rate of 8 percent on their investments, called a discount rate. That means they don't have to have as much in the bank now to pay off future liabilities.

But Buck believes that rate is too high and should be more like 6 percent - which would peg the unfunded liabilities at more like $933 billion.

"Private plans generally choose a discount rate based on a blended average of corporate bonds," he writes in his report. "We do contend that public pension funds should adopt the private pension practice."

That was a bone of contention with Abraham, who said over the time of the fund the interest rates will ebb and flow, leaving an average of about 8 percent.

"The $933 billion number is a made up number," he said. "They said we should follow the private sector's model."

But the private sector typically invests in more stocks than bonds, producing more wider swings when the market rises or falls, he said.

Buck said Abraham was ignoring the fact that politicians usually use the heady times of the stock market to provide more benefits ... thus putting more stress on the pension systems in more lean times.

The difference is significant because how poorly the pension plans are underfunded may determine how states and school districts cut jobs raise taxes in the future.

"The basic difference is one of assumptions," said Scott Stephens, senior writer at the Catalyst Ohio, who moderated the discussion. "John (Abraham) has taken a traditional point of view and Stuart (Buck) is going to more of a conservative point of view. It's hard to find right or wrong answers in this."