The precarious financial situation posed by Denver Public Schools’ pension shortfall is a time bomb that must be defused.
That’s why we support the plan recently pitched by DPS Superintendent Michael Bennet to take out a $380 million loan to fully fund the pension.
As it stands, the district faces ever-increasing annual pension contributions, the result of structural financial problems and risky decisions made in years past.
This increasing financial obligation, which falls on a district already strapped by declining student enrollment, threatens to consume Bennet’s chances of improving student achievement.
For instance, in the 2007-08 school year, $90 million of the district’s $492 million general fund revenues went to the pension fund — about 18 percent. That’s up from about 13 percent in 2003-04. A reasonable contribution would be somewhere under 10 percent of operating funds, according to Tom Boasberg, DPS chief operating officer.
The money that goes toward backfilling the pension is money Bennet says cannot be used to pay competitive teacher salaries, reduce class sizes or provide summer school or tutoring for struggling students.
Bennet believes the district can reinvest the money at a return about 2 percentage points higher than what it will pay on the loan. That would net the district $15 million to $18 million a year over and above the loan payments — money that would be plowed into the aforementioned underfunded priorities.
The proposition comes with risk. If the markets don’t perform the way actuaries have projected, the district will have to look under the couch cushions to find the money necessary to make the loan payments.
We are not downplaying those risks, because they are real and would be painful. In fact, it happened with a similar loan taken out in 1997 — but that situation was exacerbated by poor decisions.
Buoyed by a few good years of income, the district increased retirement benefits and reduced its pension contributions. DPS was then unprepared for some very poor years of market returns, the beginning of the hole it finds itself in now.
This loan would pose the same risks for bad decisions, but DPS officials say they’ve learned from the past and have the fiscal discipline to make it work. It’s imperative that benefits not be increased and officials not be deluded by a few good years. The loan also would have a 30-year term, which would spread out any damage caused by a few bad years.
Furthermore, it’s clear the district cannot afford to do nothing.
The choices that brought the school system to this situation deserve generous helpings of criticism. But it’s more important, we think, to consider the damage wrought by the school district’s underfunded pension.
A-Plus Denver, the non-profit civic organization formed to help improve the district, said the pension problem was a serious risk to DPS’s financial health.
The real victims in this financial mess are the students attending Denver’s schools now, some of whom weren’t even born when these decisions were made. Their classrooms are overflowing and their teachers are overburdened.
The proposal to take out a loan, which must be approved by the DPS school board, is the best of some unpalatable choices. It will require discipline and a commitment to protect the financial integrity of the district’s finances in the future. It also offers a path to solving a very difficult problem and a start on giving students the education they need to succeed.
