Tough choices in Alberta's education funding

It’s been a tough spring for parents, teachers and ultimately students in Alberta’s education system. Headlines about budget cuts and possible increased fees are an unfortunate way to end a school year.  

It’s a pity then, because the headlines didn’t necessarily have to happen. After all, the provincial education budget in 2011/12 is $6.2 billion, up from $6-billion last year; that includes a rise in operating expenses to almost $5.9 billion (from $5.6 billion).

But the extra money isn’t expanding educational services. In large measure, that’s because of past commitments on pensions and pay by the provincial government.

Some background: In 2007, the province assumed the teachers’ share of a pre-1992 unfunded liability in the Teachers’ Pension Plan. (Previous generations of teachers did not contribute enough to pay for the promised retirement benefits.) That deal wasn’t cheap. This year, taxpayers will pay $451 million for that assumed obligation (paid directly out of Finance ministry coffers), as well as $299 million for post-1992 pension commitments (out of the education budget). That’s $750 million out of the province’s total budget this year alone.

By assuming that pre-1992 liability, the government relieved teachers of a 3.1 per cent deduction from their paycheque. That, along with a separate three per cent salary hike in 2007 meant teachers were effectively awarded a 6.1 per cent increase.

With subsequent raises, including a 2010 arbitration award, teacher salaries are forecast to be 21 per cent higher by 2012 when compared with 2007; the government notes that will be twice the rate of inflation over the same period. In addition, each teacher was also given a lump-sum $1,500 payment in 2007 as part of the five-year deal.

Few would object to a pay raise for teachers (we all like higher pay). Also, the pension liability had to be dealt with somehow, though having taxpayers assume the entire pre-1992 liability was not the only option. The question is whether the magnitude of the 2007-12 deal was prudent, or fair to others who also have a claim on the public purse.

What’s clear, or should be, is that present school board cuts must be placed in the context of a past deal sought by teachers and agreed to by the provincial government. Choices—a 21 per cent raise over five years and assumed pension liabilities—have consequences.  

Sure, the province could transfer additional dollars from the Sustainability Fund into the education portfolio this budget year. But plenty of others also think the government should fund their sector with such cash. Plus, Alberta’s past and present deficits will have produced total red ink of $10.8 billion by 2013. So running down Alberta’s savings accounts (or borrowing money) is just another way of asking the next generation to pay this generation’s bills and obligations.

The government could raise taxes. But that’s not a sensible option either. Long-term prosperity depends upon a growing economy; that in turn depends partly upon moderate tax levels.  Besides, governments cannot, as some constantly advocate, raise taxes to pay for every public sector demand. It is entirely appropriate to ask governments to live within their (our) means.

Alberta’s past pension deal highlights another significant problem: how defined pension benefit plans create severe liabilities for governments.

Defined benefit plans—where an employer promises specific benefit levels upon retirement—often run into trouble decades after such promises are first made. (See General Motors in 2009 and its legacy costs, or several European governments and their public sector liabilities now.) In contrast, defined contribution plans, now widespread in the private sector, are a better alternative.

Insofar as the public sector is at issue, defined contribution plans (where an employer matches employee contributions to one’s RRSP or another pension vehicle) obviously benefit taxpayers at large as long-term liabilities are not created.

But such contributory plans also benefit civil servants. Such funds are not dependent on government revenues for the eventual retirement benefits. Thus, in a worst-case scenario as has occurred in some American states where public finances are a wreck, pension benefits that are instead derived from a defined contribution plan are not at risk.

Governments can move to defined contribution plans by grandfathering existing defined benefit schemes. They simply enroll new government employees in contributory accounts with matching contributions by the employer. Saskatchewan, under an NDP government, did just this with a portion of its public sector in the 1970s.  

A shift to defined contributions away from defined benefit plans helps governments stabilize public sector pension costs and ends open-ended, expensive and risky  commitments. Then, more room for other priorities opens up. In education, that means school boards can retain existing teachers and other staff. That’s the opposite of what’s now happening because of past decisions on pay and pensions in the education sector.