Pension Cost Crowd-Out In America’s Classrooms: Evidence from 12,800 School Districts

Around one-third of the real increase in annual resources for U.S. public schools since 2015 is getting consumed by pension contributions. In states like New Jersey and Illinois, it's over 100%.

Every few years, somewhere in America, voters are asked to dig deeper into their pockets to pay more for their public schools. A new sales tax here, or an extension of a property tax or parcel tax increase there. The typical pitch? This is a necessary investment in our kids, otherwise they won’t have enough music or science or laptops. The promise follows a familiar pattern: we need more money for education so we can have more resources for classrooms and better educational outcomes.

The problem is that the money is often not going where people think, as we show in a new school district pension atlas covering 12,800 districts around the U.S. These numbers have largely been invisible until now, and the fiscal picture is not reassuring.

In 2023, pension contributions nationally absorbed over 10 cents of every dollar of associated education spending — the portion of school district budgets tied to employees who teach, support, and operate America’s schools — up from 8.5 cents in 2015. These contributions amounted as of the latest year of data to $77 billion annually that could go to pay directly for teachers and textbooks.

While associated education expenditures increased by $59 billion in real terms between 2015-2023, pension contributions absorbed approximately one-third of that increase.

In the most fiscally constrained states, the increases were absorbed entirely by pension contributions. In New Jersey, real growth in pension contributions consumed essentially all real growth in associated education expenditures. In Illinois, real (inflation-adjusted) growth in pension contributions consumed all the real growth in associated education expenditures plus another 52%.

State leaders often emphasize increases in education spending as important investments in children and their education. Many assume this comes entirely in the form of new classroom resources, teachers, school aids, or other important education expenditures tied to classrooms, but our dashboard shows this is clearly misleading in many states.

Now, the promises of retirement benefits to teachers and other school employees have long exceeded the funds set aside, so we’ve known for some time that there would need to be some catching up to do. The real problem is, the share of benefits for which there are adequate funds now set aside hasn’t budged much, despite very strong returns in the stock market and other assets that states and local governments invest in with the hopes of growing the contributions. The educational and school pension plans we study had 74% of every dollar needed to meet obligations in 2015; in 2023 after a very strong decade for the stock market and lots of additional contributions, we got to 75% — just a 1 percentage point increase!

Apparently, we’re shoveling in a lot more resources without seeing improvement.

Pension Burdens Vary Sharply by State

Ten percent nationally is the gentle version of this story. Underneath it, the variation is enormous. Pension burdens run from under 4% in the lowest burden states to more than 20% in Illinois, where one in five education dollars is gone before a single lesson is taught. Nine states now spend more than 13% of their covered-employee budgets on pensions. While there is significant heterogeneity across states, most states have experienced growing retirement cost induced budgetary pressure. Overall, 37 of 50 states (and Washington D.C.) have seen their burden grow since 2015.

Translate these percentages into dollars and the cost of the shift becomes more concrete. For example, had California districts simply held their 2015 pension share of associated education expenditures, they would have freed up nearly $6 billion for other priorities in 2023 alone. In New Jersey — where real pension costs per pupil have risen 332% since 2015 while real general per-pupil spending rose just 11% — holding the old share would have left $3.2 billion available for other important education expenditures. These are real cuts that potentially translate into teachers not hired, programs cut, or school aides laid off.

And, yet the concerning part of this story is that the figures outlined above are the optimistic case.

Priced Honestly, the Bill Nearly Doubles

The current contribution amounts across states are in large part determined by each pension system’s assumption that its investments will earn roughly 7% per year in perpetuity. Over the past decade, most systems were able to hit that target, but they managed to do so due to one of the strongest sustained bull markets in modern history. If you were to bet your household budget now on the last decade’s stock returns repeating, you would rightfully be called reckless, and yet, states and their respective public pension funds do exactly that.

With this in mind, another part of our database asks the question: what happens if returns do not hit their expectations? When we re-measured the same promises using risk-free Treasury yields (i.e., the way financial economists argue guaranteed benefits should be valued) the national bill climbs from $77 billion to more than $167 billion. The resulting budgetary burden jumps nearly double from 10.57% of budgets to 20.42%.

To illustrate what this looks like in some of the most financially distressed states, consider Illinois. While Illinois already contributes one of the highest shares of its covered employee budgets toward retirement costs at 20.6%, under this risk-free investment rate scenario the share jumps to 37.0%. In dollar terms, this translates into an increase from roughly $7 billion to more than $15.7 billion — or a jump from $3,776 to $8,546 per pupil.

You Cannot Tax Your Way Out

The political instinct seemingly every time a state is faced with this situation is to raise additional revenues. However, this policy assumes a stable tax base, and the highest-burden states are quickly losing theirs. California, Illinois, and New Jersey posted some of the nation’s worst net outmigration numbers last year. These states similarly rank near the bottom of the country for their tax competitiveness and have been bleeding taxpayers who have been fleeing for relatively lower taxed states. When the people who pay the income and property taxes leave, the cost of those pension promises concentrates on those who decide to stay. Raising tax rates in this environment can accelerate tax base erosion, worsening the retirement cost problem facing these states.

This is ultimately the trap: rising obligations, a narrowing base, and in states like Illinois, constitutional protections that put adjusting existing promises largely off-limits.

Check Your District’s Metrics

This is where our dashboard comes in. Don’t take our points on faith, see for yourself. Our dashboard includes the following tools:

• District Lookup lets you search any of ~12,800 districts and trace its pension burden from 2015 to 2023 against its state’s average.

• State Comparisons places any two states’ financial metrics side-by-side.

• Sensitivity Analysis shows how pension burdens across every state would change if actual returns fell below current assumptions.

• Budget Calculator translates pension dollars into potential foregone budgetary items due to contribution totals.

This tool measures the gap, but it will not tell you whether or not the benefits are too generous or what states should do to combat the problem. Still, the direction is hard to argue with particularly in the most fiscally distressed states. Where reform is possible, there are some obvious policy choices that could help ameliorate state funding woes: moving new hires into defined-contribution or hybrid plans so the hole stops getting deeper and valuing existing promises with realistic assumptions so the costs can be addressed earlier rather than showing up in school district budgets later.

When you hear framings like “schools are underfunded” or “schools are overfunded,” usually those are missing the point. It’s that a growing share of what we already spend never reaches students, and until that problem is directly confronted, even the largest tax increases will struggle to deliver on their stated promises.

For comments and questions about your state or district’s results or general questions about the project more broadly, please use the contact form provided on the dashboard, which can be accessed here.