A Case for Contracting Out Teaching Services
It’s not often that an insurance actuary makes national headlines, but Jeremy Gold did just that for many years before his death on July 6. His claim to fame was that he was among the first to cast doubt on the rosy pension forecasts put forward by state governments, which routinely overestimated the investment returns those pension funds would earn. He practically invented the term “unfunded pension liability.” Thanks to his warnings, in 2013 Moody’s began to calculate the cost of state pension funds themselves rather than relying on government numbers.
The work of an actuary – assessing risk for insurance companies and then advising them how much that risk should cost – is decidedly unglamorous work. But Mr. Gold turned heads in 2015 by estimating that state pension funds were in the red by at least $1.5 trillion. In fact, so sketchy were the reporting standards for state pension funds that he thought the range might even extend to $4 trillion.
One of two things must happen to close this gap: either raise taxes or cut pension benefits. Needless to say, neither is a popular option. Taxpayers who routinely work into their 70s have little patience for state employees who get to retire in their 50s. They are also more numerous, and if put to a vote the taxpayers would choose overwhelmingly to cut pension benefits.
On the other side, municipal employees’ and teachers’ unions are adamantly opposed to this and believe their pension plans are written in stone – a sacred pact between private citizens and public employees that cannot be violated.
Regardless of which path state governments choose, it is becoming increasingly apparent that it is too expensive to hire state employees. Since most state employees are teachers, this means there will be less money to hire new teachers as retired teachers’ pension costs chew up more and more of state budgets.
What to do? Contract out teaching services.
This is already done for some special education and mental health services, but it will become increasingly common for everyday teaching.
Consider the annual cost of employing a teacher. In my home state of Colorado, the average salary of a teacher is around $50,000. Over a 30-year career, this adds up to $1.5 million. Even though most teachers will not work that long, state governments must assume that someone will occupy that position for 30 years and must be compensated. That is a long-term liability.
But once that teacher retires in his mid-50s he will be making around $70,000 a year and thus be entitled to a pension of approximately $50,000 a year for the rest of his life. Assuming he lives another 30 years, this amounts to $1.5 million in total pension costs. Even though several teachers may occupy that position over the course of 30 years, they are all entitled to some retirement compensation.
Then there’s health care. Although these costs vary widely among individuals, the average American spends about $10,000 a year in treatment and insurance, whether she pays that herself of has the premiums covered by her company or a government program. Before a teacher goes on Medicare at age 65, most of her health care costs will be covered by the state she works in. That amounts to $400,000 during her career and first ten years of retirement. And since many spouses use the public employee health care system along with their children, this adds even more to liability costs.
Nevertheless, lets assume the bare minimum costs in our calculation: $1.5 million in lifetime salary, $1.5 million in lifetime pension costs, and $400,000 in lifetime health care benefits. That’s a total of $3.4 million. Averaged out over a thirty-year career, the average teacher thus costs the taxpayers $113,333 a year. And this is a profession that gets four months off every year.
If reading and math proficiency were in the 70% or 80% range, taxpayers might conclude that it was worth the cost. But here in Colorado our proficiency rate among 9th-graders is 36% in language arts and 32% in math. Hardly reason to break out the party hats.
Now let’s consider the alternative for contracting out these services. With $113,333, our company could provide 30 hours of small-group literacy instruction and critical thinking field exercises to 324 kids. Six of our instructors could teach our curriculum to 36 kids every month over the course of the school year, with a teacher-to-student ratio of 1:6.
By contrast, the average class size in Colorado high schools is approximately 20 students for every teacher. Such numbers preclude the use of direct instruction methodology and result in the same mind-numbing classroom delivery (naturally with some exceptions) that we’ve come to expect over the last 40 years. Even the best public school teachers struggle to make the impact they really want to on classes of that size.
And the best part about contract teaching is that if we don’t get results, the district can fire us and bring in somebody who does. Not only is there more bang for the taxpayer buck, but you can give that buck to a different organization every year depending on your needs.
Given the current state of public education and public employee benefits, this kind of arrangement is the wave of the future.