The ATA's president doth protest too much

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Appeared in the Calgary Herald

In her recent column that defended the generous 2007-2012 pay and pension deal between the provincial government and teachers, the president of the Alberta Teachers’ Association made this unsupportable claim: taxpayers saved $45-billion because of that agreement.

The deal, wrote union President Carol Henderson, “allowed the government to restructure its own liability and to reduce the 52-year amortization period of the debt.”

To evaluate Henderson’s assertion—and warning, the number-crunching here is a slog—it helps to understand what the $45-billion figure represents.

Pre-deal, that figure was the actuarial estimate of the cost of teacher pension obligations created before 1992 and to be paid out until 2060. Importantly, such an expense—taxpayers and teachers shared it two-thirds and one-third, respectively—would only result if money for the pensions were borrowed and paid back with interest.

Specifically, under the old approach, the “old” (pre-1992) teachers’ pension fund with a massive unfunded liability borrowed money from the “new” (post-1992) pension plan. The interest rate charged was equal to the projected rate of return on the new plan’s investments (for example, 7.25 per cent in the last applicable year).

But after the new agreement came into effect, to properly calculate the difference between the old $45-billion estimate and any new price tag over five decades, one must do this: subtract the newer estimate ($16.4 billion, according to the Alberta Teachers’ Retirement Fund) from the $45-billion. The difference is thus $28.6 billion.

Henderson didn’t do that. Instead, she mistakenly asserted a $45-billion savings, this as if the province will not be paying for any (pre-1992) pensions for the next five decades.

Still, to pay $28.6 billion less for teacher pensions seems like a good deal for taxpayers—until one digs further.

For one thing, and critically, $28.6 billion in reduced financing costs could have been obtained without having taxpayers assume the remaining one-third liability. (That would not have been entirely fair to newer teachers; alternatively, it is hardly any fairer for taxpayers in general to shoulder the entire cost but we’re all paying for poor past decisions.) Such a cost reduction was always something the province and union could have done—and should have done—long ago. 

Once the province took over the entire pre-1992 teachers’ pension liability, the practice of borrowing at a higher-than-necessary rate was soon terminated. (The province now pays for the actual, annual cost of these pensions every year out of general revenues.) So it’s a bit rich to imagine the union “allowed the government to restructure its own liability.” Why would the province—fully responsible for the pension liability—ever agree to, or have done, anything else? The union’s “agreement” to that end was superfluous.

In fact, even had teachers still been on the hook for one-third, it would have made zero sense for the province or the union to do anything else but look for the cheapest financing option.

That’s why Henderson’s claim is mistaken: first, because it assumed the $45-billion was somehow a total “saving.” Second, and even more critically, because even the lower figure assumes the province would borrow money for five decades at a rate higher than that available through alternate financing. But no responsible government would do that forever, not with other available options.

Looking back over the decades, there were plenty of bad political and union decisions made about teacher pensions. They ranged from zero contributions from taxpayers for decades, to the creation of new benefits in the 1970s without upping contribution rates. (For example, since the 1970s, teachers with 30 years of service can retire with a full pension at age 55.)

The debates over such numbers matter, not least because even the post-1992 teachers’ pension plan has its own growing unfunded liability (at just over $1.7 billion). Taxpayers are half responsible for that debt.

In her column, Henderson compared the government-union pension deal to refinancing one’s mortgage to pay down the house faster, thus saving money in interest costs. She makes an invalid comparison.

The closest and proper analogy is this: Suppose Bob, with a one-third interest in his home, cannot make his mortgage payments. As a result, a relative, Susan, with a two-thirds stake, assumes the full liability.

At the same time, Susan obtains cheaper financing or just pays off the debt (in effect, what occurs now, given the province pays for pre-1992 pension expenses as they come due every year).  Bob hasn’t saved Susan any money just because the latter obtained cheaper financing, or even if she pays off the debt completely right away. That was Susan’s doing. Rather importantly, in the process, she was handed an extra bill for the entire liability.

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