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Full Disclosure?

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Why must public companies, but not public school systems, disclose total executive compensation, asks J.H. Snider in this Education Week Commentary.

While the Securities and Exchange Commission ensures easily accessible disclosure of executive compensation, including pensions, bonuses, and stock options, no such transparency exists for information about school employee compensation. In contrast, the available information about superintendents' salaries and benefits is usually fragmented and incomplete, and disclosed salaries for teachers are often misleadingly low.

Rather than downplay compensation in order to minimize school employees' perceived cost to taxpayers, schools should educate the public about the benefits and value of being an educational leader, writes Snider. Instead of hiding salaries, school systems should showcase benefits as a way to attract competent employees. According to Snider, the public should be educated, not misled, when it comes to school employees' salaries and benefits.

What do you think? Is greater transparency needed in the compensation of public school leaders?

5 Comments

Considering that private institutions publically publish executive compensation, it is only fair that the same be done with public employees. There are probably reasons for avoiding complete disclosure, such as a fear that some superintendents may appear to be overcompensated. Such a notion should be carefully measured against salary and benefit packages of CEO's in other industries before condemning school officials. The difference is, of course, that public school employees are paid from taxes and all taxpayers want some kind of accountability for public employees. Unfortunately, taxpayers seem to expect more of certain public employees than others. We often overlook the salaries of politicians while complaining about public school leaders.

Mr. Snider is somewhat disingenuous in his calculation and description of the superintendent's compensation. He lumps the lifetime value of the increase in the superintendent's pension ($784,000) into the calculation of the first-year cost of the superintendent's contract, and states that the superintendent is "eligible" for that payment. That sum is a contingent liability that will likely never accrue,and thus never cost the district a dime.

In addition, his statement that "the state pays for pensions" is somwhat misleading, and does not justify the inclusion of that amount in calculating the superintendent's compensation. Actuarially sound public retirement systems pay benefits from investments over time. The cost to the state is far less than the full dollar amount of the pension.

It appears to me that Mr. Snider's motives could stand a little transparency.

I am responding to the previous commenter's accounting argument. The commenter, who I am assuming is the executive director of the Kentucky Association of School Administrators, an organization that lobbies on behalf of superintendents, questions the accounting principles behind my estimate of the increase in the present value of the superintendent’s pension benefit.

I think the commenter raises a very important point by noting the uncertainty of future legally mandated pension obligations. Sure, if the superintendent died in the next few years, the taxpayers would get off scot-free. Similarly, it is highly likely (but less than 50% likely) that he would die before age 80, resulting in an actual obligation less than my estimated obligation. There are also many uncertainties (“contingent liabilities”) about future stock market performance, inflation, medical breakthroughs, and natural events—all of which could fundamentally impact the taxpayers’ future legal obligations.

If one is so inclined, these are great excuses for not estimating the cost of future uncertain legal obligations. Perhaps this explains why Maryland has an unfunded retirement healthcare pension liability that some now estimate at $20 billion. It was extremely hard to estimate the value of those benefits when they were granted. Certainly, too, corporate executives and their representatives for a long time fought valuing executive stock options on the grounds that estimating their future worth was next to impossible.

But difficult and controversial as any estimate of uncertain future financial events may be, I believe the effort is worthwhile. In more than doubling the superintendent’s eligible compensation for pension benefits, the school system granted the superintendent a windfall retirement benefit that it would take approximately 1.5 teachers to earn over the course of their entire careers.

Just as the Government Accounting Standards Board has passed new rules, effective December 15, requiring that the present value of future retirement healthcare obligations should be estimated, I believe that a similar accounting mindset should be applied to the calculation of the present value of executive compensation. We can debate about the particular assumptions that should be used in the calculation. But I think the need to make such assumptions is self-evident.

On the pension benefit, the commenter may not be aware that in Maryland the state picks up the bulk of the pension obligation, with the district often picking up the rest. Other states have very different policies. The approximately 11% figure I used for funding normal pension obligations already assumes investment returns in the vicinity of 8%/year. If the returns averaged much higher than that, then the pension is over funded. Likewise, if the returns were less (as they have been since 2000), the pension is under funded. If I recall correctly, Maryland’s most recent actuarial statement for its pension system assumes a $4 billion unfunded pension liability based on recent investment performance below the assumed level. With the recent upturn in the stock market, this situation could rapidly change.

Mr. Snider, please allow me to withdraw my comment about your motives, as it was inappropriate, and I regret it. But I retain a fundamental disagreement with your premise.

I do not question the accuracy of your calculations, only their utility. I take issue with describing a contingency, an abstraction, as "compensation," and particularly with including it as a lump sum, with such dramatic results.

Certainly, a significant increase in the superintendent's salary will result in a significant increase in his pension, over time, with some additional cost to the district, but not the full cost. It should be explained that way.

Most public pension systems,including the ones in my state, have unfunded liabilities. Such is the nature of the beast. Certainly, excessive unfunded liabilities is cause for concern. But again, if contributions are calculated in an actuarially sound manner, the impact of unfunded liabilities is minimized.

There are many reasonable people who share qualms with Mr. Young about labeling as "compensation" a highly uncertain future expenditure. But I don't think that economists (or well trained MBAs) would belong to that group. Economists are accustomed to looking at the present value of uncertain future revenue streams to value an asset or expenditure. They are also comfortable dealing with the language of "expected value," which is a statistical summary of uncertain events. For example, if I roll a die, the expected value is 3.5 but no one actually expects me to roll a 3.5 (in this case, it's even impossible to do so).

Mr. Young is also correct that the district doesn't have to pay the full cost of the pension. In fact, in this case, the State of Maryland picks up the entire incremental amount associated with the superintendent's boost in pay. So I would go so far as to say it costs the district nothing.

Moreover, not only is there no legal obligation whatsover for the school district to put this sum in its budget, it would probably be violating state accounting standards for local school systems if it put it in its legally mandated budget.

Having said the above, I do think there is a "moral hazard" problem when school districts can spend taxpayer dollars in such a way that there is no cost to themselves. The huge unfunded retirement health insurance liability (estimated at more than $10 billion for Maryalnd as a whole, $2.3 billion for Anne Arundel County as a whole, and $700 million for the Anne Arundel school system in particular) may also be viewed as a "moral hazard" situation. By not estimating the present cost of present benefits, there is a large intergenerational shift of wealth from the young to the old; from tomorrow's students to today's students, and from tomorrow's teachers to today's teachers. In the case of unfunded retirement health insurance, it's not a question of being an "excessive unfunded liability." Since pay-as-you-go ("cash") based accounting was used, there was no prefunding of the liability at all.

All in all, I think the case of the unreported superintendent's compensation illustrates some more serious and widespread school accounting problems. Mr. Young's comments alluded to those problems, and I'm pleased he has given me the opportunity to raise them here.

GASB 45 (the new accounting standards for retirement health insurance, effective December 15, 2006 for districts with at least $100 million in revenue) has gone a long way to address those accounting problems. A similar accounting mindset of estimating the present value of future uncertain expenditures should now also be applied to estimating the present value of employee compensation packages.

Comments are now closed for this post.

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  • J.H. Snider: There are many reasonable people who share qualms with Mr. read more
  • Wayne Young, Executive Director: Mr. Snider, please allow me to withdraw my comment about read more
  • J.H. Snider: I am responding to the previous commenter's accounting argument. The read more
  • Wayne Young, Executive Director: Mr. Snider is somewhat disingenuous in his calculation and description read more
  • Bob Frangione, Teacher/Parent: Considering that private institutions publically publish executive compensation, it is read more

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