Sunday, October 16, 2011

Retirement Pickups: Correcting the Dispatch

The Columbus Dispatch today published a story titled "Is SB5 good for Ohio?"   SB5 = Senate Bill 5, the law whose fate is being determined by referendum (Issue 2) on the November ballot.

The story addressed a number of topics, including an often misunderstood concept regarding pension plan contributions called "pickup." Unfortunately, the Dispatch didn't quite get it right.

The first point to understand is that the teachers' pension program is not operated by our school district, but rather by a quasi-State agency called the State Teachers Retirement System (STRS). STRS was created by State law, and the State retains a certain amount of control over its operations. But the primary governance of STRS is handled by a Retirement Board, made up of five elected contributing teacher members; two elected retired teacher members; an investment expert appointed by the governor; an investment expert appointed jointly by the speaker of the House and the Senate president; an investment expert designated by the treasurer of state; and the superintendent of public instruction (ie the State Superintendent) or his designated investment expert.

The STRS pension fund gets its money primarily from contributions made by working teachers and by the school districts which employ them. The maximum contribution rates are set in the law, but may be set to lower numbers if the Retirement Board feels the fund can be kept solvent with smaller contributions (STRS is not solvent, by the way). Currently, the Retirement Board has the contributions rates set to the maximum amounts allowable by law: 10% of the teacher's salary paid by the teacher, and another 14% of the teachers salary paid by the school district.

Article 32 of the Collective Bargaining Agreement between the Hilliard Education Association (HEA, the teachers' union) addresses retirement system contributions. In this article, you see the use of the word "pickup," and it has confused many people over the years, including me. While the language of Article 32 is accurate, if you don't know that "pickup" is a code word in the world of public employee retirement systems, it's easy to misinterpret this section.

Here's what "pickup" means in the context of our contact with the HEA. It DOES NOT mean that the school district (ie we the taxpayers), is paying both the 14% employer and the 10% employee shares. Rather, it is a mechanism which allows the teachers to make their share of the retirement contribution with pre-tax dollars, in a method no different than that used by those in the private sector to contribute to 401(k) plans with pre-tax dollars.
Mechanically, it works like this:

  • Let's assume that the teacher has 10 years of experience and a Master's degree. According to the pay scale in their Collective Bargaining Agreement, this teacher would have a Base Pay of $64,525. Let's make it $65,000 just to use round numbers.
  • The employer's share of the contribution to STRS is 14%, or $9,100.
  • The teacher's share is 10%, or $6,500. This is deducted from the $65,000 base pay, reducing the take home by $6,500.
  • However, for purposes of the W-2, the teacher's gross salary is reported as $58,500. This is what makes it a "pre-tax" contribution.
  • STRS recognizes the whole $65,000 for purposes of calculating pension benefits.
There is another code-phrase which gets used in regard to pension payments: "Pickup on the Pickup."  This DOES mean that the school district pays both the employer and employee shares. This benefit appears in the contracts of our administrators, and it works like this (go here to see an example, and click "Read More..."):
  • Let's use the average administrator salary of $90,000
  • The administrator's share is 10%, or $9,000, but this is paid by the District.
  • This extra 10% is treated as income as well, increasing the total employer contribution to 14% of $99,000, or $13,860, and the 10% employee contribution to $9,900. This means $23,760 in total is paid to STRS, all by the school district. The administrator has no money deducted from the $90,000 base pay for retirement contributions.
  • The administrator's salary is reported on the W-2 as $90,000
  • For purposes of calculating pension benefits, the administrator's salary is reported as $99,000.
I hope this helps straighten out what goes on with retirement plan contributions in our school district. Please let me know if you have any questions.

By the way, the teachers and administrators do not participate in Social Security, neither making contributions, nor getting any benefits.


  1. So as a board member, why is it allowable for the district to pay the administrator contribution, when ALL other employees must pay their own? AND we are cutting teaching jobs before asking administrators to pay their 'fair share'?

  2. It's allowable for the district to pay the employee share of the retirement contributions for the teachers and staff as well. They just haven't negotiated it into their contract.

    It's fruitless to break down the employment contracts into all the components, and then try to compare component to component in isolation between different contracts (ie between teachers and administrators, or between teachers in our district and teachers in another district).

    In one district, the teacher may have what appears to be a lower pay scale that others, but their health plan has lower contributions, or lower deductibles. Or the number of unused sick days that can be accumulated can differ, as well as how those unused sick days are paid out at retirement.

    To make a valid comparison, you have to look at the whole contract as a package, and compare the total cost for employees of each group.

    All those things are addressed during the contract negotiations. If they were all the same, there would be no need for local unions, and all contracts could be negotiated at the State level.

    I doubt that this would be beneficial to the teachers and staff of our district, since our average classroom teacher salary of $69,369 (per the ODE) is in the 97th percentile for the State (the State average is $56,850).

  3. I wish I had majored in education.