School districts must do more to manage costs of health benefits

CREDIT: Alison Yin / EdSource

California’s school districts have recently seen large increases in revenue and have gained substantial flexibility over how they spend their money. At the same time, widespread disagreements about how districts should spend their money have culminated in teacher strikes in some of the largest districts in the state, including Los Angeles, Oakland, and Sacramento. If the policy news is so good, why are tensions in districts so high?

The short answer is that big financial challenges remain for school districts. Among the most important of these is the cost of health and welfare benefits for districts’ employees. Like many employers, school districts in California typically offer health benefits — such as medical, dental, or vision coverage — to their workers. But these benefits are much more expensive than they used to be. For example, in 2004, the cost of providing medical benefits for a teacher in California was about $9,700 (in 2018 dollars). By 2018, that had increased to $14,600.

Many employers across the country saw similar increases. However, the increases are especially hard for California districts because they pay about 85 percent of teachers’ medical benefit costs, while the teachers pay the rest. For comparison, other employers typically pay 62-82 percent of the costs of their workers’ medical benefits. This means that when the costs of medical coverage increase, they’re not responsible for as much of the additional cost.

In addition to providing benefits for current workers, most districts also offer health benefits to at least some of their workers after they retire. These retiree benefits are often very similar to what current employees receive, and in some cases retirees receive them for the rest of their lives.

These retiree benefits represent an additional challenge because many districts have promised these benefits to their employees but have not set aside money to pay for them, resulting in an unfunded liability. Statewide, districts have about $4,700 in such unfunded liabilities per student and the liabilities in some districts are much larger. Districts already use about 1 percent of all spending for retiree health benefits, but that number might grow quickly in the near future as more workers retire.

When districts spend more money on health benefits, there’s less money for them to spend on other priorities, like teacher salaries. This is likely contributing to tensions among stakeholders in at least some districts. For example, the recent strike in the Los Angeles Unified School District resulted from disagreements between teachers and district administrators about salaries and class sizes, among other things. Those disagreements were probably harder to resolve because the district currently holds more than $15 billion in unfunded liabilities for retiree health benefits, or more than $30,000 per student.

The Sacramento City Unified School District, where the recent teacher strike related directly to health care costs, has more than $15,000 per student in these liabilities for retiree benefits, and spends more than $2,000 per student on health benefits for its current employees. That’s well above the statewide average of $1,100 per student.

Of course, as highlighted by researchers in the recent Getting Down to Facts II project, California’s school districts face a number of other financial challenges besides the costs of health benefits. For example, California schools are still funded at levels below the national average, and likely at levels well below what would be necessary to provide an adequate education for every child. More specifically, districts face difficulties paying for building construction, special education, and pension programs. These challenges mean that many districts are feeling financially strained despite their higher revenues.

These other financial pressures also make it all the more important that districts do more to manage their health benefit costs now and to make sure they are sustainable. While some districts may want to maintain their current benefit packages, others may need to consider making employee health benefits less generous or requiring their employees to pay for a larger portion of their annual benefit costs. Districts may also want to scale back their benefits for retirees and can save money in the long term by setting aside money for those benefits well before workers retire.

While these solutions are relatively straightforward, that does not mean that they are easy. After all, districts need to offer strong compensation plans to attract high-quality staff. Nevertheless, money saved on health benefits can be spent on other things to improve working conditions for teachers and outcomes for students. And the longer we wait to make these choices, the harder they become.

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Paul Bruno is a former middle school science teacher and the author of a brief on school district finances for the Getting Down to Facts II research project. 

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