Bond or bust

As if the cheating scandal and inequality among schools weren’t enough. Since the late 1970s, Atlanta Public Schools has failed to set aside enough cash in its pension fund for thousands of current and retired employees. That unfunded liability has now swelled to more than $530 million. After decades of neglect, the Atlanta Board of Education now wants to right-size one of Georgia’s worst funded pensions program. It plans to do so without raising taxes. And it’s asking Wall Street to help.

Voters on Nov. 3 could decide whether the school district should sell up to $400 million in pension obligation bonds. If residents support the measure, APS plans to take on the debt in two $200 million chunks. The first $200 million would allow school officials to pay down the liability from a woeful 17 percent level to 50 percent level of funding. The second half of the bonds would be sold at a later date and invested in the stock market. According to Jason Esteves, an APS board member who co-chairs the system’s pension task force, the plan would save the school district $20 million during the first year and at least $6 million in subsequent years.

If the plan works, APS could improve its finances, help more kids graduate, and improve the caliber of teachers in classrooms. But opponents of the proposal believe the risk involved could place the school system in an even more precarious financial position.

Esteves says the school district’s unfunded pension problem has “weighed down the trajectory of the district” for far too long. APS spends roughly seven percent of its annual budget — more than $1,000 for every student — on pension payments.

“This school board is trying to tackle a 40-year issue no other school board has tried to tackle,” Esteves says. “It’s an issue created long before our kids entered school.”

In the 1970s, APS teachers shifted from the district’s General Employees’ Pension Plan to the Teachers Retirement System of Georgia. The school system also gave other employees such as cafeteria workers, bus drivers, and janitors a chance to switch plans as well. Because most employees pay into TRS, asking them to increase their contribution to the pension plan, like city employees did during Mayor Kasim Reed’s first term in office, would only yield limited results of up to $1 million per year.

APS Board member Matt Westmoreland, noting that annual pension payments would otherwise increase over time, requiring new revenue or cuts elsewhere, says the plan would help fix APS’ past financial mistakes while helping children in the classrooms. He says savings would help fund improvements to early childhood programs, college and career readiness, and better pay for teachers.

However, pension bond critics say that taking on debt unnecessarily places the district into harm’s way. Edward Siedle, a former SEC attorney and current Forbes writer, says these kinds of investments “don’t usually work out well” for governments. Should stock investments fail to yield results, the district could find itself deeper in debt. By going the Wall Street route, and not raising taxes or cutting pension benefits, he says the school board is avoiding a politically difficult decision that would ultimately be better for the district’s fiscal health.

“It’s a dumb idea,” Siedle says. “You’re gambling by not directly paying debts, you’re gambling with a Wall Street transaction. You’re gambling with what you’re going to do with the money you borrowed.”

At the APS board meeting on May 4, Superintendent Meria Carstarphen voiced her support for the plan. She said the board’s steps to fix the pension problem without cutting benefits would make APS a better employer, which in turn could help attract top talent to teach kids.

“APS is a district that does believe we should continue to pay benefits to our staff and honor our pension plan,” she said. “Not all organizations or institutions do that. That all comes at a cost.”

The APS board, which unanimously approved a “first read” of the measure to give the public more time to digest the plan, plans to finalize the bond referendum at next month’s board meeting. If the school board OK’s the referendum, Esteves says APS will launch a campaign to promote the bond referendum’s benefits.

That vote will also represent something bigger: whether APS has regained trust of the community, or if residents still remain skeptical about the state of the district following years of dysfunction.