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Pension Expenditures Do Not Crowd Out Education Funding, NCPERS Study Finds
Critics maintain that pension expenditures by state and local governments are crowding out other important forms of spending—notably, education funding. But overwhelmingly, the data shows that the crowding-out effect simply isn't occurring.
By: Lizzy Lees, Director of Communications, NCPERS
Critics maintain that pension expenditures by state and local governments are crowding out other important forms of spending—notably, education funding. But overwhelmingly, the data shows that the crowding-out effect simply isn't occurring.
In the 2023 NCPERS research update, “Do Pension Expenditures Impact Education Spending?” lead researcher Dr. Michael Kahn conducted a thorough literature review of research arguing that pension spending is crowding out education funding. He then examined state-by-state historical data on pension contributions, education expenditures, revenues, and the economy.
Kahn found that education funding grew at three times the annual rate of pension spending from 1993 to 2019. During this period, whereas growth in education funding was stable, pension spending was volatile. The volatility in pension expenditures is often due to plan sponsors contributing less than required and making occasional lump-sum catch-up payments or due to bumps in the markets.
During the past quarter century, the average pension expenditures were 3.6 percent of state and local own-source revenues (taxes and fees collected by municipalities). The same figure for education expenditures was 33.8 percent. Even if pension costs rise faster than education expenditures, pension funding is unlikely to crowd out education funding because the ratio of the two is likely to stay about the same.
Recognizing the many competing priorities that state and local governments face, the study also examined whether state and local revenue systems are out of sync with the economy. The data showed that revenues lag economic growth in each state. “Governments can afford almost all competing priorities, but to do so, they must take determined steps to bring their revenue systems into harmony with the economy,” Kahn said.
The study concludes that, in every state, pension contributions are not crowding out education funding, but state and local revenue systems remain out of sync with the economy. Read the full study (PDF) and find the state-by-state analysis.
Learn more about the key findings from the study and hear directly from the lead researcher during NCPERS' May 4th webinar. Register here to attend or to access the webinar on demand.
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