IRS Regulation Could Threaten Charter School Teachers’ Pensions

Published February 10, 2012

The Internal Revenue Service has extended the comment period on a pension rule change that could force states to remove nearly 100,000 charter school teachers from state pensions and withdraw benefits some had already accrued.

The IRS has extended the comment deadline from Feb. 6 to June 18, after a flurry of lobbying from charter advocates and a letter that day from House Education Committee chair John Kline (R-Minnesota) and Rep. Duncan Hunter (R-California).

“This could unfairly jeopardize the retirement security of charter school teachers currently participating in these plans,” Kline and Hunter wrote to IRS Commissioner Douglas Shulman. “Equally concerning, the draft regulations could effectively prevent many public charter schools from recruiting or retaining veteran traditional public school teachers, significantly interfering with charter schools’ ability to achieve their educational goals.”

Twenty-eight states require some or all charter teachers to participate in state pensions, and 18 states allow but do not require it. More than 93 percent of charter school employees participate in state pensions, according to the National Alliance for Public Charter Schools.

‘Lack of Clarity’
The IRS has previously explicitly ruled three times that charter school employees count as public employees for the purposes of receiving pensions. But a proposed change in its definition of “government plan” sets up five criteria for participation, including that its governing body is publicly elected and a government is responsible for debts the participating institution incurs. Charter schools are not likely to meet even four of the criteria.

“Given the lack of clarity, there is a fair risk to the sector that a state faced with losing its governmental plan status based on including charter employees will probably not want to take that risk,” said NAPCS’ Legal Affairs Director, Renita Thukral.

This would also negate the pension benefits younger teachers had already earned but don’t receive until meeting the required minimum of years on the job, she said.

Defining Public Benefits
For several years, the IRS has considered how to define “government plan” for pension purposes to prevent non-governmental entities, such as mental care clinics or nonprofit zoos, from opting in to benefits approximately twice private-sector benefits.

States want to keep their pensions’ IRS designation as government plans, because the IRS allows government pension plans to use different rules than private-sector pension plans. These different rules often hide millions of dollars in state deficits since they do not require states to have as much money in the bank to call the plans fully funded as do private-sector pensions, as research by Andrew Biggs, a resident fellow the American Enterprise Institute, and others has repeatedly confirmed. Because of this, state pensions were unfunded by more than $3 trillion in 2010, but only reported deficits of $438 billion.

“The whole thing is a Ponzi scheme of sorts—people are paying today to subsidize benefits for people who are retired or about to retire,” Thukral said. “The whole thing is financially unstable, so there’s been some question about whether charter schools want to be perpetuating state plans given their fiscal instability.”

Unintended Regulatory Consequences
Thukral said officials from the Treasury Department and IRS extended the comment period to discuss these concerns.

The IRS issued School Reform News a statement that said: “There is nothing in our [proposed regulations] that excludes public charter schools being treated as a governmental entity… In addition, we are very open to comments on the factors provided by the draft proposed regs.”

Since charter schools compete with traditional public schools for teachers, barring them from state pension systems puts them at a disadvantage for recruiting and retaining teachers. Since state benefits are so good, Thukral said, most of the charter schools that do not participate only do so because the employer contribution to retirement benefits is so high.

For public schools, taxpayers often pay both the employer and employee portions of pension contributions. Asking public employees to pay their part ignited furious debates in states like Ohio and recall petitions in states like Idaho and Wisconsin.

Internet Info:
“IRS Proposed Regulations,” National Alliance for Public Charter Schools, 2011. List of pertinent documents:

Image by Fort Meade Public Affairs Office