In Maryland, a K12 public school teacher can earn more than $1 million a year. But you’d never know that from Maryland’s publicly reported compensation figures for individual teachers, which, as in other states, are derived using cash accounting methods.
Cash- and accrual-basis accounting are the two main accounting methods for calculating compensation. For a given year, cash accounting measures what people are paid; accrual accounting what they earn, including deferred compensation. The government mandates both methods: cash accounting for government workers; accrual accounting for corporate executives.
In Anne Arundel County, Maryland, where I live, the different methods lead to hugely different results. With cash accounting, total teacher compensation, including salary and benefits, ranges between $55,000 and $200,000; with accrual accounting, between $55,000 and $1.1 million. The salary component of the $200,000 is $150,000, which is the only component publicly reported at an individual level. The difference between the publicly reported $150,000 and the $1.1 million that would be reported using the accrual method is about 700 percent.
With both accounting methods, starting compensation remains roughly the same. But with accrual accounting, the range dramatically expands at the top. This occurs because of the “pension cliff,” the year when senior teachers, such as those with 30 years of creditable service, become fully vested in Maryland’s teacher pension. Large bumps also occur at 10, 15, and 20 years as a teacher becomes fully vested in retirement health benefits.
To many people, accrual accounting sounds like voodoo. For example, no one knows how long an individual teacher will live or how much retirement healthcare she will need. But such assumptions are routinely made by insurance companies when valuing insurance and by union leaders when valuing proposed employment contracts.
Accrual accounting not only isn’t voodoo; it’s the gold standard. Without it, we end up with massive structural deficits that force future generations to pay either higher taxes for the same service or the same taxes for worse service, including lower quality teachers. Communities with the largest structural deficits, such as Detroit, see reduced property values and a spiral of decline.
Unfortunately, estimating how much an individual teacher earns is arguably as much art as science, as almost any deferred compensation assumption can be easily attacked. After all, predicting the future is hard. But that difficulty doesn’t justify either pretending such assumptions don’t exist or hiding the data required for the public to make its own assumptions and analyses.
According to the National Council on Teacher Quality, the United States has $516 billion of unfunded teacher pension liabilities. One paradoxical reason misleading compensation data is associated with this debt is that no rational local politician should favor complete transparency when, as today, virtually all neighboring local governments provide misleading pension data and telling the truth would thus amount to unilateral disarmament. That is, local politicians should not prioritize telling the truth at the expense of their constituents’ short-term property values and living standards.
The only way to short-circuit this race to the bottom in teacher compensation transparency is by having the federal government mandate uniform disclosure. Analogous race-to-the-bottom incentives have led to other federal disclosure requirements.
Teacher compensation reporting should use the same accrual methods, including changes in pension value, that the U.S. Securities & Exchange Commission mandates for reporting the compensation of top executives at public companies. Not only does the SEC make this data publicly available, it mandates that it be made available in a standardized, machine-readable format known as XBRL, which facilitates easy analysis of the data over time and across corporations. The U.S. Department of Education should mandate similar compensation accounting and disclosure for K12 public schools that receive federal funding.
The teachers with the highest compensation will howl with protest like executives did when investors pressured the SEC to adopt accrual methods. But citizens should demand to know how much such teachers are paid.
J.H. Snider, the president of iSolon.org, frequently writes about education data policy and politics. For more information, see K12Transparency.info.
Snider, J.H., America’s $1 million per year K12 public school teachers, Washington Examiner, April 27, 2017.