In a recent editorial that was generally critical of Gov. Martin O’Malley’s FY 2013 budget plan, the Washington Post lauded one proposal: requiring local school systems to pick up half the cost of their teachers’ pensions and other retirement benefits. Calling the proposal “courageous,” WaPo explained:

As it works now, localities set the salaries on which teacher pensions are based but pass off most of the cost to the state. The perverse result is that localities have no reason to contain salaries and pension costs, which, unsurprisingly, have soared.

Mr. O’Malley’s proposal would restore some balance…

The idea does sound appealing—at first. But public employee retirement benefits are affected by some potent—and not readily apparent—political and economic dynamics. As I think through those dynamics, I grow increasingly worried that O’Malley’s proposal, if enacted, will create an enormous perverse incentive that will ultimately harm taxpayers, teachers, and public school students all in one fell swoop.

To recognize this perverse incentive, we must think through the political and economic dynamics, one step at a time.

Step 1: The General Assembly controls teacher pension and retirement benefits.

It is true that Maryland’s local school systems set teacher salaries. And because Maryland law dictates that teacher pensions are a set percentage of their final salary, pension costs vary with salaries. However, the Maryland General Assembly sets what that percentage is, and it dictates the non-pension retirement benefits (like health care) that teachers receive. Because of this, the WaPo editorial is wrong to suggest that the state is being manipulated by the local school systems into paying higher teacher retirement benefits.

Indeed, just a few years ago, the Maryland General Assembly chose to raise the pension percentage, though there apparently was no good policy reason for doing so. There were, however, strong political reasons to do so.

Step 2: Teachers want less of their pay to be deferred.

Last year, I wrote an op-ed discussing empirical research into teacher attitudes toward their salaries and retirement benefits. The study found that teachers, on average, believe their total pay is weighted too heavily toward “deferred compensation”—that is, pensions and other retirement benefits. They would far prefer bigger salaries now in exchange for less retirement benefits in the future, and would even be willing to accept less total pay in exchange for that shift.

This preference is not irrational; teachers, like most people, typically have considerably higher costs while working (e.g., paying off their education, buying and furnishing a home, raising children) than they do in retirement. Thus it’s not surprising that they would appreciate the extra money while working.

Step 3: Politicians and union leaders want to defer teacher pay.

If teachers would prefer to shift more of their pay to the present, and are even willing to accept less total pay in exchange for that shift, then why doesn’t it happen? After all, such a shift would be mutually beneficial to both teachers and taxpayers. This is a rare win-win opportunity in labor negotiations.

This shift doesn’t happen because it’s in the interest of politicians and union leaders to shift teacher pay toward deferred compensation. By deferring a large portion of teacher pay, politicians shift much of teachers’ employment cost to the future. That, in turn, holds down current government labor cost. Politicians can then hold down current taxes and/or shift current government spending to other purposes. That, in turn, helps the politicians to get reelected, while the cost of all that shifting becomes someone else’s problem (in the future).

This shifting also helps the union leaders. Granted, they don’t secure the better salaries that teachers really want, but they can claim important negotiating victories in the form of increased retirement benefits. The union rank-and-file doesn’t seem to realize that these are easily won victories—after all, it doesn’t take that much arm-twisting to get politicians to agree to compensation schemes that have little present cost.

As an added benefit to the politicians, the union leaders then instruct their members to go out and support the politicians’ campaigns.

Step 4: Because teachers get less of what they really want, taxpayers ultimately pay more.

Have you seen the Trident Layers commercials in which people happily agree to be paid in gum? If your boss announced that you would be paid in gum, I suspect that you wouldn’t be so happy. Man cannot live on gum alone, after all, but money can purchase a lot of the other things that we want and need.

However, you might be willing to accept payment in gum if your boss gave you gum with a market value of, say, twice your normal pay. Then you could sell the gum. Selling it would be a large inconvenience, but the additional money might make the added work worthwhile.

Shifting teacher pay toward bigger pensions and other retirement benefits, and away from the higher salaries they really want, is a lot like paying teachers in gum instead of money. Of course, teachers do need wealth to live on in their retirement years, so the higher retirement pay is more welcome than gum, but the teachers are still getting less of what they really want. In response, taxpayers ultimately have to pay the teachers more overall in order to satisfy the teachers’ compensation demands—just like your gum-paying boss would have to give you gum worth a lot more than your salary in order to keep you as an employee.

Step 5: The local school systems pay teachers what they really want.

Corollary to Step 2, the local school systems pay teachers’ salaries—the compensation that teachers value most highly. Thus, it’s the local school systems that do the heavy battling to attract and retain good teachers, competing against school systems in other states, private schools, and non-school employers. Many of those competing employers are willing to pay teachers more of what they really want—especially when that pay is at a lower total cost to the employer.

An aside: I don’t understand the WaPo editorial’s claim that “localities have no reason to contain salaries.” It’s the localities that are cutting the paychecks, right?

Step 6: O’Malley’s proposal will incentivize state politicians to further shift teacher pay toward deferred compensation, and discourage local school boards from giving teachers what they really want.

If state politicians are willing to defer much of teacher pay now (Step 3), imagine how much more willing they will be to do so if O’Malley’s proposal is enacted and local school systems become responsible for paying half the cost of that deferred pay. Moreover, the local school systems will now have (additional) incentive to cut back teacher salaries, even though salary is the form of pay that teachers value most, and thus is the form of pay that has the greatest effect in attracting and retaining teachers (Step 5).

This is the potent, perverse incentive that I see O’Malley’s proposal creating. If I’m right, then it’s no good for teachers or taxpayers. It’s also no good for public school students, whose education will be stunted as good teachers move out of Maryland public schools to jobs that pay more of the kind of compensation they want.

Toward better policy

With all this said, there is a kernel of merit to the O’Malley proposal. K-12 education, as operated in the United States, is a very localized publicly provided good—local teachers teach local kids in local schools, and are (or at least should be) accountable to local parents and local taxpayers. For that reason, public education policies and public education costs should also be local.

The only justifiable state interventions in K-12 education I can see are to (1) require that teacher retirement benefit funds be fully funded every year, thereby discouraging local school systems from becoming caught up in the perverse incentive described in Step 3, and (2) provide some financial assistance to low-income school systems.

So I do support the shifting of teacher retirement costs to the local school systems—indeed, I support the complete shifting of that cost to the local level. But, along with that, the local school systems should have the full, independent authority to set their retirement benefit policies. If the state retains any of that authority, it will remain subject to the perverse incentives of Steps 3 and 6.

The current system, with the state and local school systems sharing the costs and authority over teacher compensation, is harmful to the interests of both teachers and taxpayers. Unfortunately, O’Malley’s proposal will only make matters worse.