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The State of Illinois is likely to deliver another pension whammy to local taxpayers by shifting the burden to fund pensions for teachers and other education workers from the State to local school districts. That message was only about a third of the grim fiscal news from State Representative Robyn Gable at a town hall meeting on April 16.
“[State] Revenues have increased by about $750 million, but the budget has increased by about $1 billion. … We’re required to cut even more than last year,” Rep. Gabel said. “We have to figure out how to contain Medicaid, create a pension system that is just and sustainable and put together a budget that spends only the revenues we have,” she added.
Pension Deficits Abound
Governor Pat Quinn and legislative leaders are considering shifting the cost to fund teachers’ pensions paid through the Teachers’ Retirement System from the State to local school districts. The Teachers Retirement System covers public school teachers outside Chicago – about 370,000 active, inactive and retired teachers. The Teachers Retirement System currently has an unfunded liability of almost $43.5 billion, according to the Director of Research of Retirement Security for Illinois Educators.
The State’s “normal cost” of funding the Teacher Retirement System is about $700 million to $800 million per year. This does not include any amount needed to pay down the unfunded liability. Legislators are thinking of passing all or a portion of the “normal cost” to school districts.
The Illinois Statewide School Management Alliance, which often partners with the Illinois Association of School Boards, reported in a recent newsletter that the state’s proposal to shift all or part of the pension obligation from the state to the school districts “is very much alive in the [Illinois] State Capitol. Governor Pat Quinn, Senate President John Cullerton and House Speaker Michael Madigan are all supporting the plan.”
The Alliance said that the Governor and the leading legislators were proposing to shift the “‘normal costs’ of the Teachers’ Retirement System (TRS)” onto local school districts.
These “normal costs” to be shifted to the local school districts, the Alliance said, represent about one-third of the pension costs and “would amount to about $700 million statewide.”
A school district would be able to calculate its annual share of these costs by multiplying its entire TRS payroll by 7.65%, according to the Alliance.
The other two-thirds would remain the responsibility of the state. That part is the unfunded liability that has accrued because the state did not make proper contributions over the years, according to the Alliance.
It is not clear how local school districts would be able to obtain additional revenues to cover these new costs.
School districts rely on property tax revenues for the majority of their funding, but the state restricts, or caps, the amount a school district can levy. The tax cap, tied to the increase in the consumer price index, limits the amount a school district can increase its annual property tax levy.
The Alliance reported that so far there has been no indication that school districts would be able to levy additional funds to help cover increased pension costs.
Evanston’s school districts are already alerted to the possibility that they will be required to pay additional teacher pension costs.
In March District 65 School Board member Eileen Budde alerted her colleagues about that proposal and other possible changes being considered in Springfield that might impact school district finances.
Mary Brown, District 65 chief financial officer, said in March that in a “worst-case scenario” the District’s additional cost would be about $4 million annually. Dr. Brown said she joined other Evanston officials in a recent trip to Springfield and that she discussed the pension issue with state legislators. “The sense I got in talking to the legislators is that it’s not likely to be a drastic all-at-one-time change,” she said. “They’re looking at all sorts of possibilities and nobody was very specific about any of them. But I also did pick up that they would not make any changes in at least the next year or so.”
William Stafford, chief financial officer of School District 202, said under Senate President John Cullerton’s proposal the school districts would pay about 7.65 percent of their payroll to absorb these pension costs. This would amount to about $2 million per year for Evanston Township High School, he said. “We could be in a situation of having to lay off teachers to pay off retirement [costs],” he said. “We’ve got nowhere to go [because tax caps limit the amount a school district can levy]. It’s a problem – you’d think in theory [the legislature] would exempt pensions from tax caps.”
Doing that would “bankrupt many school districts in the state and put an incredible burden on school districts and taxpayers,” said Jean Luft, president of the District Educators Council [DEC, the teachers union for School District 65].
“If the state had paid in, this problem would not be happening,” said Marc Stefanik of Winnetka, who said he is a union-contract negotiator. “[If you shift the burden to the school districts], you’ll undermine pensions, morale, communities and teacher quality.” He added. “Teachers cannot receive Medicare or Social Security if they have a pension.”
“[The General Assembly has] a pension committee looking at all the options,” Ms. Gabel said. “Nobody wants to bankrupt anybody. We could [make the shift] gradually. In the near future we hope to have a pension that … will be sustainable. We have a deep respect for teachers. We’re definitely not going to dump it into the locals all at once,” she added.
Gov. Quinn is expected to lay out his plan to address the state’s pension issues on April 27.
Rep. Gabel said the legislature had been given “a mandate to cut $2.7 billion out of Medicaid spending. One way to limit Medicaid spending would be to limit the eligibility pool by changing the income requirement. At present, those whose income is 300 percent of the federal poverty level are income-eligible to receive Medicaid; the legislature may change that to 200 percent.
“That’s a place to cut,” she said; “people can go to a federally qualified health clinic.” Benefits for children are also at risk, she said, including the All-Kids public insurance program, which was created to provide medical insurance coverage to every child in the state who needs it. “We’ve gone from ‘All Kids’ to ‘Some Kids,’” she said.
Rep. Gabel also said she felt that some proposed cuts to Medicaid – such as some prescription drug coverage and access to hospice care – would not be approved.
Last week, Gov. Quinn made his recommendations for Medicaid service cuts, including removing about 100,000 ineligible persons from the rolls. Other recommendations include eliminating dental and chiropractic treatment for adults, limiting podiatric services to those with diabetes.
The Budget and Possible Tax Reform
“I don’t know how we’re going to balance the budget with cuts only,” said Cate Whitcomb of the League of Women Voters of Evanston.
Out of the $33.7 billion budget, Rep. Gabel said, about $3 billion comes from corporate taxes and $17 billion from personal income tax. “We need a minimum corporate tax in Illinois,” she added.
Asked whether she thought the legislature would consider taxing services, Rep. Gabel said, “That’s a possibility.”
Jeff Smith said Illinois’ tax structure is regressive. “Everyone, whether rich or poor, pays the same fee, for example, for tolls or for a fishing license. … Where’s the leadership [in tax reform]?” he asked.
Rep. Gabel said the “best opportunity” to have the legislature debate tax reform would be 2014, when the recently enacted income-tax increase was set to expire. “We’ll be looking at reworking taxes to make them more equitable,” she said.