State legislators are considering a proposal to shift the “normal cost” (e.g., the cost attributable to the current year) of funding pensions of teachers in the Teachers’ Retirement System (TRS) from the State to local school districts. It appears they plan to do this without providing any relief from property tax caps that limit the amount school districts may increase property taxes.
The State’s “normal cost” to fund TRS is pegged at about $800 million per year. This does not include the amount needed to pay down the unfunded liability, which is $44 billion, according to TRS’ estimate. Other estimates peg the unfunded liability at much higher amounts.
Teachers at School Districts 65 and 202 are members of TRS, so our schools would be impacted by the cost-shifting proposal.
While there may be a phase-in period, if the entire $800 million were shifted this year, District 65 would be required to pay about $3.5 million and District 202 about $2 million, say their administrators. As adjusted, this would be a recurring annual cost.
We oppose the cost-shifting proposal for five reasons.
First, School Districts 65 and 202 have already made painful cuts to balance their budgets for the 2012-13 school year. If they are required to absorb additional pension costs, it will likely mean cutting teaching positions. Using an average cost per teacher, that would mean cutting about 50 teaching positions at District 65, and 25 at District 202, just to meet the additional pension cost.
These cuts cannot be considered in a vacuum. District 65 is projecting deficits of $2.1 million for 2015-16 and $3.2 million for 2016-17, which do not take into account the pension costs. District 202 is projecting deficits of $450,000 for 2013-14, $1.5 million for 2014-15 and $2.1 million for 2015-16. Additional cuts will likely be necessary to address these projected deficits.
If the legislature shifts pension costs to Districts 65 and 202, it will have a substantial adverse impact on our teaching staff and the education of our children.
Second, we believe the “normal cost” to adequately fund TRS pensions may substantially exceed the $800 million estimate, and the impact of shifting the normal cost to school districts may be far greater than currently portrayed. In estimating the normal cost, TRS actuaries assume the funds paid to TRS will be invested and earn 8.5 percent per annum. Assuming a higher rate of return has the effect of reducing the “normal cost.”
TRS says a rate of return of 8.5 percent is in line with its average rate of return for the last 30 years. TRS says, however, that its actual rate of return for the last 10 years has been 6.4 percent and for the last five years, 4.5 percent. Going forward, Moody’s Investment Services recently said it plans to use 5.5 percent to judge the financial soundness of pension plans. Moody’s says that 5.5 percent is more likely in light of more recent returns on investment and the outlook for low interest rates.
While selecting the rate of return is a judgment call, we think 8.5 percent is on the aggressive side, and results in substantially lowering the estimate of the “normal cost.” It understates the adverse impact the proposed cost-shifting will have on school districts.
Third, at present the cost-shifting proposal is that only the “normal cost” be shifted to the school districts, not the “unfunded liability.” But there has been discussion in Springfield about shifting the unfunded liability to school districts as well. TRS estimates that the unfunded liability is $44 billion. That estimate, however, is based on an assumed 8.5 percent rate of return on TRS’ funds. If a 5.5 percent rate of return is used in the assumptions (as proposed by Moody’s), the unfunded liability is estimated at $75.5 billion.
We fear that opening the door to any cost-shifting proposal opens the door to shifting the “unfunded liability” to school districts – either now or in the future. If the unfunded liability were shifted to school districts, the impact would be staggering.
Fourth, State legislators passed the laws that determine the amount of the pension payments; and subject to the Illinois Constitution, State legislators will continue to control the amount of pension payments. If the cost to fund the pensions is shifted to the school districts, there will be a disconnect between those who decide what the obligation is and those who are mandated to fund it.
It is inherently unfair to impose substantial financial burdens on school districts for huge pension costs over which they lack control. In addition, it removes State legislators from accountability for their actions and creates the potential for abuse.
Finally, under Article XIII, Section 5 of the Illinois Constitution, the State, not the school districts, has a contractual obligation with teachers in TRS to make their pension payments in accordance with the statutes the State has adopted. The State’s contractual obligation is grounded in the Constitution, and it may not be “diminished” or “impaired.”
The State legislature adopted the pension plans, failed to properly fund them, and created the fiscal mess that we are in. “Solving” the mess by attempting to pawn it off on the local school districts is in our view an irresponsible – and a constitutionally suspect – way to address it.
Teachers’ pensions are a serious concern. Teachers who have put in their time have a valid expectation to receive their pensions, and the State should honor its commitments. But the current system is not sustainable. Going forward, the legislature needs to make serious pension reforms. Shifting the cost to school districts, however, is not a viable answer.