A proposal to change the funding of teacher pensions, now under consideration at the state level, takes aim at the budgets of local school districts. If all goes according to Springfield’s plan, Evanston’s School Districts 65 and 202 may have to absorb an additional $5.5 million per year. The effect could be felt as early as next June, either with the full amount for each District, or on a phased-in basis.
Teachers at Evanston’s two school districts, like most public school teachers in Illinois, are members of the Teachers’ Retirement System (TRS). They contribute about 9.4 percent of their annual salary to the TRS pension fund. The state is responsible for contributing the balance needed to adequately fund pension payments that are and will become due under state law. The state’s contribution covers pension obligations for the current year (the “normal cost”) and adds to the fund itself to help pay down the unfunded liability. Last year, the TRS normal cost alone was about $800 million.
For about the last 30 years the State of Illinois has failed to adequately fund the TRS pension fund. At present TRS estimates there is an unfunded liability of about $44 billion. That number may be low; one estimate puts it at about $75.5 billion. (See sidebar on page 23)
TRS officials admit that the problem is enormous. In the Summer 2012 TRS newsletter, Executive Director Dick Ingram wrote, “The new revenues required to close the gap just for TRS over the next three decades number in the tens of billions of dollars. … [The] inconvenient truth [is] that unless changes are made in the finances of TRS, the system faces an uncertain future within a few decades. … This harsh reality is putting real pressure on legislators to make substantial cuts in the state’s budget. One of the single largest line items in the budget is the state appropriation for TRS and the other public pension systems. If the state cuts or freezes its contribution to TRS next year and in subsequent years, our calculations show that under the worst scenarios, TRS could become insolvent between 2030 and 2049.”
Legislators appear to be looking for an exit strategy. Rather than finding a way to continue to fund TRS, the state is actively looking at a variety of ways to shift or reduce this obligation.
Two recent proposals from the state legislature are aimed at reducing or eliminating the state’s obligations to fund TRS pensions. One of these, endorsed by State Representative Tom Cross, would leave with the state the primary obligation to fund TRS but it would require school districts to make a contribution to TRS for any teacher-salary increases in the final years of their service. Some local school leaders have said that Rep. Cross’s plan is preferable because it leaves much of the cost control to the local school districts and thus would allow them to anticipate expenses.
The proposal that appears to have more traction at the state level, however, is that endorsed by House Speaker Michael Madigan and Senate President John Cullerton. That proposal would shift, perhaps on a phased-in basis, the normal cost – the annual cost to fund a current year’s obligations – to local school districts.
Shifting the normal cost to local school districts would result in an estimated additional cost of about 7.65 percent of a district’s annual cost for teachers’ salaries, according to information from the Illinois Statewide School Management Alliance, in a recent legislative report.
For Evanston’s two public school districts, District 65 and District 202, that translates to an aggregate additional expense of about $5.5 million per year – about $3.5 million annually for School District 65 and $2 million annually for School District 202.
The Madigan/Cullerton proposal does not include any relief from property-tax caps, which limit the amount that school districts can increase property taxes to either the amount of the CPI or 5 percent, whichever is less. Because of that limitation, the most obvious – and perhaps the only – way for school districts to absorb those costs is to cut services and personnel.
Both School Districts have made painful cuts to their budgets over the past three years, and this additional cost would likely force the Districts to reduce teaching staff or support services or both.
“We need to be very clear about the long-term consequences [of the cost-shift],” said Dr. Eric Witherspoon, District 202 Superintendent at, a joint meeting of District 65 and 202 superintendents and School Board presidents and vice presidents on July 18. “It will cost [District 202] $2 million a year; we will have to cut $2 million a year. … I don’t know how we can pay for this without tax caps’ being lifted,” he added.
A few weeks ago there was a buzz – perhaps a hope more than a trial balloon – that the state would exempt from tax caps the amount of money a school district would need to levy in order to meet the shifted amount, or normal cost. In other words, the state could allow a school district to levy additional taxes to pay the pension amount without its being subject to tax caps. That is, the money for regular operating expenses would be levied subject to tax caps, but the amount needed for the pension contributions would not be subject to that limit. Such a proposition, though, has failed to issue from Springfield and is not likely to be forthcoming, according to what was said at the July 18 meeting.
Collateral damage from the shift would also harm school districts. The budgets for most are already strained, and absorbing the additional costs is likely not only to affect their budgets but to lower their credit rating. Such a downgrade – e.g., from Moody’s – would mean that bonds would “cost” more: A district issuing bonds would have to pay a higher interest rate.
“Moody’s is already talking about this,” said William Stafford, CFO at District 202. “It will affect all [school] districts. … The state is already at junk-bond level.”
“The state is working to bring us down to their level,” said District 202 Board member Gretchen Livingston.
Mr. Metz brought up a third peril for local school districts: There is no long-term accountability when the organization that has to pay has no control of the amount. “We should make it so that before pension [benefits] are increased [school districts] can weigh in, so [legislators] won’t be influenced by unions without a school district’s say-so.”
Ms. Livingston said she agreed that was a good strategy, “but we probably won’t be invited to the table.”
Should Shift Happen?
Erika Lindley, executive director of ED-RED, an education lobbying group for suburban school districts, told the committee members she had been meeting with legislators for the past several months, and that she felt that there would be no proposal on pensions until after the November elections. She also said, however, that she anticipated that the pension proposal would include shifting part of the annual pension costs – the “normal cost,” or cost attributable to the current year – to the local school districts.
“I am very unwilling to concede the shift. … We have to be completely clear at this time that the shift is completely untenable.”
Ms. Lindley said the local districts could be hit by the big amount all at once or that it could be “phased in.” She attempted to focus the conversation at the July 18 meeting toward addressing how to absorb those costs. She said, “The focus of most of our conversations is on what school districts need to be comfortable with [the cost shift]. What are a district’s protections? How will we make it work?”
Most everyone at the July 18 meeting rejected that stance outright.
District 202 Board member Gretchen Livingston said, “I am very unwilling to concede the shift. … We have to be completely clear at this time that the shift is completely untenable.”
Katie Bailey, District 65 Board president, said she and Board member Tracy Quattrocki have been talking about “if the shift comes, is there a way to make it palatable? … The cost is $6 million [per year] to [local] taxpayers.”
Ms. Livingston said there is no way to make it palatable.
District 202 Board member Martha Burns said, “Most people in this room see there is no tenable way to do this [accept a cost-shift].”
“What if we withdraw?” asked Mr. Metz. “Could Evanston Township High School or the two districts create their own retirement system?”
“Tell the state, ‘I see your “cost-shift” and raise you ‘withdrawal,’” said Mr. Metz. He later told the RoundTable he knew it would not be possible for the school districts to create their own retirement system but wanted to send a strong message to the state.
Reserves on Tap?
Strong exception was also made at the July 18 meeting to a comment from Governor Pat Quinn that school districts should spend cash reserves to pay the shifted cost of TRS pensions. “We have to debunk that idea about using reserves,” said Mr. Metz.
“The Governor should go back to Finance 101,” said Dr. Witherspoon. “You do not shift continuing costs [such as the annual pension-cost shift] to one-time money [e.g., reserves]. The fact that they put that out was really insulting.”
“We have to have different cash reserves [from what] the state [has],” said Mr. Stafford. “The state receives money at least quarterly [but] we [Districts 65 and 202] get 80 percent of our money [in two installments] – and in the last few years, tax bills have been late.” He added, “It’s a lot more complicated than the Governor will make it out to be.”
Mr. Metz and Ms. Bailey and the other school board members, together with Dr. Murphy and Dr. Witherspoon, agreed that the districts would work on joint ways of educating the public about the state’s proposal and the districts’ opposition to it.
Ms. Quattrocki said, “We should add [to our statement] that we don’t want to stand in the way of pension reform.”
Dr. Witherspoon said, “That’s absolutely right.”
Mr. Metz said, “We want pension reform. We just don’t want to be taken advantage of.”
The consensus was that the two Districts would issue a joint statement opposing the shift. “Our position needs to be ‘Why would we support a tax shift that will cost us teachers and services? … Why would we support a tax shift that’s going to raise local taxes when our local taxes are already high?’” said Dr. Witherspoon.
“The information should get out to an educated public [that this move will] erode the quality of education in the community.” said Dr. Murphy.
The group would also invite local legislators – State Senator Jeff Schoenberg and State Representatives Robyn Gabel and Daniel Biss – to meet with them about the local consequences of the state’s proposal to shift to local school districts the normal cost of the TRS contribution. Said Mr. Metz, “We’ll make them understand, line-by-line, the effect [of the proposed shift].”
TRS, Unfunded Liability
TRS has estimated that the current unfunded liability is $43.8 billion. That estimate, however, rests on an assumption that TRS will receive an 8.5 percent annual return on its investments. Assuming a higher return on investment has the effect of reducing the estimated amount of the unfunded liability.
TRS officials have said that the 8.5 percent assumption is in line with its average rate of return over the past 30 years. In the last five years, TRS’s annual rate of return has been 4.5 percent.
A July 7 article in Crain’s Chicago Business online edition (ChicagoBusiness.com) describing Moody’s hard look at pension obligations said one focus is the assumed rate of return on investments. Moody’s is proposing to evaluate pensions using an assumed rate of return of 5.5 percent rather than much higher ones used by pension funds.
The Crain’s article featured a chart showing the unfunded liability of TRS using assumed rates of return of 5.5 percent (Moody’s) and 8.5 percent (TRS). The computations were made by the Commission on Government Forecasting and Accountability, Civic Federation.
Using the 5.5 percent assumption the total unfunded liability for TRS is $75.5 billion, rather than $43.8 billion, calculated using the 8.5 percent assumption.