On Jan. 14, the District 65 and 202 School Boards adopted a joint resolution concerning proposals to shift the cost of funding teacher pensions from the State to school districts. The resolution says that shifting pension costs to school districts without making meaningful reforms to the pension system is a “non-starter.” It lists a number of things that need to be part of the conversation.
Shifting the Cost
In the upcoming legislative session, State legislators are expected to consider again various proposals to address the State’s unfunded pensions, including the Teachers Retirement System (TRS) which has an estimated unfunded liability of $53.5 billion.
A number of the bills that were submitted last year include proposals to shift the “normal cost” (e.g., the cost attributable to the current year) of funding pensions of teachers in TRS from the State to local school districts. Last year, the State’s “normal cost” to fund TRS was pegged at about $800 million. This does not include the amount needed to pay down the $53.5 billion unfunded liability.
At the Jan. 14 joint School Board meeting, Erika Lindley, executive director of ED-RED which works with both Districts on legislative issues, said a major hurdle for legislators to get over before passing pension reform is how to address the projected increases in pension benefits while adhering to the Illinois’ constitution. The State constitution prohibits diminishing pension benefits.
One bill that was submitted in December by then State Representatives Elaine Nekritz, Daniel Biss (now a State Senator), Robyn Gabel and 18 other legislators would reduce the pension benefits by changing the cost-of-living adjustments, by capping the pensionable salary, by increasing teacher contributions and other means. Ms. Lindley said one theory advanced by the sponsors to support the constitutionality of the reduction in pension benefits is it is necessary in light of the State’s financial condition.
The sponsors of the Nekritz/Biss bill initially said that the proposed changes in their bill would reduce the normal cost of funding TRS from 7.89% of payroll to between 5 and 6% of payroll. Ms. Lindley said the sponsors recently said the normal cost would be reduced to 1.1% of payroll. She said ED-RED asked for additional data to assess whether the 1.1% estimate was a credible number.
The Nekritz/Biss bill would also shift the normal cost of funding pensions from the State to school districts. It proposes to phase in the cost-shifting at the rate of 0.5% of a school district’s payroll in fiscal year 2013 and then increase the amount by 0.5% each succeeding year until school districts were paying the full “normal cost.”
Teachers at School Districts 65 and 202 are members of TRS, so both Districts would be impacted if the normal cost to fund teacher pensions is shifted to school districts.
The Impact on D65 and 202
The pension reform legislation “has a lot to do with what happens here because, frankly, it has to do with money,” said District 202 Board member Gretchen Livingston. “The difficult financial situation currently faced by our State makes it difficult for school districts to get money. I’m talking about money we’ve already paid to the State of Illinois that doesn’t find its way back to Evanston either in amounts that are in proportion to what we pay in taxes or in a timely fashion.”
Mark Metz, President of the District 202 School Board, said, “At the end of the day, this cost-shifting is nothing more than yet another reduction of State funding of public education for Evanston and others, many others.
“It’s going to cost District 202 a lot of money in the end. We don’t quite know how much, again because we don’t have the numbers that talk about these other reforms, what savings there will be, what the normal cost will be, those haven’t all been hammered out. It will be even more money for District 65.
“In the era of property tax caps under which we live,” Mr. Metz continued, “it’s going to come out of other programs. It’s going to have a direct impact.”
Mr. Metz said another “huge problem” he had with the Nekritz/Biss bill was governance. “What they’re proposing is a situation in Springfield …. State legislators will control what the benefits are and yet districts and teachers will pay for them.”
He said this creates a situation where legislators may raise benefits in the future when the pressure is on and when they do not have to account for it in their own budget.
The resolution adopted by the District 65 and 202 School Boards says a shift of the pension costs to the school districts “without other areas of key reform is a non-starter.” It states, “Proposals to shift ever-increasing costs to the school districts that have been reducing costs and balancing budgets while the State has reduced its payments in support of education is neither fair nor equitable. For decades, teachers and school districts have paid their contributions to TRS prescribed by the State – in full and on time. Shifting the burden of the normal cost of benefits to school districts without meaningful reforms and well-aligned accountabilities will not reform the system or guarantee its return to good health.”
The resolution says three policy options should be key components of the discussion: 1) changes to the cost-of-living adjustments; 2) in addition to increased contributions by teachers, a tax on pension benefits over a designated minimum that would be earmarked to be put back into the system; and 3) governance changes that place accountability for the future of TRS in the hands of school districts and teachers.
The Amount of the Unfunded Liability of TRS
The unfunded liability of the Teachers Retirement System is estimated at about $53.5 billion, which amount is calculated assuming that money held in the fund will enjoy an investment rate of return of 8%.
If the calculations are made assuming a lower rate of return, the unfunded liability will be much greater. For example if a 5.5 % rate of return is used in the assumptions, the unfunded liability is estimated at $75.5 billion. Moody’s is proposing to evaluate pensions using an assumed rate of return of 5.5 percent.
If a lower rate of return is used, it will also impact the amount of the “”normal cost,”” which is the cost attributable to the current year. Lowering the rate of return would have the effect of increasing the normal cost.