The Pension Shift Buried in the Illinois Budget

As Nancy Pelosi famously said during the Obamacare debate: “(W)e have to pass the bill so you can find out what is in it…” That quote must also be applied to the Budget Implementation Bill (BIMP) passed by the Illinois General Assembly on July 3rd. This bill (SB 42) was the triggering mechanism needed to implement the provisions of SB 9 (revenue bill) and SB 6 (spending bill), which the Governor vetoed and which were overridden by the General Assembly.

It is no exaggeration to say that we had less than one hour to review this 742 page behemoth; even a graduate of the Evelyn Wood speed reading course would have been hard pressed to get through it with any sense of comprehension. What has resulted is things coming to our attention that we didn’t originally see, much like rocks rising to the surface of a farm field in the spring.

Lurking on page 348 of the BIMP was the following:

Beginning in fiscal year 2018, each employer under this Article shall pay to the System a required contribution determined as a percentage of projected payroll and sufficient to produce an annual amount equal to:

i. for each of fiscal years 2018, 2019, and 2020, the defined benefit normal cost of the defined benefit plan, less the employee contribution…

What this means is that when a school district hires a new teacher, that teacher’s normal pension contribution will be paid for by the school district instead of being the responsibility of the state as has traditionally been the case. This is known as the “pension shift”, something for which Speaker Madigan had been advocating for years.

The rationale for the shift is that by making districts responsible for their employees’ pension cost, school boards are forced to confront the true cost of employment. For instance, the practice of “spiking” salaries in the last 4 years of employment, which is common, increases the pension cost to the state with no repercussions to the district. Putting districts on the hook for pension payments puts them on notice as to the true cost of employing someone.

The problem with making a sudden shift in pension costs from state to school districts is that the impact on local property taxes would be catastrophic, especially to districts which are at the lower end of the pay scale and are constantly losing teachers for better paying jobs elsewhere. If a shift were to occur, some means would have to be provided for there to be a smooth transition of that cost over a period of years to allow for a less disruptive effect to the local taxpayers.

Senate Bill 1 (SB 1) does this through adjusting its “Adequacy Target” (the cost of providing essential educational elements) to provide for an additional amount to pay for benefits, including the employer cost of pensions. On Page 349 of SB 1 is the following:

Each Organizational Unit shall receive 30% of the total of all salary-calculated elements of the Adequacy Target, excluding substitute teachers and student activities investments, to cover benefit costs. For central office and maintenance and operations investments, the benefit calculation shall be based upon the salary proportion of each investment.

If at any time the responsibility for funding the employer normal cost of teacher pensions is assigned to school districts, then that amount certified by the Teachers’ Retirement System of the State of Illinois to be paid by the organizational Unit for the preceding school year shall be added to the benefit investment. For any fiscal year in which a school district organized under Article 34 of this Code is responsible for paying the employer normal cost of teacher pensions, then that amount of its employer normal cost plus the amount for retiree health insurance as certified by the Public School Teachers’ Pension and Retirement Fund of Chicago to be paid by the school district for the preceding school year that is statutorily required to cover employer normal costs and the amount for retiree health insurance shall be added to the 30% specified in this subparagraph (U).

Set aside for a moment the fact that even before the cost shift is included, the adequacy target is being increased by 30% to cover benefits (how many of you in the private sector have a benefit package amounting to 30% of your pay?). Suffice it to say that SB 1 provided for a smoother landing for the shift than would otherwise be the case. If you think that districts should be responsible for the entire cost of their employees, then this is an accommodation to that.

When the Governor amendatorially vetoed SB 1, he removed the highlighted language, thus removing the additional amount meant to ease the blow to local taxpayers.

This is a prime example of how bad legislation gets passed. We wait until the last moment to vote on something none of us has seen, and then we spend months figuring out what we did and how to fix it. There has to be a better way of doing this.

This entry was posted in Education, Property Taxes, Public Pensions and tagged , . Bookmark the permalink.

One Response to The Pension Shift Buried in the Illinois Budget

  1. Danny says:

    Ppl are already staggering under the property taxes we pay now. My small 1150 sq ft house in crook county cost me $3900 prop tax every year. Don’t have a fat pension. Thats $3.50 a sq foot and I still have to make repairs to my 30 year + house.

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