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.

Posted in Education, Property Taxes, Public Pensions | Tagged , | 1 Comment

Let’s Turn the Boil Down to a Simmer

There’s some misinformation flying around about the Governor’s amendatory veto of the school funding bill (SB 1) which needs to be addressed.

The thing that’s got my attention is the discussion surrounding the calculation of the “hold harmless” provision. The Civic Federation, whose work I generally respect, said this:

“(T)he veto sunsets the hold-harmless provisions of the bill after the first two years, and replaces them with an alternate hold-harmless formula based on a three-year rolling average of student enrollment. Districts that lose student population between the 2016-2017 school year and the 2019-2020 school year could lose funding under the new formula. This provision could affect a large number of districts; 527 of them lost population between 2015 and 2016.”

What the Civic Federation says about the adjustment from a “per district” to a “per pupil” isn’t wrong, but inasmuch as there’s so much heat being generated by the veto, it should not have implied that the shift sprang from the mind of the Illinois Policy Institute, because it didn’t.

The shift was provided for in the February 1, 2017 report issued by the Illinois School Funding Reform Commission and contained in HB 2808, which was the original piece of legislation in which the evidence-based model was proposed. From the report:

“To protect the per pupil current funding level for each district in any formula transition, the hold harmless will be calculated on a per pupil basis using a three-year average of student count. The use of enrollment versus average daily attendance (ADA) should be revisited by the Commission for the Oversight and Implementation of the School Funding Formula as accurate and reliable data become available and upon analysis of the impact of the new formula.” (emphasis mine)

If schools are losing enrollment, their funding should be adjusted to reflect the decline. When HB 2808 was changed to add the sweeteners for Chicago, the per pupil allocation was removed in exchange for a per district allocation. The Governor’s veto put it back. Ironically, there’s a story in today’s Tribune informing us that CPS is making staffing adjustments for the very same reason: Continue reading

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OK, Mr. Speaker, the Ball’s in Your Court.

The Governor has issued an amendatory veto to Senate Bill 1, and the gnashing of teeth and rending of garments has begun. Chicago Mayor Emmanuel, who’s staring into an abyss not completely of his own making but which is now nonetheless his to confront, said the following:

“The only thing the governor’s action advances is his own personal brand of cynical politics”

That might be the case if Bruce Rauner was the governor of Chicago, but he’s the governor of Illinois, with other constituencies to consider.

And this in today’s Tribune from my good friend Ralph Martire of the Center for Tax and Budget Accountability:

“CPS would have to tax itself locally and raise this revenue that it currently does not have access to. If CPS actually wants to have adequate resources to educate its kids, the governor’s approach would force it to pass a significant increase to its property tax, well over and above what it currently is.”

Gee, whiz, Ralph, enough with the hand-wringing already. Making Chicago pay its own way just like the rest of us is something I’ve been screaming about for months. CPS has plenty of access; it just doesn’t have the spine to go after it. How well would CPS be funded if Mike Madigan had to pay property taxes at the same level as they have to do in Harvey? (Click on photo to the left)

As it is, here’s the straight skinny on the major items in SB 1 changed by the governor’s veto:

  • The Block Grant that SB 1 placed in CPS’ Base Funding Minimum is removed, thus allowing this $202 million to go through the new “Evidence-Based” funding formula to be distributed to school districts across the state.
  • Removes $221.3 million for CPS pension normal cost and retiree healthcare from its Base Funding Minimum (hold harmless), and instead amends the Pension Code to provide a continuing appropriation for CPS normal and retiree healthcare costs. Therefore, CPS would still receive funding for its normal pension costs, but through the Pension Code and not a school funding formula, just like every other district in the state.
  • Removes CPS’ ability to reduce its local revenue target by its self-imposed unfunded pension liability (“legacy cost”) which would result in even more state aid to CPS. Under SB 1, CPS’ available local revenue is artificially reduced by its legacy cost liability of $505 million, providing $40 million more in state aid to CPS. Due to the annual growth of CPS’ unfunded pension liability, this number would have grown substantially in future years.
  • Under SB 1, no part of the current EAV of real property located in a TIF district which is attributable to an increase above the initial EAV of such property would be calculated in the district’s EAV for calculating the Local Capacity Target, which would allow school districts to under-report current property wealth. This provision is removed under the governor’s amendatory veto. (This is a biggie)

There were a number of other changes made to SB 1 to return school funding reform to the original spirit of the report issued by the Illinois School Funding Reform Commission and its commitment to promote equity and adequacy statewide. For instance: Continue reading

Posted in Education, Illinois Budget, Property Taxes, Public Pensions | Tagged , , , | 1 Comment

Stand Down, Chicken Little. The Sky Isn’t Falling, Schools Will Open

Chicken Little is now running around saying the sky is going to fall (in the form of schools not opening on time) unless the Governor signs Senate Bill 1, or some other education funding bill that includes an “Evidence Based” funding model. But is that really the case?

Senate Bill 6, the budget bill that was passed over the Governor’s veto several weeks ago contains the following language:

“The following amounts, or so much thereof as may be necessary, are appropriated to the Illinois State Board of Education for Evidence-Based Funding, provided for in Section 18-8.15 of the School Code.”

While it’s true that Senate Bill 1, if it became law, would add Section 18-8.15 to the Illinois School Code and that section would define “Evidence-Based Funding,” (as of this writing) Senate Bill 1 has not yet been sent to the Governor, so neither the term “Evidence-Based Funding” nor its model of funding is defined in statute.  Section 18-8.15 of the Illinois School Code simply does not exist and may never exist.  It is a nullity.

What that means is that funding under Senate Bill 6 using the “Evidence-Based Funding” model is contingent upon the happening of a future event (the passage of a bill containing a definition of “Evidence-Based Funding”). There was no language in Senate Bill 6 that made its passage contingent upon the passage of Senate Bill 1.  In fact, such contingent language was contained in Senate Bill 1 as introduced, but was omitted by House Floor Amendment 2, which became the bill. The omission of such contingent language is an unambiguous expression of legislative intent that passage of Senate Bill 6 was not contingent upon passage of Senate Bill 1, or vice versa.

What is then left is the phrase. Continue reading

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If Not SB 1, Then What?

As I said in my previous post, my problem with SB 1 is the fact that it provides for funding of the Chicago Public Schools’ (CPS) normal pension cost within the framework of a bill that’s supposed to focus on money for the classroom.

The Republican alternative to SB 1, SB 1124/HB 4069 contains all of the elements of the “evidence based model”, which means that as far as the meat of the bills are concerned, there’s no difference between the two. Our alternative makes other changes that would provide additional funds to districts throughout the state and provide other cost-saving elements.

As it relates to CPS, our bill makes the following changes:

  • The Chicago Block Grant is eliminated, though $50 million of what was in the Block Grant is incorporated into CPS’ Base Funding Minimum. The other $202 million would be run through the new formula.
  • In exchange for the elimination of 80% of the Block Grant, SB 1124 keeps the funding of CPS’ normal pension cost. (I’m not crazy about this.)
  • CPS’ normal pension costs are no longer included in its “base funding minimum” and its legacy costs are no longer reduce its “local capacity”. That combination allows CPS to remain in Tier 1, giving it an estimated $30 million in extra funding as previously noted.

Thus, I’m estimating that CPS gets $301 million over and above what it’d get if it was thrown in with the rest of the great unwashed ($50 million block grant + $221 million pension cost + $30 million for being in Tier 1 instead of Tier 2).

There are other things in SB 1124 that provide relief to school districts that aren’t included in SB 1: Continue reading

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