Examining Another Plan to Shift Pension Costs Back to Schools
Editor’s note: This is the first in an occasional series looking at various proposals to deal with Illinois’ pension crisis.
As he prepared for a primary election fight, Gov. Bruce Rauner made waves with his budget proposal and a total package of savings worth $1.5 billion. The waves came because a large piece of his plan relies on state legislators shifting the fiscal responsibilities of education pension liabilities from the state to local districts. Critics fear that shift would cause a spike in property taxes and tuition and it would be a significant change to the structure of the pension system. Getting the Legislature to pass this change will not be easy. The proposal also is one with history from both sides of the aisle, so it is one worth understanding.
What are the funds affected and what would Rauner’s proposal do?
Rauner proposes to shift state pension obligations for educators -- whose funds include the Public School Teachers' Pension and Retirement Fund of Chicago (CTPF), the Teachers’ Retirement System of Illinois (TRS), and the State Universities Retirement System (SURS) -- back to their employers, local school systems and universities. Outside of Chicago, the state historically carries the majority of debt for education-related pensions across the state.
The Teachers’ Retirement System of Illinois covers teachers and other key staff in all public schools outside the City of Chicago and membership is mandatory. At the end of fiscal year 2017, there were more than 412,400 members, including 120,151 recipients and 160,488 contributors. The State Universities Retirement System includes anyone employed by public colleges and universities across the state. SURS has more than 232,800 members in all of its plans, including 64,545 recipients and 64,117 active members in its defined contribution plan, with a little more than half being non-academic staff. Finally, the smallest of the three, the Public School Teachers' Pension and Retirement Fund of Chicago, has more than 63,500 members. Operating in Chicago, the CTPF is the oldest pension fund in the state and its membership is made up of teachers and employees from Chicago Public Schools (CPS), including charter schools. In 2016, CTPF had 28,298 benefits recipients and 29,543 active members. CPS carries $9.36 billion in unfunded liabilities.
Rauner’s proposed shift would move 25 percent of the total debt from the pension funds listed above per year over the next four years from the state to local school districts and university systems. Each jurisdiction would be responsible for paying off the debt tied to their former and current staff. If the change is adopted by the Legislature, the governor’s office claims that savings in fiscal year 2019 would be $363 million from shifting the state’s cost to the universities and school districts, and an additional $228 million from shifting the state’s obligation to the CTPF.
A recycled idea?
The idea to shift education pension liabilities is not new or unique to Republicans. In fact, historically this idea has been tied to Democrats. In 2012, House Speaker Michael Madigan proposed a similar change. Madigan wanted a shift over the course of 30 years and predicted savings of $200 billion for the state. Although he dropped his proposal after negotiations with then-Governor Pat Quinn, a year later Madigan again claimed the change was inevitable, arguing that it wasn’t fair that the state fund the responsibilities of downstate pension funds.
A few years after Madigan’s efforts, a group of Democratic legislators led by State Rep. Christian Mitchell introduced legislation that would have shifted education pension obligations to the respective employers. The shift would again have been done over a period of 30 years, with the money saved being redirected to needy school districts like Chicago Public Schools and districts downstate. The proposal, however, didn’t get a committee hearing.
In Chicago, historically, Mayor Rahm Emanuel and others have pointed out that CPS has been responsible for financing the majority of its own fund, while the obligations of districts in the suburbs and downstate are largely covered by all the state’s taxpayers with money collected from across Illinois, including from Chicago.
In fact, in 2017, local school districts began to cover a small portion of their pension costs. The new law, enacted in July of 2017, applies only to benefits for salaries awarded above $177,412 -- the governor’s salary. TRS reports that 16,000 educators statewide earn such a salary.
What’s the push back?
Despite that small change taking effect last year, Rauner faces a tough road getting his proposal through the Legislature. In fact, past, failed proposals have had a much longer shift period, giving local districts and their taxpayers decades to slowly adjust to taking on their debt. Rauner’s four-year timeline is aggressive.
Critics of Rauner’s proposal, like school administrators, have expressed concern that the shifts could result in cuts to services offered in schools or in the firing of key staff. Critics also have warned that the change could result in further tuition hikes, making college unaffordable for many Illinoisans at a time when enrollments at many public universities in Illinois have been dropping dramatically in the wake of a two-year state budget impasse. For example, an analysis by the Illinois Education Association, one of the state’s largest teachers’ unions, highlighted a scenario that for every percentage point of pension costs shifted to a university, a two-percentage-point increase in tuition is required to fund it. In a recent committee hearing, Al Bowman, Executive Director of the Illinois Board of Higher Education said university officials are worried about the proposed shift and were not consulted by the governor. He also said a four-year shift is unreasonable and suggested a 20-year shift instead.
Others, like TRS officials, point out that shifts would not result in money saved for everyday taxpayers. Instead, they say, the shifts that remove debt from the state’s budget could result in higher local taxes.
Dusty Rhodes of NPR Illinois, also points to how the pension shift could hurt poorer K-12 districts. Because wealthier districts tend to have staff with higher salaries, they also will have higher pension costs. If pension costs are considered as part of the new school funding formula, it will make the wealthier districts seem poorer than they currently appear. This could result in school districts in poorer districts receiving less from the state and wealthier school districts receiving more.
Rauner has refuted that property taxes would increase under his proposal. In an interview, he said the shift would lead to lower property taxes. Rauner argues the shift puts responsibility for payments where the decisions are made. He believes that “align(ed) interests” would result in more reasonable pension costs. He also argues that his budget gives money back to schools in higher amounts than the burden caused by a shift.
Rauner also has pointed to Maryland as a model state. Maryland shifted pension obligations from the state to local counties in 2012. Maryland, however, raised state taxes and state fees, including the state income tax, and channeled some of that money into state aid, at the same time so that counties would have money available to pay for the increased shift. In some cases, some counties were in better financial shape because of the increased aid. Rauner’s plan does not contemplate any similar tax increases.
Movement to Stop the shift in Springfield
Rauner’s pension shift, along with a healthcare cost increase for state workers, is the most important piece of his budget proposal because the $1 billion in savings it creates is necessary for his budget to be balanced. However, the shift has failed to garner support and Rauner, so far, has failed to assuage concerns that the change would result in property tax increases, something he has campaigned against.
Before Rauner even introduced the idea of a shift in his budget address, state Rep. David McSweeney, a suburban Republican, introduced HR27, a resolution which says it is "the opinion of the Illinois House of Representatives that the proposed educational pension cost shift from the State of Illinois to local school districts, community colleges, and institutions of higher education is financially wrong.” As of March, 2018, more than 65 legislators from both parties had signed on as co-sponsors.
The budget process is far from over. Legislators still have a chance to write and pass an entirely different budget for the state. Even if Rauner’s proposal fails, history shows the pension crisis is a topic Illinois will continue to grapple with well into the future.
If the state’s elected officials truly are interested in “aligning responsibility,” paying attention to the experience of administrators adjusting to last year’s change in Illinois and watching Maryland’s implementation of its new law are two good places to start.