Arguing for the cost shift
Thursday, Jan 3, 2013 - Posted by Rich Miller
* The Tribune points out that a state law passed several years ago to prevent payroll “spiking” by school districts has meant that the districts are simply handing out the biggest end of career raises they can.
The law mandated that the pension impact of any school district pay raises above 6 percent a year for the last four years of service would have to be paid for by the local districts. So, many districts simply give out the maximum 6 percent raises, which, with compounding, equals 26 percent over four years…
Lake Forest High School District 115’s new contract with teachers, reached after a five-day walkout in September. The Tribune reported that “at least 20 teachers will receive 6 percent raises this year because they are scheduled to retire … Typically, teachers and administrators may announce their intention to retire up to four years in advance and receive an annual 6 percent salary bump, which is factored into their pension under state law …” Why four years? Because a teacher’s pension is calculated on the average of his or her four highest consecutive years of salary over the last decade of service.
That’s one of the strongest arguments in favor of shifting future pension obligations to local schools. They will be much more careful about personnel costs when they must pay those costs.
As we discuss in another editorial on this page, Illinois lawmakers have been in no rush to fix the state’s vastly underfunded pension system. One sticking point: Many Republicans oppose a Democratic proposal to shift pension costs to suburban and downstate public schools. (The Chicago public school system already has that obligation.)
Republicans say that would force schools to raise property taxes to pay for the new obligation. That assumes the only way to meet a government financial cost is to raises taxes. Come on.
This can be done by gradually phasing in the obligation, by reducing future pension obligations and by requiring employees to pay more into their own pensions. This does not require a tax increase.
Local school boards would be less likely to hand out big end-of-career pay raises if they had to pay for years and years of higher pension costs attached to those raises. The cost of government should fall on the government that incurs the cost. If Lake Forest or any other district wants to reward a teacher at the end of a career, fine. Just don’t stick somebody else with the bill.
It’s really difficult to argue with that logic.
- OneMan - Thursday, Jan 3, 13 @ 9:06 am:
Yep…
Seems to me this is a bit of a no-brainer… Or at the least the state covers some baseline and the district gets the rest.
- CC - Thursday, Jan 3, 13 @ 9:08 am:
This law had little to no effect on the practice. I sat on a school board in the past 8 years and learned that they simply extended the “retirement contracts” in term to avoid the law. Admittedly, this applies more to administrators than teachers but teachers are not exempt. The standard administrator or district staff retirement contract is now more than 5 years. It usually would have the huge increase in the 5th or 6th year prior to retirement and allow maximum raises throughout the term of the agreement. This all complies with the state law. The district protects itself by making it all contingent upon continued performance measurements and the individual not being dismissed for cause.
- western illinois - Thursday, Jan 3, 13 @ 9:11 am:
One Man has it right There is no reason the state cant institute a cap right now.
This can be separate from the cost shift call it the cost cap
- dupage dan - Thursday, Jan 3, 13 @ 9:20 am:
=It’s really difficult to argue with that logic=
What is the liklihood that such logic finds it’s way into law? Zero? Negative Zero?
- RNUG - Thursday, Jan 3, 13 @ 9:22 am:
Good idea to address future costs but doesn’t address the basic issue of the State’s backlog of underfunding the 5 pension systems. All it does is shift the “normal” cost of TRS and some SURS off to local taxpayers. Admittedly, that’s largest portion of “normal” cost but it’s only $1B - $1.5B or so once the full transfer is in place.
And once all the school districts are “equal” on pension responsibility, are we going to change the school aid formula so all districts receive equal funding? Will we cut CPS back or expand the rest of the State? I’d guess CPS won’t be cut back.
If expanded, then all the State has done is take the same pile of money they’ve been paying out and relabel it from “pension” to “education” … then the politicians could “claim” they increased education funding … but it just another shell game and won’t free up any money to start paying off the pension funding backlog.
- langhorne - Thursday, Jan 3, 13 @ 9:25 am:
this is off track from the cost shift, but, since we are past jan 1, do all retirees get their (evil) compounded automatic annual increase, aka COLA? the one some say would be unconstitutional to rescind?
- Anyone Remember? - Thursday, Jan 3, 13 @ 9:28 am:
Two questions. Doesn’t anyone at the Tribune Editorial Board read their own paper? Specifically, Eric Zorn showed the argument that the State does not contribute to CPS pension costs is, at best, as misunderstanding. At best.
https://capitolfax.com/2012/07/11/todays-history-lesson/
http://blogs.chicagotribune.com/news_columnists_ezorn/2012/07/pension.html
Second, anyone there ever read the Illinois Constitution of 1970? Specifically, Article X, Section 1: “The State has the primary responsibility for financing the system of public education.” This proposal takes us farther from this.
- Mike M - Thursday, Jan 3, 13 @ 9:52 am:
I agree that the logic “the state can’t act fiscally responsible, so we should let the locals deal with this” is spot on.
I’ll also agree that “logic” just all of a sudden became logical over the past couple years, and at no other time in the state’s history, and on no other issue did it apply.
So now that we’ve explode this logic bomb, what other fiscal issues can we apply it to?
- Cook County Commoner - Thursday, Jan 3, 13 @ 9:58 am:
“They will be much more careful about personnel costs when they must pay those costs.”
School districts do not pay the costs: The tax payors pay the cost. I would favor this cost shift if it provided a mechanism prohibiting passing new pension costs onto the property owners.
Unfortunately, most people don’t pay attention to what goes on at their local school districts. Those that do pay attention, namely the mommies and daddies with kids in the system, seem to do the teachers’ bidding.
At least that’s been my experience when a school district debt increase came up for a vote. The mommies and daddies knocked on my door with their kids in tow requesting my vote “for the children” and “to maintain property values.” Well, I hope they have the sense to understand the latter claim is a loser now. And then the vote comes up in a non-presidential year to ensure maximum voter apathy.
The state needs fundamental rethinking about gov employee pensions and school funding. And this will probably require amendment of the state constitution. That probably will not happen for years. But to continue to shift more cost to residential property, no matter how small or how phased in, is insane.
People are financially stressed. They need a property tax roll back. Further jeopordizing the roof over their heads can only be a tactic originating from those that owe fealty to the beneficiaries, namely the teachers and their campaign money.
- nickypiii - Thursday, Jan 3, 13 @ 10:12 am:
Property taxes are usually requested at the maximum legal levy alrady. THEY WON’T GO UP UNLESS YOUR VOTE ALLOWS THEM TOO. Local districts should pay for the costs associated with their employees. Save the State this cost and find a way to enhance spending on education. Ill is always very low on the list each year as a percentage of total education cost provided directly by the State. State should pay more of the cost overall and therefore decline the over reliance on local property taxes everywhere for education.
- RNUG - Thursday, Jan 3, 13 @ 10:21 am:
nickypiii,
Not necessarily true. There are ways around the caps; the most common is moving whatever construction / maintenance can be off to the “life/safety” category. Plus there was some discussion about the pension shift cost being exempted from falling into the cap area. In both those cases, no taxpayer vote would be required; just the school board’s vote.
- walkinfool - Thursday, Jan 3, 13 @ 10:34 am:
“what’s the likelihood such logic finds its way into law? ”
Exactly the same likelihood that the Nekritz bill, or something close to it, will pass.
The best points outlined in the editorial are already in the bill. The likelihood is high, if legislators do their jobs.
- Sparky - Thursday, Jan 3, 13 @ 10:39 am:
We have the 6% retirement incentive in our district also. Not that big of deal if we cut it. Just get our money some other way in contract. Salary boost, insurance, etc. Everyone knows there is only so much of the pie. How you slice it makes little difference to me.
- Captain Illini - Thursday, Jan 3, 13 @ 11:13 am:
A two tiered system is the only way to get around this issue, whereby all who’ve satisfied the 20 year requirement for insurance, and those who are vested for retirement should be benchmarked and set aside…the rest will be subject to the whims of the Legislature, unfortunately. The cost shift to local school districts should only cover those costs above and beyond the primary state funding formula that are unique to those districts. Logic however has left the building with Elvis…
- Old and In The Way - Thursday, Jan 3, 13 @ 11:25 am:
RNUG
Good idea to address future costs but doesn’t address the basic issue of the State’s backlog of underfunding the 5 pension systems. All it does is shift the “normal” cost of TRS and some SURS off to local taxpayers.
Since SURS primarily covers higher Ed employees the only costs shifted to local taxpayers would be for community college employees. Universities have no local taxpayer support so watch those tuition fees increase. I suspect the community colleges would also raise tuition rather than shift to taxpayers. The cost shift for higher Ed is much like the whole “pension reform” movement to date…..not really well thought out. How about taking the time to bring all the stakeholders together to come up with a plan. Doing this in three days is insane. BTW this isn’t reform it’s theft from the employees!
- Scott Herr - Thursday, Jan 3, 13 @ 12:42 pm:
I agree with the pension cost shift principle but NOT how it would be implemented in any of the bills under discussion.
This should be addressed instead in the context of school funding and consider two significant factors:
1. There is a glaring disparity in property taxes between Chicago and surrounding suburbs. Property taxes in suburbs adjacent to Chicago are about 81% higher than Chicago. More about this in “Why are Chicago property taxes so low?” at http://www.scottherr.org/2012-12/chicago-property-taxes/
2. Chicago receives about three times the funding per pupil than other districts that have similar property values per student. More about this at “Chicago receives too much school funding from Illinois” at http://www.scottherr.org/2013-01/chicago-school-funding/
- State Rep Mike Fortner - Thursday, Jan 3, 13 @ 12:43 pm:
There’s another way to deal with the 6% end of career boosts. In my proposal HB6204 any salary in creases expliticly tied to a retirement date don’t figure into the defined benefit, but regular step increases do. The incentive for the boosts disappears.
- RNUG - Thursday, Jan 3, 13 @ 1:21 pm:
Captain Illini
They already created Tier 2 last year for new hires as of 1/1/2012. It’ll fix the problem in 30 years or so. They need money now so they have to figure a way to steal it from the tier 1 employees and retirees.
- Plutocrat03 - Thursday, Jan 3, 13 @ 1:28 pm:
Just another sneaky way to raise taxes.
Remember how the millions from the lottery were of help education? Did not help when they reallocated the GA money towards their pet projects and education funding did not rise as much as was touted.
- Bocephus - Thursday, Jan 3, 13 @ 1:53 pm:
Nobody ever wants to talk about the real problem which is teacher union contracts that have language that guarantees benefits regardless of escalating costs. Once it’s in the collective bargaining agreement, it’s almost impossible to bargain out. Wait until March when most Illinois schools start cutting jobs and programs just to keep the doors open. My local district spends $2 million a year just on insurance for teachers and staff.
- nickypiii - Thursday, Jan 3, 13 @ 2:00 pm:
Scott Herr: The premise of the article you’re quoting is incorrect. How many $300,000 houses are in Dolton, Riverdale, Cal City, etc? Tax rates are the result of the property tax equation. More overall value of property = less tax rates. If the State paid even closeto half the cost of education state wide, we wouldn’t have an over reliance on local property taxes to fund education. Tax services to expand sales tax base and spend it on education. 25% of the income tax increase was originally to be used for property tax relief. That provision was cut out of final bill.
- Liberty_First - Thursday, Jan 3, 13 @ 2:32 pm:
The trouble with the cost shift is the state will simply free up the money to keep spending not pay the liability.
- Scott Herr - Thursday, Jan 3, 13 @ 2:37 pm:
nickypiii, the $300,000 house value was just an example. Property taxes in 2012 for a $130,000 house with a standard $6,000 homeowner exemption:
- Dolton: $6,305
- One block away in Chicago: $1,779
- Rod - Thursday, Jan 3, 13 @ 2:37 pm:
While I support the shift we should have no illusion that having local property tax payers pick up the tab for pensions will stop districts from inflating pensions with raises. CPS has given raises repeatedly to administrators it knows will be retiring with a year. Because the district is so massive the public has been largely unaware of this practice that has been going on for years.
- Foxfire - Thursday, Jan 3, 13 @ 4:10 pm:
First, is there any credible evidence that the 6% end-of-career bumps is a contributing factor to the problem of underfunded pensions?
Second, if the 6% increase is such a bad policy, then why doesn’t the state legislature lower it further? My recollection is that the end-of-career bumps used to be higher, much higher, but that was determined to be “bad policy” so the 6% cap was implemented.
Third, 6% is really not all that unreasonable. With most pay scales it would amount to a CPI/cost-of-living adjustment plus an ordinary “step” increase.
Finally does anyone really believe that the powerful teachers unions really want this benefit to go away? They like it and they want it, regardless of who pays the bill.
- Anyone Remember? - Thursday, Jan 3, 13 @ 4:15 pm:
Plutocrat03
When Georgia started their Lottery, the statute specifically limited the Lottery proceeds to specific items
http://www.galottery.com/education
and they specifically state Lottery proceeds cannot totally fund those programs
http://www.galottery.com/lotterybenefitsgeorgians/
This limited, targeted earmarking of the proceeds, along with the admission tax dollars are needed, was based upon the Illinois experience (”the Lottery will fund education!”). Apparently they did learn from our mistake.
- dupage dan - Thursday, Jan 3, 13 @ 4:50 pm:
Anyone, the small problem with your post is that the Illinois Lottery was not enacted to “fund education”. That came later.
- Small Town Liberal - Thursday, Jan 3, 13 @ 6:09 pm:
Liberty_First - Repeating a worn out talking point doesn’t make it true.
The state has cut spending significantly, I believe back to about 2008 levels.
Haven’t you noticed how angry lots of folks are at Quinn? Do you think it’s because he increased their funding?
Try doing some thinking instead of just repeating the liberal spending cliche over and over.
- geronimo - Thursday, Jan 3, 13 @ 9:27 pm:
It is the constitutionaly responsibility of our state to fund Education as well as the pension plan for Education employees. As our legislators bloviate about the high priority of Education and how our schools are not getting properly funded because of the pension debt, it is these people who have deliberately funneled monies away from schools and pensions to other places. Seeing as how Illinois is 50th- or last place- in meeting their responsibilities of funding public schools, and have been at or near the very bottom for decades, I find it interesting that any of them EVER thought Education and our children were a priority. Our kids are convenient pawns to be used as a tool to inflame taxpayers to diminish the pension system to free up money for other use. They can say all they want that the freed up money will now go to schools for Educational programs, but they haven’t shown evidence that that will happen for many decades now. This is not a new problem. Why would it magically happen now?
- Anyone Remember? - Thursday, Jan 3, 13 @ 10:00 pm:
dupage dan
When I arrived in Illinois in the mid 1980s (right after the $40 million Lotto Jackpot), was told at that point “the Lottery is to fund education” - when did that change?
- Arthur Andersen - Thursday, Jan 3, 13 @ 10:37 pm:
With all due respect to Rep. Fortner, I can see a way to work around the language in his bill and continue end-of-career pay increases.
If old AA can figure it out, let’s assume the IEA and IFT will be able to do the same.
- State Rep Mike Fortner - Thursday, Jan 3, 13 @ 10:55 pm:
AA - I propose nothing in my bill to end retirement based increases. What I propose is to make those types of increases entirely the responsibility of the local employer. If a school district and the union want to negotiate a big pay bump for a near retiree, I leave that as a local choice. However, I would make that choice have no fiscal impact on the state pension systems. This doesn’t forbid it, but it reduces the incentive since the local district would have to pick up both the salary bump and the attendant self-managed pension contribution.
- RNUG - Friday, Jan 4, 13 @ 12:59 am:
Anyone Remember? @ 10:00 pm
The lottery was never intended to fully fund education; that was supposed to be done with general revenue funds.
If my memory is working, what they said at the time was the revenues from the Lottery would go to education … and the Lottery revenues did … but at the same time they reduced by the same amount the money coming from GRF … so the schools ended up with the same amount of funding, not the increase people who voted for the lottery were expecting.
Classic Illinois bait and switch. You can expect the same types of actions in the future on other issues.
- Anon - Friday, Jan 4, 13 @ 7:07 am:
There is also the concern that the TRS forecast for an 8% return on investment is far too high, and that in this economy the actual number should be 6% or less.
Taxpayers have been burned by unrealistic forecasts before, according to the Illinois Policy Institute:
“[T]he state’s fiscal year 2014 pension contribution was projected to be $3.7 billion when the pension ramp was created [in 1996]. The actual contribution for fiscal year 2014, on the other hand, will be $6.8 billion. That’s nearly twice as much as what was predicted, despite the fact that taxpayers have pumped $8 billion more into the pension system than the original pension ramp called for.”
Republicans are concerned that if investments continue to underperform the cheery assumptions, a far bigger burden would be placed on the localities. Many suspect that Dem state lawmakers want to offload this mess to the locals before it blows up even further.