Cary Grade School District 26’s Stand on Pension Reform

Taken from a statement from the Cary Elementary School Board:.  Considering House Speaker Mike Madigan is insistent on transferring teacher pension costs to local taxpayers and this is the last week of the legislative session before extraordinary majorities are required, I thought some might find this of interest.

Newly-elected McHenry County College Board member Chris Jenner has just finished his service on the Cary School Board.

Cary District 26

Statement of Position

Date: December 17, 2012

Topic: Possible Effects Proposed Solutions to the Illinois State Pension Crisis Could Have on
Cary District 26

Introduction: This paper lists the possible effects the Illinois State Pension crisis could have on District 26. It then defines the issue and lists potential and proposed solutions. It finishes by stating District’s 26 position and rationale.

Possible Effects on District 26: Actions taken to address the Illinois state pension crisis could affect any or all District 26 stakeholders. Due to increased pension costs, District 26 may have to:

  • D26 AppleReduce staffing levels resulting in increased class sizes and/or preventing the return of Specials;
  •  Propose a property tax hike on Cary homes and businesses;
  • Dramatically reduce benefits and/or increase employee retirement contributions for all classes of district employees, making it difficult to attract and retain employees;
  • Implement a strategy of RIFing newly hired teachers prior to their obtaining tenure, resulting in a high teacher turnover rate, difficulty in attracting high quality new teachers, and a lack of continuity in classroom instruction;
  • Move standard classroom instruction to a model that requires fewer teachers that the district must pay higher TRS contribution rates for, which may include delivering instruction via a virtual platform from third party providers, and which could create legal issues.

Defined: Illinois’ 5 state pension systems are in financial crisis. Illinois recently raised the state personal income tax by 67% and the state corporate income tax by 46%. State revenue is at record highs, yet General State Aid to schools continues to be cut. Illinois is on course to spend more money on the Teacher Retirement System (TRS) than on aid to schools as early as FY2016. Today’s five Illinois state pension systems were created by the 1970 Illinois Constitution. The initial basic parameters for the TRS were:

  • 60% of salary at age 60
  •  70% of salary at age 66
  •  Annual Cost of Living Adjustment (increase), i.e. COLA, of 1.5%, not compounded
  •  No sick leave accruals, Early Retirement Option (ERO), or automatic end of career raises

Also inserted into the 1970 Illinois Constitution was the “Pension Protection” clause, Article XIII, Section 5, which states, “… the benefits of [a state pension system] shall not be diminished or impaired.” Cary District 26 believes that the Teachers Retirement System established in 1970 was fair and reasonable. But that the enhanced benefits legislated since then, combined with the “Pension Protection” clause, have created a system that is not fiscally viable, and is in need of radical change. The longer it takes for that change to happen, and the less radical the change, the greater the financial disaster will be, and the worse the effect will be on TRS annuitants and taxpayers alike.

The March 2012 “Financial Condition of the Illinois State Retirement Systems” from the Illinois Commission on Government Forecasting and Accountability ( Mar2012.pdf) shows that taxpayers fund approximately 74% of the money that goes into TRS.

Essentially, 95% of workers in Illinois are funding three quarters of the retirement for 5% of Illinois employees. And most of the 95% have significantly less valuable retirement benefits than the 5% they are funding.

The 1970 parameters of the TRS were noted above. By 2010, the parameters were as follows.
Retirement Age

  • Age 62 with 5 years of service credit.
  • Age 60 with 10 years of service credit.
  • Age 55 with 20 years of service credit (discounted annuity or Early Retirement Option)
  • Age 55 with 35 years of service credit.

Retirement Formula

  • – Assuming career starts at age 25, and annuitant works every year till age 59, they will receive the maximum annuity of 75% of final average salary.

Annual COLA 3% compounded, up to two years credit for sick day accruals, ERO.

Factors contributing to the financial stress on the TRS include:

  • – Teacher salaries, Illinois’ are 3rd highest of the 50 states,
  • – Unaffordable pension costs due to increased legislated benefits,
  • – Unrealistic Return on Investment (ROI) assumptions,
  • – The age at which employees are allowed to retire.

Potential and Proposed Solutions: The TRS provided its summary of proposed solutions and their requirements for meaningful pension reform on its website in mid-2012 ( Independent researchers have also proposed solutions and suggested requirements of successful reforms. Proposed solutions and proposed requirements for reform are summarized below.

  • Annuitants can have either a COLA, or the health insurance benefit of the Teachers’ Retirement Insurance Program, but not both.
  • COLA does not begin until 5 years after retirement.
  • Individual asset tracking.
  • Force the state to pay its obligation into TRS via court order.
  • Phase in shifting the state’s funding responsibility to local districts.
  • Have local districts pay all additional costs due to any salary increase, not just increases above 6%.
  • Increase employee contributions.
  • Reduce or eliminate the COLA, or tie it to the CPI, the Social Security COLA, or a cap.
  • Pension income over a certain amount, e.g. $50,000 becomes taxable.
  • Subject Illinois TRS pension payments to annuitants living out of state to Illinois income tax.
  • Increase annuitant contributions to health insurance costs.
  • Start new employees on, and migrate existing employees to, a retirement plan in which benefits are based on contributions instead of a defined benefit plan.

District 26 Position: The Pension Protection Clause of the Illinois Constitution and subsequent legislated pension enhancements have created a situation in which the majority of money in circulation will be required to pay for state employees’ retirement benefits, of which TRS is the vast majority. District 26 believes it is patently unfair for Illinois taxpayers to foot the majority of the cost of a retirement system that for most, is better than their own retirement plan. District 26 also believes it is wrong for government and courts to hold the Pension Protection Clause much stronger than the promise to fund public services such as education.

Based on the current situation, any meaningful reform of state pensions will not align with the Pension Protection Clause. The courts have routinely upheld challenges to the Pension Protection Clause. A constitutional amendment or revision of the constitution at a constitutional convention would be required to soften or repeal the Pension Protection Clause.

District 26 holds that the solution to the pension crisis must include the following, and that no option is
considered “off the table”.
– Teacher retirement benefits should align with retirement benefits of comparable workers in the
private sector.
– While District 26 doesn’t oppose taxpayer contribution to teacher retirement benefits, TRS
annuitant benefits should be based primarily on employee contribution, and not be predefined.
– The solution must be fair to both beneficiaries and taxpayers.
District 26 will therefore advocate for:

  • Elimination of the current pension system.
  • Distribution (or allocation by accounting) of all existing TRS assets to individual participants, based on individual participant contributions.
  • Replacement retirement plans left to local district control.
  • Control of the TRS and appointment of the TRS Board by local districts, should TRS be left in place and the pension cost burden be shifted to suburban and downstate districts.
  • Creation of a task force of retirement planners with proven track records from private industry to develop retirement plan options that local districts will have the option of implementing.
  • Movement to a plan in which retirement benefits are based on contributions made to the plan.

District 26 will also adopt the following budget assumptions:

  • Until significant pension reform occurs, District 26 will base its budgets and financial plans on the district contribution to TRS increasing by 1% per year.
  • District 26 will consider implementing and budgeting for a staffing strategy which attempts to mitigate the negative financial impact of any pension cost shift.

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