The following research paper is an honest attempt to identify and address the Illinois Pension Crisis as being put forth by the various components.Foremost are: 1) the preservation of the promise made to retire and soon be retired educators; and 2) Protection of the rights of taxpayers and students.
In collaboration with the World Trade Council
Illinois pensions have reached a breaking point. The sky is falling and it is falling now. Taxpayers knew they were in trouble when the Illinois government recently announced an $83 billion shortfall in pension revenue. Things got even worse when the Governmental Accounting Standards Board (GASB) and Moody’s revised accounting rules for public organizations in order to more accurately reflect their debt.[i] The result of this change was that Illinois announced it actually is $143 billion short of the current capital need to fund the $632 billion—(yes, billion)–in pension commitments between now and 2045. With only $65 billion on hand to meet their obligations to thousands of public employees, they would need an 18.6% yearly return on that $65 billion. These employees include teachers whose pensions make up $376.5 billion of that shortfall.[ii]
With pension benefits increasing at a rate of 6.5% a year,[iii] the funding problem is compounded. The state’s contributions to the teachers’ pension funds have not kept up with the unexpected mushrooming pension costs created by the generosity of the local school boards. The situation is made even worse by the fact that the government has already taken substantial action in an attempt to correct the shortfall: e.g., hiking property taxes to the maximum amount. When this property tax hike is taken in conjunction with 9.5% sales tax[iv] and a 6.9% decline in Chicago’s population over the last decade[v] (substantially reducing the tax base) the only resort for the state is to enact drastic legislation to address the shortfall.
Chicago Mayor Rahm Emanuel is taking on the Chicago Teachers Union in an attempt to address the pension problem. It is important to acknowledge that there is a lot of bad press on both sides. Emanuel looks bad because he and his hand-picked school board are entering a fight with seasoned union negotiators representing a motivated group of educators. Meanwhile the teachers look bad because they are asking for even more money. They already make $74,839[vi] (annualized as $99,785) and in February asked for a 30% raise to $92,606[vii] (annualized at approximately $123,000). Their current annualized salary, prior to any raise, is approximately $99,785. In contrast the median household income in Chicago is $45,734.[viii] Make no mistake, there will be blood spilled over this come the next election. That entire aside, Chicago and by extension Illinois, faces a real problem. For Chicago the solution lies in how to decrease the cost of the school system. The cost of the pension funds can’t disappear, due to the fact that Illinois’ constitution states that retirement benefits for public workers cannot be “diminished or impaired,” but future pension plans can and must be, altered.[ix] If this does not occur, the state of Illinois will face financial collapse. The fact that teachers’ pensions have increased by 80% since 2000 demonstrates the need for immediate action.[x]
There are two levels on which this action must take place: 1) the local level and 2) the state level. The city of Chicago must take action to combat its unsustainable school expenditures. Chicago is facing a massive increase in pension related expenditures, from $231 million in 2013 to $684 million in 2014, with subsequent escalations of $18 million a year.[xi]
Because the financial liability has already been committed and cannot simply be reduced, Chicago needs to create a budget surplus. There are a number of ways in which the Chicago Public School System (CPS) could do this. The best option is for Chicago to institute a voucher program. Such a program has been successfully implemented in Washington D.C. and Florida with an average savings of 40% over the per pupil public school cost.[xii] CPS spends approximately $13,000/pupil. The 40% reduction would result in savings of $5200/year. CPS currently has 404,151 students enrolled. If only 87,115 (21.56%) of them accepted vouchers, it would cover the projected pension increases from 2013 to 2014.[xiii]
The voucher program would not negatively impact the students or their educational program. To the contrary, a study conducted on the New York voucher program found that African Americans who participated “were 24 percent more likely to attend college, and more than twice as likely to attend selective four-year colleges, as their peers who had not won the voucher lottery in a random draw.”[xiv] This is especially significant since 41.6% of CPS students are African Americans.[xv] A 2010 study by the Department of Education found that students who attended voucher schools were more likely to win “opportunity scholarships.”[xvi] Vouchers create a free market for education and allow students to pursue their dreams, no matter their economic status. It truly allows America to become a land of opportunity for all. It is important to note how vouchers save money. They effectively create an open market on teacher salaries; removing the union interests and creating a free market for jobs and salary allocation.
On the state level there currently is a bill (SB1932) that outlines a voucher program for CPS. It was introduced in February of 2011. In July of 2011 the bill was sent to an Assignment committee where it is still languishing. The bill outlines the qualifications and funding for a voucher program. The full text of the bill can be found at http://www.ilga.gov/legislation/97/SB/09700SB1932lv.htm.
Another bill that could help to fix the pension problem is SB1673. It deals with one of the main causes of the pension crisis:–districts have been giving teachers raises and increasing benefits while making the state foot the bill. SB1673 was also introduced in February of 2011. It passed the Senate in less than two months and was then sent on to the House. The House debate over the bill was tabled for the 2012 summer recess. Since the bill was not voted upon before the recess, it was sent to the Rules committee where it sits. SB1673 outlines a number of provisions that would help with the pension crisis and is estimated to save Illinois more than $50 billion dollars over the next 30 years. Without getting into all the technical details, the main things it does are: 1) decrease teachers’ retirement payout by altering the cost of living increases, 2) push back the age of eligibility for retirement benefits and 3) reestablishes the amount (9%) that teachers are required to pay into their retirement fund. (The unions had negotiated the 9% down to 2%.) The bill also has the districts paying for any increase in pension benefits that result from an increase in salary. Further, the school districts are required to take control of the pension funds liability by 1% a year until 2019, after which it increases by 0.5% a year.[xvii] Overall, the bill moves the financial responsibility back to the school districts that have made those decisions which have created the pension crisis. This plan hands the financial responsibility to the school districts that actually make the financial decisions, thus ensuring a more prudent fiscal future.
Another issue that would help to decrease pension plan costs is how the pension plans themselves are structured. Currently Illinois has a defined benefit pension plan which means that the employee is guaranteed a lifetime pension by the employer upon retirement. That benefit is based upon age, duration of service and final years’ salary. The defined benefit plan puts all of the risk on the state, as they are on the hook for the benefits regardless of the economic climate. This is highly risky for the state, especially if the economy goes down and expected investment returns are not realized.
The alternative is a defined contribution retirement plan. Their pension is determined by employee’s contributions—(often matched to a certain percentage by the employer)–and the investment performance of those contributions. The employee themselves direct the investments of those funds.[xviii] While it is likely many people would be against public employees’ pensions being based solely on the discretionary performance of the defined contributions made by both employee and employer (although that is what the private sector is like) there are other solutions. For example, point two of California Governor Jerry Brown’s twelve point plan outlines a hybrid system with defined benefit pension, defined contribution, and Social Security all making up equal parts of the retirement plan.[xix] (It should be noted that Illinois teachers do not pay into, and therefore do not receive, Social Security.) Brown’s twelve point plan passed but without the hybrid portion.[xx] It is highly unlikely that Illinois would be able to convert fully to a defined contribution retirement plan, but any shift in that direction would help the budget crisis that Illinois is in. It must be remembered that there is no magic bullet to fix Illinois’ financial outlook. It will take a combination of programs, cuts, and alterations in order to adequately address the problem.
As was mentioned at the beginning of the article, the Illinois constitution prevents pension plans from being “diminished or impaired.” The problem is that Attorney Eric Madiar, Chief Legal Counsel to Illinois Senate President John Cullerton, has stated that he interprets the wording in the constitution to mean that the existing pension plans of state employees cannot be altered by the state government in any way. The only way they can be changed is through negotiations with the unions.[xxi] The upshot is that any changes imposed by the legislature would, by law, only be applicable to new hires. While pension reform is desperately needed it will not be able to solve the massive budget shortfalls that Illinois will be facing over the coming decades. The effect of the changes to pension legislation will not be seen for decades. However, the improved financial outlook will have an immediate impact.
The state is left with only a few options to make up the additional shortfall: 1) The government can increase revenue by increasing taxes, which after the massive tax hike of this past year is highly unlikely (more on that later), or 2) they can decrease costs by cutting state programs or 3) reduce the number of public service employees (firing employees). With the current 2013 budget outlining 9% cuts in government programs, it would be hard for more substantial cuts to occur in the near future.[xxii] The only option left is to reduce the number of public employees. One of the first targets could be teachers. Those cuts should be tempered so as not to send class sizes through the roof. Teachers are also very hard to fire. However, if Rahm Emanuel is able to pass the teacher evaluation plank of his proposal to the teachers’ union, he would have a mechanism by which he could bypass the security afforded by tenure. It must be remembered that Chicago only has a 56% high school graduation rate and an average ACT score of 16 (the state average is 21).[xxiii] It could be concluded that, because of the current low academic performance, Emanuel has the ability to make significant staff changes. The fact that teacher evaluations are already scheduled to come into effect during the 2016-17 school year shows how important education is to Emanuel. It also raises the probability that he is planning to use teacher evaluation as a tool to trim the teachers’ portion of the education budget.[xxiv]
The question then becomes, “What would happen to the students?” There would be two options. The first is that they have new teachers who would be employed under the revised pension benefit plan. The second option is that students are diverted away from the public school system and into charter schools. Charter schools in Chicago spend an average of only $6829 per pupil–a savings of approximately $6200 over public schools–making them a fiscally desirable alternative to public schools.[xxv] This train of logic is not meant to be a conspiracy theory, but simply illustrates how current legislation could potentially lead to a more fiscally sound future. If the teachers’ evaluation proposal does make it through, it could be used to accelerate the migration to charter schools.
As was stated above, raising taxes yet again is not a good option for Illinois; closing their tax loopholes is. Closing just three loopholes would result in $1.5 billion in new revenue over the next three years and would make Illinois tax laws more consistent with the rest of the US. The first major loophole is that Illinois’ taxes are currently coupled with federal tax laws regarding how companies are allowed to record the depreciation of equipment. If Illinois changed its policies from allowing one time depreciation deductions to deductions over time, it not only would line up with other states’ tax policies, but would generate $1 billion in revenue over the next three years. The second loophole is the vendor discount which refunds retailers 1.75% of sales tax revenue generated at their stores while costing Illinois $109 million in 2010. Walmart alone received more than $9 million. The third loophole allows companies to lower their tax base by not including payroll and property in their tax equation. This loophole costs Illinois $63 million per year.[xxvi]
While Illinois faces a rough few years as it tries to climb out of a massive oncoming shortfall in pension funds, there is hope. Two pieces of legislation currently buried in the legislative process have the ability to turn around this state’s economic future. Combined with a renewed awareness of the need for economic prudence, this state might not be as doomed as everyone else seems to think. The potential for a straightforward solution to the pension problem also has national significance, as 18 other states’ pension programs were rated as a “serious concern” by the Pew Center on the States study. Eight of those states (Alaska, Colorado, Kansas, Kentucky, Illinois, Maryland, New Jersey and Oklahoma) received the lowest possible pension score (zero).[xxvii] The fact that Illinois has the ability to deal with such a transcendent issues means that it could serve as the template for how other states should deal with the problem, or, as a dire warning of the consequences of inaction. It is important to remember that our government is a Republic; the leaders answer to the people. Tell your representative what you think; change the future of Illinois and this nation, take a stand for what you believe in; fight for our future and the future of our children.
[i] Ingram, Jonathan. “Illinois Policy Institute – Blog – Illinois pension funds need 19 percent annual investment returns to make ends meet “Web. 9/11/2012 <http://illinoispolicy.org/blog/blog.asp?ArticleSource=5003>.
[ii] Ingram, Jonathan. “Illinois Policy Institute – Blog – Illinois pension funds need 19 percent annual investment returns to make ends meet “Web. 9/11/2012 <http://illinoispolicy.org/blog/blog.asp?ArticleSource=5003>.
[iii] Ingram, Jonathan. “Illinois Policy Institute – Blog – CTU demands huge raise on top of million-dollar pensions “Web. 9/12/2012 <http://illinoispolicy.org/blog/blog.asp?ArticleSource=5041>.
[v] Helliker, Kevin. “Chicago Population Sinks to 1920 Level – WSJ.com “Web. 9/11/2012
[vi] “Chicago Public Schools : Stats and facts “Web. 9/13/2012 <http://www.cps.edu/About_CPS/At-a-glance/Pages/Stats_and_facts.aspx>.
[vii] Wille, Michael. “Illinois Policy Institute – Blog – Hubris defined: Chicago teachers union wants 30% salary raises “Web. 9/12/2012 <http://www.illinoispolicy.org/blog/blog.asp?ArticleSource=4685>.
[viii] “Chicago, Illinois (IL) income, earnings, and wages data “Web. 9/11/2012 <http://www.city-data.com/income/income-Chicago-Illinois.html>.
[x] Ingram, Jonathan. “Illinois Policy Institute – Blog – CTU demands huge raise on top of million-dollar pensions “Web. 9/12/2012 <http://illinoispolicy.org/blog/blog.asp?ArticleSource=5041>.
[xi] Ingram, Jonathan. “Illinois Policy Institute – Blog – Illinois pension funds need 19 percent annual investment returns to make ends meet “Web. 9/11/2012 <http://illinoispolicy.org/blog/blog.asp?ArticleSource=5003>.
[xii] VonderHaar, James. “Research & Commentary: School Vouchers Are a Cost-Saver for Taxpayers | Heartland Institute “Web. 9/11/2012 <http://heartland.org/policy-documents/research-commentary-school-vouchers-are-cost-saver-taxpayers>.
[xiii] “Chicago Public Schools : Stats and facts “Web. 9/11/2012 <http://www.cps.edu/About_CPS/At-a-glance/Pages/Stats_and_facts.aspx>.
[xiv] “How to boost graduation rates – Chicago Tribune “Web. 9/11/2012 <http://articles.chicagotribune.com/2012-09-09/news/ct-edit-voucher-0909-bd-20120909_1_vouchers-paul-e-peterson-graduation-rates>.
[xv] “Chicago Public Schools : Stats and facts “Web. 9/11/2012 <http://www.cps.edu/About_CPS/At-a-glance/Pages/Stats_and_facts.aspx>.
[xvi] “How to boost graduation rates – Chicago Tribune “Web. 9/11/2012 <http://articles.chicagotribune.com/2012-09-09/news/ct-edit-voucher-0909-bd-20120909_1_vouchers-paul-e-peterson-graduation-rates>.
[xvii] “Major Legislation and Proposals “Web. 9/11/2012 <http://trs.illinois.gov/subsections/legislative/majorlegislationandproposals.htm>.
[xviii] “What are defined-contribution plans? “Web. 9/13/2012 <http://www.taxpolicycenter.org/briefing-book/key-elements/savings-retirement/defined-contribution.cfm>.
[xix] “Twelve_Point_Pension_Reform_10.27.11.pdf (application/pdf Object) “Web. 9/13/2012 <http://gov.ca.gov/docs/Twelve_Point_Pension_Reform_10.27.11.pdf>.
[xx] “Gov. Brown signs California pension reform bill – Inside Bay Area “Web. 9/13/2012 <http://www.insidebayarea.com/timesstar/localnews/ci_21530423/gov-brown-signs-california-pension-reform-bill>.
[xxi] Madiar, Eric. “Madiar Pension Abstract 03-02-11.pdf (application/pdf Object) “Web. 9/13/2012 <http://www.senatedem.ilga.gov/images/pensions/D/Madiar Pension Abstract 03-02-11.pdf>.
[xxii] “Closing Illinois corporate tax loopholes can raise revenue to avoid painful budget cuts. “Web. 9/13/2012 <http://www.ajustharvest.org/2012/02/northside-p-o-w-e-r-coalition-call-on-governor-to-close-corporate-tax-loopholes/>.
[xxiii] Wille, Michael. “Illinois Policy Institute – Blog – Hubris defined: Chicago teachers union wants 30% salary raises “Web. 9/12/2012 <http://www.illinoispolicy.org/blog/blog.asp?ArticleSource=4685>.
[xxiv] Tareen, Sophia. “Teacher Evaluations At Center Of Chicago Strike “Web. 9/13/2012 <http://www.huffingtonpost.com/2012/09/13/teacher-evaluations-at-ce_0_n_1880264.html>.
[xxv] “AppendixB_SchoolBasedBudgeting.pdf (application/pdf Object) “Web. 9/13/2012 <http://www.cps.edu/FY13Budget/documents/AppendixB_SchoolBasedBudgeting.pdf>.
[xxvi] Cafas, Thomas and LeRoy, Greg. “il_loopholes.pdf (application/pdf Object) “Web. 9/13/2012 <http://www.goodjobsfirst.org/sites/default/files/docs/pdf/il_loopholes.pdf>.
[xxvii] “Trillion_Dollar_Gap_Underfunded_State_Retirement_Systems_and_the_Roads_to_Reform.pdf (application/pdf Object) “Web. 9/12/2012 <http://www.pewstates.org/uploadedFiles/PCS_Assets/2010/Trillion_Dollar_Gap_Underfunded_State_Retirement_Systems_and_the_Roads_to_Reform.pdf>.