Association for Public Policy Analysis & Management

According to the principle of fiscal neutrality, state education funding should not favor school districts that possess greater per capita wealth. In the United States, schools have historically been financed, at least in part, through local property taxes. In states such as Illinois, local property taxes remain the primary source of school funding. Naturally, the assessed value of land in districts in different locales and of varying sizes can be markedly different. As a result, some school districts can generate significantly more revenue than others. In such areas, state education funding is ostensibly structured to offset local inequities in wealth. We examine the impact of teacher pension financing on funding equity.

Research on teacher pensions has tended to focus on the peculiar incentives embedded in the structure of these plans. For instance, most teachers belong to defined-benefit plans which guarantee retirees a specified amount of money every year until they pass away. In DB plans, benefits are back loaded (Costrell and Podgursky 2009). This structure entices teachers to stay until they can reap their maximum benefit (Costrell and Podgursky 2009). After this point, pension wealth declines. This occurs because DB plans offer an annual benefit. If a teacher works a year longer, their annual benefit may increase; however, they will also collect their benefit for one fewer year. Thus, the declining pension wealth acts as an incentive to retire.

Recently, teacher pension research has begun to focus on issues related to equity. Using teacher salary scheduled from Missouri, Shuls (2017) has shown that the design of teacher pension systems may favor teachers in wealthier school districts. This happens because the pension system only uses three years of employment in pension calculations. These three years happen to be at the point when differences in salary among districts are at their greatest.

This paper bridges the gap between research in equity in school finance and teacher pensions by examining a new data source. In many states, there has been an unnoticed funding stream which may undermine the principle of fiscal neutrality—state-funded teacher pensions. In states such as Illinois, the employer share of teacher pension costs has been borne by the state government, instead of school districts. Until recently, this subsidy to school districts was never accounted for in district finances. The Government Accounting Standards Board (GASB) now requires state pension funds to report each district’s proportionate share of state-level costs. We exploit this new data source. This paper examines the extent to which the state subsidization of local pension in Illinois undermines state efforts to increase equity among school districts. We use public administration data to conduct standard quantitative analyses, such as OLS regression and the weighted average methodology to analyze the relationship between pension subsidies and district descriptive characteristics. Our results suggest that when a state makes payments to the pension plan based on local teacher salaries, the state undermines efforts to improve equity among school districts.