Panel Paper: School District Pension Reform As a Cut in State School Aid

Thursday, November 8, 2018
Truman - Mezz Level (Marriott Wardman Park)

*Names in bold indicate Presenter

Darren Lubotsky, David F. Merriman, Chuanyi Guo and Jason Ward, University of Illinois, Chicago

We study the impact of a major reduction in the Illinois public-sector pension program on state funding disparities across public school districts in Illinois and on the labor market for public school teachers. In April 2010 Illinois Governor Pat Quinn signed legislation (PA 96-0889) that created a Tier II pension benefit for Illinois public school teachers who first contributed to the system after January 1, 2011. Teachers that had contributed to the system prior to that date continued to be eligible for much higher benefits under a Tier I system. Depending upon a teacher’s age, work history and salary profile the expected present value of Tier II benefits could be as much as $600,000 less than an otherwise identical teacher enrolled in Tier I.

Illinois local school districts other than Chicago are not responsible for the employer’s pension contribution under either Tier 1 or Tier II, the responsibility for making employer contributions and making pension payments falls entirely upon the state of Illinois. Thus, teacher pension benefits are implicit state aid to local school districts. The switch to Tier II pension benefits can be thought of as a large and variable reduction in intergovernmental aid from the state to school districts, who are otherwise responsible for all employment costs such as salary and health benefits. We use data on earnings and employment histories for virtually all public school teachers in Illinois (about 114,000 annual observations) to estimate the expected reduction in the present value of pension benefits in each district as a result of the introduction of Tier II benefits. This reduction is likely to vary substantially across districts because of differences in salaries and tenure length across districts. For example, districts that tend to have younger teachers and high teacher turnover accrue little in pension wealth and therefore might be expected to experience small declines in pension wealth as a result of the pension reform.

Variation in the impact of the pension reform across districts may reduce or exacerbate state funding inequalities between poorer and wealthier districts. The second part of our project compares state aid for pension payments, and the change in aid brought about by the 2010 reform, with Illinois General State Aid (GSA), which is state funding that is explicitly designed to reduce disparities in cross-district resource availability.

Since pension funding is larger for teachers with higher salaries and for those who have longer teaching careers, our hypothesis is that state funding of pensions is highly regressive and confers larger benefits on wealthier districts, but the 2010 reform likely mitigated this.

Finally, we estimate the impact of the pension reform on the teacher labor market. The pension reform reduced total compensation specifically among experienced and higher-salaried teachers. We hypothesize that this increased the proportion of teachers who exit the profession in the early years of their career and also makes it more difficult for districts to hire and retain experienced teachers. We therefore examine data on turnover rates, teacher salaries, and measures of teacher quality.