Association for Public Policy Analysis & Management

Panel: Teacher Pensions: Unseen Effects on Schools, Employees and Equity

(Education)

Teacher pensions are complex. Little-explored facets of financing and plan structure have major intended consequences. The structure of benefit plans and the rules placed on participating teachers can have major effects on the teacher labor market. Moreover, the finance methods for pensions can have major impacts on how education funding is distributed. This panel consists of three papers examining pension policy in Illinois, perhaps the most complicated and fascinating case of teacher pension policy.

In Illinois every school district expect Chicago Public Schools participates in the Illinois Teachers Retirement System (TRS).  TRS is one of the largest teacher pension plans in the United States. The system’s current funding level is below 40 percent, with an unfunded liability of $73.4 billion. This has put a strain on state finances.

Illinois is one of a number of states where state government – and not school districts – pays the employer share of teacher pension costs. The state’s combined payment towards normal costs and debt service was $4 billion in 2017. This is roughly equivalent to the $4 billion that the state sent to districts via general state aid, that same year.

Complicating the situation in Illinois is that local property taxes are actually the primary source of education funding. Illinois has over 850 school districts, each with its own taxing authority. Local revenues per pupil vary greatly, following inequities in wealth. General state aid is designed to offset these inequities. However, the growing liabilities of the pension system have limited the state’s ability to increase state aid.

The first paper in the panel examines the impact that Illinois pension finances on overall funding equity. Until recently, the state subsidy of teacher pensions was unaccounted for at the district level. New accounting rules now require TRS and districts to report the effective state subsidy of pension costs. This subsidy varies greatly by district. Shuls, Costrell and Hitt exploit this new data source in “Undermining Equity: How State Pension Subsidies Favor Wealthy Schools Districts.”

In order to relieve pension costs, Illinois lawmakers in 2010 closed the old benefit plan and created a much more modest plan for new hires. This cut state costs and therefore served as a cut in aid to local districts. However, the composition of the labor force in each district varies, as does teacher pay. In “School District Pension Reform As a Cut in State School Aid,” Guo and colleagues explore the possibility that pension reform may have exacerbated previous inequities. Moreover, they examine the impact that the reform had on teacher labor markets and how that impact differentially affects districts.

Other rules have been put in place, intended to lower pension costs. These include return-to-work rules. Illinois limits the number of hours that TRS retirees can work. In “Post-Retirement Work of Older Americans” Fitzpatrick explores the possibility that limiting hours, rather than earnings, may increase the labor supply of high-earning retirees and decrease the labor supply of low-earning retirees.