Restrictions on pension spiking a win for Illinois taxpayers
Illinois’ fiscal year 2019 spending plan includes reforms to discourage some irresponsible spending by local governments.
Pension spiking – the practice of hiking an employee’s salary near retirement to increase his or her lifetime pension benefits – has long been a problem in Illinois school districts. But a new provision in the fiscal year 2019 spending plan is a good step toward reining in the practice.
Retirement benefits for participants in the Illinois Teachers’ Retirement System, or TRS, are calculated based on an average of an employee’s highest four consecutive years of salary within his or her final 10 years of service. Annual benefits can be as high as 75 percent of that amount. Because the state picks up the cost of local pensions, local officials don’t bear the full financial consequences for intentionally inflating future pensions. In fact, during contract negotiations, pension spiking can be used as a tradeoff for other benefits that are paid locally.
A 2005 law sought to limit the cost of pension spiking by restricting salary increases in the last four years of employment to 6 percent of salary annually for TRS participants. Employers could still increase salaries by more than that amount, but the state would demand local officials pay costs associated with the resulting higher pensions.
Unfortunately, this 6 percent restriction effectively encouraged spiking salaries right up to the cap.
Rather than serving merely as a ceiling, some school districts used the 6 percent salary hikes as a new rule of thumb. For example, union contracts in Palatine Community Consolidated District 15 and Crystal Lake Elementary District 47 essentially guaranteed pension spiking for teachers near retirement, with annual raises of 5 to 6 percent.
Other districts, such as Glenbard Township High School District 87, chose to break the 6 percent cap, putting their local taxpayers on the hook for $164,198 in penalty payments to the state in addition to the cost of the increased salaries, according to the Chicago Tribune. One suburban Chicago school district paid more than $1 million dollars in penalties to spike pensions for dozens of employees.
From 2004 to 2014, school districts across the state made a total of $38 million in penalty payments, according to the Chicago Tribune.
While some claim pension spiking is an important tool to attract teachers, Illinois Policy Institute analyses have found Illinois teacher pension benefits are already extremely generous. The average recently retired career teacher in Illinois receives a $73,300 annual pension benefit and can expect a total of $2.2 million in lifetime benefits.
Luckily, the new Illinois fiscal year 2019 spending plan is further cracking down on the practice. By reducing the spiking cap to 3 percent of salary from 6 percent, the state expects to save $22 million in the coming fiscal year. If local officials choose to live within the new caps rather than paying penalties, local taxpayers, who foot the bill for salaries, should see savings as well.
Illinois desperately needs meaningful pension reform to deal with its unfunded liabilities and the pressure annual pension payments put on the budget. The state officially reports about $130 billion in pension debt. Using a different rate of return and a shorter repayment schedule, Moody’s Investors Service puts the amount at closer to $250 billion. Annual pension payments consume about 22 percent of the state budget.
Lawmakers should also work toward aligning pension costs with salary decisions, meaning local governments should bear the annual contribution costs of the pension benefits they incur.
While more work remains to be done, stricter pension spiking caps are a step in the right direction.