Updated: March 1, 2019
Issue: A state law was enacted in 2005 to discourage school districts from granting double–digit raises to educators approaching retirement in order to boost their pensions. When triggered, the law increases the annual contribution a district must pay to TRS.
The law is triggered when a school district grants a TRS member a raise in excess of a threshold set by statute and the raise in question would factor into the calculation of the member’s initial pension upon retirement.
The threshold set in 2005 was 6 percent.
In June of 2018, the threshold was reduced from 6 percent to 3 percent. However, for a few years, many school districts will have to use both thresholds.
The 3 percent threshold applies only to raises and salaries paid to TRS members “under a contract or collective bargaining agreement entered into, amended, or renewed on or after” June 4, 2018 for a school year that begins after July 1, 2018.
The 6 percent threshold applies to raises and salaries paid to TRS members “under a contract or collective bargaining agreement entered into, amended, or renewed” before June 4, 2018, even if payments pursuant to the contract or collective bargaining agreement extend beyond July 1, 2018.
Many news organizations annually report that school districts pay “excess salary payments” to TRS after granting raises in excess of the threshold to teachers and administrators close to retirement.
Discussion: If a school district grants an educator a raise in excess of the applicable threshold in a year and that raise is used to calculate the member’s initial pension, the law requires the school district to pay for the long–term cost of the portion of an educator’s pension created by the portion of the raise that exceeds the threshold. These costs are called “excess salary payments.”
Without this law in place, TRS and state government would be responsible for the entire long–term cost of pensions created by large salary increases.
Not all raises above the applicable threshold for TRS members fall under the law. Two permanent exemptions in the law relieve school districts of paying the excess salary cost:
- An educator that leaves one district and receives a raise when they start to teach in another school district.
- Educators whose jobs are affected by school district consolidations or annexations.
TRS does not “grant” the exemptions that are listed in the law. School districts are entitled under the law to the exemptions just like taxpayers are entitled by law to specified exemptions and deductions on their federal and state income taxes. The Internal Revenue Service and the Illinois Department of Revenue do not “grant” deductions and exemptions.
It is important to note that the law does not outlaw raises by school districts that exceed the applicable threshold for members close to retirement. The law only transfers the responsibility of paying for the pension created by a raise in excess of the threshold.
Many times the excess salary payments are referred to incorrectly as “penalties” and “fines.” The words “penalty” and “fine” are not used in the law. School districts are not breaking the law when granting raises in excess of the applicable threshold so they cannot be assessed a penalty. In reality, the excess payment is a “cost” that results from a voluntary action. It is similar to being required to pay a sales tax on a loaf of bread because you voluntarily decide to buy a loaf of bread.