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The "Cost Shift"

The “Cost Shift:” Public Schools Paying More of the “Normal Cost” of Teacher Pensions

Updated: December 13, 2019

Issue: A proposal discussed by state government for many years would require all school districts outside of the city of Chicago to pay a greater share – if not all – of the annual cost of pensions for TRS members, a so-called “cost shift.” Right now state government pays the majority of the “employer’s” share of the annual cost of teacher pensions.

In July 2017, the General Assembly enacted a limited cost shift for school districts employing TRS members. Under the law, local school districts pay more of the cost of a member’s pension if that member’s salary is equal to or greater than the governor’s statutory salary, which currently is $177,412. The district is responsible for paying the actuarial cost of the benefits earned on the portion of the member’s salary that exceeds the governor’s statutory salary.

Discussion: Active teachers, school districts and state government split the cost of what is owed each year to retired TRS members, as well as the cost of benefits for future retirees. These contributions are supplemented by TRS investment income. Any cost shift would not affect teacher contributions but would require school districts to pay a greater share of the pension cost due each year – what is called the “employer’s normal cost.”

School districts assuming a portion or all of the employer’s normal cost of TRS pensions would alleviate the state from paying the amount called for in the “shift.” Under most proposals, the state would still be responsible only for paying down the TRS unfunded liability. For example, estimates indicate that in fiscal year 2019, annual school district contributions would have risen from a total of $88.5 million to more than $1.2 billion if the entire employer’s normal cost had been shifted to school districts. The state’s annual contribution would have dropped from $4.5 billion to $3.4 billion.

In the past, House Speaker Michael Madigan, D–Chicago, Senate President John Cullerton, D–Chicago have said they do not believe it is fair that suburban and downstate school districts do not pay more of what is owed in a given year to retired teachers. They note that in the City of Chicago, a larger share of the annual cost of teacher pensions each year is funded by a property tax levy in the city — about 18.6 percent, compared to 2.3 percent in the rest of the state.

Under legislation proposed in the spring of 2012, suburban and downstate school districts would have been increasingly responsible, over a number of years, for paying an increased share of the annual costs of TRS pensions and the state would pay less toward these costs. Eventually, school districts would be responsible for paying the entire annual cost of benefits being earned every year.

In 2017, former Gov. Bruce Rauner proposed a four-year phase-in of a total cost shift for school districts outside of Chicago. Under this plan, school districts would have started to pay the normal cost of their TRS members’ pensions; with the amount increasing by 25 percent per year until the full normal cost was assumed by the district. It was estimated that if this proposal had been enacted for fiscal year 2019, the state’s annual contribution would have been reduced by $262 million – an amount that would be shared by 850 local school districts.

The legislation enacted in 2017 relating to teachers that earn more than the governor’s salary had a small effect on the amount of money shifted from state government to local school districts. About 16,000 of the System’s 160,000 active members earned a salary that met or exceeded $177,412. As a result, the first-year “cost shift” under the new law totaled approximately $2.5 million.

Shifting the annual cost of pensions to local governments does nothing to lower the costs of teacher pensions for taxpayers. The proposal is just a transfer of responsibility for pension costs from a larger group of taxpayers to a smaller group of taxpayers. The cost of the pensions remains the same. The shift means that the annual cost of pensions for a school district’s teachers would not be spread out statewide among millions of taxpayers, but only spread among thousands of people who live in that school district, much like the way municipalities pay for the pension costs for police and firefighters.