Understanding teacher pension “pick ups”

Increasing local pension accountability would increase each school district’s total costs by an average of 3.7 percent.

The Illinois Policy Institute’s recent report, Playing favorites, proposes that the state end the practice of paying the “employer share” of teacher pension costs. The goal is to stop Illinois from having one unit of government (local school districts) hand out the benefits on which pensions are based, while another one (the state) pays the cost. That practice has destroyed spending accountability in Illinois, put teacher retirements at serious risk and left Illinoisans with a massive tax increase.

As the report found, increasing local pension accountability would increase each school district’s total costs by an average of 3.7 percent. But we also found that more than half of Illinois school districts could offset these costs by ending the local school district practice of paying, as a benefit, the teachers’ required contribution to pensions. Based on data self-reported by school districts directly to the Illinois School Board of Education, or ISBE, almost two-thirds of school districts in the state pay some or allof their teachers’ required contribution.

The following provides greater detail on teacher pickups and is a supplement to our report released in October 2011.

Teacher’s required pension contributions 
Teachers are obligated by law to pay 9.4 percent of their salary into the retirement system. But over the years, school districts began paying, as a benefit, the teacher’s required contribution. This practice often is called a “pickup.” Pension pickups have become a standard in almost two-thirds of Illinois’ school districts.

As we pointed out in our October 2011 report, this benefit has been gained through the collective bargaining process.

But just as with end-of-career salary spikes, generous healthcare benefits, sick day accumulations and other perks that have been negotiated by the unions, these expensive benefits no longer are affordable and are contributing to the state’s $83 billion pension crisis. The state and school districts must reform retiree benefits if Illinois is going to return the teachers’ pension to solvency. Already, the head of the Teachers’ Retirement System has warned that the system may no longer be able to meet its obligations by 2029.

The teachers’ share – who really pays?
Every year, ISBE compiles its annual Illinois Teacher Salary Study by asking a series of questions directly to each school district. In particular, each district self-reports to ISBE an answer to the following question:

“What percent of the teachers’ salaries is paid by the board to TRS? This includes the teacher’s share of 9.4%. If the board pays all of the teacher’s share, the maximum compounded percent is 10.4. It excludes THIS (insurance). If none, please enter 00.0%.”

Here are the results from the 2010-2011 ISBE salary study:

*a pickup amount exceeding 9.4 percent reflects the add-on requirement described in the Appendix 1.

Table 10 of the ISBE report highlights that almost two-thirds of school districts boards self-reported paying some or all of the teachers’ required contribution. Boards at almost 55 percent of elementary districts pay some or all of the teachers’ required contribution, while secondary and unit districts reported 59 and 75 percent, respectively.

On the contrary, 306 school districts reported that they do not pay any of their teachers’ share.

Table 18 of the 2010-2011 ISBE report, page 40, provides a complete list of which districts pickup and which do not.

Remit vs. cost
All school districts remit the actual pension contribution to TRS on behalf of every member. Teachers do not write checks with TRS in the “Pay to the order of” line. That procedure is undisputed and well documented.

The bigger question is who actually bears the cost of the pension contribution. The TRS Employer Handbook addresses this issue directly (see chapters 3 and 4 in the TRS Handbook for details):

“While the contribution is a member obligation, the employer may agree to pay this contribution for the member as a benefit.”

That is precisely what needs to be addressed. Just who bears the cost, not who is remitting the funds.

The TRS handbook addresses how member-paid and employer-paid contributions should be accounted for. The specific language is included in the Appendix 1.

That said, it’s not clear if TRS knows who bears the cost. TRS gets a bundle of money in pension contributions from each school district without any reference to who really paid for the teachers’ portion. That’s why ISBE surveys each board to determine who’s paying. Otherwise, to figure out who pays requires digging through hundreds of confusing, convoluted and non-transparent teachers’ contracts. But that’s something the Institute also did.

Pickups and contract negotiations
School districts have begun to challenge pension pickups. Last year, Cary School District 26 and the Cary Education Association entered into a dispute over who should continue to pay the teachers’ portion of pension contributions. The school board included the following language in the proposed contract:

3.2 TRS Contributions. Under the 2008-2011 contract, the Board paid 4.7% of each teacher’s 9.4% of salary pension obligation owed to the Illinois Teachers Retirement System (TRS). The Board proposes as follows:

2011-2012 and 2012-2013 Years:
Non-retirees – Board ceases to pay 4.7% of each teacher’s salary to TRS and each teacher now becomes responsible for paying his or her full share of this pension obligation.

Only with mediation was Cary able to reach an agreement with the union. While the pension pickup remains in place, the school district negotiated significant cuts in other benefits.

Rockford School District 205. The school district in Rockford experienced a similar situation in in March 2012. In a letter to teachers, the superintendent proposed teachers begin paying for a portion of their required amount. From the letter:

• “RPS 205 teachers currently pay nothing toward their pension. RPS 205 currently pays the full pension contribution each year, which is 9.4 percent of each teacher’s annual salary.”
• “RPS 205 is proposing that teachers pay less than one percent toward their pensions.”

The pick-up remains in place, but the union ceded ground on health care benefits, class sizes, and other items that will save the district $9.5 million over the course of the deal.

Chicago Public Schools. Suburban and downstate teachers aren’t the only ones who have part of their personal pension contribution picked up by the employer. The same happens in the Chicago Public Schools system. As reported in the Civic Federation’s CPS budget review dated August 22, 2011, “CPS ‘picks up’ 7% of the 9% annual employee pension contribution, meaning it pays 7% of the employee 9% contribution on behalf of teachers.103 The District’s FY2012 cost for the 7% employee pick-up is approximately $146 million and is part of the District’s budgeted pension appropriation.”

The below table from the CPS salary schedule reports the pickup amount.

As mentioned above, CPS includes pension pickups as a line item in its budget. The following page is from CPS’ FY2012 Budget Overview:

The practice of paying the teachers’ share of pensions is now prevalent throughout the state.

The Illinois Policy Institute has reviewed hundreds of teachers’ contracts across the state in order to better understand the pension pick-up process. What it found is that language for pickups varies greatly, from little mention of the benefit, to full and explicit descriptions that show two salary levels – a base salary and one that includes the TRS payment.

The Institute welcomes greater transparency on pension pickups and other employee benefits that can be provided by ISBE, TRS and other governmental bodies. With greater transparency, the state can optimize its spending and avoid confusion or misinformation about some of the most pressing issues facing the state.

Appendix 1. Pickup information from the TRS Employer Handbook, section 3.