New restrictions on an expensive form of pension abuse, known
as “pension spiking,” were one of the few bright spots of the recently enacted
fiscal year 2019 spending plan. But if state Sen. Dale Fowler, R-Harrisburg, has
his way, this taxpayer protection will be reversed before it has a chance to
have an impact.
On July 25, Fowler filed a bill – Senate Bill 3622 – that would increase the
pension-spiking cap to 6 percent from 3 percent, undoing a change made as part
of the fiscal year 2019 budget. Government unions such as the Illinois Education
Association and Illinois Federation of Teachers have voiced strong support for
Pension spiking – the practice of hiking an employee’s end-of-career salary to
increase his or her lifetime pension benefits – has long been a problem in
Illinois school districts.
Retirement benefits for Illinois Teachers’ Retirement System, or TRS,
participants 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
pension benefits can be as high as 75 percent of that amount. Because the state
picks up pension costs for local teachers and university employees, local
employers don’t bear the full financial consequences of inflating future pension
benefits. In fact, during contract negotiations, school boards often use pension
spiking as a tradeoff for other benefits that are paid locally.[to top of second column]
A 2005 law originally sought to restrict pension spiking by capping annual
salary increases in the last four years of employment to 6 percent of salary for
TRS participants. Employers could still increase salaries by more than that
amount, but they would pay a penalty to cover the costs resulting from pensions
spiked above the cap.
Unfortunately, this 6 percent restriction effectively encouraged officials to
spike salaries right up to the cap.
Rather than serving
strictly as a ceiling, some school districts treated pension spiking
as a matter of course. For example, union contracts in Palatine
Community Consolidated School District 15 and Crystal Lake Community
Consolidated School District 47 essentially guaranteed annual raises
of 5 to 6 percent for teachers near retirement.
Other districts, such as
Glenbard Township High School District 87, had exceeded the 6
percent cap on late-career salary increases, putting local taxpayers
on the hook for $164,198 in penalty payments to the state – which
come on top of the cost of those salary increases. Schaumburg
Community Consolidated School District 54 has paid more than $1.2
million in penalties for spiking dozens of employees’ pensions.
School districts across the state paid more than $50 million in
penalty payments since the 2005 law was passed, according to an
investigation by the Illinois News Network.
While some claim pension spiking can be an important tool for
attracting talent, pension benefits for TRS participants are already
extremely generous. An Illinois Policy Institute report found that
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.
The best option is for local employers such as schools and
universities to pay the full amount of pension costs they incur, to
properly align incentives to keep pensions affordable.
The lowered pension-spiking cap included in the state’s latest
budget was a small step in the right direction, with savings up to
$22 million projected in the coming fiscal year. If local officials
adhere to the new cap, rather than pay penalties for violating it,
local taxpayers will see savings as well.
Fowler’s bill would be a step backward for taxpayers.
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