Should federal funds designed to support the education of low-income students be diverted to paying down state pension debts? That’s the subject of an amendment in the current bill to reauthorize the No Child Left Behind Act, and it’s the question behind a recent report from Stand for Children. The report, authored by Jessica Handy, the Government Affairs Director at Stand for Children-Illinois*, looks at the consequences of a large “surcharge” that the state of Illinois levies against any school district using Title I or IDEA funds to hire teachers. I talked to Handy to learn more about how this issue affects Illinois schools. The following interview has been edited for content and clarity.
Chad Aldeman: Your new report is about a teacher pension “surcharge” paid by Illinois districts. Can you explain what it is and why it exists?
Jessica Handy: Yes, in Illinois the state pays for the majority of teacher pension employer costs. School districts technically employ teachers and set their salaries, but the state pays the employer contribution into our defined benefit plan, which is called the Teachers’ Retirement System. School districts pay only a very small percentage—0.58 percent of their payroll—into TRS, with the exception of teachers who are paid with federal funds.
Federal funds are primarily Title I funds, IDEA funds, or other funds that are targeted specifically to areas of high poverty where student need is higher. If a teacher is paid with these federal funds, the district must also pay 36 percent of their salary as a surcharge into TRS. This creates a disparity. If a district hires a teacher with local funds or with state funds then the school pays just 0.58 percent into TRS, but if they hire a teacher with federal funds, then the district must pay 36 percent of their salary into TRS. That’s what we’re calling the TRS surcharge.
Aldeman: What does that surcharge mean for a district making personnel decisions?
Handy: It means districts are doing one of two things.
Some districts have said, “Our priority is to hire teachers with [federal] money, and we’re just going to take the hit.” They know that of every federal dollar they receive, 64 cents will go toward that teacher’s salary and the other 36 cents must go to TRS. [In other words, it will cost a district $68,000 to offer a teacher a $50,000 salary.] Some districts are willing to take that hit because it’s important to them to have full-time, certified teachers there to work with their students.
Other districts have gotten more creative. Instead of hiring a certified teacher, these districts decide to purchase something, like textbooks, where they can spend every dollar of their Title I funds, instead of just 64 cents on the dollar. Or they hire two part-time aides instead of one certified teacher because those aides don’t participate in TRS (they have a different retirement system). We’re seeing more and more districts making decisions that actually impact student learning, where the interests of the kids aren’t coming first. It’s a combination of what’s good for my kids and how can I keep the most of my money Title I money in my district to spend without TRS taking a cut off the top.
Aldeman: You mentioned that districts are changing their decisions over time. What about the surcharge? How has that 36 percent changed over time?
Handy: Good question. 10 years ago, that rate was less than 10 percent. The state was paying about 10 percent of total teacher payroll for the employer contribution, and the federal contribution was (and continues to be) the same as the state’s employer contribution rate. It was easier for districts to deal with when they were keeping 90 cents on the dollar.
But the state was not paying enough into our pension system, so unfunded pension debt rose. Federal law allows states to use federal funds to pay into the pension system, but states can’t charge federal funds a higher rate than they pay into TRS through either state or local payments. So as pension debt has grown and as the state has started prioritizing pension payments in a way they hadn’t in the past, the federal funds rate has grown right along with it. The TRS surcharge on federal funds has gone from 10 percent to 36 percent over an eleven-year period.
I should also add that this issue does not impact Chicago. Chicago Public Schools is the only school district in Illinois that pays its own employer contributions for teacher pensions. CPS teachers are members of a different pension fund, not in TRS. So no matter what fund the money is coming from, CPS is on the hook for paying the pension, whether it is a state- or local- or federally-funded position.
Aldeman: Can you say something about which districts lose out the most under this arrangement and why that might be?
Handy: The districts that get the most federal funds are the districts that have the most student needs. Most of these are Title I funds, which are specifically targeted to students who live in poverty, especially when there is a high concentration of poverty, so those students can get the support they need to meet academic standards.
We’re now tapping into funds which are very specifically supposed to be going to the neediest students to pay Illinois’ massive pension debt. But it is not the right source to be using to pay our pension debt. It’s almost the worse source we could be using because this is money that’s specifically targeted to our neediest kids in our poorest districts.
The Education Trust put out a report this March (“Funding Gaps 2015”) that showed that Illinois has the most inequitable school funding of any state in the country. When we are already faced with such inequities in our school funding system, adding this extra burden on poor districts is ridiculous.
Aldeman: Do you know if this issue applies to other states?
Handy: We’ve dug into this quite a bit, and from what I can tell, Illinois is an outlier.
The way we know that is, in the House version of the ESEA rewrite, an Illinois congressman named Bob Dold added an amendment that would ban the practice of levying the TRS Surcharge on poor districts’ federal funding. Dold’s amendment would say that federal funds can only be used to pay up to the normal costs of pensions. States can’t pay their pension debt with federal funds, they can only pay the actual costs of benefits going forward. That amendment went through without a ton of discussion or opposition.
After it went through (ESEA is now in conference committee) people started to pay attention and wonder, “How would this affect us?” Some states are a little concerned. They pay the same rate into a retirement system for locally paid or federally paid teachers, but that rate might be more than the normal costs. Those states worry they might get caught up in something where they’re not being a bad actor like Illinois is by inequitably saddling poor districts with a surcharge.
I’ve been talking to some national pension groups who’ve done surveys, and from what we can tell, this is very much an Illinois-specific issue.
Aldeman: Can you speak to what the Dold amendment might do and what impact it might have on Illinois?
Handy: The Dold amendment came out of conversations that the congressman had with his local education advisory committee, which mainly consists of school districts in the northern suburbs of Chicago. Those districts range from some of the neediest to some of the wealthiest in Illinois. But all agreed that taking 36 percent off the top of federally funded teacher positions is an unfair practice. So they brought this issue to Dold.
In Illinois, this amendment would end the practice of charging the 36 percent TRS Surcharge. We would have to go back to charging 8 percent, which is our normal cost rate. That difference, which is about $65 million that was coming from federal funds before, would get shifted to the state. The state would have to pay that in their certified pension contribution every year.
It would be a relatively small price tag for the state, but it’s also a price tag that fluctuates every year. If more and more districts get creative with accounting, and eventually if districts decide that they’re not willing to take that pain as it grows, more and more of them will shift [from hiring full-time teachers] to hiring aides or buying textbooks with their Title I money. Districts will find creative ways to shrink that $65 million anyway, so it’s not a real number, it varies every year.
So we’re hopeful that the amendment or something similar will make it into the ESEA, but if it doesn’t we’re also prepared to file our own legislation in Illinois and try to tackle it here.
Aldeman: Who are the opponents to addressing this surcharge at the federal or state level, and what is their argument?
Handy: It’s hard to say, because the issue is a no-brainer. Our report is called “An Education Funding No-Brainer,” and it really is. We can’t find any group that would say that this is a fair way to fund pensions.
TRS is chaired by the Superintendent of the State Board of Education. In August of 2013 the then-chairman, Chris Koch, brought the surcharge before TRS to let them know about school districts that had complained about the inequity of the practice. TRS agreed and decided to change the policy. They sent a letter to school districts saying, “We’ve changed this for you, you no longer have to pay this 33 percent (it was 33 percent at the time). Now you can pay just normal costs.”
Then in May 2014, the legislature reversed that change as part of their budget implementation bill. It was a very high-level decision that the General Assembly made in the process of budget negotiation, to keep those federal funds subsidizing their payment to TRS as part of the last minute budget deal.
I think the only one I could say would be opposed to Dold’s amendment…well, probably nobody in theory, but in practice, it could be our leaders as the next budget gets negotiated and finalized.
Aldeman: Any other final thoughts or things you think people should know about this issue?
Handy: This issue is just a piece of a larger funding issue that we’re working on with Illinois’ big funding reform bill. The bill passed the Senate, it went on to the House, but did not get a vote.
In general, the more we look at funding reform, the more I personally see that pensions play a really big role in funding equity. I don’t think it’s a lot of people’s first instinct to look at pensions as something that could be used to improve funding equity. But this is one small issue that costs poor districts $65 million a year.
Another issue we’ve seen with pensions is that Illinois and a few other states pay pension contributions for all teachers, in contrast with the majority of states where local districts pay the pension contributions for their own employees. There are a lot of equity issues there as well. Wealthier districts with higher salaries have higher pension costs. When these are paid by the state it disproportionately benefits wealthier districts, whereas districts that have less money, lower salaries, and lower pension costs get less from the state on a per-teacher basis. The state’s paying their pension contributions as well, but lower-income districts would be better off if the state would put that money currently allocated to pay pension contributions into something that could be allocated more equitably.
As we’re thinking about funding equity, I think pensions are something that we should all, whatever state we’re in, take a look at. We should remind ourselves that those teacher pension dollars really are education dollars, and ask whether we are really using that money in a way that prioritizes equity and drives better student outcomes.
*Disclosure: Stand for Children is a Bellwether client.