ISSUE BRIEF:
SHIFTING THE NORMAL COST & EMPLOYER “PICK-UPS” FOR
TEACHERS
MARCH 2012
I. INTRODUCTION
Following Governor Quinn’s budget address, there has been a lot of focus on pension reform
generally and the Teachers’ Retirement System (TRS) specifically. 1 Much of the current media
attention has focused on two key issues. The first issue concerns the responsibility to pay the
normal cost for teacher pensions. The normal cost is the annual cost for TRS members’ pension
benefits. Both employer and employee contributions are used to pay the annual normal cost.
Currently, teachers who are members of TRS contribute a fixed amount of 9.4 percent of their
salary. The employer normal cost contribution is calculated annually, and is typically presented
as a percentage of total employee payroll. For example, in fiscal year 2011, the total employer
normal cost contribution rate for TRS was 8.77 percent of payroll.
In Illinois, the state government has the primary responsibility to cover the employer normal cost
for teacher pensions, even though teachers are employees of local school districts rather than the
state. This has raised some fundamental questions: should the state shift all or some of the
obligation to pay the employer-cost for teacher pensions to local school districts, and if so how
would such a shift affect local school districts’ budgets?
The second key issue highlighted by media outlets involves employer “pick-ups.” Much
reporting on this issue has created misunderstandings of what an employer pick-up is, and how it
works. In fact, there are two types of employer pick-ups. One is an accounting practice, and is
done solely for income tax purposes and has no fiscal impact whatsoever on school districts. The
second type is one in which the employer actually pays part or all of a teacher’s pension
contributions. However, even when a school district actually pays a teacher’s pension
contributions, there is no negative material impact on the school district. Nor is there a financial
windfall to the teacher because of concomitant reductions to the applicable teacher’s salary. This
issue brief provides an overview of school districts’ TRS contributions, as well as facts
concerning the issue of employer pick-ups.
II. WHAT DO SCHOOL DISTRICTS CONTRIBUTE?
Given the state’s poor fiscal condition—it faces a minimum fiscal year 2013 deficit of $10.4
billion—state lawmakers are looking to save money any way they can. This is in large part the
© 2012, Center for Tax and Budget Accountability
Page 1
driving force behind proposals for all or a portion of the state’s normal cost contributions for
teacher pensions to shift to school districts. Under current law, the state pays the bulk of the
employer normal cost and school districts pay a flat rate of 0.58 percent of employee payroll.
However, in addition to 0.58 percent of payroll, school districts make several other pension
contributions, which are not part of the employer normal cost.
Currently, the contributions school districts make to TRS include up to four separate
components:
(i)
(ii)
(iii)
(iv)
The cost associated with increases in pension benefits caused by salary increases
that exceed 6 percent, a legislative set limit (40 ILCS§5/16-158(f)), 2
a one-time amount for unused, uncompensated sick leave which exceeds certain
legislatively established limits (40 ILCS§5/16-128(d-10)), 3
a one-time amount for employees who utilize the Early Retirement Option (40
ILCS§5/16-133.2); and
0.58 percent of payroll for a specific benefit multiplier (40 ILCS§5/16-158(e)).
Of those four local school district contributions, every school district must annually contribute
the 0.58 percent contribution. The other three components fluctuate from school district to school
district and year to year. However, even though school districts have the responsibility to make
all four of the preceding employer contributions to TRS, only the 0.58 percent component is
included in the reported total employer contribution.
For fiscal year 2011, when all employer contributions for teacher pensions are aggregated, the
reported total school district contribution was $147,747,541. 4 In terms of a total contribution
rate, this represents 1.53 percent of payroll, 5 or almost three times the reported 0.58 percent
contribution.
III. HOW WOULD A SHIFT IN THE NORMAL COST IMPACT SCHOOL DISTRICTS?
To evaluate whether it makes sense to shift some or all of the employer contribution for teacher
pensions from the state to local school districts, it is essential to analyze any such proposal in the
context of both the state’s current overall school funding regime and what such a shift in cost
could mean to local school districts. Consider the cost question first. If 100 percent of the state’s
normal cost contribution for teacher pensions shifted to local school districts, in fiscal year 2011,
this would have increased local school districts’ cumulative contribution to over $800 million. 6
This is five times more than the actual fiscal year 2011 contribution of $147.75 million.
To accommodate such a significant increase in pension contributions, local school districts’
property tax rates would rise. This is an issue because on average, Illinois school districts already
cover over 50 percent of the cost of education from local property taxes. 7 Counting all local
revenue sources, that figure increases to 65 percent. 8 Currently, Illinois school districts, on
average, receive less than 30 percent of funding for their educational costs from state revenue
sources. 9
That percentage funding break-down already places Illinois dead last in the nation (tied with
Nevada) in the portion of education funding covered by state versus local revenue sources,
© 2012, Center for Tax and Budget Accountability
Page 2
according to a study issued in 2011 by the National Center for Education Statistics (NCES).
Indeed, that NCES study found that, on average, education funding by revenue source across all
50 states is as follows: (i) 48 percent is covered from state based resources; (ii) 34 percent from
local property taxes and 10 percent from other local sources; and (iii) eight percent from the
federal government.
In the 2009-2010 school year, the total revenue for all Illinois’ school districts was $25.42
billion,10 and the state’s contribution was $5.68 billion. 11 If the state had contributed the national
average of 48 percent, it would have had to contribute an additional $6.52 billion.12 Instead, this
cost was borne by school districts largely through property taxes.
Perhaps, if Illinois were starting its school funding allocation from scratch it would be sound
public policy to require local school districts rather than the state government to have the
primary responsibility to pay the employer normal cost contribution for teacher pensions. After
all, teachers are not employed by the state, but by local school districts, which set their salaries.
That said Illinois is not starting from scratch, and the state already places a disproportionately
high burden on local property taxes to cover the cost of K-12 education. Teacher pensions have
primarily been the state’s only educational funding responsibility. It would be beyond piling on
for the state to shrink its responsibility to help pay for teacher pensions, without simultaneously
moving to assume more of the responsibility to fund schools in the first place.
Indeed, the potential impact of shifting the state’s normal cost contributions onto school districts
across the state could be quite significant. Figure A sets forth a detailed itemization of the
median percentage of education funding covered by local property taxes, rather than state
resources, in Illinois aggregated to the county level. 13 Figure B shows the median school district
property tax rate for each of Illinois’ 102 counties. 14 The median total school district property tax
rate in 2008 was 3.46 percent. 15 Figure C is a map displaying the median low-income rate of
each of Illinois’ 102 counties. 16
One thing that these Figures show is that school districts with very high populations of lowincome students have relatively high local school district property tax rates. Despite having high
school district tax rates, only a small percentage of their school district revenue comes from local
property taxes. What this indicates is that their property tax base would not be sufficient to
absorb any shift in the employer normal cost for teacher pensions. In contrast, counties in which
school districts derive the majority of their revenue from local property taxes have relatively low
school district property tax rates. Overall, these Figures demonstrate that school districts are
demographically and financially varied, and it would be difficult to impose a uniform normal
cost shift on them.
IV. WHAT IS AN EMPLOYER PICK-UP?
In discussing the pension contributions that school districts currently pay, some reports have
erroneously asserted that employer pick-ups create an extra financial burden for school districts.
Further, that this practice is costing school districts millions of dollars. However, this is an
incomplete understanding of what an employer pick-up is. There are two types of employer pickups. The first is a tax accounting employer pick-up, while the second is an actual compensation
adjusted pick-up.
© 2012, Center for Tax and Budget Accountability
Page 3
A. Tax Accounting Employer Pick-Ups
An employer pick-up is an important designation for income tax purposes. The Internal Revenue
Code excludes pension contributions that are an employer pick-up from an employee’s taxable
income. According to TRS, “Illinois law requires employers to pick up on a before-tax basis the
entire 9.4 percent TRS member contribution.” 17 This means that in Illinois, regardless of if
teachers or school districts actually pay the employee contributions, for tax purposes all
employee contributions are regarded as an employer pick-up. Since pension contributions are
deferred income federal law prohibits their taxation, and this type of employer pick-up provides
an income tax savings to employees. However, upon retirement the tax-deferred contributions
may be subject to federal and state taxes.
This type of pick-up does not mean that an employee does not actually pay his or her pension
contributions. Instead, it means that their employer deducts the employee’s pension contribution
from his or her salary before taxation. So, while according to federal tax law, this practice is
deemed an employer pick-up, it is done solely for accounting purposes to reduce federal tax
liability. It does not increase any financial obligation for local school districts. It just reduces
federal income tax liability.
B. Actual Compensation Adjusted Pick-Up
The second type of an employer pick-up is one in which a school district actually pays part or all
of a teacher’s contributions to TRS. TRS refers to this practice as “Employer-Paid 9.4 percent
Retirement Contributions.” However, this form of an employer pick-up does not create an
additional material burden for school districts.
Since this practice is also called an employer pick-up, many have drawn the incorrect conclusion
that teachers bear no financial responsibility for their retirement benefits. The Illinois Pension
Code specifies that employers may pick-up employee contributions by either
a reduction in the cash salary of the [employee] or by an offset against a future salary increase or
by a combination of a reduction in salary and offset against a future salary increase (40
ILCS§5/16-1521).
In other words, teachers’ salaries are reduced to account for the pick-up. Put another way, the
dollar amount of the pick-up would be part of teachers’ salaries if school districts did not directly
pay it to TRS.
Employer pick-ups are analogous to a salary increase or bonus, and are negotiated as part of
employees’ compensation packages. In instances where school districts actually pay teachers’
TRS contributions, teachers’ salaries and bonuses are reduced to account for the employer pickups. Claiming that employer pick-ups cost school districts millions of dollars is disingenuous,
because it ignores their basic economic reality. The Illinois Pension Code mandates that if a
school district provides an employer pick-up, it must pay for the teachers’ pension contributions
from “the same source of funds which is used in paying salary to the [teacher]” (40 ILCS§5/161521). Finally, employer pick-ups can be advantageous to school districts because percentagebased raises occur on base salary, which excludes employer pick-ups. This means that in school
© 2012, Center for Tax and Budget Accountability
Page 4
districts that provide teachers with employer pick-ups, those teachers’ future salary increases will
be limited.
V. CONCLUSION
Looking forward to fiscal year 2013, the state is facing a $10.4 billion budget shortfall, and it
consistently suffers from a structural deficit. 18 Given the state’s poor fiscal position for the near
future, many have looked to pension reforms as ways to minimize budget deficits. Governor
Quinn’s budget address touched upon several potential pension reform measures, a key one
being to shift the state’s obligation to pay the bulk of the employer normal cost for teacher
pensions to school districts. This issue brief has demonstrated that such a shift would create a
new and large financial requirement for school districts, which would be difficult for many to
meet. Moreover, Illinois ranks last in terms of state spending on K-12 education, and school
districts are already relying heavily on local property taxes. Shifting the state’s normal cost
obligation onto school districts would only mean that an even higher proportion of school
districts’ revenue would come from property taxes. The issue brief has also highlighted that
school districts’ pension contributions contain multiple components and can be more than just
0.58 percent of payroll. Finally, even with an employer pick-up teachers in Illinois do shoulder a
financial responsibility for their public pensions. While shifting the state’s normal cost
obligations onto school districts may provide some relief to the state’s budget it will not mitigate
these financial obligations, and will instead push them onto school districts that, on average,
already derive the majority of their revenue from local sources.
###
If you would like more information about this topic, or to schedule an interview with Amanda Kass,
please call 312-332-1103 or email Amanda at akass@ctbaonline.org.
Center for Tax and Budget Accountability
70 E. Lake Street, Suite 1700
Chicago Il, 60601
www.ctbaonline.org
© 2012, Center for Tax and Budget Accountability
Page 5
Figure A:
2010 Percentage of School District Revenue derived from
Local School District PropertyTaxes per County
Jo Daviess
Stephenson
Winnebago Boone
Carroll
Ogle
Kane
DeKalb
Whiteside
Lake
McHenry
DuPage
Lee
Cook
Kendall
Rock Island
Mercer
Henderson
Hancock
Bureau
Henry
Tazewell
Fulton
Scott
Pike
Greene
Calhoun
Macoupin
Monroe
50.01% - 75% (26 counties)
25.01% - 50% (57 counties)
0% - 25% (14 counties)
Ü
Randolph
Effingham
Bond
Jasper
Clay
Marion
Clinton
Clark
Jefferson
Perry
Franklin
Jackson
Williamson
Union
Johnson
Hamilton
Saline
Pope
Pulaski Massac
Crawford
Richland Lawrence
Wayne
Washington
Alexander
Edgar
Coles
Shelby
Fayette
St.
Clair
75.01% - 100% (5 counties)
Moultrie
Cumberland
Jersey
Median Percentages
Douglas
Montgomery
Madison
Low: 10.4%
High: 82.1%
Macon
Christian
Vermilion
Champaign
Piatt
Sangamon
Morgan
Ford
De Witt
Logan
Menard
Cass
Iroquois
McLean
Mason
Brown
Livingston
Woodford
Peoria
Schuyler
Adams
Kankakee
Marshall
Knox
McDonough
Grundy
Putnam
Stark
Warren
Will
LaSalle
Wabash
Edwards
White
Gallatin
Hardin
Created by: AKass ©
Center for Tax &
Budget Accountability
Data obtained from
the Illinois State
Board of Edu.
Figure B:
2008 Median School District Property Tax Rate per County
Jo Daviess
3.75
Rock
Island
3.9
Warren
4.3
McDonough
4.97
Hancock
3.65
Schuyler
4.16
Adams
4.02
Brown
5
Pike
4.75
Calhoun
4.56
Ogle
4.09
Whiteside
3.21
Lee
4.58
Bureau
3.64
Stark
5.2
Knox
4.49
4.36 - 4.82
Monroe
4.13
St.
Clair
3.24
Randolph
3.7
Williamson
3.82
Union
2.6
Alexander
5.23
Johnson
2.74
Pulaski
4.24
Douglas
4.41
Coles
4.7
Cumberland
3.66
Effingham
3.73
Franklin
3.41
Jackson
3.43
2.12 - 2.96
Shelby
4.09
Jefferson
2.54
Perry
3.27
Iroquois
5.15
Champaign
3.27
Piatt
4.33
Jasper
3.43
Clay
4.18
Marion
2.72
Washington
2.79
Kankakee
3.38
Ford
5.21
Moultrie
4.59
Fayette
4.76
Clinton
2.64
2.97 - 3.84
Ü
Christian
4.7
Bond
4.77
3.85 - 4.35
Data obtained from the
Illinois State Board of Edu.
Macon
3.96
Macoupin
Montgomery
4.31
4.98
Madison
4.21
2008 Median
School District Tax Rate
4.83 - 5.58
De Witt
4.35
Cook
2.65
Will
2.78
Grundy
2.75
McLean
5.24
Logan
3.14
Sangamon
4.46
DuPage
2.16
Livingston
4.32
Woodford
4.05
Menard
4.78
Morgan
Scott
5.21
4.34
Jersey
3.75
LaSalle
2.96
Tazewell
2.77
Cass
5.51
Kane
4.21
Kendall
3.78
Marshall
3.59
Mason
4.82
Lake
2.84
McHenry
2.78
DeKalb
4.67
Putnam
3.76
Peoria
3.84
Fulton
5.58
Greene
4.07
Winnebago Boone
5.45
4.25
Carroll
5.43
Henry
4.53
Mercer
4.79
Henderson
5.15
Stephenson
5.05
Saline
4.55
Pope
3.38
Massac
4.21
Edgar
4.29
Clark
4.03
Crawford
5.08
Richland Lawrence
4.4
4.49
Wayne
3.6
Hamilton
5.16
Vermilion
4.72
Wabash
3.89
White
4
Edwards
4.07
Gallatin
4.15
Hardin
2.12
Created by: AKass ©
Center for Tax &
Budget Accountability
Figure C:
2010 Percentage of Low-Income Students per School District (median)
aggregated to County
Jo Daviess
Stephenson
Winnebago Boone
Carroll
Ogle
Kane
DeKalb
Whiteside
Lake
McHenry
DuPage
Lee
Cook
Kendall
Rock Island
Mercer
Henderson
Hancock
Bureau
Henry
Tazewell
Fulton
Scott
Greene
Calhoun
Macoupin
Monroe
50.01% - 75% (13 counties)
25.01% - 50% (74 counties)
0% - 25% (13 counties)
Randolph
Effingham
Bond
Jasper
Clay
Marion
Clinton
Clark
Jefferson
Perry
Franklin
Jackson
Williamson
Union
Johnson
Hamilton
Saline
Pope
Pulaski Massac
Crawford
Richland Lawrence
Wayne
Washington
Alexander
Edgar
Coles
Shelby
Fayette
St.
Clair
75.01% - 100% (2 counties)
Moultrie
Cumberland
Jersey
Low-Income Percentages
Douglas
Montgomery
Madison
Ü
Macon
Christian
Vermilion
Champaign
Piatt
Sangamon
Morgan
Iroquois
Ford
De Witt
Logan
Menard
Cass
Brown
Livingston
McLean
Mason
Pike
Low: 12.8%
High: 81.5%
Kankakee
Woodford
Peoria
Schuyler
Adams
Grundy
Marshall
Knox
McDonough
LaSalle
Putnam
Stark
Warren
Will
Wabash
Edwards
White
Gallatin
Hardin
Created by: AKass ©
Center for Tax &
Budget Accountability
Endnotes
1
Teachers for Chicago Public Schools (CPS) are not members of TRS. There is a separate pension system for CPS
teachers, the Chicago Teachers’ Pension Fund. CPS was excluded from all school district data used for this issue
brief.
2
P.A. 94-0004 created this rule; however, P.A. 94-1057 provided certain permanent and temporary exemptions to it.
3
Unused, uncompensated sick leave is eligible to count as creditable service.
4
This figure is from the fiscal year 2011 Actuarial Valuation Report done by Buck Consultants for TRS.
5
This figure was calculated by dividing the total school district contribution for fiscal year 2011 by assumed
payroll; both figures are reported in the fiscal year 2011 Actuarial Valuation Report done by Buck Consultants,
which does not include unused, uncompensated sick leave contributions.
6
Estimate calculated by determining the amount of the normal cost contribution that paid by the state and adding
that to the aggregate school district contribution for fiscal year 2011. The state’s normal cost contribution was
calculated by multiplying the total employee payroll for fiscal year 2011 by 7 percent, this methodology is from
TRS. Figures for the local school districts’ aggregate contribution and employee payroll are from the fiscal year
2011 Actuarial Valuation Report done by Buck Consultants, which does not include contributions for unused,
uncompensated sick leave.
7
Data obtained from the Illinois State Board of Education’s fiscal year 2011 Report Cards. For the purposes of this
report, the Center for Tax and Budget Accountability removed CPS from the data.
8
Ibid.
9
Ibid. State revenue includes general funds, as well as special education funds.
10
Ibid.
11
Ibid. State revenue includes general funds, as well as special education funds.
12
Ibid.
13
Data obtained from the Illinois State Board of Education’s fiscal year 2011 Report Cards. For the purposes of this
report, the Center for Tax and Budget Accountability removed CPS from the data.
14
Ibid.
15
According to the Illinois State Board of Education, the total tax rate is “a district's total tax rate as it appears on
local property tax bills.” Data obtained from the Illinois State Board of Education’s fiscal year 2011 Report Cards.
For the purposes of this report, the Center for Tax and Budget Accountability removed CPS from the data.
Calculation done by the Center for Tax and Budget Accountability.
16
Ibid.
17
Teachers Retirement System. 2011. Employer Guide, “Chapter Three: Creditable Earnings.” Page 15.
18
A structural deficit means that the state’s mix of taxes do not generate an amount of revenue growth that is
sufficient to keep pace with the amount of revenue needed to continue funding public services at current levels
(adjusting yearly for inflation and population growth).
© 2012, Center for Tax and Budget Accountability