Illinois Schools In Pension Limbo

It’s expected to be some time before the courts decide whether Illinois can trim retirement benefits for public school teachers, university workers, and state employees. But the uncertainty continues to affect the credit outlook of schools and community colleges across the state.  

Much of the political class in Illinois continues to insist the state’s pension problems have been solved. This summer, the Illinois Supreme Court decided the state Constitution prohibits the more modest step of making state retirees pay health insurance premiums. But self-styled reformers were undeterred.

The day of the court decision, Gov. Pat Quinn’s office said: “We believe the pension reform law is constitutional.”

Not everyone is so sanguine. Tucked into the flurry of reports issued by credit rating agencies, one phrase has been appearing again and again, undercutting the financial outlook for many public schools and community colleges across Illinois. Under headings such as “Challenges” or “What could make the rating go down,” there’s often a warning along the lines of “increased budgetary pressures due to a shift in pension costs from the state.”

Tom Aaron, with Moody’s Public Finance Group in Chicago, says that’s because of “the likelihood that the state may have to search for additional pension answers.” Despite prognostications by Quinn and others, Aaron says it’s not certain whether last year’s pension overhauls will be upheld by the Supreme Court.

“So in the event they are not, there is a risk that the state is going to have to go back to the drawing board in terms of trying to solve its pension issues,” he said.

And that could include a shift in pension costs from the state onto individual school districts, colleges and universities.

Though no one in state government is talking much about it these days, the cost-shift was once a key component of pension proposals. House Speaker Michael Madigan decried the “free lunch,”  in which school boards set employee pay without worrying about future pension costs, since those would be borne by the state.

Even as recently as March 2014, Senate President John Cullerton mentioned it in a speech at the Union League Club of Chicago:

“We’ve suggested to the suburban and downstate areas, ‘You’ve got to start paying a little bit of your employers’ portion of the pensions.’ It’s called a cost-shift. … It’s important. This makes good public policy,” Cullerton said.

More recently, Cullerton spokesman John Patterson said while the Senate president remains interested in the idea, “we’ll have to wait and see how the 2015 legislative agenda takes shape.”

Moody’s doesn’t think schools can afford to wait. Moody’s Public Finance Vice President Rachel Cortez says the agency asks whether districts are bracing themselves for the possibility of a cost-shift:

“The stronger credits, the stronger management teams tend to be aware that that could be coming, and are preparing for it, making contingency plans," she added.

One recently downgraded district is Lincoln-Way, serving the southwest suburbs of Frankfort, Mokena, and New Lenox. It expanded from two to four schools in the last decade, but the housing bust and economic downturn have hurt the district’s finances. Superintendent R. Scott Tingley says a pension shift would cost at least an additional $600,000 per year. But he says ongoing reductions in state funding are already a problem. And that’s not all:

"Our fear is that if the funding formula changes and we’re hit even harder, then that puts us in a more difficult situation,” Tingley said.

Tingley says the new state funding formula proposed in Senate Bill 16 would have cost Lincoln-Way $2 million a year.

Earlier this year, the Illinois State Board of Education reported nearly 62 percent of school districts had budget deficits. That’s up from just 18 percent in 2011. With state funding already wilting, there’s only so much districts can do to shore up for a cost-shift.

You can read more about the topic in the latest Illinois Issues magazine.