Clarifying TRS Pension Payments

Newspaper articles in early May, 2012, highlighted the financial impact end-of-career teacher pay raises can have on school districts. The newspapers reported that Naperville CUSD 203 has paid $146,649 in pension “penalties” into the Teacher Retirement System (TRS) over the last two years for salary increases that exceeded the 6 percent cap. In fact, districts are not charged “penalties” or “fines,” but are required to compensate the State of Illinois for amounts in excess of established limits to cover the added future pension cost to the system. Some of the information presented through the media may have left readers with more questions than answers. We hope to address some of those questions below.

Why are Districts required to pay?

In 2005, a law went into effect to address many issues in the pension system including limiting State cost. The pension formula, in a simplified explanation, says that the highest four compensation years out of the last ten prior to a teacher’s retirement are used as the basis of the person’s pension. Any year of these four in which total compensation is more than 6% higher than the previous year must be fully actuarially funded by the District.

The formula used to calculate what a District owes is not based on an “average” 6 percent increase over four years, but on each single-year increase that is over 6 percent. Conversely, the State does not apply a “credit” if any of the four review years is below the 6 percent threshold. The formula used is complex, and the resulting expense to a District may lead to the impression that the salary increases were excessive or unfounded, but this is not the typical case.

Why would a teacher have a 6 percent pay increase?

It is important to note that compensation increases are not always pay rate increases, but in many cases the increase reflects extra pay for extra work. More than two-thirds of the compensation increases in our District that exceeded the cap were the direct result of the teacher taking on more duties such as coaching, bus duty, activity sponsorship, writing curriculum during the summer, etc. These are essential duties that support the education of the student. Having staff capable and willing to take on such duties is important to academic achievement, individual growth and student safety.

Of the 35 retiring employees over the cap in 2010-2011, only 15 were over due to a pay increase. Their collective compensation exceeded the cap by $2,313 – or an average of $154 per person. As a result, the District paid $19,987 to the State. These types of salary increases are often the result of a lane change due to post graduate coursework credit.

A teacher may actually earn compensation well below a 6 percent “average” during the four review years and the District can still be required to compensate the State for overages. In this real life example, a retired District 203 teacher had an average pay increase during the four review years of only 4.1 percent. The first of the teacher’s review years was above 6 percent with the remaining three years falling between 0 and 3 percent annually. Based on the State formula, the teacher was $1,184 over the limit for one year resulting in a bill of $12,231 to the District. If the teacher had been paid at the fully allowable 6 percent each year, the teacher would have retired with a higher base salary and a much higher pension benefit from the State at no additional cost to the District.

Can’t the District avoid such expenses?

Per the negotiated contract, if an employee notifies the District of their intent to retire in four years, then a flat increase, not to exceed 6 percent, can be implemented. This plan is called the Salary Enhancement Option (SEO). However, the District cannot control when an individual chooses to retire or the amount of notification given. Even an employee on SEO may elect to retire earlier than four years and a prior year may have exceeded the 6 percent cap.

Prohibiting any qualified teacher who is not participating in the SEO and has the potential of retiring within the next four years from taking on any coaching duties, activity sponsorships or other extra pay assignments would be discriminatory and unethical. Furthermore, consider the depth of knowledge, experience and dedication we would be denying our students access to if this practice were to be followed.

Understanding the issue further

Naperville CUSD 203 endorses and practices strong fiscal responsibility. During the May 7, 2012 Board of Education meeting Dave Zager, Chief Financial Officer, addressed the subject of TRS payments for the members. A video of the presentation is below.

Please see the TRS "Penalty" Fact Sheet for additional details.

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