Speaker Madigan and Last Year's Prada: Threatening a Cost Shift

It’s Thursday and SB2404 will come up today in the Illinois Senate for a vote.  It will very likely pass.  Then, Madigan’s House supported SB1 will head full speed toward the Senate. SB2404, once passed in the Senate, will steam full throttle toward the House.  Each may be held hostage in committee, may be voted up or down, or may collide into a fusion of many parts to be sent to both chamber of the General Assembly.  Think chimera or, better, Frankenstein. 

Madigan is supporting his bill as the best fiscal solution for Illinois, and he “knows” the court will back his plan.  Cullerton says the Justices won’t, and he supports a union-supported bill plan that will pass through the courts even if it puts less pressure on the state’s workers to pay for the pension debts. 

Now suddenly, Speaker Madigan is trotting out last year’s creation: shifting the cost of pension costs to the local school districts.  Maybe the Speaker is being nostalgic?  Maybe he’s thinking of the time when he and Senate Leader John Cullerton were thick as, well, you know – really tight.  Maybe he’s trying to remind Republicans in the Senate that this cost-shift is a worse alternative to the SB1 he has sent them from the House?  Maybe the two of them will never have Paris.  But it would behoove all of us to recall the dangers of the shift of costs to local districts and how it worked when the two legislators were thick as…

"What we’ve suggested is that local districts have a little skin in the game when they hire teachers and administrators and set their salaries.  They should be required to set aside money into the pension system for their future retirees.”  Senate Leader John Cullerton (McQueary, Kristen.  Illinois schools may chip in…  NY Times.  19 February 2012).

“Unlike elected officials in Wisconsin and Indiana, we work with unions in Illinois.” – John Cullerton to Phil Kadner 16 February 2012).  

“Some Skin in the Game” (…or...Making local school districts pay for pension costs).

Idiom: While many credit sagacious investor Warren Buffet with the phrase “to have some skin in the game,” Mr. Buffet has strongly denied such attributions.  In essence, the idiomatic phrase means being personally, emotionally, or financially vulnerable to a possible venture and, therefore, connected to it at all levels of possible aftermaths.  According to William Safire, the Oxford English Dictionary explains the “skin game” was a card game in which each player has one card which he bets will not be the first to be matched by a card drawn from the deck; so dealer or player, all have equal chances of winning or losing

( http://www.nytimes.com/2006/09/17/opinion/17iht-edsafire.2839605.html ).

Sadly, in the case of the public pension system, it appears to be losers all around.  The concept of shifting responsibility for the teacher’s pension from the state of Illinois to local school districts has become increasingly popular in the last few months. 

The president of the senate, Mr. Cullerton, sees this transfer as an opportunity to force local districts to keep increasing costs of retirees and salary increases in check.  Costs for pensions per district would become an essential part of union contract negotiations (McQueary, Kristen). 

For Governor Quinn, the “rendezvous with reality” will also call for everyone’s sacrifice, including the local districts. 

Regarding teacher retirement benefits, the state could save nearly $1.5 billion; according to the Associated Press, Governor Quinn has given the nod to those who would seek such a shift in responsibilities (http://www.stltoday.com/news/local/illinois/quinn-looks-to-shift-teacher-pension-funding-to-local-school/article_bed030a4-1a1d-56f9-bcd0-c2fedce38fa3.html). Such savings would allow the state of Illinois to continue making payments to reduce the unfunded liability, a result of years of pension holidays, to continue to provide and improve  human services, and to force local districts to enact new procedures for dealing with public unions. 

On the other hand, many Republicans and others  - including the Illinois Association of School Boards – figure the costs would be injurious to local taxpayers as well as the districts themselves.  Such requirements might bring “an additional  $800 million in contributions toward teacher pensions,” which coincidentally is the projected amount the state of Illinois will owe to the pension system this year - without their required payment to the unfunded liability (McQueary, Kristen). In short, it may be more than coincidental that this proposal will allow the debtor (the state) to pay simply the interest on past non-payments and not the current bill that is due for 2012.   

Meanwhile, Republicans in the General Assembly realize what kind of pressure is being put on the local districts and the citizens who live within those school boundaries.   They foresee an increased burden on the local taxpayers and the school boards. “ ‘It could either be a property tax increase or depending on how they structure the deal they’re going to have to cut whatever those costs are within [the] school district,’ Rep. Ed Sullivan, R – Mundelein, said. ‘So you’re either going to lose teachers or have a massive property tax.’”  ( http://www.stltoday.com/news/local/illinois/illinois-republicans-against-shifting-pension-costs-to-school-districts/article_aa4db910-5cfe-11e1-b880-001a4bcf6878.html)  Such a deal might also be phased in through several years; thus, easing the immediate pain and immediate financial impact upon taxpayers.  Regardless, financial resources on the local district levels will become strained.  Perhaps there will be cuts to staff, increased class sizes, or loss of auxiliary programs - Theater Arts, Music, Creative Writing, to name a few.

Some truths are still evident.  School income – also wealth – is created by a combination of three elements:

1.      Property Wealth – This is the combined value of all the real estate in a school district, which in turn determines just how much money the local schools can generate from their property taxes.  According to Dick Ingram, head of TRS, Illinois is a state of financial extremes.

2.      Tax Effort – The total assessed value of real property must be multiplied by the school district tax rate to determine the amount of property taxes the district can receive.  Tax rates are subject to local referendums; therefore, taxpayers themselves decide whether or not to support their local schools and by how much.

3.      State Equalization Aid – The State of Illinois is supposed to provide equalization funds to compensate for the differences in local property wealth, but the dollars can never meet the vast gaps in differences.  District relying on state aid have far less than districts that can rely on wealthy property taxes (Illinois Association of School Boards. Playing fair with the children of Illinois. www.iasb.com) .

Need an example?

In south suburban Ford Heights, where the median annual household income is about $16,000 and the average home is worth $42,000, the local taxpayers give up property tax rates of 21.7 percent.  On the other hand, in Winnetka, where the average home is worth $1 million, and the annual household income is $207,955, the property tax rate is about 6%, according to statistics compiled by the Cook County clerk (Kadner, Phil. Pols pull bait and switch on teacher pensions, taxes.  Chicago Sun-Times.  12 February 2012). 

Here’s a real rendezvous with reality.

Shifting the costs of the state’s pension problems to local taxpayers would break the poor but only slightly distress the wealthy.  (Personally, while I can live with the latter, I find it unconscionable to do the former.) 

Augmenting that most unacceptable fact, Illinois (in 2006!) had the most inequitable education funding system in the country, with per pupil spending ranging from a high of almost $23,700 to a low of less than $4,500 (Center for Tax and Budget Accountability.  The current status of public education funding in Illinois. 2006).  And, today, while taxpayers in Schaumburg pay a composite tax of nearly 7.7%, those who struggle in poverty-ridden Robbins will pay property taxes ranging from 9 to 10.3%, with an income average at least one third that of Schaumburg. 

In the case of House Speaker Madigan, “skin in the game” means, basically, if you are a public employee, it’s your skin.  “The question is how to do that (solve the pension problem) within the confines of the state constitution, which says public employee pension benefits cannot be reduced once they are given.  Madigan outlined a potential trade-off.  ‘The question is for a person on a public job today, can we say to them “Everything you’ve earned up to today you keep, no change?” But…can we say to that person, “Starting tomorrow, it’s going to be a different deal.  It won’t be as rich.  The benefit level will not be as high, but we will save the stability and integrity of your pension system.’” (http://www.pennlive.com/newsflash/index.ssf/story/quinn-asks-lawmakers-to-put-some-skin/80c6ffd8eea873ac52a4b9427d90ce9e)

So, either the public employees sacrifice or the local taxpayers sacrifice (of which the public employees are included again).  Meanwhile, companies in Illinois carry on calmly claiming their rights to tax loopholes and rebates.  While the governor nods to the idea of locals paying more, remember that big-box Illinois retailers receive back 1.75% of the sales tax revenue they collect from consumers on behalf of the state (Sachdev, Ameet & Cancino, Alejandra.  Tax giveaways under a microscope. Chicago Tribune.  4 March 2012).  And that’s just one small sampling.