In the affluent Northfield Township High School District 225, many administrators and teachers alike earn six-figure salaries and dozens of educators have gotten big pay hikes just before retiring, a way to boost their pensions.
But after a 2005 law took effect to rein in pension costs, the district amassed more than $725,000 in state penalties for giving steep raises to outgoing educators, state records show, leaving local taxpayers seemingly stuck with the bill.
Instead, though, the state waived 99 percent of the penalties after applying widespread exemptions in the law, reducing the bill to less than $6,700.
The Teachers’ Retirement System of the State of Illinois, known as TRS, used legal exemptions to waive almost 75 percent of penalties for local districts across Illinois, a Tribune investigation found. The waivers shifted the cost of those penalties to taxpayers statewide.
The exemptions, not widely known by the public, reveal a key failing of the decade-old law that was intended to curtail big salary spikes and impose cash penalties on districts that give raises larger than 6 percent to retiring educators.
In May, the Tribune reported that hundreds of districts were giving raises so large that local taxpayers across Illinois had to pay penalties totaling $38 million by 2014. But new data from the pension system reveals that the penalties would have been far greater had they not been waived — giving local districts a break even after they doled out excessive raises that pad pensions.
Over the decade, suburban Chicago and downstate districts actually piled up almost $150 million in penalties — extra payments required to cover the higher costs of pensions resulting from large raises.
But districts paid only about a quarter of that after TRS used exemptions to shave the bills. Dozens of districts didn’t have to pay a dime in penalties after giving hefty raises.
That didn’t mean the bill for the unpaid penalties just disappeared. About $110 million was still needed to cover the inflated pensions, and the state, already struggling with massive pension obligations, had to pick up the tab.
“We try to keep those (penalties) as low as we can, but we don’t feel like shifting that to Illinois taxpayers. We don’t think that’s the right thing to do,” said Kevin O’Mara, superintendent of Cook County’s Argo Community High School District 217. With no exemptions applied, his district paid the full penalty of nearly $80,000 after giving large raises to retiring educators.
TRS, the largest state pension system in Illinois and among the worst-funded in the nation, already gets most of its contributions through income and sales taxes and other taxes and fees generated by residents across Illinois.
But the 2005 law required a cost shift: Local districts had to use their own taxpayer dollars to make extra pension payments when raises higher than 6 percent were given to departing educators. Those extra payments, commonly referred to as penalties, cover the higher pension costs resulting from big raises and are designed to curtail big salary spikes. TRS calls the payments “excess salary increase” contributions.
As it turned out, local districts continued giving big raises and the state paid the lion’s share of the penalties — money that could have gone toward student instruction or other state needs.
Spokesman David Urbanek said “TRS and school districts followed state law” regarding raises exceeding 6 percent, use of exemptions and extra pension payments made to the state.
Nelson Gray, the former president of the Illinois Association of School Business Officials, said: “Districts haven’t done anything wrong. And the state didn’t do anything wrong and annuitants didn’t do anything wrong and TRS hasn’t done anything wrong. These are all structural pieces to the pension system.”
Chicago Public Schools is not part of TRS and was not included in the 2005 law. It contributes to its own pension fund for educators and, unlike TRS, gets limited dollars from the state.
The Tribune reported previously that a 2011 memo by a legislative commission noted that school districts didn’t pay about $70 million to TRS because of exemptions and “extended grandfathering of labor contracts” from 2007 to 2009, saying the money “will be made up by increased state contributions.”
The law allowed districts to continue paying hefty raises — such as 20 percent — to retiring educators if the increases were included in a contract “entered into, amended or renewed” before the 2005 legislation took effect. That opened the door for several years of hefty pay raises with no penalties.
For example, high school history teacher Richard Skoda was already getting pay raises higher than 6 percent by the time the 2005 law came on the books.
By 2007-08, his annual salary increased to $169,943 — one of the highest teacher salaries in the state — after four years in a row of double-digit percentage raises and other retirement bonuses from Cicero-based J.S. Morton High School District 201.
But the district didn’t pay penalties because of the prior-contract exemption — he’d already been promised retirement-related raises in a teacher’s contract signed before the 2005 law was enacted.
Skoda, who until recently was a longtime school board member and president in Hinsdale Township High School District 86, has been critical of large raises that increase pension costs for districts and the state.
“The whole system is endemic. It is structurally flawed. It is unsustainable,” Skoda said. As to his own situation, Skoda said his district spelled out the retirement-related contract provisions. “They put the rules out there, and I played by them.”
In addition to grandfathered contracts, other exemptions included raises associated with teaching summer school, jumping from one district to another, district consolidation, special stipends or getting a promotion, depending on the circumstances.
The majority of the exemptions are now repealed, according to TRS, but some remain on the books.
The new data obtained by the Tribune through open records laws shows just how much TRS shaved off for districts by using the legal loopholes:
*More than half of the 926 school districts and education groups and agencies paid less than 50 percent of their original pension penalties.
*A total of 167 districts or other entities paid 100 percent of their original bills. The highest among those were south Cook County’s West Harvey-Dixmoor School District 147, which paid a full penalty of about $284,000, and Bellwood School District 88, which paid $250,000.
*By contrast, 279 districts and other entities paid less than 10 percent of their original penalties, or nothing at all. Those include Orland Park-based High School District 230, Des Plaines School District 62, Oak Park Elementary School District 97 and Cass School District 63 in DuPage County, which paid just $429.33 of its original penalty of $233,741.68.
Cass Superintendent Kerry Foderaro said he’d never seen the larger penalty figure until the Tribune provided it and didn’t even recall getting a TRS bill.
He said he thought the district was “airtight” because it has worked so carefully to keep salary increases to 6 percent for retiring educators. Foderaro found that one teacher exceeded that cap by $169 in 2011, prompting a small penalty. He said the rest of the penalties were waived because of the prior-contract exemption. Oak Park 97 also attributed the waivers to prior contract provisions.
In Orland Park’s District 230, spokeswoman Carla Erdey said various exemptions were used to reduce the district’s penalties from $2.86 million to about $45,000. Those included prior labor contracts, raises that come with certain promotions and summer school instruction.
In Des Plaines 62, penalties dropped from $2.1 million to $43,000.
Despite those waivers, “everyone has worked hard” to reduce the double-digit-percentage increases to 6 percent, said Gray, District 62’s assistant superintendent of business services. His district gives up to four years of 6 percent raises to outgoing educators.
In Northfield 225, district officials said various exemptions were applied to reduce penalties, including multiyear teacher contracts that allowed raises larger than 6 percent.
“Our assurance on this issue is that all exceptions were within the purview of the law,” spokeswoman Karen Geddeis said.
She added that the district had never before seen the original penalty figure of $725,319.97. The district did know that penalties were being waived by TRS on a case-by-case basis.
TRS’ Urbanek outlined in an email how TRS calculates the penalties.
The retirement system first calculates an “assessed” amount — TRS doesn’t use the word penalties — stemming from salary increases greater than 6 percent that are used in determining educator pensions. Typically, the educators’ four highest consecutive salaries in the last 10 years are used in the formula.
Using several factors, TRS determines an educator’s pension based on the exact raises included. Then it calculates what the pension would have been had all salary increases been capped at 6 percent. The difference between the pension amounts is used to calculate the penalty owed by a local district.
In many cases, districts are billed for the full amount, Urbanek said, but in others exemptions apply and the bill is reduced.
“TRS works with the school districts when the districts believe that an exemption applies and an assessment should be reduced,” he said. “The districts many times contact us. It is up to TRS initially to determine whether an exemption applies and when it does, the amount owed is reduced accordingly.”
Districts also can appeal in a formal legal way, such as an administrative review, but few do, Urbanek said.
Asked about the difference between the $150 million in penalties assessed and the less than $40 million paid after exemptions, Urbanek responded: “TRS does not comment on the pros and cons of public pension policies and laws enacted in statute by state government.”
The Illinois General Assembly put the exemptions in place, starting with the 2005 law and follow-up legislation in 2006.
Former state Sen. Jeff Schoenberg, a Democrat from Evanston, was chief sponsor of the 2006 legislation that added more exemptions.
He recalled that the original law was directed at double-digit-percentage raises given to superintendents and other top administrators.
“Subsequently, there was growing proof that the new law inadvertently impacted teachers, too, which was not the original purpose,” Schoenberg said. That prompted lawmakers to add more teacher-related exemptions that wouldn’t generate penalties.
He also stressed that the law worked, at least in part.
The goal was to curtail the widespread practice of giving hefty raises to outgoing educators, and “to the extent over time, the new law has been a qualified success,” Schoenberg said, with districts moving to 6 percent raises.
“The objective always was to change the behavior and expectations of school boards,” he said. “They may have seen subsequent relief from the penalties, but there’s compelling proof that the behavior largely changed.”
