Par for the Course

Dramatically increasing a superintendent's salary at the end of his career so as to pad his retirement is nothing new in Illinois.  Rather, it is par for the course.  Illinois seems to have a tradition of doing just this, among our other illustrious traditions.  It is one of the reasons (among other reasons, like the state failing to pay its required contributions in full over the last thirty or so years) that the Teachers' Retirement System (TRS) is in financial trouble.  In fact, TRS is projected to become insolvent by 2029 according to Executive Director Dick Ingram (see here).  School districts all over Illinois have engaged in this practice of increasing salaries and thereby padding retirement pay (you can read about it here).  This may be one of the reasons that Governor Quinn has proposed in his pension reform plan to shift the state's responsibility for TRS contributions to the local school districts (click here for analysis of the pension reform proposals).

You see, this problem of school districts dramatically increasing salaries just prior to retirement in order to pad pensions has been going on for a long time.  Because the burden of those increased pensions is borne by the state, the state has tried to rein in the practice.  In 2005, they passed a law saying that the local districts could continue to do this but that a district would have to pay a penalty (meant to help the state bear the burden of the increased pension) for any raise greater than 6% per year.  Since the passage of that law, it is interesting to note just how many of these end of career raises were exactly 6% per year (the recent proposed contract for the Minooka CCSD 201 superintendent contains annual raises of exactly 6% per year).

Now 6% per year is still a large number (and remember this is just the increase in salary--it does not include the three years of retirement payments or post-retirement health insurance costs) when your economy and, therefore, tax revenues are growing at a much slower rate.  It is a very large number when, as is the case in Minooka CCSD 201, the equalized assessed valuation upon which property tax revenue based is dropping (the EAV of the district dropped almost 6% from 2009 to 2010 and nearly 10% from 2010 to 2011).  All the talk about our district's budget over the past three years has been about how we are projecting sustained and growing deficits as far as the eye can see (remember deficits, debt and insolvency are not the same thing, but deficits over a sustained period of time certainly create debt and insolvency once your cash balances are depleted).  In addition, as we will see in the near future, even these projections do not present an accurate picture since the assumptions of stable or growing EAV upon which they are based are already proving to be seriously flawed.  As many of you are aware, over the course of the past few years, our school district has instituted many deficit reduction measures from saving money on our health insurance costs, increasing our student registration fees, and, unfortunately, reducing teaching and support staff positions.  And, based on the budget realities going forward, there will be many more such hard decisions to come.  But, the taxpayers and parents of Minooka CCSD 201 can rest assured that the district has taken care of its superintendent both now and in retirement (see previous post).

Superintendent Offered New Contract

At yesterday's meeting of the Minooka CCSD 201 school board, the school board voted (by a 5-2 vote) to offer the current superintendent, Mr. Al Gegenheimer, a new four-year contract (click here for a copy of the proposed contract; see subsequent post for more information).  Those voting "yes" were Skwarczynski, Hannon, Budde, Carlson and Satorius.  Those voting "no" were Brozman and Martin.  The new contract, which purports to take Mr. Gegenheimer up to his retirement, includes a 6% raise for each of the four years of the contract.  This is after the school board voted at the January 2012 meeting to increase the superintendent's salary by 3% for the 2011-2012 school year, retroactive to July 1, 2011 (another 5-2 vote, with the same members voting "yes" and the same members voting "no").  The salaries over the four years of the new contract would be as follows (the superintendent's current salary for the 2011-2012 school year is approximately $136,269):

2012-2013:  $144,445
2013-2014:  $153,112 (approximate based on 6% raise)
2014-2015:  $162,298 (approximate based on 6% raise)
2015-2016:  $172,036 (approximate based on 6% raise)

A little quick math tells you that the final projected salary of $172,036 represents an increase of approximately 26% over the superintendent's current salary.  If you include the 3% retroactive raise from January of this year, the $172,036 represents an increase of approximately 30% over the superintendent's salary at the end of the last school year. 

In addition, the new contract provides for three annual post-retirement payments equal to 20% of the superintendent's final annual salary.  So, assuming a final salary of $172,036 as projected above, the three annual payments would be $34,407 each.  That is, the taxpayers of Minooka CCSD 201 will be paying the then former superintendent $34,407 each year for three years at the same time he is collecting a pension of up to 75% of the average of his highest four years of salary from the Teachers' Retirement System (approximately $118,480 based on these assumptions).  Keep in mind also that in addition to paying the then former superintendent, the taxpayers of Minooka CCSD 201 will be paying the salary of a new superintendent as well.

The contract also provides for the school district to provide the superintendent with health insurance (hospitalization/major medical) during his retirement until such time as he qualifies for Medicare (typically at 65) or becomes employed by another employer offering health insurance coverage.  This means that if the current superintendent retires at the end of this agreement, the school district would be obligated to provide him health insurance for approximately five years.  At the time that the proposed contract was voted on, it was unclear whether this provision was legal.  As a consequence, the motion that was voted on provided that the proposed contract be accepted pending further consultation with the school district's attorneys.  Since the proposed contract was presented to the school board for the first time at some time after 10 p.m. on the night of the meeting, it would have been difficult to consult the school district's attorneys before the vote was taken.

For those who like to put the pieces together and see the big picture, see my previous posts regarding financial projections, unsustainable spending, and underfunded pension systems.  The most difficult thing about being an elected official is that it is easy to spend other peoples' money (Margaret Thatcher had a famous saying about spending other peoples' money).  It is much more difficult to enforce discipline.  There is something akin to a moral hazard at work.  If you need proof, you can merely look to the budget deficits of the federal, state and local governments.

Bumps in the Road: Part 2

So here is Governor Quinn's pension reform plan.  As you can see, the plan calls for an increase of 3% to employee contributions, reduction of the cost of living allowance (COLA), delay of COLA, increase of the retirement age to 67, and shifting the state's current payment responsibility to local school districts, community colleges and public universities over a period of years.  Of course, this is merely a plan at this point and will be subject to political deal-making and subsequent modifications.

Next Minooka 201 School Board Meeting and Superintendent Contract

The next meeting of the Minooka CCSD 201 school board is Wednesday, April 25, 2012. The Committee of the Whole Meeting starts at 6:00 p.m. in the board room (the old library) at the Minooka Primary Center located at 305 Church Street in Minooka. The Committee of the Whole Meeting will be followed by the regular Board Meeting at 7 p.m. Both meetings are open to the public, and everyone is encouraged to attend. You can find the agenda for each of the meetings here.  You may notice that one of the action items on the agenda for the regular Board Meeting is the superintendent's contract.  Hiring and reviewing the superintendent is one of the most important functions of the school board (some would say the most important function).

Bumps in the Road

I saw this article about municipal defaults, and it reminded me about the bumps in the road.

Seeing the Bumps in the Road

What happens when the future does not look like the recent past? Psychologists tell us that human beings are subject to something called "normalcy bias." In essence, it means that human beings believe that their future will look a lot like their past (typically, their more recent past). According to the "normalcy bias" theory, we humans have a hard time seeing the bumps in the road ahead, and the larger the bump, the harder time we have seeing it (as counterintuitive as this may seem).

So why do I bring this up? Because, it has something to do with what is likely coming down the road in terms of our school district. In order to see what the future holds for our school district, we have to see beyond the borders of our district and look at the bigger picture (i.e., what is happening at the state level and the federal level). Most of us know that both the State of Illinois and the United States government have budget problems. But, how many have thought about the true extent of those problems, the likelihood of any constructive solutions to those problems and what this means for our school district? If we are being brutally honest with ourselves, we must accept that due to political constraints, neither the state nor the federal government are likely to solve their budget problems until they are forced to do so.

Illinois will be forced to confront its budget problems much sooner since Illinois does not have the ability to print money like the federal government. In fact, Illinois is in the beginning stages of really confronting its budget problems. I say "confronting" rather than "solving" because many of the strategies that are being floated are methods of shifting the burdens caused by the state's profligacy to the municipalities and school districts in Illinois. So, for example, some of the strategies being discussed are (1) cutting back on transportation funding for school districts (see here); and (2) shifting the burden of teacher's pensions to the local school districts (see here and here). Other strategies would hit retired teachers directly (see here).

Now, the discussion of these strategies are largely preliminary at this point.  Some strategies will be followed and others will be discarded.  However, it should be clear that in the future (the very near future), education funding from the State of Illinois will be dropping significantly (more than it already has).  It is also likely that at the same time that the amount of state education funding is dropping, the state will be shifting additional financial burdens (at least some portion of unfunded pension burdens) to the local school districts.  We should not assume that federal funding will replace state funding, since even though the federal government can print money to finance its deficits, it can not do so without causing inflation.  Also, the federal government's budget problems are just as serious, if not more so, than those of Illinois.  For those who think that the economy is on the mend and the financial crisis is a thing of the past, all you have to do is compare the annual growth rate of federal debt (roughly 10% per year) to the annual growth rate of the U.S. economy (roughly 2 or 3% per year, if we are lucky).  Perhaps this is an opportunity for us to teach our children what it means for something to be "unsustainable."

So, what is a local school district to do?  I would suggest that Illinois school districts like ours should plan for the future by preparing for zero funding from the state and federal government.  This will, of course, imply changes to the operation of our school district.  The loss of transportation funding would be a large adjustment on its own.  The more difficult adjustment, however, would be the possibility that, in the not too distant future, the cost of all local teachers' and administrators' pensions will be borne by local school districts.  The adjustments will be even harder if we allow ourselves to be lulled into complacency by the "normalcy bias."