No one approach to staffing is pervasive in Illinois school districts. The reality is that school districts often choose staffing approaches which reflect local factors. Some districts are highly unionized, while others tend to be somewhat paternalistic. In certain instances, parents are very influential in district policy setting; while in others, community groups or teachers have a strong voice in many matters. As a result, issues related to collective bargaining or political forces associated with employee, parent, and community groups will influence how the school board staffs its schools.

Some school districts establish firm staffing ratios either through board policy or collective bargaining agreements. For example, a school board may set a policy which states that no kindergarten class may exceed 23 students; while in others, collective bargaining agreements include class size maximums. Under either approach, if any class section exceeds the cap, the school district adds a new class section.

Other school districts operate under staffing guidelines which do not automatically require the addition of a new class when a section exceeds a maximum enrollment. Rather, the guidelines, which are usually written as administrative procedures, serve as a preferred class size range. Under this model, the administration and school board retain the authority to determine final staffing levels. See a sample of staffing guidelines below.

The firm staffing ratio method can be problematic for school districts, especially those with limited classroom space or financial concerns, since the addition of a new class section is mandatory. In contrast, staffing guidelines facilitate a thoughtful approach to management without the inflexibility associated with firm maximums. School districts would be well advised to maintain a flexible rather than a firm staffing ratio approach.

Not all school districts have staffing models. In these instances, no specific staffing ratio requirement or guideline exists. For some districts, this approach is effective. Staffing decisions are made by the school board on a case-by-case basis often on the counsel of the district administration or by delegation to the administration. However, the absence of a formal policy or procedures may create some internal or external issues often related to inequities.

Class size issues can become a source of conflict within school districts. It is not unusual for parents and teachers to lobby administrators and school board members, often at open board meetings, to lower class size. Also, controversies periodically emerge when special education students are mainstreamed into regular classes for parts of a school day. The issue usually centers on whether the guidelines are altered to reflect the partial mainstreaming of special education students. Although staffing ratios or guidelines are no guarantee of political stability, they can provide a structure to help focus discussion.

Employee compensation methods vary from district to district, but to a large extent, they are driven by employee satisfaction. In this section, we will examine each of the three main employee groups individually: teachers, non-certified personnel, and administrators. However, before discussing compensation models, it is important to understand the concept of salary market philosophy.

The answers, of course, are no. Educators, similar to other professions, are compensated commensurate to what other educators are paid within some logically defined market. This market area usually includes some specific geographic boundaries and type of district (K-8, 9-12, or K-12). Often both the teachers and school boards focus on a defined market during the collective bargaining process.

By way of example, in the school district where I served as superintendent, we had an agreement that the “salary market” for teacher compensation included all the elementary and high school districts in three townships: Evanston, New Trier, and Niles. This helped provide focus during the bargaining process.

Defining the market is only the first step in the compensation process. The second is establishing a market philosophy. That is, setting a target for employee compensation in the market area. Some districts have clearly defined market positions such as “We want our employees to be paid at the average of the market.” Others may not actually define a market philosophy, but see one emerge as actual salaries are determined.

To illustrate the market philosophy, let’s consider this. For FY2008 Chicago School District 299 had a starting salary (BA Step 1) of $44,963 and a top (Ph.D/Ed.D. Step 13) (Chicago Public Schools, 2008) of $82,375. In contrast, Skokie School District 68 began at $42,417 and topped out (MA32 Step 30) at $97,559.

If I was interpreting the compensation philosophies of these two school districts, I might conclude that Chicago 299 is primarily interested in attracting new teachers since it offers a substantially higher beginning salary but less committed to the career faculty members because of its lower top salary. On the other hand, because of its high MA32 Step 30 salary, Skokie 68’s philosophy is probably designed to reward longevity and reduce teacher turnover.

Also, one other important factor impacts employee compensation – ability to pay. Some school districts have more financial resources than others, and therefore, are more able to compensate their employees at a higher level. Therefore, a school district’s financial position also factors into compensation decisions.

These factors (market position, market philosophy, and financial health) are integral to understanding the different compensation levels offered by school districts and the intent of systems to attract and retain employees.

Teacher Compensation

Even though calls for merit plan plans or performance bonuses are increasingly common, teachers are still paid similarly to the way they have been paid for decades. That is, they are compensated through teacher salary schedules on which salary increases are based on experience (steps) and the number of semester graduate credits (lanes) earned. The number of steps and lanes vary, however, from district to district and are usually determined through the collective bargaining process. They are also influenced heavily by the financial position of the school district since a lack of resources may limit the increase the board of education is willing to accept. A sample school district FY 2010-11 teacher salary schedule follows:

Figure 1: Teacher Compensation

You probably noticed that along the left side there are 30 steps. Teachers move up one step each year. This is what is referred to as the step increase. One source of confusion and sometimes disagreement in collective bargaining relates to the step increase. Traditionally, teachers do not equate a step change to a raise while school board members do. The reality is that step movement is a raise because it increases a teacher’s salary from one year to the next. Even if the salary schedule as a whole did not change, teachers would still receive higher salaries the following year as they moved up a step. Only those at step 30 would not see an increase.

During presentations to the board of education or during contract negotiations, you will hear the term, average cost of step. As part of the budget preparation process or during collective bargaining, school business officials will calculate the average cost of the step increase. This figure represents the average percentage increase to the board for all teachers. It is not uncommon for an average cost of a step increase to be 2% or more. Therefore, without any salary schedule increase, teachers will average 2% higher salaries merely because they moved up a step on the teacher salary schedule.

In addition to steps, teachers’ salaries increase if they earn additional graduate study credit. You will notice that our sample teacher salary schedule has seven lanes ranging from BA to MA+32. The number of lanes varies significantly from district to district; however, they too have additional salary increases associated with them. Therefore, teachers who move up a step and earn enough graduate course credit to change lanes would receive raises for both even if the schedule stayed the same.

To illustrate this further, let’s take a look at the percentage increase a teacher would receive on our sample schedule even if the schedule remained the same from year to year. For calculation purposes, here are our assumptions.

Isn’t this interesting? This particular teacher would receive a 15.9% increase without any schedule change. The FY2008 salary would even be higher if the entire salary schedule increased.

Finally, you may also be familiar with the term “schedule increase”. Traditionally, teacher schedules in their entirety increase annually. When the complete schedule increases, this is referred to as a schedule increase.

Most teachers actually receive at least two separate annual increases: schedule and step. Some also qualify for a lane-related increase if they earn additional graduate course credit. Is it any wonder that when contract negotiations heat up and percent increase figures are discussed by the Board and teachers was well as written about in local newspapers that there is some confusion?

In addition to the steps and lanes on our sample schedule, you also see something called the index. Many but not all salary schedules are built on indexes. When salary schedules are distributed to teachers, sometimes the indexes are not included because they can be a source of confusion for those not familiar with salary schedule structures. What most teachers really want to know is – “What is my salary for the year”?

Administrators need to understand salary schedule indexing. In the schedule above, the index represents the percentage that any point on the salary schedule is higher than the base (BA Step1) salary. To illustrate this, look at BA Step I. The salary for this step is $46,351. BA Step 2 has an index of 1.03. To calculate the salary for BA Step 2, you multiple the base salary $46,351 by the index for the step (1.03) resulting in a BA Step 2 salary of $47,742.

$46,351 X 1.03 = $47,742

The same process is used to establish each point on the salary schedule. One advantage of this system is that a district can negotiate a base salary then create a spreadsheet with built in indexes to almost instantly create a salary schedule.

A salary schedule indexing system can provide valuable insights into a school district’s salary philosophy. If you study the indexing pattern in Figure 9.2, what conclusion might you draw about this school district’s salary philosophy? Here are a few that I would suggest. The school district:

You may want to examine your own district’s salary schedule to see what patterns you can identify.

Another common feature of teacher compensation programs is the inclusion of longevity provisions. These are usually additional salary amounts which are added to teachers’ salaries the year after they have reached the last step on the schedule. These emerge from the collective bargaining process and are generally listed as a footnote on the salary schedule. If, for example, the district represented in Figure 9.2 had a $500 per year longevity provision, a teacher with 31 years of service in the MA32 lane would be paid $107,107. Longevity increases are cumulative and continue as long as the teacher is employed.

Finally, it is important to recognize that not only does the teacher salary schedule approach have a long history in public education, but the Illinois state legislature has all but ensured that the present model will continue with passage of the Illinois Labor Relations Act of 1984. This law requires school boards to bargain collectively with teacher unions. In essence, it narrows the compensation model options by requiring agreement from teachers before any change can be made in teacher salaries (Braun, 2008).

Non-Certified Personnel

Non-certified personnel (support staff) compensation models tend to be less structured than those of teachers. Even though they enjoy the same collective bargaining rights as teachers, a smaller percent of support staff groups tend to form unions. Historically, they have not sought the same level of unionization as teachers. They also tend to be smaller groups which were not initially as universally organized as were teachers by national level associations such as the American Federation of Teacher or the National Education Association. Support staff may either affiliate with teachers’ union or form their own.

Although some school districts compensate support staff using a salary schedule model, others are paid primarily on an hourly basis or through some version of a merit-based plan. Others receive annual salaries not tied directly to schedules. Therefore, you will find among districts a variety of compensation models often primarily a function of local past practices and tradition.

Finally, one common misunderstanding among school administrators is that salaried support staff members are exempt from the overtime pay provisions of the Fair Labor Standards Act (Braun, 2008). Even if employees are salaried, they are entitled to overtime pay unless they meet the legal standards for exempt status.

Administrative Compensation

In Illinois, administrators are management. As such, their salaries are set at the discretion of the board of education. For the most part, administrators need an Illinois Type 75 General Administrative certificate. However, certain employees in some districts, such as psychologists or deans of students, are not part of a bargaining unit nor required to hold a Type 75 certificate. They may, however, be compensated under the administrative classification.

Administrative compensation models vary from school district to school district. Several of the most common approaches are discussed below.

Administrative Salary Schedules

Although Illinois administrators are not permitted to bargain collectively because they are classified as management employees, school boards may chose to cooperate with administrators as a group as occurs in Chicago 299 (Chicago Public Schools, 2008) . Under this approach, a salary schedule model is used to establish compensation by administrative positions.

Across the Board Increases. Another common compensation model is some form of across the board raises. Sometimes the percentage increase is equal to that of other employee groups. Under this approach, administrators typically receive the same percentage increase given to other employee groups such as teachers. However, even with an across the board model, it is not uncommon for boards of education to make exceptions for certain administrators who are viewed as underpaid. The term “catch up” is used to describe a special additional one-time salary increase.

Merit Increases. Unlike teachers, administrators may be compensated under some version of a merit pay plan. Whether this takes the form of linking administrators’ salary increases to performance indicators or the awarding of a bonus, merit plans tend to be individual in nature. In many instances, actual salary increases under merit plans may be tied more to meeting broad goals or even the reputation of the administrator as perceived by the board of education and/or superintendent rather than exact quantitative criteria. Nonetheless, this model is common in Illinois.

Unique Plans. In addition to the above approaches, school boards may adopt any other compensation model they choose. In one district in which I served, administrators were paid based upon their position in the salary market. The compensation philosophy was to pay administrators toward the low end of the salary market range for their position when they were hired. Then, as they performed satisfactorily over a number of years, their salaries would increase to the point that they ultimately reached the third quartile of their market.

Quartile refers to the position of the salary in the market. For example, if you had a market composed of 19 administrators whose salaries were ranked from the bottom to the top. The 5th salary from the bottom would be the 1st quartile, the 10th would represent the second quartile or median while the 15th would be the 3rd quartile. Therefore, at the 3rd quartile, three-quarters of the salaries in the market would be lower.

Under this model, each year an administrator’s salary would be compared to a quartile distribution for that position in the market. Any administrator at or below the 3rd quartile of their market would receive a market-based increase. Those who fell below the 3rd quartile would receive an additional “catch up” increase depending upon their market position. For example, if an administrator’s salary fell in the 1st quartile (the lowest salary up to the first quartile), the person would receive an additional 3% salary increase. From the 1st quartile to the 2nd quartile or median, the increase would be 2%; while above the median to the 3rd quartile, the salary raise would increase 1%. However, if an administrator’s salary exceeded the 3rd quartile, the person would have 1% deducted from the market increase since the compensation philosophy goal was to pay administrators at the 3rd quartile of the market.

Through this process, administrators were well paid but not the highest. Since the system was market data-driven versus arbitrary, it was perceived by administrators as fair and equitable. It is also important to note that the superintendent could recommend a smaller or even no raise for any administrator not performing to district standards

Frequently, the second largest reoccurring district expenditure is for employee benefits. It is not unusual for benefit costs to be 10% or more of overall expenditures. This is not surprising since one of the widely recognized advantages of a career in public education has traditionally been excellent benefits.

The most common general employee benefits include:

Depending upon the employee group, these benefits may vary. Most often, requiring employees to pay at least a portion of any insurance premium is considered sound policy. Without some cost, employees may automatically accept a benefit even if it is not needed, thereby driving up district costs. For example, employees may be covered by their spouses’ health insurance plans, but also take advantage of the district’s insurance if offered at no cost. Under the other hand, if employees have to pay a portion of the premium, they may elect to decline district coverage.

Another advantage of shared premium costs is that it encourages employee groups to participate in studying ways to reduce premiums (Kersten & Dada, 2005). School districts may collaborate with employees to form committees designed to study insurance programs in order to find ways to reduce costs while maintaining acceptable coverage levels. Since both the district and employees benefit from premium reductions, this can be a win-win situation for both. In times of tight finances, school districts are wise to look for such strategies to reduce overall benefit costs.

Do you remember the first time you were asked to select from an array of healthcare plans? If you are similar to many employees, you were probably confused. You may have had to choose from a list of option ranging from traditional fee for service plans to health maintenance organization (HMO) with varying benefit and premium cost levels. Although an in-depth understanding of each may be necessary for school business officials, what you really need is a basic understanding of the various options. In this section, I will summarize the key elements of each. To fully understand the differences in your local school district plans including options even within the categories below, you will want to contact the school districts insurance specialist.

Health Maintenance Organization

Usually the lowest cost healthcare plan for both the school district and the employee is the HMO. Often referred to as a managed care plan, participants select a primary care physician within the Health Maintenance Organization (HMO) network who initiates medical treatment as necessary which may include referral to HMO approved specialist as needed. The primary advantages of an HMO include:

Because of the reduced costs, those electing an HMO lose the flexibility to receive treatment from medical professionals not part of the HMO network (Kersten & Dada, 2005).

Preferred Provider Option

A popular employee insurance option is the Preferred Provider Option (PPO). Unlike the HMO, PPOs allow employees to seek medical treatment directly from any healthcare professionals, including specialists, who are part of the PPO network. For this flexibility, those electing the PPO can expect higher annual deductibles and increased out-of-pocket costs. Also, participants must ensure that the doctors they choose are approved by the PPO or be willing to pay substantially more for medical care. However, in most areas, the number of doctors participating in PPOs is usually quite high (Kersten & Dada, 2005).

Fee for Services

A health insurance option which is disappearing from the market is the traditional Fee for Services plan. Under this option, employees have complete freedom of choice for both doctors and hospitals but must complete claim paperwork. However, the high cost of premiums has eliminated this as an option in many districts.

Flexible Spending Accounts and Dependant Care Assistance Plan

Most school districts allow employees to take advantage of an Internal Revenue Service approved option to shelter a portion of their income with a specific limit from federal and state taxes to pay for specific healthcare costs including health insurance premiums, medical and dental care including prescriptions and even certain over-the-counter items through a Flexible Spending Account (FSA). A Dependant Care Assistance Plan (DCAP) allows employees to shelter up to $5000 annually for childcare costs. One word of caution – employees must “use” or “loose” the amount sheltered within 14.5 months of the beginning of the annual FSA period. DCAT funds must be used within 12 months (Kersten & Dada, 2005).

Health Reimbursement Account

School districts are also authorized to offer Health Reimbursement Account (HRA) to employees. This benefit option, which is a specified dollar amount provided by the Board of Education, is usually negotiated as part of collective bargaining. Similar to FSAs, employees may use these tax free funds to pay healthcare costs. School districts often provide these as a way to provide an incentive to participants to accept higher deductibles accompanied by annual lower premiums. Since the lower premium costs benefit both the board and employees while allowing participants to use their HRA to pay the increased deductibles, they can be a win-win for everyone (Kersten & Dada, 2005).

Health Savings Account

An increasing popular insurance-related benefit is the Health Savings Account (HSA). Although it is probably not appropriate for those who require regular medical care such as families with children or those with a high levels of healthcare needs, employees who do not seek healthcare very often may find it attractive. What distinguishes an HSA from a FSA and HRA is that it is actually owned and controlled by the employee not the school district but is managed through the district. Consequently, participants may carry over HSA funds indefinitely. They are also free to invest HSA funds in a wide range of options including mutual funds. HSAs are typically funded by employees and/or school districts with tax free dollars. HSAs must also be offered in conjunction with a regular healthcare plan with deductible minimums of $1,000 for single and $2,000 for family coverage (Kersten & Dada, 2005; Rossheim, 2005)

As school districts struggle to find ways to reduce expenditures, they often look toward healthcare costs, which traditionally increase at a rate far exceeding inflation. In fact, the Kaiser Family Foundation (2011) reports that the average family premium is 114% higher in 2010 than 2000. From 2009 to 2010, the average family premium increase was 3% while the single premium grew by 5%. As a consequence, school administrators must look for ways to reduce health insurance related costs. Several strategies a colleague and I proposed included the following (Kersten & Dada, 2005).

Educate Yourself on Costs

An important first step is learning as much as possible about all aspects of health insurance. Without a sound understanding of healthcare components and costs, little substantial progress can be made.

Analyze Premium Expenditures and Identify Areas for Cost Containment

Since most administrators are not insurance experts, they must rely on industry experts for advice on ways to contain costs. As a result, some consult their present insurance cooperative manager or insurance broker or employ a cost reduction specialist with a high level of industry expertise who will study such areas as:

Partner with Employees

Since both employers and employees benefit from reduction in premium costs, a good starting point for school administrators is to suggest the formation of a joint administration/employee benefit committee led by an insurance consultant to review the current health insurance program and recommend changes which may reduce costs without significantly reducing benefits.

Manage Prescription Plans Aggressively

According to the Kaiser Family Foundation, prescription drugs represent 10% of total healthcare costs (Kaiser Family Foundation, 2011). Therefore, examining ways to reduce these costs is important. Often, by adjusting co-pays for prescription drugs, school districts and employee may be able to reduce medical insurance premiums substantially.

Promote Healthier Lifestyles

School administrators may be able to reduce insurance costs by promoting life-style changes. Although the results may not be immediate, they may have an effect over a longer period of time. Some suggestions include:

In addition to health insurance, school district employees may offer several other insurance-related benefits including dental, vision, life, and disability. Premium and benefit levels are typically locally determined, often as an outcome of the collective bargaining process. Dental insurance generally provides full coverage for cleaning while both dental and vision plans pay a percentage of related medical costs. Life insurance usually provided upon death a flat dollar amount or a percentage related to income level. Finally, employees who elect disability insurance are provided a percentage of their income for an extended period when they are unable to work due to illness or injury.

Finally, a true benefit of a career in education in contrast to the business world is the number of work days. A widely recognized benefit whether you are an administrator, teacher, or support person is the increased number of days off. Not only do school district employees receive additional paid holidays, but many have extended time off during winter, spring, and summer breaks. Also, school employees are provided generous paid sick leave allocations, often accompanied by unlimited unused sick leave accumulation. It is also common for school districts to allow employees two or more days annually for either personal and/or business use. Twelve month administrators and classified personnel usually receive vacation days in addition to regular school holidays.

One area in which administrators are often rewarded beyond other employee groups is in fringe benefits. As with compensation, fringe benefit levels are traditionally tied to an administrative benefit market. Because administrators are usually the smallest employee group and represent the board of education, they typically receive higher board subsidies for insurance premiums, in many instances 100%. In addition, administrators may also be provided travel allowances and conference cost reimbursements not generally available to other employee groups.

Most school district attorneys will recommend that the board of education establish a separate written administrative benefit plan to clearly delineate all fringe benefits. This approach not only establishes a clear understanding of benefits offered but provides continuity during times of administrator and board transition.

Employees often view total compensation models as equitable since all employees receive the same dollar amount, irrespective of their personal situations. Everyone is treated the same, unlike traditional benefit plans where some employees receive a great deal more in fringe benefit dollars from the district based on their benefit choices. If, for example, a teacher’s spouse has a benefit plan which provides family health insurance, the teacher may choose to use the district’s fringe benefit dollars for additional salary or a 403(b).

The negative aspect of total compensation for employees is that they assume the risk of premium increases much more directly. Also, insurance premiums often increase at a much greater rate than salaries so over time, teachers may find a larger portion of their pay allocated to pay insurance premiums.

For school district boards, a total compensation approach can be attractive since it places a greater portion of the risk for premium increases on the shoulders of the employees. Also, district costs are more predictable since benefit amounts are fixed.

One of the most substantial public education employee benefits is access to a defined benefit retirement plan – lifetime retirement income. Unlike much of the business world which has shifted from defined benefit models to defined contribution plans such as the 401(k), an retirement investment account owned by individual employees into which typically both employees and employers contribute some amount. Since Illinois public school employees have defined benefit retirement plans, they earn generous retirement annuities for life. The three public school retirement systems in Illinois are the Teacher Retirement System (TRS), Chicago Teachers Pension Fund (CTPF), and Illinois Municipal Retirement Fund (IMRF).

Teacher Retirement System (TRS)

School district employees, who are required to hold Illinois certification for their positions, including administrators, are members of TRS (Teachers’ Retirement System, 2011). Since this is a state-funded pension system, the State of Illinois contributes substantially to TRS annually. In addition, both employers and employees contribute a percentage linked to employee salaries. The FY2011 contribution rate for employees was 9.4% of gross salary, while employers contributed 0.58%. In addition, TRS members also contribute an additional 0.88% and employers 0.66% for FY11 to help fund the Teachers’ Health Insurance Security (THIS) Fund. TRS participants are eligible to retire at age 60 under the regular program with 10 years of service and at 62 with 5 years. Under certain circumstances, which will be discussed later, retirement may occur before age 60.

TRS is a formula driven system through which retirement annuities are calculated based on a person’s years of service and final average salary. For most teachers, the formula is fairly simple. For each year of employment, teachers earn 2.2% in service credit. Therefore, teachers who retire with 20 years of service have accrued 44% toward the pension formula. If they retire with 35 years of service credit (the maximum allowed for the pension calculation), their percentage is 75%. Retirees who have 34 years of service (34 years X 2.2% a year = 74.8%) must participate in the Early Retirement Option (ERO) to avoid a penalty.

In addition to calculating the service credit percentage, a final average salary is determined by taking the salaries of the highest four consecutive years in the teacher’s final ten and dividing it by four. For example, if the employee’s final four highest consecutive salaries were $69,000, $73,000, $77,000, and $81,000, the average annual salary would be $75,000.

Once the percentage and average final salary are calculated, doing the math is quite simple. However, in order to retire without a penalty, teachers need to either be 60 years of age or have 35 full years of service credit. It is important to note that TRS employees may accumulate up to 340 unused and uncompensated sick days for up to two years of service credit.

To illustrate a simple pension, let’s assume the teacher:

The formula is:

Percentage Earned for Years of Service X Average Final Salary = Annual Pension

75% (.75) X $75,000 = $67,500

In addition to the annual pension, retirees receive a 3% pension increase each January. However, retirees do not begin collecting the 3% increase until the January following their 61st birthday. The good news, though, is that the increase is retroactive to the date of retirement. As a result, most retirees can expect a substantial pension increase at that time, particularly if they retired at 55.

Early Retirement Option (ERO). In Illinois, teachers may retire if they are at least 55 years of age by December 31 of their retirement year and have earned a minimum of 20 years of service credit. Thus some teachers choose to retiree before age 60 without maximum service credit. Under this scenario, teachers have two options. They can retire either with or without participating in the state’s Early Retirement Option (ERO).

With ERO. Another option available to teachers 55 and over who have a minimum of 20 years of service credit but are not yet 60 years of age is the Early Retirement Option (ERO). Under ERO, TRS employees may retire before age 60 with less than 35 years of service without a pension reduction if both they and their employer pay a fee to TRS. Employees pay 11.5% times their highest salary for each year they are under 60 or 35 years of service, whichever is less. Employers contribute 23.5% times the highest salary for each year an employee is under 60. ERO is only guaranteed until 2012. At that time, the Illinois legislature will review it to determine if it will continue. If not, the retirement age without penalty (pension reduction) will be 60.

To illustrate the cost of ERO to both the retiree and the school board, let’s consider an example. Our assumptions are that the retiree:

Given these assumptions, in order for this teacher to retire, the individual would be required to pay $51,750. This is because the teacher is 5 years under age 60. As a result, the teacher is assessed 57.5% (11.5% X 5 years)of their $90,000 salary. The school board would have a much larger assessment, $105,750 (117.5% X $90,000). One point worth noting is that even though the teacher has the option for ERO, the school board by law does not. It must pay the required fee to TRS if the teacher chooses ERO. However, the school board does have the right to limit the number of employees who can retire annually under ERO to 10% of those eligible. Nonetheless, the costs for boards of education, especially if several employees choose to retire in a specific year, can be a substantial.

Without ERO. A good question to consider is – what impact does retiring without ERO have on a person’s pension? Unfortunately, the effect is substantial. Retirees are subject to a steep pension reduction, 1/2 percent per month (six percent a year) for each month they are under 60 if they have less than 35 years of service credit. Although the retiree may avoid the early retirement fee associated with ERO, the pension reduction may minimize the viability of early retirement. For example, a person who would otherwise has a pension of $50K and retires at age 55 without ERO is penalized 30% resulting in an annual pension of $35K.

Salary Increase Maximums. One other provision which is important to consider is a relatively recent change in the maximum amount a person’s salary can increase during the final four years of employment without the board of education accruing a substantial penalty. At the present time, the limit is 6% a year which virtually eliminated the 20% bonuses which had become common in certain areas of the state. Boards of education will be very reluctant to approve any teacher or administrator contract which exceeds this level.

Optional Credit. Another important TRS provision you should be aware of is optional service credit. TRS members may earn service credit even when not working in a teacher certified position in an Illinois public school. TRS members may earn service credit for such experiences as military service, employer-approved leaves of absence related to such reasons as childbirth, and certain out-of-state teaching.

Survivor Benefit. As part of their TRS contributions, members pay for survivor benefits. Under this TRS provision, spouses of retirees who have passed away can elect to receive one-half of the deceased member’s pension as well as the 3% annual increases for life.

In this section, we examined a typical, non-complex retirement calculations. However, a full discussion of all possible factors was unrealistic. To understand the system in greater detail or relate it to your personal situation, you are encouraged to either visit the TRS website at http://trs.illinois.gov or call their office.

The CTPF is similar in many respects to TRS including the formula-driven retirement calculation which uses salary and service credit to determine the actual pension (Chicago Teacher Pension Fund, 2010). However, there are some significant differences. These include:

The list above summarizes some of the most significant differences. To understand the CTPF provisions more fully, you can access their website at http://ctpf.org or contact their Chicago office.

School employees who are not required to hold an Illinois teaching certificate and work 600 or more hours a year for at least 8 years are eligible for an IMRF pension (IMRF, 2008). It is interesting to note that this is a state endorsed independent pension system which also includes other municipal workers such as city and park district employees. Only the employer and employee not the state contribute to IMRF.

Under IMRF, employees’ pensions are calculated similar to TRS through a formula which includes two factors: a service credit percentage determined by an employee’s experience and an average salary based on the highest consecutive 48 months in the employees final ten years. Similar to TRS, retirees receive a life-long pension.

Employees contribute 4.5% of their income while the employer’s payment is actuarially determined by IMRF. Members may also use one year of accrued sick leave for service credit.

An employee’s pension can vary significantly based on years of IMRF experience, age at retirement, and salary history. However, to illustrate how the pension formula works, let’s consider an employee who has:

The pension formal is:

In addition, three other provisions are worth noting. First, a retiree’s spouse receives one half of the retiree’s pension for life in the event of death. Also, a 3% pension increase tied to the retiree’s initial retirement annuity is added each January following retirement. Finally, retirees receive some additional annual compensation under what IMRF calls the 13th check program. The amount varies from year to year but was designed to partially offset the limited pension increases after retirement which is not cumulative as it is under TRS. IMRF employers contribute 0.62% of their payrolls to fund this payment. To calculate the retiree payment, IMRF takes the total amount contributed by employers and divides it by the June benefit payments to retirees (Illinois Municipal Retirement Fund, 2008). To understand in greater detail these provisions as well as how an IMRF pension is calculated, please see the fund’s website at http://www.imrf.org.

Under the Illinois Retirement Reciprocal Act, retirees from 11 different systems may combine service credit toward retirement (Chicago Teacher Pension Fund, 2010). This provision allows, for example, teachers who earn service credit under IMRF as teacher assistants to combine this with their TRS credit when calculating their retirement annuities even though a portion of their pension will be paid by each system.

As of January 1, 2011 a new two tier pension system took effective for public school employees. Current members of TRS, CTPF, IMRF, and other reciprocal systems (Tier I) are not affected by the changes. However, employees hired after January 1, 2011 are subject to Tier II regulations (Teachers' Retirement System, 2010).

These changes are substantial. In fact, Tier II hires can expect significantly reduced retirement benefits. Although the impact of the changes is a long way off for most new hires, an understanding of future retirement benefits is essential for long-term financial planning. The key changes for Tier I include:

As you can see from our discussion, each of the retirements systems is somewhat complex. Administrators need to understand the basic provisions in order to work with boards of education and employee groups. However, they also need to exercise caution when advising individual employees. Retirement system personnel have the knowledge necessary to calculate retirement annuities and are the only ones authorized to answer employee questions. Although it is appropriate to have preliminary discussions with employees about retirement, responsible administrators will always refer employees to their respective retirement systems for advice and any potential pension calculations.

In addition to the defined benefit retirement plans, most school districts will provide voluntary access to defined contribution plans in which employees may participate to supplement their pensions. These are individually owned investment accounts to which employees contribute a portion of their regular income. Since they are retirement accounts, most employees are not able to withdraw funds without a substantial tax penalty until they are 59 ½ years old. The three most well known options potentially available to K-12 public school employees are the regular 403(b), Roth 403(b), and 457 deferred compensation plans (Lincoln Investments, 2008).

403(b)

The most widely offered defined contribution plan in Illinois public school districts is the 403(b), a tax deferred retirement plan. Offered through the school district, employees contribute pre-tax dollars to an investment account with a district authorized investment or annuity company through a payroll reduction agreement. The investment account earnings grow tax deferred until withdrawal (usually after retirement) but no sooner than age 59 ½ or as a result of separation of service at 55. Fund withdrawals are subject to the employee’s regular income tax rate. Participants typically have several investment options through mutual funds companies or annuities issued by insurance companies. Employees for 2011 may contribute up to $16,500 of income or $22,000 if 50 or older (Internal Revenue Service, 2011).

Roth 403(b)

Another type of defined contribution plan which became available in 2005 is the Roth 403(b) which some school districts make available to employees. The Roth is largely the same as the regular 403(b) with one important exception. Employees make after-tax contributions; however, all qualifying distributions are tax free. Depending upon their personal circumstances such as age and projected income tax level at retirement, participants need to weigh which type of 403(b) makes the most sense for their individual circumstances (Internal Revenue Service, 2011).

457 Deferred Compensation

A third type is the 457 Deferred Compensation plan, a tax deferred retirement savings vehicle very similar to the 403(b). Contribution levels are the same as the 403(b); however, one important consideration is that an employee may participate in both a 403(b) and a 457 simultaneously thereby doubling the amount they can invest. For example, teachers 50 years of age or older with sufficient income can invest up to $44,000 annually. A 457 also provides opportunities to withdraw funds penalty free prior to 59½ in certain situations (Internal Revenue Service, 2011).

Each of the three optional retirement savings plans offers the potential for employees to plan efficiently and effectively for retirement. However, similar to any investment, these are not without risk especially since they are often highly invested in the stock market. As of January 1, 2009, school districts assumed more additional responsibilities for 403(b) plans including providing information to employees and oversight for employee investments and fee assessments.

In Chapter 9, we have examined four personnel-related areas including staffing patterns, compensation models, fringe benefits including healthcare options, and retirement planning. Each of these impacts the financial position of the district. School administrators must be well informed in each area if they are to be an efficient and effective school-level and district leaders.