HB 6258: a Commentary from the Teachers' Retirement System of Illinois

·         A new comprehensive pension reform proposal, House Bill 6258, was introduced in the General Assembly on December 5 by Representative Elaine Nektitz, D-Northbrook and Representative Daniel Biss, D-Evanston that seeks to stabilize TRS finances and eliminate the System’s unfunded liability in 30 years.

·         TRS will not take a position on House Bill 6258. It is the legislature’s job to dictate the laws and rules that govern TRS and other public pension systems. The job of TRS is to administer those laws and work to secure the System’s finances so that the promises made to generations of teachers by the General Assembly can be kept.

·         Right now, HB 6258 [is] just the latest in a catalogue of proposals. It has a long way to go before it becomes law. It has not been debated in either chamber of the legislature.

·         This bill does not eliminate or supersede the legislation that is pending in the General Assembly that would force TRS members to make a choice between the current cost of living adjustment and no state health insurance in retirement, or a reduced COLA and continued state health insurance in retirement. This is another option for legislators to consider.

·         If this new proposal is approved by legislators and signed into law by the governor, it will face a court challenge. The main argument will be that the bill changes the pension benefits of retired TRS members and, therefore, violates the pension protection clause of the state constitution. That clause prevents existing pension benefits from being “diminished or impaired.”

·         For all members, in general, the bill would reduce the annual cost of living adjustment; raise the retirement age for all members under age 46; increase active member contributions by 3 percentage points over time; cap the amount of salary that can be used to determine a final average salary; create a new law that prevents the state from skipping its annual pension contribution; and shifts the annual cost of TRS pensions from the state to local school districts.

Specifics for TRS members:

FOR ALL ACTIVE and RETIRED TIER I MEMBERS (service before January 1, 2011)

·         The annual 3 percent COLA would apply only to the first $25,000 of a pension.

·         Currently, the average TRS pension is $48,216. Under current law, with the COLA that pension grows to $49,662 in the second year and $51,152 in the third year. In this proposal, with a capped COLA, the same pension would grow to $48,966 in the second year and $49,716 in the third year.

·         Members would not receive a COLA until age 67 or five years after they retire, whichever comes first. This would apply to all retired members already receiving a COLA under the old rules. These members could see their COLA suspended for a period of time.

·         The retirement age would be set on a sliding scale based on the member’s age and the time the law takes effect: 46 and older: retire at 55 with 20 years of service and receive a reduced benefit, or at 60 and receive a full benefit; 40 to 45 years old: retire at 56 for a reduced benefit and 61 for full benefits; 35 to 39 years old: retire at 58 for a reduced benefit and 63 for full benefits; 34 and younger: retire at 60 for a reduced benefit and 65 for full benefits.

·         The salary used to determine an active member’s final average salary would be capped at the maximum Social Security wage base ($113,700 in 2013) or, for a union employee, at the member’s salary at the time the law takes effect.

·         Active member contributions would increase from 9.4 percent to 10.4 percent in 2014 and increase to 12.4 percent in 2015.

For all Tier II members (service after January 1, 2011):

·         Members would have the option of staying with the existing Tier II benefit structure or switching to a “cash balance” plan, which is a hybrid between a defined-benefit plan and a defined-contribution plan.

·         Here’s how a “cash balance” plan works: TRS members and school districts would continue to pay an annual contribution and TRS would annually credit investment earnings between 4 percent and 10 percent to each member.

·         While the contributions and investment earnings of all “cash balance members” would be co-mingled for investment purposes, each “cash balance” member would have an individual notional account on file with TRS that would be comprised of their individual contributions, school district contributions, and investment income.

·         Upon retirement, TRS would calculate a guaranteed life-time annuity based solely on the money credited to each member’s account and adjusted for estimated future investment earnings and the member’s anticipated lifespan in retirement. The annuity continues even after money in the member’s account is exhausted.

·         All new TRS members that begin service after the law takes effect will automatically be enrolled in the “cash balance” plan.

·         For all school districts: School districts would be responsible, beginning in 2014, for paying an increased share of the annual costs of TRS pensions, and the state would pay less toward these costs. Eventually, school districts would be responsible for paying the entire annual cost of benefits being earned every year. In FY 2013, the annual cost of TRS pensions is approximately $900 million. Starting in 2014, the share of the annual cost paid by local school districts would increase by 0.5 percent each year until the total annual pension cost is paid by the districts.

·         For state government: If the state does not pay its annual contribution to TRS within a set period of time, TRS could go to court to force the state to pay the contribution in the same way that the Illinois Municipal Retirement Fund can force local governments to pay their contributions. The law is designed to make TRS 100 percent funded in 30 years. Once the outstanding pension obligation bonds are paid off, the money being used to retire that debt will be dedicated to paying off the TRS unfunded liability until that liability is retired, instead of funding the annual cost of pensions. In fiscal year 2013, the amount of TRS funds dedicated to paying off the bond debt is $347 million.