A TRS Review of Proposed Pension Code Changes to Date

Potential Pension Code Changes to Be Debated During the New 98th General Assembly

Although the actual legislation containing proposals to overhaul the benefit structure and funding mechanism for Teachers’ Retirement System and the state’s other public pension funds ceased to exist on January 8, 2013 with the final adjournment of the 97th General Assembly, the underlying concepts and proposals will continue to be debated by the new 98th General Assembly during 2013. These proposals will be re-introduced into the legislative process and will acquire new bill numbers. Here is a menu of the concepts and proposals that were discussed during 2012 and could be debated by lawmakers and stakeholders in 2013:

One suggested solution to the financial problems facing TRS would reduce all members’ annual cost-of-living adjustment; raise the retirement age for all members under age 46; increase active member contributions by 2 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 shift the annual cost of TRS pensions from the state to local school districts. The legislation, if enacted, would reduce the unfunded liabilities of TRS and the state’s other pension systems, as well as the annual payment state government must make to support the systems. The TRS unfunded liability, under this concept, would be eliminated in 30 years…

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.”

Specific Elements:

All Tier I members affected – The legislation would apply to all active and retired Tier I members, those with service before January 1, 2011.

COLA limits – A 3-percent COLA would be added annually to a retired member’s pension, but the COLA rate would apply only to the first $25,000 of a pension...

Six-year [or four-year (SB 1)] moratorium on all COLAs – All COLAs due to TRS members would be eliminated for a period of six years [or four years (SB 1)] after enactment in order to slow the annual increase in the overall cost of TRS pensions. All pension benefits would be frozen and members would not receive any COLA funds that were eliminated during the moratorium.

Increase in active member contributions – Active member contributions would increase from 9.4 percent to 10.4 percent in 2014 and increase to 11.4 percent in 2015...

Increase COLA eligibility – Members would not receive a COLA until age 67 or five years after they retire, whichever comes first. This restriction 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 when the bill takes effect.

Increase in the retirement age – The retirement age would be set on a sliding scale based on the member’s age at 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.

Salary caps for calculating a pension – The salary used to determine an active member’s final average salary would be capped at the maximum Social Security wage base, which is $113,700 in 2013. However for a TRS member employed under an individual or union contract, the cap would be set at the member’s salary at the time the law takes effect if the salary exceeds the Social Security wage base. Contractual salaries that are below the Social Security wage base when the bill takes effect would be allowed to rise to the Social Security wage base.

Language forcing state government to pay its annual TRS contribution – 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.

Thirty-year timetable for full funding – The law is designed to make TRS 100 percent funded in 30 years, which would wipe out the current $53.5 billion unfunded liability. A 30-year timetable adheres to standard actuarial practices. The current state standard is 90 percent funding in 50 years.

Funds dedicated exclusively to the unfunded liability – Once the outstanding pension obligation bonds are paid off in 2033, 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. In FY 2033, the funds will total $684.2 million.

A Benefit Choice for the Future: COLA and Health Insurance [Senator Cullerton’s bill] – This proposal calls on all active, inactive and retired TRS members to choose between two options in the make-up of their retirement benefits. This irrevocable, one-time election would have to be made during a six-month period after enactment. This proposal would save state government an estimated $33.4 billion to $37 billion over 30 years.

·         Option 1: Accept a change in the annual Cost-of-Living Adjustment for a TRS pension – from 3-percent compounded to a COLA that is capped at 3 percent or one-half of the consumer price index, whichever is less. The COLA would not be compounded. The TRS member retains “access” to state-supported health insurance through the Teachers’ Retirement Insurance Program. For active members, all future salary increases will be used to calculate the member’s future pension.

·         Option 2: Reject the change in the COLA, and it remains at 3 percent compounded annually. The TRS member losses “access” to state-supported health insurance through the Teachers’ Retirement Insurance Program. For active members, all future salary increases will not count when the member’s future pension is calculated.

Under this proposal, TRS members agreeing to Option 1 would first see the new COLA on the January 1 in the year after turning age 67 or in the year after the fifth anniversary of the member’s retirement, whichever is earlier. If a retired Tier I member now eligible for the current COLA accepts Option 1, the current COLA would suspended until the member is eligible for the new COLA.

Optional “Cash-Balance” plan for Tier II members – those with service beginning after January 1, 2011 – Tier II 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 [savings] 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 of between 4 percent and 10 percent to each member. While the contributions and investment earnings of all “cash-balance members” would be commingled 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.
New TRS members in the “Cash-Balance” plan – All new TRS members that begin service after the law takes effect will automatically be enrolled in the cash-balance plan.

School districts pay the annual cost of TRS pensions – 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 [or normal costs without the service debt] 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…

Potential Pension Code Changes to Be Debated During the New 98th General Assembly