Thursday, April 11, 2013

State Pension Overhaul Remains in Legislative Limbo (from the Teachers Retirement System of Illinois)

…Legislators… have yet to build enough support in both the House and the Senate for any one proposal designed to secure the long-term finances of TRS and the other state pension systems. The stakeholders in the discussions – TRS members and other public employees, organized labor, school districts, business interests and state officials – remain at odds over key principles.

These principles include:

The constitutionality of changing retirement benefits for members, the structure of future benefit packages, the need for a strong state funding guarantee for the pension systems, the need for increased state revenues to meet the rising cost of public pensions and other priorities, and how much state government should contribute annually to TRS and the other systems.

Legal counsel advises against TRS taking a position on any legislation that affects benefits. It is the legislature’s responsibility to establish the laws and rules that govern benefits. The role of TRS is to administer those benefits and prudently invest for the long term. TRS will take a position on legislation that adversely affects the overall funded status of the System. The central goal of this often-contentious pension debate is a solution to the looming financial crisis that TRS and the other systems will face in the future. Without changes in the current way pensions are funded, TRS will face insolvency. The System would not have enough assets to pay benefits [Please also read Chief Legal Counsel to Illinois Senate… Eric M. Madiar’s analysis What happens if the Illinois public pension funds are on the verge of bankruptcy]. In general, the options under discussion to stabilize the pension systems focus on reducing pension costs, increasing revenues or a combination of both. Some of the most-discussed proposals lawmakers are considering follow:

Senate Bill 1
Senate Bill 1 is sponsored by Senate President John Cullerton, D-Chicago, and was approved by the Senate 30-22 on March 20 with the 30 votes needed for passage. The bill now will be considered by the House. The bill, as amended, affects only actively working Tier I members of TRS. Retired TRS members and all other public employees are not included in this version of Senate Bill 1. The major component of Senate Bill 1 is language that forces active TRS members to make a “choice” that will determine the size of their pensions and whether or not they have access to state-supported health insurance in retirement. President Cullerton believes that these “choice” provisions keep the bill within the boundaries of the pension protection clause of the Illinois Constitution because members would be offered “consideration” in exchange for future benefits.

Opponents to Senate Bill 1 argue that no matter what choices members are allowed to make, the bill “diminishes” the future pension benefits of active TRS members that were set when they first began teaching and contributing to TRS. This would violate the pension protection clause. Specifically, Senate Bill 1 requires active Tier I members to choose between two options in the make-up of their retirement benefits after the bill takes effect. TRS members who have signed agreements with their school districts on or before Jan. 1, 2013 making an irrevocable decision to retire in the future will not have to make an election. They will be treated exactly like retired members and all current pension laws will apply to their pensions and retirements.

Option 1:

• Accept a change in the annual cost of living adjustment (COLA) for a TRS pension – from 3 percent compounded annually to a non-compounded COLA that is capped at 3 percent or one-half of the consumer price index, whichever is less.

• The TRS member retains “access” to state-supported health insurance.

• All future salary increases will be used to calculate the member’s future pension.

• Upon retirement, members would be eligible for a COLA on the Jan. 1 in the year after turning age 67 or the Jan. 1 after the fifth anniversary of the member’s retirement, whichever is earlier.

• Members may participate in a new “cash balance” retirement plan that would supplement their Tier I pensions.

• Members could participate in an Early Retirement Option similar to the current ERO.

Option 2:

• Reject the change in the COLA and it remains at 3 percent calculated annually from a member’s current pension.

• The TRS member loses “access” to state-supported health insurance in retirement.

• All future salary increases from the effective date of the law will not count when the member’s future pension is calculated. Salary increases included in personal or organized labor contracts in force at the time the law takes effect would be included in the pension calculation.

• Members would be eligible for a COLA on the later of the Jan. 1 following the first anniversary of their retirements or on the Jan. 1 in the year after the members turn age 61.

• Members would not be eligible for ERO.

House Bill 3411
House Bill 3411 is sponsored by State Rep. Elaine Nekritz, D-Northbrook, and House Republican Leader Tom Cross of Oswego. This bill is pending on the floor of the House and includes the following provisions:

For all active and retired Tier I members the COLA each year would be equal to one-half of the consumer price index and calculated from the member’s original pension amount, not from the current pension amount. The COLA increase would be capped at 3 percent. All COLAs would apply only to the first $25,000 of a pension. The COLA for annual benefits of $25,000 or more would be capped at $750. 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 COLAs suspended for a period of time, but they would not lose any COLAs previously received. 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 or frozen at the current rate if already over the Social Security limit.

However, for a TRS member employed under an individual or union contract, the cap would be set at the member’s maximum salary under the contract at the time the law takes effect.

Active member contributions would increase over two years from 9.4 percent to 11.4 percent beginning in the 2014-2015 school year. The retirement age would be set on a sliding scale based on the member’s age at the time the law takes effect:

• 45 and older: Current rules apply. Retire between the ages of 55 and 59 years old with at least 20 years of service and receive a reduced benefit, or retire at age 60 or older and receive a non-reduced benefit.

• 40 to 44 years old: Retire between 56 and 60 years old with at least 20 years of service for a reduced benefit and at 61 for non-reduced benefits.

• 35 to 39 years old: Retire between 58 and 62 years old with at least 20 years of service for a reduced benefit and at 63 for non-reduced benefits.

• 34 and younger: Retire between 60 and 64 years old with at least 20 years of service for a reduced benefit and at 65 for non-reduced benefits.

House Bill 3411 would create a new “hybrid” Tier III plan for new TRS members. Tier II members could opt in. Tier III would be a combination of a TRS style defined-benefit annuity – a guaranteed lifetime pension and a 401(k)-style defined contribution plan – an amount of money contributed over the member’s career that is distributed evenly in retirement until the account is exhausted.

Throughout March, the House debated and sent the Senate a series of bills that each contains one change in the Pension Code found in House Bill 3411. Each of these bills was approved and sent to the Senate.

[The following contents of these House bills were formerly part of HB 3411]:

House Bill 1154
House Bill 1154, as amended, was approved with a 101-15 vote and would cap the salary reported for all active members and eventually used in benefit calculations at the maximum Social Security wage base or the current salary if higher.

House Bill 1165
House Bill 1165, as amended, was approved with a 66-50 vote and would reduce the annual COLA. All future COLAs, after the bill takes effect, would apply only to the first $25,000 of a pension and be delayed as in House Bill 3411.

House Bill 1166
House Bill 1166, as amended, was approved with a 76-41 vote and would increase the retirement age for most active members as in House Bill 3411.

Senate Bill 2404
Another major proposal was developed by the We Are One Illinois coalition of organized labor. The proposal was introduced as Senate Bill 2404 by State Sen. Linda Holmes, D-Aurora and is pending in the Senate Executive Committee as amended. In Senate Bill 2404, new revenue would be generated by increasing payroll contributions for active TRS members and all other public employees. The TRS contribution rate for active teachers would climb from the current

9.4 percent to 11.4 percent over two years. The proposal calls for a new state law that guarantees the state will make the required contribution to TRS every year. In Illinois, only pension benefits for members are protected as a contractual right by the state constitution. In other states, state contributions to help fund the benefits are guaranteed as contractual rights.

We Are One coalition wants a contractual protection for state contributions in Illinois. Under Senate Bill 2404, 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 required contributions. The Illinois Municipal Retirement Fund is the only statewide pension system that currently has a legal guarantee of funding (from local governments); the IMRF funded ratio is 83 percent.

from TRS

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