A “Possible” Content of Next Week’s Pension Reform Bill from Linda L. Brookhart, Executive Director, State Universities Annuitants Association

House Speaker Madigan is calling for an Executive Committee hearing for the afternoon of Monday, December 2^nd.  The House has been called back for an 11:00 a.m. session on December 3^rd.  As of this writing – there is no pension deal yet.  And there is no legislation posted.  Here is a possible content of the bill.  Note I said possible! 

CHANGES TO CURRENT EMPLOYEES AND RETIREES 

Tier 1 Participant and Tier 1 Retiree Benefit Reforms

1. Automatic Annual Increases:
The proposal reforms automatic annual increases provided to Tier 1 participants and Tier 1 retirees.  Moving forward, such members shall receive an annual increase to his or her retirement annuity that is equal to 3% of the lesser of, the previous year’s retirement annuity, or the sum of $1,000 multiplied by each year of service credit.  The amount of $1,000 will be annually increased at a rate equal to ½ the increase in the consumer price index.

For members not yet retired, such members shall be subject to a staggered delay also known as automatic biannual increases.  Members that are older than age 50 as of the July 1, 2014 will experience a two year period immediately following their retirement in which they will not receive an automatic increase in their retirement annuity for one of those years.  Members age 47-50 will experience a six year period in which they receive only three annual increases.  

Members age 44-47 will experience an eight year period in which they receive only four annual increases.  Finally, member younger than age 44 will experience a 10 year period in which they receive only 5 annual increases.  Once the applicable time period expires, such members shall receive automatic increases each year thereafter at the new rate as prescribed by this proposal.

2.  Employee Contributions:
The proposal reduces employee contributions for Tier 1 participants by 1% of earnings.

3.  Effective Rate of Interest:
The amendment provides that in subsequent fiscal years, the “effective rate of interest” (ERI) shall be an amount equal to the rate of a 30 year US treasury bond plus 75 basis points.  This ERI shall apply prospectively towards crediting interest to money purchase plan accounts, portable plan lump sum payouts, portable plan refunds, purchases of service credit, etc.

4.  Pensionable Earnings Limitations:
The proposal limits the pensionable earnings of a Tier 1 participant at the Tier 2 earnings cap.  Participants currently receiving earnings in excess of the Tier 2 earning cap shall have his or her pensionable earnings limited to his or her salary received 365 days prior to the effective date.  The limitation shall increase at the same rate as the Tier 2 wage cap increases.  It should also be mentioned that members currently covered under a collective bargaining agreement that is in force as of the effective date of the bill shall be exempt until that agreement expires or is amended, and the limit shall be applied to the annualized rate of earnings as of the date that agreement expires or is amended.

5. State Funding Reform:
The proposal enhances statutory funding requirements so that the State shall be required to adhere to a funding schedule that provides a contribution of an annual amount determined by the System to bring the total assets of the system up to 100% of the total liabilities of the System by 2044.  The current statutory contribution schedule is to bring the total assets of the System up to 90% of the total liabilities by 2045.  Beginning in Fiscal Year 15, the State funding mechanism requires the state to fund the state’s portion of projected normal cost for that fiscal year, plus an amount sufficient to amortize 100% of liabilities by FY 2044.

6.  Pensionable Stabilization Fund (specifically for SURS):
The proposal revitalizes the Pension Stabilization Fund.  The current dormant fund begins receiving $1 billion annually in Fiscal Year 2019, with SURS receiving approximately $200M.  GRF (General Revenue Fund) transfers into the Fund will continue until each of the state retirement systems are funded at their targeted funding ratio. Contributions from the fund to the systems are in addition to required contributions as certified; however, the systems shall not include such contributions from the fund for the purposes of calculating the annual certified state contribution.  The purpose of this provision is to expedite the amortization of the unfunded accrued liability and to get the systems to 100% funded before 2044.

7. Entry Age Normal Actuarial Cost Method:

The proposal changes the actuarial cost method for the 5 state retirements from “projected unit credit” actuarial cost method to “entry-age normal” actuarial cost method, effective in FY 2016.  This method is the most common and accurate actuarial cost method used by public retirement systems.

8. Normal Retirement Age:
The proposal reforms Tier 1 participants’ normal retirement age.  The following adjustments apply to Tier 1 participants retiring after July 1, 2014:

 Participants age 46 or older on the effective date shall not be subject to any delay in retirement eligibility;
 Participants age 45 on the effective date shall be subject to a 3 month delay in retirement eligibility;
 Participants age 44 on the effective date shall be subject to a 6 month delay in retirement eligibility;
 Participants age 43 on the effective date shall be subject to a 9 month delay in retirement eligibility;
 Participants age 42 on the effective date shall be subject to a 12 month delay in retirement eligibility;
 Participants age 41 on the effective date shall be subject to a 15 month delay in retirement eligibility;
 Participants age 40 on the effective date shall be subject to an 18 month delay in retirement eligibility;
 Participants age 39 on the effective date shall be subject to a 21 month delay in retirement eligibility;
 Participants age 38 on the effective date shall be subject to a 24 month delay in retirement eligibility;
 Participants age 37 on the effective date shall be subject to a 27 month delay in retirement eligibility;
 Participants age 36 on the effective date shall be subject to a 30 month delay in retirement eligibility;
 Participants age 35 on the effective date shall be subject to a 33 month delay in retirement eligibility;
 Participants age 34 on the effective date shall be subject to a 36 month delay in retirement eligibility;
 Participants age 33 on the effective date shall be subject to a 39 month delay in retirement eligibility;
 Participants age 32 on the effective date shall be subject to a 42 month delay in retirement eligibility;
 Participants age 31 on the effective date shall be subject to a 45 month delay in retirement eligibility;
 Participants age 30 on the effective date shall be subject to a 48 month delay in retirement eligibility;
 Participants age 29 on the effective date shall be subject to a 51 month delay in retirement eligibility;
 Participants age 28 on the effective date shall be subject to a 54 month delay in retirement eligibility;
 Participants age 27 on the effective date shall be subject to a 57 month delay in retirement eligibility; and
 Participants age 26 and younger on the effective date shall be subject to a 60 month delay in retirement eligibility.

—Linda L. Brookhart, Executive Director, State Universities Annuitants Association