Illinois Senate Bill 1 (from the Teachers' Retirement System of Illinois)

On December 3, the Illinois General Assembly approved Senate Bill 1, a comprehensive overhaul of Tier I retirement benefits and the overall funding structure of the Teachers’ Retirement System.

• Gov. Pat Quinn says he will sign the bill into law. While the effective date of the new law is June 1, 2014, TRS expects an immediate court challenge to the bill’s constitutionality. A court challenge would likely delay the implementation of the law’s provisions until a final ruling is made.
• Retired TRS members will receive their scheduled January 2014 cost of living adjustments as calculated under current law because the earliest Senate Bill 1 could take effect is June 1, 2014.
• Senate Bill 1 is designed to eliminate the $55.7 billion TRS unfunded liability by 2045 and stabilize TRS finances for the next 30 years and beyond.
• This long-term stabilization of TRS finances is accomplished primarily through a reduction in pension benefits for active and retired Tier I members of TRS. The bill also creates a guarantee that state government will provide adequate future contributions to support a fully-funded TRS.

 

 ...The bill would reduce the future pensions of all active and retired Tier I members compared to pension calculated under current law. The average TRS pension is $48,216. Under the bill, a retired member currently receiving a $48,216 pension would see an 18.6 percent reduction in his or her benefit after 20 more years of retirement as compared to current law. A 55-year-old active member who will retire at 61 after 30 years of active service and a $48,216 initial pension will see a 23.3 percent reduction in his or her benefit after 20 years of retirement, as compared to current law…

The bill applies to all active, inactive and retired Tier I members (service before January 1, 2011). Tier II members are not affected.

Active Tier I Members Salary Contribution Decrease

Active Tier I member contributions would decrease from 9.4 percent to 8.4 percent beginning in the 2014-2015 school year. For a TRS member earning $70,000, the decrease reduces the contribution to TRS from $6,580 per year to $5,880, or $700.

Creditable Earnings Cap for Tier I Members

A member’s annual salary that eventually is used to determine the member’s final average salary would be capped at the Tier II salary cap at the time the law takes effect. For example, in fiscal year 2014, the Tier II salary cap is $110,631. Under existing state law, the salary cap rises annually. The increase is equal to one-half of the annual rate of inflation.

For any member covered by an individual contract or collective bargaining agreement, the cap will be the member’s annualized salary on the day the current contract expires. A contract cannot be amended or extended to increase the level of the cap. For any member not under contract but with a current salary that exceeds the cap, that member’s salary cap would be set at their salary on the bill’s effective date. Members with a “grandfathered” salary would each have their own cap.

For example, member “A” earns $110,000 at the time the bill takes effect and the cap is $110,631. His/her full salary would be recorded as TRS “creditable earnings” in that year. Member “B” earns $112,000 at the time the bill takes effect and would see $112,000 used as creditable earnings. In the second year after the bill takes effect, and member “A” earns $111,000, only $110,631 would be counted as creditable earnings. Similarly for member “B,” if he/she earned $113,000 in year two, only $112,000 would be counted as creditable earnings.

Increased Retirement Age for Tier I Active Members

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: Current rules apply. Retire between the ages of 55 and 59 with at least 20 years of service and receive a reduced benefit, or at 60 or more and receive a full benefit
• 45 years old: Retire at 55.4 years to 59.4 years with at least 20 years of service for a reduced benefit and at 60.4 years for full benefits.
• 44 years old: Retire at 55.8 years to 59.8 years with at least 20 years of service for a reduced benefit and at 60.8 years for full benefits.
• 43 years old: Retire at 56 years to 60 years with at least 20 years of service for a reduced benefit and at 61 years for full benefits.
• 42 years old: Retire at 56.4 years to 60.4 years with at least 20 years of service for a reduced benefit and at 61.4 years for full benefits.
• 41 years old: Retire at 56.8 years to 60.8 years with at least 20 years of service for a reduced benefit and at 61.8 years for full benefits.
• 40 years old: Retire at 57 years to 61 years with at least 20 years of service for a reduced benefit and at 62 years for full benefits.
• 39 years old: Retire at 57.4 years to 61.4 years with at least 20 years of service for a reduced benefit and at 62.4 years for full benefits.
• 38 years old: Retire at 57.8 years to 61.8 years with at least 20 years of service for a reduced benefit and at 62.8 years for full benefits.
• 37 years old: Retire at 58 years to 62 years with at least 20 years of service for a reduced benefit and at 63 years for full benefits.
• 36 years old: Retire at 58.4 years to 62.4 years with at least 20 years of service for a reduced benefit and at 63.4 years for full benefits.
• 35 years old: Retire at 58.8 years to 62.8 years with at least 20 years of service for a reduced benefit and at 63.8 years for full benefits.
• 34 years old: Retire at 59 years to 63 years with at least 20 years of service for a reduced benefit and at 64 years for full benefits.
• 33 years old: Retire at 59.4 years to 63.4 years with at least 20 years of service for a reduced benefit and at 64.4 years for full benefits.
• 32 years old: Retire at 59.8 years to 63.8 years with at least 20 years of service for a reduced benefit and at 64.8 years for full benefits.
• 31 years old: Retire at 60 years to 64 years with at least 20 years of service for a reduced benefit and at 65 years for full benefits.

New COLA Formula and Rates for Tier I Active and Retired Members

Effective in fiscal year 2015, there will be two formulas used to determine the size of each year’s cost of living adjustment. The COLA formula to be used will be determined each year by the current size of the member’s pension. Each member, upon retirement, will multiply their total service credit by $1,000 to determine an initial “threshold” that will be used in the future to determine the annual COLA. For example, a member with 30 years of service upon retirement would have an initial “threshold” set at $30,000. Every year, the $1,000 threshold multiplier will be increased by the rate of inflation, but the rate will not fall below 0% in case inflation is negative.

Members who retired between the ages of 55 and 60 prior to the effective date of the bill and are not scheduled to collect accumulated COLA increases until age 61 will receive all accumulated COLA increases, but those COLA increases will be calculated under the new law.

As long as a member’s pension is less than their threshold, when the member is eligible for a COLA it will be 3 percent compounded, which means calculated from the member’s current pension. For example, if the member’s threshold is $30,000, then in every year that the member’s pension is below $30,000, the annual COLA will be 3 percent compounded. So with an initial pension of $25,000, the member’s first COLA would raise his/her pension to $25,750; to $26,522 with the second COLA and $27,317 with the third COLA.

Once a member’s pension equals or exceeds their threshold, the COLA calculation changes. The COLA in every year then becomes 3 percent of the member’s current threshold amount. For example: A member already retired with a current pension of $48,216:

UNDER THE CURRENT COLA

1st COLA -- $49,662
5th COLA -- $57,572
10th COLA -- $66,742
15th COLA -- $77,373
20th COLA -- $89,696
25th COLA -- $103,982

UNDER THE PROPOSED COLA

1st COLA -- $49,145
5th COLA -- $54,265
10th COLA -- $60,272
15th COLA -- $67,321
20th COLA -- $75,592
25th COLA -- $85,297

For example: A member aged 55 that will retire at 61 with 30 years of service and an initial pension of $48,216:

UNDER THE CURRENT COLA

1st COLA -- $49,662
5th COLA -- $57,572
10th COLA -- $66,742
15th COLA -- $77,373
20th COLA -- $89,696
25th COLA -- $103,982

UNDER THE PROPOSED COLA

1st COLA -- $49,145
5th COLA -- $53,305
10th COLA -- $59,312
15th COLA -- $66,361
20th COLA -- $74,632
25th COLA -- $84,338

Staggered COLA Forfeiture

When Tier I active members retire, they would forfeit at least one COLA increase, and as many as five increases, based on a sliding scale tied to the member’s age at the time the bill takes effect. Following the prescribed forfeiture time frame, members will receive continual COLAs annually:

• 50 years and older: Forfeit one COLA increase in a two-year time frame immediately after retirement. The second scheduled COLA would be forfeited.
• 47 to 49: Forfeit three COLA increases staggered every other year over a six-year time frame immediately after retirement, starting with the 2nd scheduled COLA
• 44 to 46: Forfeit four COLA increases staggered every other year over an eight-year time frame immediately after retirement, starting with the 2nd scheduled COLA.
• 43 and younger: Forfeit five COLA increases staggered every other year over a 10-year time frame immediately after retirement, starting with the 2nd scheduled COLA.

Actuarial Benefit Calculation Change

In order to limit the size of pensions determined by the actuarial calculation, the bill changes the two interest rates used in the formula from the mandated 6 percent and 8 percent to a single floating rate: The new floating rate is the interest rate on a 30-year U.S. Treasury bond plus 75 basis points. (0.75 percent) Under current conditions, for example, the new interest rate used in the formula would be 5 percent.

Supplemental Pension Contributions

When the state’s pension obligation bonds are paid off in 2019, the state will automatically earmark $350 million in FY 2019 and $1 billion every year beginning in FY 2020 to help TRS and the other retirement systems retire the collective unfunded liability. These additional payments will continue until the systems’ funding status reaches 100 percent. These payments will be in addition to the state’s regularly set pension contribution. For TRS, this means a “supplemental” payment of $215 million in FY 2019 and $614.9 million in FY 2020 and every year after that until the unfunded liability is paid off.

Mandatory State Pension Contributions

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. This provision, however, can be altered or repealed by the General Assembly in the future.

Optional Defined Contribution Retirement Plan

Up to 5 percent of Tier I TRS members will be able to freeze their current defined benefit pension plan benefits and join a new defined contribution benefit plan that will be in effect until the day they retire. Right now, a TRS DC plan could hold approximately 7,000 Tier I members.

Members would have one opportunity to elect membership in the new DC plan. Once members elect to join the DC plan, they cannot rejoin the DB plan. A member would need to work at least 5 years in order to be vested in the DC plan.

The DC plan is open to active Tier I members only and would begin on July 1, 2015. On that date, all members that have joined the DC plan would have their creditable service frozen on that date for purposes of determining their old DB pension. To determine a member’s DB pension after the member switches to the DC plan, TRS would use the member’s service credit accumulated under both the DB plan and the DC plan upon retirement.

Active members in the DC plan pay an 8.4 percent salary contribution. The state’s contribution would be determined annually. Members could elect to control the allocation of their money for investment purposes, or have TRS administer the investments. Upon retirement, members would receive a DB annuity, plus equal payments from an accumulated DC retirement account until those funds are exhausted.