Saturday, June 28, 2014

Regarding Illinois’ new pension law for Tier I members (from the Teachers’ Retirement System of the State of Illinois)

The scheduled June implementation of a controversial new state law that changes retirement benefits for all Teachers’ Retirement System members in Tier I was stopped cold in May by a Sangamon County Circuit Court. 

Tier I includes all members who are retired or who first contributed to TRS or a reciprocal system before Jan. 1, 2011. This means that for the foreseeable future, all current TRS retirement benefits, automatic annual increases, eligibility standards and other pension laws will stay in place. The new law remains on the books, but in a legal limbo.

A court injunction delaying implementation of the new law will be in effect until a final decision is reached in a lawsuit challenging the act’s constitutionality. The lawsuit is currently in a circuit court, and it is expected that a final ruling ultimately will be made by the Illinois Supreme Court. The case probably will take many months to resolve.

The new pension law, approved by the General Assembly and signed by Gov. Pat Quinn in December of 2013, had been scheduled to take effect on June 1, 2014. TRS had been working diligently to make sure the transition to the new law was as smooth as possible. All of that work has been put on hold until further notice...

For TRS members in Tier I, the injunction stops changes in the pension code that would have: 

• Decreased the contribution rate for active members from 9.4 percent to 8.4 percent 

• Established a cap on creditable earnings for all active members 

• Increased the retirement age for members under age 46 

• Reduced the size of future cost-of-living adjustments (COLA) for all active and retired members

• Required future retired members to forfeit between one and five COLAs 

• Created an optional retirement plan for a small percentage of active members that is similar to a 401(k)

• Mandated increased annual funding for TRS from state government 

• Provided TRS, for the first time, with the authority to sue the state if adequate funding is not appropriated in any year

The new law is designed to fix a systemic financial problem faced by TRS and the state’s other pension systems that jeopardizes the future payment of retirement benefits. Over the next 30 years, the law eliminates a growing long-term deficit at TRS by increasing state funding and cutting benefits for all Tier I members in order to reduce future expenditures. 

The current TRS unfunded liability is $55 billion, out of a total long-term liability of $93.9 billion. This means that TRS has less than 41 cents for every dollar it owes all of its members over the next 30 years. Without changes to the System’s overall financial structure to correct this imbalance, the unfunded liability will continue to grow until TRS has insufficient assets on hand to pay benefits to its members. 

The principal reason that TRS carries an unfunded liability is that in every year since 1939, legislators have never allocated 100 percent of the money required to fully fund the System. Money routinely has been diverted from TRS to other government spending priorities. The parts of the new law that cut future benefits form the basis of the constitutional challenge. 

The lawsuit contends that any benefit cut violates the pension protection clause of the 1970 Illinois Constitution, which states, “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” 

As the administrative agency in charge of implementing state pension laws for teachers, TRS is a defendant in the lawsuit. The Illinois Attorney General is defending the constitutionality of the law [?], and, under state statutes, is representing TRS in the case. Over the course of the next several months, TRS will continue to provide members with as much information as possible about the status of the lawsuit and what decisions in the court case may mean.

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