Saturday, January 10, 2015

“TRS Tier II members are paying the entire cost of their pensions plus an extra 2.4 percent to TRS. That extra 2.4 percent subsidizes the pensions of Tier I members” —Dick Ingram, TRS Executive Director

According to Bob Lyons, TRS Trustee, “the financial inequities of the Tier II funding and benefit structure must be fixed. Current law requires Tier II members to pay 9.4 percent of their salary and that subsidizes both Tier I and Tier II benefits. The Tier II contribution is 50 percent higher than the benefit’s value, which is 6 percent of their pay.

“In 20 years, when Tier II members are a significant majority in TRS, the subsidy they pay will cause a reduction in the state’s annual contribution. Eventually, the state will not owe any annual contribution to TRS because the members will be paying the entire cost. This is fundamentally unfair to Tier II members.

“These new positions will cost the state more money with an increase of the FY 13 contribution and a reduction of contributions from Tier II teachers. We believe that a funding requirement can be written that will make the payment guarantee a benefit that can be protected by the constitution, and that too will cost the state money” (Insolvency by Bob Lyons, TRS Board, March 2012). 

An actuarial analysis of Senate Bill 1 shows the bill would create Social Security chaos, eventually leading to massive local property tax hikes and making the proposal an unfunded mandate of historic proportions.

The problems relate to the benefit changes affecting “Tier 1” employees, i.e., those hired prior to January 1, 2011. The “Tier 2” benefit structure for employees hired after that date already faces problems because the benefit is worth less than employees are paying for it. Tier 2 is a looming issue that must be resolved, but SB 1 would create the same problem for the Teachers’ Retirement System (TRS) and, likely, the State Universities Retirement System (SURS).

According to the TRS actuaries’ analysis of SB 1,”[T]he current proposal [SB 1]…creates a Social Security compliance issue for Tier 1 in addition to the existing issues for Tier 2.” In other words, Illinois’ school districts would eventually begin paying the 6.2% employer portion of Social Security taxes. This is because TRS – and, very likely, SURS – would fail to qualify to be exempt from Social Security. Teachers, or 80% of Illinois public employees, are not currently eligible for Social Security, thus saving the state billions of dollars.

Given already tight budgets, this represents a huge unfunded mandate thrust upon school districts – perhaps the largest ever. School districts would endure a huge TRS pension cost-shift – far from paying nothing under a cost-shift. Property taxpayers would almost certainly be asked to pick up the tab through new levies.

The analysis further states that “SB 1 provisions result in Tier 1 and Tier 2 members paying for more than the cost of their benefits.”

"A vote for Senate Bill 1 [was] a vote to raise taxes, violate the law, and go to unnecessary extremes to hurt working families," Dan Montgomery, president of the Illinois Federation of Teachers said. "And it takes a certain kind of audacity to force workers to pay more than their pension is worth and create a system that penalizes members for being a part of it" (A TRS actuarial study reveals SB 1 would create Social Security Chaos and force property tax hikes, May 2013). The TRS actuarial study is available at the following link: SB 1 as amended May 1, 2013 (House Amendments 1 & 3) Comparison of Contributions and Actuarial Accrued Liability).

It is estimated that the total value of Tier II retirement benefits for newer and future teachers outside Chicago would be approximately one-third the total value of the Tier I benefit for other teachers when they retire. 

As stated by Dick Ingram, TRS Executive Director, “Tier II is the pension benefit structure created by the General Assembly in 2010 for anyone who had not contributed to TRS or another Illinois public pension system before January 1, 2011. Tier II is designed to help solve the financial problems faced by TRS and the other systems by reducing pension benefits for these new members. Lower pensions mean reduced long term costs for the state.

“If Tier II is left alone, it will accomplish its mission. The $61.6 billon TRS unfunded liability will shrink over several decades and eventually be eliminated because the state will pay less to the ever-growing number of Tier II members. In fact, at some point in the future, we estimate that Tier II members actually will help create a surplus of funds for TRS that effectively could eliminate the need for any state government contribution to the System.

“But the core of Tier II – the reduced benefits structure – is a problem the Teacher Recruiting and Retention Task Force will review. The benefit structure is unfair to all Tier II members. Right now, a Tier I member’s pension costs roughly 20 percent of an active member’s salary. Because of the benefit reductions in Tier II, a Tier II member’s pension is worth just 7 percent of an active member’s salary. However, by law, active Tier II members of TRS, like me, pay the same 9.4 percent salary contribution to the System that active Tier I members pay.

“What all this means is that Tier II members are paying the entire cost of their pensions plus an extra 2.4 percent to TRS. That extra 2.4 percent subsidizes the pensions of Tier I members” (Topics and Report, Teachers Retirement System of the State of Illinois, winter 2015).

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