Saturday, July 8, 2017

In the News from the Illinois Teachers’ Retirement System: Tier III Benefit Structure Created & Changes to Funding for TRS




In conjunction with this week's passage of a state budget for fiscal year 2018, the Illinois General Assembly approved a new law that significantly changes the Illinois Pension Code by creating an optional "Tier III" benefit structure and changing the way state government funds TRS.

None of the Pension Code changes enacted on July 6 affect active Tier I members or retired members in any way. There are no changes to benefits, active member contributions or health insurance coverage for Tier I and retired members. There are no changes to Tier II except that these members will be able to switch to Tier III.

The legislature did not extend the state's income tax to retirement income.
NEW TIER III BENEFIT STRUCTURE
  • The law gives current Tier II members and future Tier II members – all new teachers – the option of joining a new "Tier III" retirement plan.
  • The optional Tier III "hybrid" retirement plan has two parts – a small life-long "defined benefit" (DB) pension and a "defined contribution" (DC) plan similar to a 401(k).
  • It is unknown at this time when Tier III will be available to members. Before Tier III can be implemented, the plan must be reviewed and approved by the U.S. Internal Revenue Service. It is unknown how long that process may take. The TRS Board will establish the final implementation date of the Tier III plan.
  • For Tier III members, the full retirement age will be 67 years and the automatic annual increase (AAI) is the same as the Tier II AAI – one-half of the previous year's consumer price index, not compounded.
  • The calculation for an initial pension under Tier III is Service Years multiplied by Final Average Salary multiplied by 1.25 percent. The Tier I and Tier II pension calculation is Service Years multiplied by FAS multiplied by 2.2 percent. 

CHANGES TO STATE FUNDING FOR TRS
 
New laws enacted with the state budget are designed to reduce the amount of money TRS will receive in fiscal year 2018 – and in the near future – from state government in its annual contribution to TRS. It is expected that the original state contribution for TRS in fiscal year 2018 – $4.65 billion – will be recalculated.

First, TRS must retroactively "smooth" the fiscal effect of any changes made in the TRS assumed rate of investment return over a period of five years. The "smoothing" applies to any assumption changes from 2012 on.

Second, local school districts will pay more of the cost of a member's pension if that member's salary is equal to or greater than the governor's statutory salary. The district will be responsible for paying the actuarial cost of the benefits earned on the portion of the member's salary that exceeds the governor's salary.

Sincerely,

Teachers' Retirement System of the State of Illinois 




4 comments:

  1. From Fred Klonsky’s Blog:

    At about the 37 minute point of our talk on Hitting Left with the Klonsky Brothers with Alderman and Democratic candidate for governor of Illinois, Ameya Pawar, and following an extended conversation about public employee pensions, I asked, “If the legislature passed a bill changing the benefit structure of the pension system, diminishing benefits, would you sign it?”

    “No, I wouldn’t,” Alderman Pawar said. “Because they keep playing the same game over and over again.”

    I was prescient. Only a few hours earlier, the legislature overrode a veto by Governor Rauner of a budget agreement. That was good. But part of the budget agreement was a change to the pension system that few of us knew was in the agreement. This is bad news.

    Late yesterday I received this notice from the Illinois Teachers Retirement System:

    In conjunction with this week’s passage of a state budget for fiscal year 2018, the Illinois General Assembly approved a new law that significantly changes the Illinois Pension Code by creating an optional “Tier III” benefit structure and changing the way state government funds TRS.

    A Tier III? Let me explain that in 2010, Speaker Madigan pushed through the legislature in 12 hours a Tier II to public pensions that meant that for those hired after January 1, 2011 workers would need to work longer, pay less into the system and receive 60% of the pension that Tier I employees receive.

    The law gives current Tier II members and future Tier II members – all new teachers – the option of joining a new “Tier III” retirement plan. The optional Tier III “hybrid” retirement plan has two parts – a small life-long “defined benefit” (DB) pension and a “defined contribution” (DC) plan similar to a 401(k).

    The change does not impact current retirees or Tier I members. How is it a diminishment? Because a defined contribution system is a stock market gamble compared to our current defined benefit system, which like Social Security, guarantees a planned financial retirement.

    For the time being, it is a choice option for Tier II and the new Tier III employee. But don’t miss the game plan. This is another slow chipping away at the defined benefit system and further undermines the financial stability of TRS by drawing member contributions out of the system.

    By the way, none of the legislators I am in touch with notified us that this was in the bill. Did they know? Did they read what they were voting on? Could those of us who have been in the pension fight for years have mobilized folks to oppose including this Rauner agenda item while still supporting passage of the budget: a tax increase and an override if we knew about this?

    I did read that the budget agreement included $1.5 billion in savings from pension reform and wondered where these “savings” were coming from. Savings without added revenue means a cost to the retirement system. A cost to future retirees. Now we know.

    What else is in the budget bill that we don’t know about yet?

    Fred Klonsky’s Blog: https://preaprez.wordpress.com/2017/07/08/keeping-retirement-weird-chipping-away-at-public-pensions-a-tier-iii/

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  2. This is the same nonsense that Madigan pulls every time legislation is passed. If it weren't for the constitution, they would have forced this down all of our throats. I hope that teachers in Tier 2 aren't fooled by these shenanigans. Poor tier 3 and tax payers who are on the hook down the road. I hope that the IRS throws it out for insufficient compensation. It's another kick the can down the road again. Tier 3 will probably require soc. security by IRS and that could cost the state a bundle.

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  3. Typical Springfield....they fail to make contributions since inception and screw the teachers. Time for the lawyers again.. Are they going to make up the loss in Social Security that teachers lost. Did they forget that Dan Rostenkowski cut public employee pensions effectively already?

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