Wednesday, July 12, 2017

John Dillon’s Synopsis of the previous post entitled: Tier II (Tier III) Optional Benefit Structures for TRS of Illinois (from Senate Bill 42, Public Act 100-0023 "Budget Implementation Act" Pages 270-83)

·      New members or old (Tier 2) have 30 days within which to make this selection.

·      To opt into the defined contribution or to opt to stay within Tier II is an irrevocable decision? 

·      Determination of a final average salary will be increased to the average of the last ten years of earnings.  

·      Such earnings cannot exceed the federal Social Security wage base in effect at that timeCurrently $127,200.

·      No retirement annuity unless the participant has attained 67 years of age and meets the other necessary criteria.                                                                                       
·      Multiplier is now at 1.25% for each year of service time’s final average salary.  No longer 2.2. 

·      Increases in annuity payouts are provided annually as measured by the BLS measurement of the consumer price index, but such payments will be 1/2 of the unadjusted measure of the consumer price increase. 

·      Survivors will be provided 66 and 2/3% of the dying spouse's retirement annuity at time of death.  

·      Employees not contributing to a defined contribution shall part with 6.2% of their salary to the retirement system.  And this cost will not be more than the 6.2% unless such employees have decided to make contributions to the defined contribution plans available under this act.

·      In addition, the 6.2% can be lowered by agreement of the State Actuary and CGFBA to a lesser amount if the "normal costs" are reduced.  If the normal costs increase, the rate shall be capped for employee at 6.2%.  Neither of these variations are involved in those who choose a defined contribution.

·      Tier 2 and new Tier 3 hires can choose to join a defined contribution plan that "aggregates" employer and employee contributions.  The term aggregate means to add together; i.e., participants pay in and are given a match or sweetener to do so by the employer.  This is likely a cost shift to districts. [Read my comment on shifting the normal costs].

·      Tier 2 or 3 members who join the defined contribution plan will pay 4% of salary to the plan.  The employer shall pay an additional amount, not beyond 6% of the employees’ salary and no lower than 2%.  I see no basis for the differences.  Is this a negotiated item?

·      The State Board of Investments and private sector companies will help plan investments.  Hello, Ken Griffin and Gov. Rauner’s friends!

·      Earlier collected earnings in TRS may be rolled over into the plan based upon authorized federal law and the retirement system as long as they are qualified plans. The concept of “qualified plans” leaves much to be desired.  I remember that Bernie Madoff met ERSA requirements for “qualified plan” before later changes.

·      Each retirement system will reduce the employee's contributions to the contribution plan by the costs of administrative fees and costs of offerings (think advertising, etc.)...

For John Dillon's entire response, click here.

For previous post, click here.


  1. Re: Shifting Normal Costs (from Nov. 24, 2014)

    If Illinois policymakers pass a bill to shift its responsibility of paying the “normal costs” to local school districts, many school districts would not be able to afford to pay these costs, even if they are “phased in for a few years.”

    “A shift would create a new and large financial requirement for school districts, which would be difficult for many to meet. Moreover, Illinois ranks last in terms of state spending on K-12 education, and school districts are already relying heavily on local property taxes. Shifting the state’s normal cost obligation onto school districts would only mean that an even higher proportion of school districts’ revenue would come from property taxes.

    “[Furthermore,] property tax bases would not be sufficient to absorb any shift in the employer normal cost for teacher pensions… School districts are demographically and financially varied, and it would be difficult to impose a uniform normal cost shift on them… Illinois ranks last in terms of state spending on K-12 education, and school districts are already relying heavily on local property taxes… While shifting the state’s normal cost obligations onto school districts may provide some relief to the state’s budget, it will not mitigate these financial obligations and will instead push them onto school districts that, on average, already derive the majority of their revenue from local sources” (The Center for Tax and Budget Accountability, March 2012).

    What would be other probable effects? In cash-strapped school districts, of which there are many, teachers would not receive increases in their salaries; many teachers would lose their jobs; student programs would be reduced or eliminated; class sizes would increase; it would be more difficult to recruit, as well as retain and attract, the best teaching candidates… (Education Sector Policy Briefs).

    The public school system in Illinois would be jeopardized; the public school teacher’s dignity and guaranteed retirement security would be imperiled, and their students’ right to be taught by the very best teachers available in Illinois would be at risk.

    Approximately one-third of the total pension payment is the normal costs; the other two-thirds of the payment is the interest owed on the debt that the state created for not fully funding the pension system for almost six decades. To transfer the normal costs of the teachers’ retirement system to the school districts is to diminish the state’s role in providing income retirement security to its public employees.

  2. From May 11, 2011 on this blog:

    Tier-Three Pension Plan:

    --A 401(k)-style Defined-Contribution benefit plan:
    --Teachers would pay 6% of their salaries under this plan. If school districts decide to participate in this option, they would match teacher contributions;
    --A Defined-Contribution Plan is not a guaranteed pension plan;
    --Benefits are based on investment earnings; there are no survivor or disability benefits; investment fees are paid by member.

  3. From February 11, 2012 on this blog:

    ...Because we are victims of today’s disappearing and weakened organized labor unions that were once the guardians of middle-class workers and a representative democracy; because we are victims of our unions' lack of strong leadership and their lack of sustained organizational acumen, and because of our own indecisiveness and political ignorance; because of our inability to marshal essential resources and to draw upon experts in the fields of economics and law; because of our inability to build an effective coalition and to launch a counter-attack against the arrogant, wealthy minority that is waging an economic war against the poor and middle class in Illinois and elsewhere, we will continue to be the scapegoats for the reprehensible problems created by the “wealthy elite” until we mobilize our collective efforts against their powerful economic interests, their lucrative lobbying of the state’s policymakers, and their insistence upon deficit reduction by way of public “pension reform.”

  4. In the "right-to-work" state of Florida, the attempt to hire and retain excellent teachers is mere window dressing - as are glitz-laden charter schools who hire high school graduates at $100 per day for the 180 day school year and call them full-time teachers as long as they promise to graduate from college someday. None of the charter school "teachers" are union members; charter schools refuse to have any unions. The right-to-work laws pretty much neutralize public school teachers in unions.
    You can pretty much guess the quality and professionalism of people who willingly accept a salary of $18,000 per year. The most frightening aspect to this is that they do what they are told - read scripted lessons while refusing to answer questions not recognized with the teacher-version text books. They call the police officers assigned to schools whenever even repeated minor rule infractions occur. I have spoken to many of these teachers in Brevard County, the Space Coast.
    Why do I mention this from Florida?
    It is on its way to Illinois in one form or another. The Illinois unions, the IEA and the IFT, must not remain neutral now or ever.

  5. Placing Illinois Teachers in Social Security via 401k's (from the Teachers Retirement System):

    “Issue: Requiring newly-hired Illinois teachers to become part of Social Security would help ease the burden on TRS, lower the state’s contribution to public pension systems, help ease the long-term financial problems facing Social Security, and create more income stability for retired teachers.

    “Discussion: Making newly-hired teachers pay into Social Security and allowing them to be eligible for benefits would affect all current and retired teachers. Illinois teachers have never been part of the Social Security system. Most teachers rely almost solely on a TRS pension during retirement. Active teachers contribute 9.[0] percent of their paycheck to help fund TRS and school districts contribute 0.58 percent of every teacher’s salary to the System. Last year, all told, teachers contributed $917 million to TRS and school districts contributed $155 million.

    “For new teachers to become part of Social Security this scenario would mean a mandatory 12.4 percent payroll deduction split evenly between the member and the employer, which in the case of Illinois teachers is school districts and state government. Teachers would still be required to contribute 9.[0] percent of salary to TRS.

    “For school districts, the cost of teacher pensions would immediately rise by a considerable amount. Instead of contributing 0.58 percent per new teacher, every district would have to contribute 6.2 percent per teacher. It is estimated that this increased cost would equal $41 million for Illinois school districts in the first year and more than $2.4 billion over 10 years. Plus, districts would still have to contribute 0.58 percent for each participant in the current system.

    “Finally, a 1999 study by the General Accounting Office found that adding teachers and other public employers from around the country who are not currently in Social Security would create, at best, a temporary surge in revenue for Social Security. Over the long term, adding teachers to Social Security would only increase the System’s total obligations and deepen the long-term funding problem.”