Wednesday, July 12, 2017

Tier II & Tier III Optional Benefit Structures for TRS of Illinois (A Short Synopsis of Senate Bill 42, Public Act 100-0023 "Budget Implementation Act" Pages 270-83) by John Dillon

·      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.

·      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.”

  6. The following is from the Teachers’ Retirement System of Illinois:

    July 10, 2017 - In early July the General Assembly approved a new law that significantly changed the Illinois Pension Code by creating a voluntary “Tier III” benefit structure. The law also alters the way the state funds TRS.

    The pension code changes are designed to be cost-saving measures for state government and were enacted as part of a $36.1 billion state government budget for fiscal year 2018.

    None of the Pension Code changes affect active Tier I members or retired members in any way. There are no changes to Tier I benefits, active member contributions or health insurance coverage.

    The new law gives current Tier II members and future Tier II members the option of joining a new “Tier III” retirement plan. After Tier III is implemented, new members will automatically become a part of Tier III unless they opt into Tier II. 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 403(b).

    However, 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...

  7. Under the Tier III plan:

    Members will make payroll contributions to the pension portion that are based on the cost of their benefits, but no more than 6.2 percent of salary.

    Members will contribute a minimum of 4 percent to the DC portion of the plan.

    Normal retirement age is determined by Social Security. Currently, 67 years.

    The Final Average Salary (FAS) for calculating an initial pension is the member’s average salary during the last 10 years of service. By comparison, the Tier I FAS is the highest four consecutive salaries out of the last 10 years of service and the Tier II FAS is the highest eight consecutive salaries out of the last 10 years of service.

    The automatic annual increase (AAI) is similar to the Tier II AAI – one-half of the previous year’s consumer price index, not compounded. The Tier I AAI is 3 percent annually, compounded.

    The Tier III calculation for an initial pension is Service Years multiplied by Final Average Salary multiplied by 1.25 percent. For comparison, the Tier I and Tier II pension calculation is Service Years multiplied by FAS multiplied by 2.2 percent.

    Local school districts, rather than the state, will bear the primary burden of making the “employer contributions” to both the DB and DC plans in Tier III.

    In addition, the new law makes two changes to how state government calculates the amount of money TRS will receive from state government in fiscal year 2018 and in the near future. It is expected that the original state contribution for TRS expected in fiscal year 2018 – $4.65 billion – will be recalculated.

    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. Up until now, the fiscal impact of change in the assumed was totally absorbed at one time. For example, in 2016 TRS reduced its assumed rate of investment return from 7.5 percent to 7 percent and the result was a $402 million increase in the fiscal year 2018 state contribution to TRS. Under this new law, that $402 million increase would be phased in over a five-year period.

    In addition, 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 of about $180,000. The district will be responsible for paying the actuarial cost of the portion of the member’s pension that exceeds $180,000.

    Also in conjunction with the fiscal year 2018 budget, the General Assembly enacted a 32 percent increase in the state’s income tax, which will raise an estimated $5 billion in new revenue for the state. The individual tax rate will increase, effective on July 1, 2017, from 3.75 percent to 4.95 percent. The corporate tax rate will increase, effective on July 1, 2017, from 5.25 percent to 7 percent (Teachers’ Retirement System of Illinois).

  8. Also from May 11, 2011 on this blog:

    The Tier-Two Pension Plan:

    SB 1946 passed on March 24, 2010 in approximately 10 hours (There was no public policy for this legislature); it was signed into law on April 14, 2010. It began January 2011.

    Note: Tier II members are subsidizing both Tier I and Tier II benefits. In the future, when Tier II members are the 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 and school districts will be responsible for making up the difference. Furthermore, these teachers will receive a TRS pension that will be less than Social Security; thus, it will be in violation of the Safe Harbor provision of the Social Security Administration, which states that anyone who does not receive Social Security must receive a benefit equal to a Social Security benefit.

    Special note: teachers do not receive Social Security; the State of Illinois saves billions of dollars by not having to pay into Social Security.