What they just did to the Illinois teacher pension system by Fred Klonsky

“On Friday evening those of us who are members of the Illinois Teachers Retirement System received an email blast informing us that ‘significant changes’ had taken place to the pension system as a result of the budget resolution, SB 9.

“The TRS notice explained that the legislature had created a new Tier III which would allow for younger teachers and future teachers (in Illinois but not Chicago) to opt out [of a defined benefit plan and] to invest their retirement savings in a private annuity, like a 401k. The conversion of our Defined Benefit system (DB) to a Defined Contribution (DC) has been a part of the Rauner Turnaround Agenda since he was elected.

“Let’s take a step back. In order for there to be a ‘Tier III’ there had to have been a ‘Tier II.’

“In 2010 the Illinois Democratic legislature, in a nearly secret vote pushed through in less than 24 hours with no hearings or input from anybody, a law that created Tier II for any teacher hired after January 1, 2011...

“According to Bob Lyons, TRS Trustee [in January 2015], ‘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. 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…” (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).

“It is widely assumed that when the first Tier II teacher reaches retirement age, law suits will fly and ‘Social Security chaos will ensue. Meanwhile, the current $130 billion state pension liability will grow.

“Is the new Tier III some feeble attempt to address the Tier II fiasco? I contacted my State Representative Will Guzzardi. He explained:

• ‘Tier III is strictly optional, both for current Tier II members and future members. Any new hire will have the option to choose Tier II if he / she so prefers.

• ‘As I thought, the anticipated cost savings to the state come primarily from the fact that the employer contribution of the DC portion of Tier III will be picked up by local districts instead of the state.

• ‘For some employees, depending on anticipated length of service and other factors, Tier II may be preferable to Tier III. For those who don’t want any stock market risk in their retirement, they can keep a strictly defined-benefit plan under Tier II. For those who prefer the portability of a DC plan or see the combined package as preferable, they can opt in to Tier III…’”

“It was clear what had happened. The Republicans wanted to introduce a DC plan into the public pension system and in order to get the state’s first budget in two years the Democrats needed Republican votes. Once again, pensions became a bargaining chip. It is voluntary now. But who believes it will end there?

“The thought is perhaps by offering Tier II teachers the Tier III investment option, it will solve the problem of Tier II teachers’ pensions that do not meet the safe harbor requirement of the federal government – benefits equal to Social Security…”

For the complete article, What they just did to the Illinois teacher pension system by Fred Klonsky, click here.