Thursday, August 10, 2017

“Tier III: where you can be given less for longer service in exchange for a 403(b) program” by John Dillon

“…The creation of a ‘new’ Tier III (SB42) was cradled within the bills recently enacted in the Illinois General Assembly to override the potential veto of a new budget.  The bill’s sponsors – Senator Donne Trotter and Representative Greg Harris – managed a bill of nearly 800 pages, which included the language adopted to create a new Tier III, which provides for a ‘defined contribution’ (403b) in a hybrid arrangement with a lesser-earning defined benefit (pension).

“According to Representative Harris, the task of implementing the bill’s language will fall upon the TRS, SURS, and SERS.  Following the outline of language within the bill, they will develop the structure that will assure new hires of a certain date (possibly sometime in 2018) to enter into the new Tier.  Or they may decide not to. 

“New hires will also be able to choose Tier II, the plan where working 35 years brings parity with a ceiling cap.  Or they can choose Tier III.  And so can ALL the Tier II current hires.  They can move from Tier II to Tier III and participate in a part pension and part 403b program…

“We Are One Illinois provides no information thus far on the new Tier.  Illinois Federation of Teachers does not have anything either.  Go to TRS, and you will find a cogent description of the new bill by Mr. Ingram’s office.  Go to IEA, and you will find a Frequently Asked Questions review of the benefits, which states, ‘The IEA and all the unions within We Are One Illinois labor coalition took a position of neutrality.’

“For [John Dillon], a position of neutrality is unsettling.   Here’s why: Tier III offers some tantalizing differences for the burgled Tier II teacher now 6 years into their profession.  Tier III will raise her retirement earnings ceiling from $112,000 to $127,000.  Contributions for a Tier III teacher will be reduced to 6.2% of salary, rather than the 9% they are now paying.  And they will be provided a defined contribution (think a 403b), for which they will pay 4% of salary and the local will match from 2% - 6%. 

“Looks good from far, but it’s far from good. Tier III reduces the multiplier for final average annuity from 2.2 to 1.25.  This means the break-even point will be moved nearly 40% further into the future.  What took 28 years or 35 years to make parity will take MUCH longer!  Example:  Under 1.25, a teacher will be eligible for 50% of a final averaged salary in 40 years.  The cap of 75% of earnings in retirement will take the Tier III teacher 60 years of teaching.

“The annual cost of living adjustment will no longer contain a 3% simple rate.  Retired Tier III teachers will receive only will get ½ of the CPI, but nothing below zero.

“According to Representative Harris, any teacher electing to move from Tier II into Tier III will have her multiplier frozen at 2.2 for those previous Tier’s years and altered to a 1.25 multiplier from thence on.   Example: Six years at 2.2 will equal more than 13% of final averaged salary.  At 1.25%, a bit over 7%. 

“For the people who want ‘their own’ portable investment program – a 403b – this may be perfect.  Teach a few years before finding another suitable profession.  On the other hand, one can see, that point of breaking even is pushing much farther down the field for a player in the Tier III group. 

“In the FAQ section of Tier III for the IEA, leadership in IEA states: ‘We knew pension legislation of some kind was going to have to pass for there to be a budget.  So, we worked to ensure the unconstitutional model, which had been part of SB16 was not included.  Additionally, we worked to make sure end of career salary increases which could be sued for calculating one’s pension were not reduced from 6 percent to the consumer price index.’

“In Rauner’s outline of the budget, his office identifies the move to a defined contribution as a first priority for our state.  His interest in a consideration model, as proposed by Senate leader Cullerton is extremely valued, but not until some certitude as to its acceptance by the Illinois Supreme Court can be determined.  In other words, to be announced later.  It’s coming.

“But, in actuality, don’t we now already have at this point a form of consideration for those people in Tier II and those coming in at Tier III very soon?  Choose a Tier II and pay more for less – even to the point that your funded ratio in Tier II is now 155% - or choose Tier III, where you can be given less for longer service in exchange for a 403b program which can be taken when you realize you’re being ripped off.

“The ultimate ramifications of this ‘new’ Tier increase my concern for our beleaguered educational system in Illinois. Neutrality?”

For the entire article by John Dillon, click here.


  1. Indeed, Illinois State politicians will use Tier III as a "consideration" to diminish the Pension Protection Clause. Nevertheless, this is just another end run around Article XIII, Section 5 of the Illinois Constitution.

    Changes to the formula for calculating pensions is just another attempt to breach a constitutional contract to obtain a better financial deal for the unethical liars and thieves in the Illinois General Assembly.

    New teachers who are placed in Tier III, and those Tier II teachers who unwittingly opt out to go into Tier III, will be making less money and paying down the State's unfunded liability.

  2. Tier III Pension Plan:

    1.25% X 35 years = 43.75% (age 57)
    1.25% X 45 years = 56.25% (age 67)
    (And there is no compounded COLA)

    Remember: The Pension Protection Clause was intended to insulate public pensions from the danger that government employers would claim that funding shortfalls or other fiscal exigencies required diminishments or impairments.

    Remember: The Pension Protection Clause mandates a contractual relationship between the State of Illinois and public employees. The Clause also mandates the Illinois General Assembly not to impair or diminish public employees' and retirees' rights and benefits. To repeat: The Clause is an "enforceable contractual relationship." In other words, the State and public employees can choose to renegotiate their agreement. This is called "a modification of contractual principles" or consideration. Of course, with Tier II and Tier III members, the State hopes public employees are ignorant of what John Dillon is stating in his post.