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Fri November 29, 2013
Pension Legislation Details Released
Earlier this week, legislative leaders announced a deal to bring a pension overhaul before the full chambers. It is estimated to save $160 billion over the next 30 years. Illinois has the nation's most underfunded retirement systems.
On Friday, the leaders' staff sent around the memo below that highlights changes for public employee pensions. Lawmakers are expected in Springfield to vote on legislation Tuesday, December 3. Employee unions have already indicated opposition and if it passes, a legal challenge is likely.
PENSION REFORM PROPOSAL
Details as of 11/29/13
Funding schedule and method for certifying contributions: Establishes an actuarially sound funding schedule to achieve 100% funding no later than the end of FY 2044. Contributions will be certified using the entry age normal actuarial cost method (EAN), which averages costs evenly over the pensioner’s employment and results in level contributions.
Supplemental contributions: The State will contribute (i) $364 million in FY 2019, (ii) $1 billion annually thereafter through 2045 or until the system reaches 100% funding, and (iii) 10% of the annual savings resulting from pension reform beginning in FY 2016 until the system reaches 100% funding. These contributions will be “pure add on,” which means State contributions in any year will not be reduced by these amounts.
Funding guarantee: If the State fails to make a pension payment or a supplemental contribution, a retirement system may file an action in the Illinois Supreme Court to compel the State to make the required pension payment and/or supplemental contribution set by law each year.
Employee contribution: Employees will contribute 1% less of their salary toward their pension.
Annual annuity adjustment (COLAs): Future COLAs will be based on a retiree’s years of service and the full CPI. The annual increase will be equal to 3% of years of service multiplied by $1,000 ($800 for those coordinated with social security). The $1000/$800 will be adjusted each year by the CPI for everyone (retirees and current employees). Those with an annuity that is less than their years of service multiplied by $1000/$800, or whatever the amount is at the time of retirement, will receive a COLA equal to 3% compounded each year until their annuity reaches that amount.
Additionally, current employees will miss annual adjustments depending on age: employees 50 or over miss 1 adjustment (year 2); 49-47 miss 3 adjustments (years 2, 4, and 6); 46-44 miss 4 adjustments (years 2, 4, 6, and 8); 43 and under miss 5 adjustments (years 2, 4, 6, 8, 10).
Pensionable salary cap: Applies the Tier II salary cap ($109,971 for 2013), which is annually adjusted by the lesser of 3% or ½ of the annual CPI-U. Salaries that currently exceed the cap or that will exceed the cap based on raises in a collective bargaining agreement would be grandfathered in.
Retirement age: For those 45 years of age or under, the retirement age will be increased on a graduated scale. For each year a member is under 46, the retirement age will be increased by 4 months (up to 5 years).
Effective rate of interest (ERI): For all purposes, the ERI for SURS and the rate of regular interest for TRS will be the interest rate paid by 30-year U.S. Treasury bonds plus 75 basis points.
GARS Tier 2 fix: Brings GARS Tier 2 salary cap and annual adjustment in line with other Tier 2 benefits.
Pension abuses: Prohibits future members of non-governmental organizations from participating in IMRF, SURS, and TRS. Prohibits new hires from using sick or vacation time toward pensionable salary or years of service (applies to SERS, SURS, TRS, IMRF, Cook County, and Chicago Teachers).
Defined contribution plan: Beginning July 1, 2015, up to 5% of Tier 1 active members have the option of joining a defined contribution plan. The plan must be revenue neutral and employee contributions will be equal to those for the defined benefit plan. If a member chooses to opt into the defined contribution plan, benefits previously accrued in the defined benefit plan will be frozen.
Collective bargaining: All pension matters, except pension pickups, are removed from collective bargaining.
Healthcare payments: Prohibits the State pension systems from using pension funds to pay healthcare costs.