Senate Bill "We Are One Illinois" Coalition Proposal

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1 TRS Update Pension Reform Proposal - House Bill 1165 Issue: House Bill 1165, sponsored by House Speaker Michael Madigan, D-Chicago, was approved by the House on March 21. The House vote was with 60 votes needed for passage. The bill now moves to the Senate for consideration. Discussion: House Bill 1165 is designed to help eliminate the TRS unfunded liability by reducing the annual cost-of-living adjustments for all TRS Tier I members, active and retired. House Bill 1165 affects all active and retired Tier I members (service before January 1, 2011). The annual COLA would continue to be 3 percent annually, calculated from a member s current pension. All future COLAs after the bill takes effect would apply only to the first $25,000 of a pension. Effectively, with a $25,000 cap, the Tier I COLA is $750 every year if the member s salary exceeds $25,000. For a member with a salary of $25,000 or less, the 3 percent COLA increase would apply to the entire pension until the total pension exceeds $25,000. Currently, the average TRS pension is $48,216.As an example, under the current COLA law, that $48,216 pension grows to $49,662 in the second year and $51,152 in the third year. Under HB 1165 with a capped COLA, the same pension would grow to $48,966 in the second year and $49,716 in the third year. All members would not receive a COLA until age 67 or five years after they retire, whichever comes first. This would apply to all retired members already receiving a COLA under the current rules. These members could see their COLA suspended for a period of time until they meet the new COLA eligibility rules, but these members would not lose any COLAs previously received. TRS will not take a position on House Bill It is the legislature s job to dictate the laws and rules that govern TRS and other public pension systems. The job of TRS is to administer those laws and work to secure the System s finances so that the promises made to generations of teachers by the General Assembly can be kept. Senate Bill "We Are One Illinois" Coalition Proposal Issue: On May 9 the Illinois Senate approved Senate Bill 2404 on a vote with 30 needed for passage. The proposal was drafted by the We Are One Illinois Coalition and Senate President John Cullerton, D-Chicago, and is designed to help solve the state s public pension financial problems over the long term. The Coalition said this proposed solution involves benefit reductions and a strong guarantee in law that state government will make its annual pension contributions in the future. Discussion: The bill requires all active and retired Tier I TRS members to make a choice about the future of their individual benefit structure. President Cullerton believes that the choice

2 provisions ensure that the proposal does not violate the pension protection clause of the Illinois Constitution because members are part of the decision-making process. Sponsors project that Senate Bill 2404, if enacted, would reduce the total unfunded liability of the five pension systems by $8.5 billion to $15.7 billion. The projection is that SB 2404 would save the state between $45 billion and $51 billion in future pension expenditures. The projections say that the bill would free up $850 million in the fiscal year 2015 state budget for other purposes. TRS will not take a position on Senate Bill It is the legislature s job to dictate the laws and rules that govern TRS and other public pension systems. The job of TRS is to administer those laws and work to secure the System s finances so that the promises made to generations of teachers by the General Assembly can be kept. Here are the choices outlined in the bill for active TRS Tier I members and retired TRS Tier I members: Active Tier I members would choose between three options: Active Option 1 The TRS Cost-of-Living Adjustment formula would be 3 percent annually calculated from the member s original pension. Automatic forfeiture of two years of the member s COLA once the member is eligible for a COLA. Access to state-subsidized health insurance in retirement. Access to an Early Retirement Option similar to the current ERO. Access to a new optional cash balance plan to supplement the member s pension. Active Option 2 The TRS COLA would continue to be 3 percent annually calculated from the member s current pension. No access to state-subsidized health insurance in retirement. All future salary increases from the effective date of the law will not count when the member s future pension is calculated. o Salary increases included in personal or organized labor contracts at the time the law takes effect would be included in the pension calculation. Salary increases included in renegotiated contracts or amendments to existing contracts would not be included in the pension calculation Active Option 3 Active member contributions would increase by one percentage point in the first year after enactment and increase by another one percentage point in the second year after enactment. The current active member contribution is 9.4 percent. The TRS COLA would continue to be 3 percent annually calculated from the member s current pension. Automatic forfeiture of three years of the member s COLA once the member is eligible for a COLA. Access to state-subsidized health insurance in retirement.

3 All future salary increases from the effective date of the law would count when the member s future pension is calculated. Retired Tier I members would choose between two choices: Retired Option 1 The TRS COLA would continue to be compounded. The COLA would be 3 percent annually calculated from the member s current pension. A staggered automatic forfeiture of two years of the member s COLA after the effective date of the bill. A member that has not received their initial COLA will receive that accumulated COLA at age 61 before the staggered forfeiture begins. Access to state-subsidized health insurance in retirement. Retired Option 2 The TRS COLA would continue to be 3 percent annually calculated from the member s current pension. No access to state-subsidized health insurance in retirement. For school districts, there is no shift of the annual cost of pensions from the state to local school districts. The bill contains language which all but requires state government to pay its full annual contribution to TRS and the other state pension systems. If the state does not pay its annual contribution to TRS within a set period of time, TRS could go to court to force the state to pay the contribution in the same way that the Illinois Municipal Retirement Fund can force local governments to pay their contributions. The bill is designed to make TRS 90 percent funded by Once the state s outstanding pension obligation bonds are paid off in fiscal year 2020, the state will contribute an additional $1 billion each year above the regular annual pension contribution to help pay off the unfunded liability. On May 9 the Illinois Senate approved the bill on a vote with 30 needed for passage. The measure is now pending in the House Rules Committee. Early Retirement Option Extension - Public Act (Senate Bill 1366) Issue: Gov. Pat Quinn signed Senate Bill 1366 into law on June 28, The law extends the Early Retirement Option to TRS members until June 30, The law was sponsored by State Sen. Daniel Biss, D-Evanston and State Rep. Elaine Nekrtiz, D-Northbrook. Discussion:The major difference between the old ERO and this new ERO are the increases in the member and school district contributions necessary to fund the program. The increases were recommended by the General Assembly s Commission on Government Forecasting and Accountability to cover the anticipated future cost of the program.

4 For TRS members, the one-time contribution to participate in ERO is 14.4 percent of salary for every year the member is under age 60 or for every year the member s creditable service is less than 35 years, whichever is less. The member contribution rate in the old ERO program was 11.5 percent. For school districts, the one-time contribution to have an employee participate in ERO is 29.3 percent of the member s salary for every year the member is under age 60. The employer s contribution rate in the old ERO program was 23.5 percent. The law keeps in place the current 0.4 percent payroll contribution paid by all active members to help fund the current ERO program. Under the new law, the eligibility criteria for participating in ERO will be negotiated and set by each school district and the union representing TRS members in that district. For the first time, school districts will not be required to allow at least 10 percent of their ERO-eligible employees to participate in the program. The bill was signed in to law as Public Act on June 28, 2013 by Governor Pat Quinn. Pension Reform Proposal - Senate Bill 1 Issue: A new comprehensive pension reform proposal was amended onto Senate Bill 1 on May 1, 2013 by House Speaker Michael Madigan, D-Chicago. The proposal seeks to stabilize TRS finances and eliminate the System s unfunded liability in 30 years. TRS will not take a position on Senate Bill 1. It is the legislature s job to dictate the laws and rules that govern TRS and other public pension systems. The job of TRS is to administer those laws and work to secure the System s finances so that the promises made to generations of teachers by the General Assembly can be kept. Discussion: Senate Bill 1, as amended, affects all active and retired Tier I and Tier II members and contains the following provisions: COLA Formula The bill outlines two formulas to calculate the size of each year s COLA after enactment. For each TRS member, the formula to be used will be determined each year by the size of the member s initial pension. Each member, upon retirement, will multiply their service credit by $1,000 to determine a threshold that will be used in the future to determine the annual COLA. For example, a member with 30 years of service upon retirement would have a threshold set at $30,000. If this member s original pension in their first year of retirement is less than $30,000, then when the member is eligible for a COLA it will be 3 percent calculated from the member s original pension. In every year that the member s pension is below $30,000, the annual COLA will be 3 percent calculated from the member s current pension. Once this member s pension equals or exceeds $30,000, the COLA calculation changes. The COLA in every year then becomes 3 percent of $30,000, or $900. In every year thereafter, this member s COLA is $900.

5 If this member s original pension equals or exceeds $30,000, then when the member is eligible for a COLA it will be 3 percent of $30,000, or $900. This member s COLA in every year thereafter will be $900. Right now, the average TRS pension is $48,216. With the current COLA that pension grows to $49,662 in the first year that member is eligible for a COLA and $51,152 in the second year. Under Senate Bill 1, a member with 30 years of service and a pension of $48,216 will see that pension grow by $900 to $49,116 in the first year the member is eligible for a COLA. In the second year, the member s pension will increase by another $900 to $50,016. COLA Eligibility Members would not receive a COLA until age 67 or five years after they retire, whichever comes first. This would apply to all retired members already receiving a COLA under the old rules. These members could see their COLA suspended for a period of time, but would not lose any COLAs previously received. Reportable Salary The salary used to determine an active member s final average salary would be capped at the maximum Social Security wage base in 2012, which is $110,100. This cap would grow every year by one-half of the urban Consumer Price Index in the previous year. However for a TRS member employed under an individual or union contract, the cap would be set at the member s maximum salary under the contract at the time the law takes effect, if the salary exceeds the cap set in law. Contractual salaries that are below the cap when the bill takes effect would be allowed to rise to the cap. Active Member Contributions Payroll contributions would increase from 9.4 percent to 10 percent during the school year and increase to 11 percent beginning in the school year. Retirement Age The retirement age would be set on a sliding scale based on the member s age and the time the law takes effect: 45 and older: Current rules apply. Retire between the ages of 55 and 59 with at least 20 years of service and receive a reduced benefit, or at 60 or more and receive a full benefit 40 to 44 years old: Retire at 56 to 60 with at least 20 years of service for a reduced benefit and at 61 for full benefits. 35 to 39 years old: Retire at 58 to 62 with at least 20 years of service for a reduced benefit and at 63 for full benefits. 34 and younger: Retire at 60 to 64 with at least 20 years of service for a reduced benefit and at 65 for full benefits. Sick Time TRS members hired after the effective date of the bill will not be able to add unused sick time to their total service credit when the time comes to calculate their initial pension. For School Districts There is no shift of the annual cost of pensions from the state to local school districts.

6 For State Government If the state does not pay its annual contribution to TRS within a set period of time, TRS could go to court to force the state to pay the contribution in the same way that the Illinois Municipal Retirement Fund can force local governments to pay their contributions. The law is designed to make TRS 100 percent funded in 30 years. Once the state s outstanding pension obligation bonds are paid off in fiscal year 2019, the state will contribute an additional $1 billion each year above the regular annual pension contribution to help pay off the unfunded liability. Approved by the House, May 2, 2013, on a vote with 60 needed for passage. Rejected by the Senate on May 30, 2013 on a votes with 30 needed for passage. Increasing the Retirement Age - House Bill 1166 Issue: On March 14, 2013, the Illinois House approved a proposal that would increase the retirement age for all TRS members who are under the age of 45 in The House vote to send the bill to the Senate for consideration was The proposal is sponsored by House Speaker Michael Madigan, D-Chicago. Discussion: The retirement age would be set on a sliding scale based on the member s age and the time the law takes effect: 45 and older: Current rules apply. Retire between the ages of 55 and 59 with at least 20 years of service and receive a reduced benefit, or at 60 or more and receive a full benefit. 40 to 44 years old: Retire at 56 to 60 with at least 20 years of service for a reduced benefit and at 61 for full benefits. 35 to 39 years old: Retire at 58 to 62 with at least 20 years of service for a reduced benefit and at 63 for full benefits. 34 and younger: Retire at 60 to 64 with at least 20 years of service for a reduced benefit and at 65 for full benefits. TRS will not take a position on House Bill It is the legislature s job to dictate the laws and rules that govern TRS and other public pension systems. The job of TRS is to administer those laws and work to secure the System s finances so that the promises made to generations of teachers by the General Assembly can be kept. Approved by the House, March 14, 2013 on a vote and pending in the Senate on the order of the 2nd reading.

7 Cap on Salaries Used to Determine Final Average Salary - House Bill 1154 Issue: On March 14, 2013, the Illinois House approved a proposal that would reduce the pensions of Tier I members by capping a member s salary that is reportable to TRS and used in benefit calculations. The bill was sent to the Senate on a vote. Discussion: Under House Bill 1154, the salary reported for all active members and eventually used in benefit calculations would be capped at the maximum Social Security Wage Base, which is $113,700 in The Wage Base changes each year in response to economic conditions. There are exemptions to the cap: A TRS member employed under an individual or union contract, the cap in the bill would not be set at the Social Security Wage Base, but would be set at the member s maximum salary under the contract at the time the law takes effect if that contractual salary exceeds the Social Security Wage Base. The Social Security Wage Base cap would apply to any member whose maximum contractual salary is below the Wage Base when the bill takes effect. For members who are not employed under a contract and have a current salary that exceeds the Social Security Wage Base, the cap is set at their current salary. This proposal is similar to a wage cap currently in state law that affects the calculation of the final average salary for all Tier II members. In fiscal year 2012, the average salary of active TRS members was $66,696. TRS will not take a position on House Bill It is the legislature s job to dictate the laws and rules that govern TRS and other public pension systems. The job of TRS is to administer those laws and work to secure the System s finances so that the promises made to generations of teachers by the General Assembly can be kept. Passed by the House, March 14, 2013, on a vote and pending in the Senate on the order of the 2nd reading. Extending the Illinois Income Tax to Pensions and Retirement Income Issue: Currently, Illinois citizens do not have to pay Illinois income tax on pensions and other retirement income. Legislative leaders have discussed changing the law to extend the income tax to pensions and all retirement income. Discussion: No legislation has been drafted yet, but initial suggestions called for taxing pensions at 5 percent which is the current state individual tax rate. He estimated that extending the income tax to retirement income would raise $1.6 billion annually for the state. Any extension of the income tax would exempt modest pensions, but that has yet to be defined. TRS has not seen any specific language so it is difficult to analyze the concept. However, it is likely that extending the income tax to retirement income would be challenged in court. Taxing pensions and retirement income also will be very difficult to pass in the legislature because seniors are a large, active group of voters and they do go to the polls.

8 TRS cannot predict what the courts may do, but it is likely that extending the income tax to pensions is constitutional and would not violate the pension protection clause of the Illinois Constitution. Taxing pensions does not diminish or impair the benefit teachers and public employees receive, it is a tax on that benefit. In a practical sense, taxing pensions does diminish the retirement benefit. Legally, however, it would not be a diminishment. Requiring Retired State Employees to Pay Health Insurance Premiums Issue: On June 21, 2012, Governor Pat Quinn signed legislation that requires all current and future retired state employees to pay health insurance premiums, just as retired teachers have for decades. The new law is Public Act Discussion: This law will not have a dramatic effect on the vast majority of TRS members who are in the Teachers Retirement Insurance Program because retired TRIP members already pay insurance premiums. Only about 1,200 TRS members will be affected by the bill, mostly certified teachers who work for state agencies and the Illinois State Board of Education. The law will set up a sliding scale for premiums based on several factors, including retirement income and years of service. The Department of Central Management Services will determine premium levels. TRIP members already pay an average premium in retirement of $577 a month, depending on where they live and what coverage they select. 62 percent of TRIP funding now comes from active and retired members 42 percent from retired members and 20 percent from active teachers. The remaining 20 percent of the cost is a state subsidy. This law makes the other state retiree health insurance plans more like TRIP in the way it s funded. Under the old law, enacted in 1997, state employees who have 20 years of service do not pay premiums in retirement for health insurance. Retiree health insurance costs the state $880 million a year and 90 percent of retired state employees do not pay any premium. While there will probably be a court challenge to this bill, most legal experts say that health insurance plans for retirees are not protected by the Illinois Constitution because health insurance benefits are by state officials and organized labor.