December 6, 2012
On the final day of the General Assembly’s fall veto session, a bipartisan group of State legislators unveiled a new pension reform proposal designed to help resolve the State’s pension crisis.
Governor Pat Quinn has called on the General Assembly to make pension reform its top priority and to take action by January 9, 2012, when the newly elected members of the legislature will be sworn in. The total unfunded liability of the State’s five retirement systems stood at $96.8 billion, as of June 30, 2012 and the systems had a combined funded ratio of only 39%.
House Bill 6258 was introduced on December 5, 2012 by Representative Elaine Nekritz, who serves as the chair of the House Personnel and Pensions Committee. The bill has 21 co-sponsors. Unlike other recent attempts at pension reform, the proposal does not include any members of the leadership from the House or the Senate as a sponsor. The group plans to request an actuarial analysis from the pension funds to generate cost savings data associated with the bill before any vote is held in the General Assembly.
The pension reforms contained in HB6258 apply to only four of the five State pension systems: the State Employees’ Retirement System, Teachers’ Retirement System, State Universities Retirement System and General Assembly Retirement System. The bill does not apply to the State’s Judges’ Retirement System. It also does not include changes to pension funds of any local governments such as the various police and fire pension funds across the State, the Illinois Municipal Retirement Fund or the Chicago area pension systems.
Unlike pension reform proposals advanced earlier in 2012, HB6258 does not offer retirement system participants a choice between retiree health benefits and pension benefits. This choice, known as “consideration,” was proposed as a way to reduce pension benefits without running afoul of the Illinois Constitution, which states that pension benefits are contractual obligations and may not be diminished or impaired. Under the consideration approach, pension benefits could be modified if employees received something in exchange for accepting the modification. As a form of “consideration” the new proposal offers a guarantee of State contributions and the preservation of the pension system. The bill’s sponsors also believe that the proposal might pass legal muster because it does not include changes to benefits already earned; in their view, automatic annual benefit adjustments are future benefits that have not been earned. If enacted it seems certain that HB6258 will face legal challenges.
The major components of HB6258 are summarized below.
Tier I Employees
(Hired before January 1, 2011)
Annual Automatic Increase
• An annual automatic increase of 3% would apply only to the first $25,000 of a pension if a retiree does not receive Social Security and the first $20,000 if a retiree does. The annual increase is limited to $750. This change applies to both current and future retirees.
• Current retirees keep the annual increases they have already received.
• Retirees receive no annual increase until they reach age 67 or five years after they retire, whichever comes first. This provision will apply to current retirees.
• The retirement age would increase as follows:
• Retirement ages in the current statute would apply to employees 45 and older;
• One year would be added to current retirement ages for employees between 40 and 44 years old;
• Employees age 35 to 39 add three years to current retirement ages; and
• Employees 34 and younger add five years to current retirement ages.
• The salary that counts toward a pension would be capped at the higher of the Social Security wage base or the employee’s salary when the bill becomes law. The Social Security wage base for 2013 totals $113,700.
• Tier I employee pension contributions would go up by 2 percentage points, phased in over two fiscal years.
Tier II Employees
(Hired After January 1, 2011)
• New TRS and SURS employees hired after July 1, 2013 join a cash balance plan.
• Existing Tier II employees (hired after January 1, 2011, but before July 1, 2013) have the option of joining a cash balance plan.
• Cash balance plan:
• Employee contributes at current Tier II levels;
• Actual employer (school district, State university or community college) would pay employer’s contribution of 6.2%;
• Interest would be credited to employee’s account at an annual rate between 4% and 10%, depending on the yield on 30-year U.S. Treasury bonds and the fund’s investment earnings; and
• Automatic annual increase of 3% would apply to the original granted annuity.
Changes to State Contributions
• Contributions set on an actuarially-based 30-year funding plan, with a 100% funding goal by FY2043.
• Courts could force the State, school districts and universities to pay their required pension contributions. “Other State funds” could be intercepted if the payments are not made as required by law.
• Once existing pension obligation bonds are paid off, annual debt service amounts would be diverted to a special fund to pay off unfunded pension liabilities.
Transfer of Normal Cost to Employers
• School districts, community colleges and universities would take over the State’s normal pension cost at a rate of 0.5 percent of payroll per year for normal costs incurred after July 1, 2013.
• Normal cost contribution is enforceable through an intercept of State funds or through the court system.