Legislation and Issues
New Pension Benefit Law for TRS
Public Act 98-0599 (Senate Bill 1)
As of November 21, 2014
Issue:A new comprehensive plan to overhaul the Illinois Pension Code was signed into law by Gov. Pat Quinn on December 5, 2013. The goal of the new law is to stabilize TRS finances and eliminate the System’s unfunded liability by 2044, primarily by reducing benefits for retired and active members and creating funding guarantees and contribution levels that will gradually, over 32 years, fully fund TRS.
On November 21, 2014, Sangamon County Circuit Court Judge John Belz ruled that the new pension law violates the Pension Protection Clause of the Illinois Constitution. The judge’s ruling will be appealed, probably to the Illinois Supreme Court.
For now, Judge Belz’s ruling keeps in place the current law governing the calculation of TRS pensions and cost-of-living adjustments, as well as the administration of TRS benefits.
The law was the product of six months of work by a joint House-Senate Conference Committee and negotiations between Democratic and Republican legislative leaders.
The Illinois House approved the law on December 3, 2013 on a 62-53 roll call with 60 votes needed for passage. The Senate vote was 30-24 with 30 needed for passage.
Five lawsuits challenging the law as a violation of the pension protection clause were filed in Chicago and Springfield during December of 2013 and January of 2014. These lawsuits were consolidated in Sangamon County Circuit Court.
As part of this court challenge, on May 14, 2014 the court issued a temporary injunction that delays the implementation of the new law until the court ruled.
Discussion: For TRS alone, the law is designed to eliminate the System’s $55.7 billion unfunded liability by 2044. Eliminating the TRS unfunded liability would guarantee continuous pension payments for all generations of TRS members when they retire. With a 40.6 percent funded ratio, TRS cannot right now make that guarantee for future retirees.
Because of decades of insufficient funding by the General Assembly, TRS, in effect, has less than 41 cents on hand for every $1 promised in retirement benefits to TRS members.
If the law is upheld by the courts, it would reduce total state contributions to TRS over the next 30 years by an estimated $85 billion; money that could be used to fund other state services and programs. The law would reduce the future pensions of all active and retired Tier I members compared to pension calculated under current law. The average TRS pension is $48,216.
TRS will not take a position on the new law. 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.
If the law is upheld by the courts, it would apply to all active, inactive and retired Tier I members (service before January 1, 2011). Tier II members are not affected.
Here are the major provisions of Public Act 98-0599:
Active Tier I Members Salary Contribution Decrease
Active Tier I member contributions decrease from 9.4 percent to 8.4 percent of salary. For a TRS member earning $70,000, the decrease reduces the contribution to TRS from $6,580 per year to $5,880, or $700.
Creditable Earnings Cap for Active Tier I Members
The creditable earnings cap for active Tier I members equals the creditable earnings cap for Tier II members at the time the law takes effect. In fiscal year 2014, the Tier II cap on creditable earnings that can be used to determine the Final Average Salary is $110,631.
Under state law, this salary cap rises annually by a rate that is equal to one-half of the annual rate of inflation in the previous year.
There are exceptions to the salary cap in the new state law that allow for a member to establish a cap that is higher than the statutory Tier I and Tier II cap. In general, if a member’s salary at the time the law takes effect is higher than the Tier II cap, then the Tier II cap does not apply to that member.
- For any member covered by an individual contract or collective bargaining agreement that is in effect on or prior to the effective date of the law, the cap is the member’s annualized salary on the day that contract expires, even if that salary is higher than the statutory cap. A contract cannot be amended or extended after the effective date of the law to increase the cap.
- For any member not under contract but with a current salary that exceeds the cap, that member’s salary cap is set at their salary on the bill’s effective date. Members with a “grandfathered” salary each have their own cap.
Increased Retirement Age for Tier I Active Members
The law gradually increases, over the next 30 years, the retirement age for all teachers by five years. The current minimum age of 55 years with 20 years of service, for instance, increases over time to 60 years with 20 years of service.
The retirement age for members younger than 46 is set on a sliding scale based on your age at the time the law takes effect. Under this formula, the law essentially adds four months to the old minimum retirement age of 55 for every year that a member is under age 46 at the time the bill takes effect; until a total of five years has been added to the minimum retirement age.
- For members aged 46 and older at the time the bill takes effect, the old retirement ages and eligibility remain in force: A member can retire between the age of 55 and less than 60 years with at least 20 years of service and receive a reduced benefit; or at age 60 or more with at least 10 years of service and receive a “full,” or non-reduced benefit.
- At the top of the scale, for a member aged 45 at the time the bill takes effect, he/she can retire as early as 55 years and four months with at least 20 years of service and receive a reduced benefit, or as early as age 60 years and four months with at least 10 years of service and receive a “full,” or non-reduced benefit.
- At the bottom of the scale, for a member aged 31 or younger at the time the bill takes effect, he/she can retire as early as age 60 years with at least 20 years of service and receive a reduced benefit, or as early as age 65 years with at least 10 years of service and receive a “full,” or non-reduced benefit.
New COLA Formula and Rates for Tier I Active and Retired Members
There are two formulas used to determine the size of each year’s cost of living adjustment. The COLA formula to be used is determined each year by the current size of the member’s pension.
Each member, upon retirement, multiplies their total service credit by a factor that is initially set at $1,000 when the bill takes effect. This “pension threshold” is then used to determine the member’s annual COLA. For example, a member with 30 years of service upon retirement in 2016 would have an initial “pension threshold” set at $30,000.
Beginning in 2016 and in every year thereafter, the $1,000 threshold multiplier is increased by the rate of inflation, but the rate will not fall below 0% in case inflation is negative.
- As long as a member’s pension is less than his/her current pension threshold, when the member is eligible for a COLA it will be 3 percent compounded, which means calculated from the member’s current pension.
- Once a member’s pension equals or exceeds his/her threshold, the COLA calculation changes. The COLA in every year then becomes 3 percent of the member’s current threshold amount.
COLA Calculation for Retired Tier I Members Awaiting Their First COLAs
Under state law a Tier I member who retires after attaining the age of 55 but before turning age 61 accumulates an annual COLA. But he/she will not collect those accumulated COLAs until the January after he/she turns 61.
Under the old pension law, the COLA that accumulated for these members was 3 percent compounded.
Under the new law, if it is implemented at a time when a member is still accumulating COLAs but has not yet received any of those COLAs, and the member’s pension exceeds their current pension threshold, the calculation for the accumulated COLAs will be a combination of the old law’s 3 percent compounded increase and the new law’s increase, which is the current pension threshold multiplied by 3 percent. For these members, the separation between the old law calculation and the new law calculation will be the implementation date of the law.
Service Credit Used in the New COLA Formula
The service credit used to determine a member’s eligibility for a TRS pension is different from the service credit used to calculate your “pension threshold” and your annual COLA.
TRS service credit includes:
- All regular service
- Any service time purchased by the member under an early retirement incentive
- Any optional service purchased by the member, such as leaves of absence, substitute teaching and teaching service in another state
- Unused sick time for anyone who is a TRS member prior to the effective date.
Eligibility: The service credit used to determine your eligibility for a pension includes all TRS service plus any service in a pension system that has reciprocal rights with TRS.
Threshold and COLA: The service credit used in calculating your new “pension threshold” will be only TRS service credit and will equal the service credit that TRS used or will use to calculate your initial TRS pension at retirement.
The COLA Formula and Social Security
Any TRS member who receives Social Security from a spouse’s benefit or from other employment will still use $1,000 as the initial “threshold multiplier” and will still receive his/her Social Security benefits.
Because TRS members don’t receive Social Security for their service in education and their TRS benefits are not coordinated with Social Security benefits, all TRS members will use $1,000 as the starting point for their first “threshold multiplier.” Because the members of some other state pension systems receive Social Security and have their benefits coordinated with Social Security, their “threshold multiplier” starts at $800.
Staggered COLA Forfeiture
Tier I active members may have to forfeit at least one COLA increase, and as many as five increases, based on a sliding scale tied to the member’s age at the time the law takes effect. Following the prescribed forfeiture time frame, members will receive continual COLAs annually:
- Under the new law, any TRS member eligible to retire that does retire on or before June 30, 2014 will not have to forfeit any COLA increases. However, this provision is currently inoperable because of the May 14, 2014 court injunction delaying the implementation of the law.
- 50 years and older: Forfeit one COLA increase in a two-year time frame immediately after retirement. The second scheduled COLA would be forfeited.
- 47 to 49: Forfeit three COLA increases staggered every other year over a six-year time frame immediately after retirement, starting with the 2nd scheduled COLA
- 44 to 46: Forfeit four COLA increases staggered every other year over an eight-year time frame immediately after retirement, starting with the 2nd scheduled COLA.
- 43 and younger: Forfeit five COLA increases staggered every other year over a 10-year time frame immediately after retirement, starting with the 2nd scheduled COLA.
Actuarial Benefit Calculation Change
In order to reduce the size of pensions determined by the actuarial calculation, the law changes the interest rates used in the formula from the mandated 6 percent and 8 percent to a single floating rate. The new floating rate is the interest rate on a 30-year U.S. Treasury bond plus 75 basis points. (0.75 percent) Under current conditions, for example, the new interest rate used in the formula would be 5 percent. The new rate changes annually.
Supplemental Pension Contributions
When the state’s pension obligation bonds are paid off in 2019, the state will automatically earmark additional payments to TRS and the other state pension systems until the systems’ funding status reaches 100 percent. These payments will be in addition to the state’s regularly set pension contribution.
In FY 2019 the extra payment is estimated at $350 million and then $1 billion every year beginning in FY 2020. For TRS, this means an estimated “supplemental” payment of $194 million in FY 2019 and $554 million in FY 2020 and every year after that until the unfunded liability is paid off.
Also, beginning in FY 2016 the state will each year earmark 10 percent of the savings the state will realize from the law’s provisions to TRS.
Retiree Health Insurance Subsidies
There are no changes to the administration or funding mechanism for the Teachers’ Retirement Insurance Program. The law prevents TRS from using any supplemental pension contributions from the General Assembly to help fund any state subsidies for retiree health insurance programs. TRIP will still be subsidized by state government, but not with money from the supplemental pension contributions.
Mandatory State Pension Contributions
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. This provision, however, can be altered or repealed by the General Assembly in the future.
Optional Defined Contribution Retirement Plan
Up to 5 percent of Tier I TRS members will be able to freeze their current defined benefit (DB) pension plan benefits and join a new defined contributionv (DC) benefit plan that will be in effect until the day they retire. Right now, a TRS DC plan could accept approximately 7,000 Tier I members.
The DC plan is open to active Tier I members only. Members would have one opportunity to elect membership in the new DC plan. Once members elect to join the DC plan, they cannot rejoin the DB plan unless the DC plan is ended by the legislature. A member would need to work at least 5 years in order to be vested in the DC plan.
After the law takes effect, all members that have joined the DC plan would have their creditable service frozen on that date for purposes of determining a DB pension. To determine a member’s eligibility for a DB pension after the member switches to the DC plan, TRS would use the member’s service credit accumulated under both the DB plan and the DC plan at retirement.
Active members in the DC plan pay an 8.4 percent salary contribution. The state’s contribution would be determined annually. Upon retirement, members would receive a DB annuity, plus equal payments from an accumulated DC retirement account until those funds are exhausted.