Speaker Madigan’s Pension Proposal – HA #1 to Senate Bill 1
House Amendment #1 to Senate Bill 1 is a comprehensive package that will stabilize and bring solvency to 4 of the State’s pension funds (GARS, SERS, SURS, and TRS). This package will ensure the State meets its obligations to the pension systems by adopting an actuarially accepted payment schedule, providing an enforceable funding guarantee, and altering benefits for current and prospective annuitants. The concepts in this package are not new, and several have been approved by the House.
1) New funding schedule. The new schedule requires the systems to reach 100% funding in 30 years, beginning in FY 15 and ending 2044.
2) New method for certifying contributions. Beginning in FY 15, contributions will be certified using the entry age normal actuarial cost method (“EAN”) instead of the projected unit credit actuarial method (“PUC”). The PUC method, which the systems currently use, requires higher contributions closer to retirement. The EAN method averages costs evenly over the pensioner’s employment, thereby resulting in more level contributions. This change was approved by the House in HB 1277 (Senger).
3) Supplemental contributions beginning in FY 20. The State currently makes payments on pension obligation notes from 2010 and 2011, and in 2019, the State will make a final payment of $952 million. Once those payments end, the State commits to annually contribute $1 billion in addition to the state’s scheduled contributions to the state-funded systems. The additional contributions will continue until all systems reach their funding goal.
4) Provide a funding guarantee. If the State fails to make a required payment under the funding schedule or fails to contribute the additional $1 billion promised above, the systems will have a right to bring a mandamus action to compel the State to make the payment. Each Board will have a fiduciary duty to bring an action if necessary. Payments compelled under this provision are expressly subordinate to the state’s debt service obligations.
5) Establish a pensionable salary cap for Tier I employees. The amendment applies the Tier II salary cap to Tier I employees. For 2013, the salary cap was $109,971. The cap will increase annually by ½ the consumer price index for urban consumers. There is a grandfather clause for those employees with salaries that currently exceeds the cap or will exceed the cap based on raises due to the person under a current collective bargaining agreement. Under the proposal, a person whose salary exceeds the salary cap is only eligible for an annuity based on the salary cap.
6) New method of calculating the COLA. Retired members will keep the compounded 3% annual increases they received up until the enactment, but future COLAs will be calculated differently. Going forward, the COLA will be based on 3% of a maximum annuity amount based on their years of service. The cap will be $1,000 for each year the employee had worked ($800 for those coordinated with Social Security). As an example, an individual retiring with 30 years of service will have a COLA of 3% of $30,000 or $900, which accumulates annually. If a person’s initial annuity is under this threshold, that person will continue receiving a 3% compounded adjustment based on their initial annuity until they reach the cap. This adjustment was originally proposed by Senator Radogno and incorporated in Senate Amendment #4 to SB 35.
Additionally, current and future retirees would have the first or next year in which they can receive their COLA delayed. Retirees who are age 67 and older would be unaffected by this delay. Those under age 67 would have their COLA paused until either they reach age 67 or until the 5th anniversary of their retirement, whichever comes first.
7) Increase the retirement age for employees under 45 years old. The amendment raises the retirement age, on a graduated scale, for current Tier I members who are under 45 years old (no change for those 45 years of age or older). This language was approved by the House in HB1166 (Madigan) and is included in the Cross-Nekritz pension reform package (HB 3411).The retirement age is increased by the following schedule:
• Age 40 to 44 – additional 1 year added to the applicable system’s minimum retirement age;
• Age 35 to 39 – additional 3 years added; and
• Below 35 – additional 5 years added.
8) Increase employee contributions by 2%. Beginning July 1, 2013, employees will be required to contribute an additional 1%, and this is increased to 2% on July 1, 2014.
9) Eliminate the subject of pensions for collective bargaining. Bargaining units and employers with participants in the State systems would be prohibited from negotiating changes related to pensions.
10) Fix the COLA for Tier II members of GARS. Under current law, the General Assembly and Judges’ Retirement systems have their salary cap and annuity increased by the lesser of CPI or 3%. All other systems have their salary cap and annuity increased by the lesser of one-half of CPI or 3%. This draft lowers the General Assembly Retirement System down to one-half of CPI to bring it in line with other systems.
11) Prohibit non-governmental organizations from participating in State systems. The amendment prevents new employees of several “non-governmental” organizations from participating under IMRF, SURS, and TRS. Additionally, it prohibits new employees of all state systems from using sick time or vacation time in calculating their annuity.
12) Change the effective rate of interest. The amendment suggests that the Comptroller adopt a more conservative number for what is known as the “effective rate of interest” (“ERI”). Under current law, the ERI determines benefits for university and community college employees hired before 2005. The amendment still provides that the Comptroller set this rate, but advises a figure that will more appropriately determine benefits for certain participants.
13) Prohibit the use of pension funds to pay costs associated with healthcare. The amendment makes clear that the state funded pension systems are not to use retirement contributions for the purpose of subsidizing the cost of retiree healthcare.
14) Require separate appropriation request for employer normal cost and amortization of the unfunded liability. The Governor must introduce and the systems must certify these costs separately.
- foster brooks - Wednesday, May 1, 13 @ 9:11 am:
Thanks for posting that Rich
- Robert the Bruce - Wednesday, May 1, 13 @ 9:16 am:
#9 seems like a strong move. While I generally like anything that reduces the power of public employee unions, I wonder if the legislature has the authority to do this?
- Original Rambler - Wednesday, May 1, 13 @ 9:22 am:
Those of you who are relying on the Constitution to preserve the status quo need to read Sue’s posts from late yesterday. She outlines a very plausible scenario.
- Mason born - Wednesday, May 1, 13 @ 9:30 am:
How is #9 different then what Scott Walker did in Wisconsin? Looks an awful lot like the Wisconsin action.
- Anonymous - Wednesday, May 1, 13 @ 9:36 am:
Collective bargaining rights for state employees are a creation of state statute, not the federal labor laws, so of course the legislature can limit those rights.
- walkinfool - Wednesday, May 1, 13 @ 9:46 am:
Changes with real bite and substance for the long term. This has more than I expected (e.g. #9,11,13.)
Madigan was initially correct in proposing cost-shifting, but it had to be removed to get more support.
Cross should jump in as co Chief Sponsor and help close the House deal.
- Norseman - Wednesday, May 1, 13 @ 9:57 am:
Mason, that’s the $64,000 question. Let’s see if anyone asks the question. I’m sure you’ll hear some Orwellian doublespeak response.
- Rich Miller - Wednesday, May 1, 13 @ 9:58 am:
They took away pretty much all collective bargaining powers in Wisconsin. This focuses solely on pensions.
- Stuff happens - Wednesday, May 1, 13 @ 9:59 am:
#8 is the kicker for me. Just can’t afford it; I’m living out of savings as it is because the University has given one raise (3%) in five years. Property taxes and utilities keep climbing, though.
If this goes through, it’s definitely time for me to look for a new job and get out of Illinois.
- Downstate Illinois - Wednesday, May 1, 13 @ 10:35 am:
Can someone explain the COLA portion better. Does it cap the compounded COLA at ($1,000 x the years of service), or does a retiree only get COLA on the first ($1,000 x years of service) of someone’s pension? Or, is there a third explanation.
- Fred's Mustache - Wednesday, May 1, 13 @ 10:47 am:
It appears that retirees would receive a COLA on the first ($1,000 x years of service) of someone’s pension.
- The Doc - Wednesday, May 1, 13 @ 10:48 am:
Confused about inclusion of language that mandates 100% funding in 30 years. Why not, say, 80%, or something of the like?
- Fred's Mustache - Wednesday, May 1, 13 @ 10:49 am:
I understand this bill is not an ideal situation for state employees, but I think that under the circumstances, this is a reasonable bill that doesn’t inflict as much pain on state employees (like myself) as other proposals. It could have been much worse.
- RNUG - Wednesday, May 1, 13 @ 11:03 am:
Downstate Illinois @ 10:35 am:
As I’m reading it, the AAI “calculation basis” will be either 3% up to the cap or 3% times a cap calculated on the number of years of service times a fixed amount. The fixed amount will be either $1,000 (non-coordinated/no SS) or $800 (coordinated w/SS).
Here’s some examples based on my understanding:
Example 1: 30 years, current pension $40,000, w/SS
30 yrs * $800 = $24,000 cap *.03 = $720 AAI
Under the current system, the increase would have been $1,200 ($40K*.03) and it would have compounded the next year
Example 2: 25 years, current pension $50,000, no SS
25 yrs * $1000 = $25,000 cap *.03 = $750 AAI
Under the current system, the increase would have been $1,500 ($50K*.03) and it would have compounded the next year
Example 3: 35 years, current pension $20,000, no SS
35 yrs * $1000 = $35,000 cap. Since $35,000 is more than the current $20,000 pension, the AAI gets calculated on the current pension. $20,000 *.03 = $600 increase
Under the current system, the increase would have been the same $600
- Secret Square - Wednesday, May 1, 13 @ 11:37 am:
“Confused about inclusion of language that mandates 100% funding in 30 years. Why not, say, 80%, or something of the like?”
I’m guessing that language is in there primarily to please the bond market folks.
- Arthur Andersen - Wednesday, May 1, 13 @ 11:55 am:
RNUG, for what it’s worth, my ciphering on the COLA is exactly the same as yours.
The only issue still not getting much attention at this point is the inclusion of IMRF, CTPF, and Cook County in the sick leave provisions of #11.
- Property Owner - Wednesday, May 1, 13 @ 12:15 pm:
After reading the summary the big question to me is who pays how much?
It is clear that the people in the pension system probably will be paying more while receiving lower increases in benefits over the years (points 5,6, 7 &
. At the same time, changing the interest rate used (point 12) will probably increase the unfunded liability unless bond interest (interest income to the pension system) experiences a large increase over the next few years.
Points 3 and 4 of the plan probably point to either more money from the taxpayers (a tax increase of some type) or cutting spending on other programs or maybe both a tax increase and cutting other spending.
Has anyone put a dollar value on the contribution of the three major parties to the current $100B unfunded liability under the proposed plan?
- Foxfire - Wednesday, May 1, 13 @ 1:08 pm:
With regards to this -
5) Establish a pensionable salary cap for Tier I employees. The amendment applies the Tier II salary cap to Tier I employees. For 2013, the salary cap was $109,971. The cap will increase annually by ½ the consumer price index for urban consumers. There is a grandfather clause for those employees with salaries that currently exceeds the cap or will exceed the cap based on raises due to the person under a current collective bargaining agreement. Under the proposal, a person whose salary exceeds the salary cap is only eligible for an annuity based on the salary cap.
Does anyone know if the employee’s contribution towards the pension system is capped? Or, will employees be required to contribute based on the total salary? SSI contributions terminate once you reach a cap.
- Arthur Andersen - Wednesday, May 1, 13 @ 1:16 pm:
Property, #12 doesn’t relate to the assumed investment return rate. It’s specific to SURS and basically takes away a lucrative benefit calculation not available to other systems.
Fox, the contributions are capped along with the salary. To do otherwise violates Fed tax law.
- mid-level - Wednesday, May 1, 13 @ 2:01 pm:
The 100% funding level vs. say an 80% funding level is strictly for Wall Street. So the State can borrow money cheaper. Or so they hope.
- Downstate Illinois - Wednesday, May 1, 13 @ 3:13 pm:
Fred and RNUG, thanks.
- Property Owner - Wednesday, May 1, 13 @ 3:40 pm:
“The 100% funding level vs. say an 80% funding level is strictly for Wall Street.”
There is no reason 100% cannot be the actual funding level. I received a notice from my pension plan recently. The plan, from my private employer, is currently funded at 117% of liabilities and has been funded at over 100% for many years. Full funding of pension plans, be they public or private, is totally possible.
- Arthur Andersen - Wednesday, May 1, 13 @ 7:02 pm:
One piece of very inside baseball-the change in actuarial methods from PUC to EAN could sharply increase costs in the short-term. Impossible to estimate without an actuarial abacus, but big.
- Just The Way It Is One - Wednesday, May 1, 13 @ 7:10 pm:
This bill looks like the Ticket to final passage–perhaps with a little bit of tinkering here or there…
- Concerned - Wednesday, May 1, 13 @ 7:17 pm:
Can someone please explain the grandfather clause in #5?
- RNUG - Wednesday, May 1, 13 @ 10:09 pm:
Concerned @ 7:17 pm:
I did skim the bill again. I think item #5 above is found on page 217. Based on the previous sentences it appears to refer to teachers but it’s not totally clear.
It wouldn’t apply caps to pensionable salary during any CURRENTLY IN FORCE contract. But the cap takes effect as soon as that contract is amended or renewed … so it could delay the pension earnings being capped for one or two years for some union employees.
Note: if for some reason you have an individual employment contract, from the language it would appear to also be grandfathered in until said contract is amended / renewed. Would that apply to people like school superintendents who have individual contracts for some fixed term?
- Harry - Thursday, May 2, 13 @ 1:10 am:
Foxfire–Contributions also subject to salary cap. That was not the case in the original 96-0889 but was fixed in the trailer bill 96-1490.
If you now make more than the cap, or will make more due to an employemnt contract or CBA now in effect, you get the higher number but no more than what you now have or are contractually entitled to. You wont get rolled back, but eventually the cap may catch up to you and then you can get more.
SEC hammered the State on PUC and 90%, using EAN and 100% are a bow to reality.