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.
