On Thursday, Dec. 5, 2013, Governor Quinn signed into law historic pension reform legislation. Senate Bill 1 (SB1) allows the state to take a significant step toward fiscal stability, evident in the immediate positive comments from rating agencies. These reforms could improve Illinois’ bleak credit profile, making it easier and cheaper to access the resources needed to invest in growing the Illinois economy and creating jobs.
There has been a lot of back and forth in the news about what the pension reform bill says, and what that means for the average Illinois government or public employee. We at the Metropolitan Planning Council (MPC) would like to offer up a plain, bare-bones description of how the law changes the way pension systems in the state operate.
First off, the basics:
SB1 is the outcome of a special conference committee on pensions and negotiations of legislative leaders. On Tuesday, Dec. 3, the Illinois House and Senate passed the bill with a roll call of 62-53 and 30-24, respectively. The law is projected to save $160 billion over 30 years and fully fund the pension systems, which today have over $100 billion in unfunded liabilities—the money needed to cover current and future retirees benefits—and are only 41 percent funded, the worst ratio in the nation. The pension debt has affected everything from the revenue available to fund state services, its bond rating and ability to pursue capital improvement projects.
What the law says:
SB1 affects employees hired before Jan. 1, 2011, and applies to four of the five public employee retirement systems in Illinois: State Employees’ Retirement System, Teachers’ Retirement System, State Universities Retirement System and General Assembly Retirement System. It does not apply to the Judges’ Retirement System.
Annual increase: Before this law, employees received cost-of-living adjustments of 3 percent, compounded annually. Now:
- A certain threshold is created based on number of years served. The threshold equals the number of years an employee has served multiplied by $800 for state employees or $1,000 for teachers and university employees. For example, the threshold for a retiree with 30 years of service is $24,000 or $30,000.
- The threshold multiplier (beginning at $800 and $1,000) will increase by the Consumer Price Index each year.
- If a retiree’s benefit is less than their threshold, their annual cost-of-living adjustment is 3 percent, compounded, meaning it is based on their current benefit.
- When a retiree’s pension benefit hits their threshold, the annual benefit then increases by 3 percent of the new threshold amount.
- Retirees must forgo at least one and as many as five cost-of-living increases, based on age. These skipped increases follow a pattern: They occur every other year, starting with the second year. So for example, someone who is 50 years old or older forfeits one cost-of-living increase in a two-year time frame immediately after retirement. The second year’s adjustment would be forfeited. Whereas someone 43 years old or younger would forfeit five cost-of-living increases, staggered every other year over a 10-year time frame immediately after retirement. Again, the second year’s adjustment would be forfeited, and the fourth year’s, and the sixth year’s, etc.
||# increases forfeited
|50 and older
||1 forfeit over 2 years
|47 to 49
||3 forfeits over 6 years
|44 to 46
||4 forfeits over 8 years
|43 and younger
||5 forfeits over 10 years
Retirement age: For each year an employee is younger than 46, an additional four months would be tacked onto the time he or she would have to work to receive full retirement benefits. This adds up to an extra six years and eight months for someone who will be 26 when the law goes into effect on June 1, 2014.
Salary cap: A member’s salary that determines his or her pension benefit is capped at $110,631, increased annually by inflation.
Employee contribution: Decrease employee contributions by 1 percent.
- The pension systems can sue to force the state to pay its required annual employer share. However, lawmakers could vote to change the payment schedule and reduce the annual payment.
- After 2019, when the state’s pension obligation bonds are fully paid, it must automatically earmark additional payments to the pension systems until they are 100 percent funded. These payments will be in addition to the state’s regularly set pension contribution. In fiscal year 2019 the extra payment will be $350 million and $1 billion every year beginning in fiscal year 2020
Optional 401K plan: Members can opt into a 401K retirement plan.
While the effective date of the new law is June 1, 2014, an immediate court challenge to the law’s constitutionality is expected. The Illinois Constitution states that “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”
Local pension reform
SB1 moves Illinois toward state fiscal stability; however, the General Assembly must also work toward improving the pension systems of the City of Chicago and other local municipalities, which only it can do. The City of Chicago’s six pension funds have only 50 percent of the funding necessary to support the current system and an unfunded liability of $26.8 billion.
Nevertheless, coming to an agreement on state pensions is a big step forward. Now that state pension reform has been enacted, MPC looks forward to working with state leaders to accomplish multiple priorities in the coming year.