Illinois Public Pension Systems: Funding, Solvency & Legality

Report
Presented by Rene J. Noppe, Jr.
Western Illinois University
AASA National Conference on Education
evolve YOUR PERSPECTIVE
February 13-15, 2014 Nashville, TN
PART 1
A. Illinois State Public Pension Systems
B. Illinois Public Act 098-0559
C. Rationale for the P.A.
D. Failed attempts at pension “reform”
legislation
E. The 1970 Illinois State Constitution
a) Article XIII Section 5
b) Article XIII Section 3
Illinois Retirement Systems
Illinois has 13 systems covered under the Illinois
Retirement Systems Reciprocal Act. Discussion is
limited to “the 5 state retirement systems” below:
1. State Teachers’ Retirement System
TRS
2. State Universities Retirement System SURS
3. State Employees Retirement System
SERS
4. General Assembly Retirement System GARS
5. Judges Retirement System of Illinois
JRS
6. Illinois Municipal Retirement Fund
IMRF
Illinois Public Act 098-0559
 P.A. 098-0559 (aka SB 1) “The Pension Reform”
bill was adopted December 3, 2013 by the
Illinois General Assembly. Effective: 6/1/14
 The legislation reduced benefits for future and
current retirees in 4 of Illinois’ 5 major public
pensions. (Yes, they reduced current retirees pensions)
 The required state contribution for FY 2013 to
the 5 state retirement systems total
$5,868,300,000.
 Is there a problem here? Did this happen
overnight?
State Rationale for P.A. 098-0559
Illinois has: (from PA 098-0559 Section 1. Legislative Statement)
1. the lowest credit rating of any state;
2. increased its cost of borrowing as a result;
3. increased its income tax;
4. reduced retirement benefits for new hires-2011;
5. budgeted cuts to important state programs;
6. an accrued pension debt $100,000,000,000.00;
7. determined the problem can’t be solved w/o
violating the Illinois Constitution
Attempts to Reform Pensions
The Illinois General Assembly (GA) has long wanted
to address the public pension issue. (Last 5 years)
HB 1165; HB1154; HB1166; and
SB 1; SB35; were attempts by the GA to reform the
public pensions of Illinois. (None of these passed)
All of these provided for a decrease in COLA’s and
increase retirement age. (“Reform” means “Reduce”)
SB 2404 was proposed by “We Are One Illinois”
coalition (union) which called for a 2% contribution
increase by the employee – No Benefit Reduction.
P.A. 098-0559 & Illinois Constitution
Article XIII General Provisions (Pension Protection Clause)
Section 5 of Article XIII of Illinois Constitution states:
Membership in any pension or retirement
system of the State, any unit of local
government or school district, or any
agency or any instrumentality thereof, shall
be an enforceable contractual relationship,
the benefits of which shall not be
diminished or impaired. Is this statement unclear?
Illinois General Assembly Oath
Article XIII General Provisions (Oath of Office)
Section 3 of Article XIII of Illinois Constitution states:
“I do solemnly swear (affirm) that I will
support the Constitution of the United
States, and the Constitution of the State of
Illinois, and that I will faithfully discharge
the duties of the office of…to the best of
my ability.” Is this statement unclear?
Illinois
Public Pension
Systems
Teachers’ Retirement System-TRS
 39th largest pension system in U.S.
(Created originally in 1915 and current system in 1939)
 Provides retirement, disability, death &
survivor benefits (Annual compounded 3% COLA)
 Teachers, administrators, and other certified
personnel employed outside Chicago
 366,000 members
 $36.5 billion in assets as of June 30, 2012
 $90 billion in accrued liabilities
TRS cont’d
 TRS requires teachers to belong and
contribute: 4% of Salary in 1939 increased
periodically to 9.4% in 2005
 Teachers do not participate in Social Security
 Retirees do NOT pay Illinois state income tax
 TRS is a qualified pension plan under
provisions of the Internal Revenue Code,
Section 401a
 PA 098-599 may negatively impact the above
standing
TRS cont’d
TRS is funded from the following sources:
1. Member contributions, (9.4% of salary)
2. Investment income,
3. Employer contributions
4. Illinois state appropriations
TRS has a funding ratio of about 40%
The actuarial recommendation is 90% by 2045
State Universities Retirement SystemSURS
 One of the 100 largest pension system in U.S.
(Originally created 1941 with current system 1963)
 Provides retirement, disability, death &
survivor benefits (Choose from 3 plans)
 Professors, teachers and support staff (clerical,
service workers) of public higher education
 81,000 active members/217,000 total
 $13.7 billion in assets as of June 30, 2012
 $19.3 billion in accrued liabilities by 2045
SURS cont’d
 SURS requires teachers to belong and
contribute 8% of Salary
 Professors do not participate in Social Security
 Retirees do NOT pay Illinois state income tax
 SURS is a qualified pension plan under
provisions of the Internal Revenue Code,
Section 401a
 PA 098-599 may negatively impact the above
standing
SURS cont’d
SURS is funded from the following sources:
1. Member contributions, (8% of salary)
2. Investment income,
3. Employer contributions
4. Illinois state appropriations
SURS has a funding ratio of about 40%
The actuarial recommendation is 90% by 2045
State Employees Retirement SystemSERS
Provides retirement, disability, death & survivor
benefits to various state agency employees
(Created in the 1940s)
Social security benefits are offered to all state
employees who elect to participate
61,545 active members / 51,994 retirees
$11.8 billion in assets as of June 30, 2012
$34.7 billion in accrued liabilities
SERS has a funding ratio of about 25%
General Assembly Retirement SystemGARS
Provides retirement, disability, death & survivor
benefits to all members of the General Assembly,
Governor, Lt. Governor, Secretary of State,
Treasurer, Comptroller and Attorney General
(Created in 1947)
Participation is not required
Certain clerks and secretaries to the House and
Senate may participate after 10 or more years of
service
GARS cont’d
$56.1 million in assets as of June 30, 2012
$247.4 million in accrued liabilities
GARS is funded by:
1. Member contributions set at 11.5 % of salary
2. State appropriations
3. Investments
GARS has a funding ratio of about 18.5%
Judges Retirement System-JRS
Provides “retirement…of judges who are aged or
otherwise incapacitated…for old age, disability,
death and termination of employment”
(Created 1941)
968 active participants / 665 Retirees
$601.2 million in assets as of June 30, 2012
$2.022 billion in liabilities
JRS was not included in the Illinois Pension
Reform Legislation (P.A. 098-0559)
JRS cont’d
JRS is funded by:
1. Member contributions set at 11 % of salary
2. State appropriations
3. Investments
GARS has a funding ratio of about 29.7%
Illinois Municipal Retirement FundIMRF
Provides retirement, disability, death benefits to
employees of units of local government
(Created in 1939)
All non-teaching staff in school districts, and
cities, counties, villages, park districts, and
townships (except City of Chicago and Cook County)
Over 42 types of local government participate
covering nearly 3,000 units of government
A unit of government cannot withdraw from IMRF
IMRF cont’d
182,000 active members / 80,000 retirees
Hourly standard is 600 or 1,000 hours in 12 month
period (School districts are under the 600 hour rule)
IMRF is funded by:
1. Member contributions 4.5 % of salary
2. Employer contributions (fluctuates yearly)
3. Investments
4. NO funding from the State of Illinois
IMRF cont’d
Each unit of government is a separate pension
plan
School districts are informed each Spring as to its
IMRF contribution rate for the next year
School districts have the authority to levy real
estate taxes to satisfy the employer’s obligation
to IMRF (In 2009, 9.7% of payroll) (In 2011 12.4 %)
IMRF benefits are a recruitment tool
State underfunding of pensions doesn’t affect
IMRF
IMRF cont’d
A majority of IMRF employees are also in Social
Security
IMRF has a funding ratio of about 84.5% (2010)
PART 2
A. Funding equity
B. Pension solvency
C. Lawsuits
D. Increased district costs
Funding Equity
The major pensions:
A. Different salary contributions 8% - 11.5%
B. Different years of service requirements-e.g.
while not covered in presentation, teachers
need 20 years to be vested, judges 4 years.
(IMRF is 8 years)
C. Funding ratios vary from 18% to 40% (IMRF is
85%)
D. Chicago school district can levy for teacher
pension
Equity cont’d
E. Judges Retirement System excluded from new
law reducing pension benefits
F. IMRF excluded from new law reducing pension
benefits
G. New length of service years dependent on
current (Age 46+ = no delay; 31 = 5 year delay)
H. COLA “skip” on basis of age (2, 3, 4, 5 yrs. rule)
(Age 50+ = no 2nd COLA; graduated to 43 or
below = no 2nd, 4th, 6th, 8th, or 10th COLA)
Equity cont’d
I. IMRF can levy for pensions and social security
J. Teachers and other active pension members
have always paid their assigned contributions
K. Many teachers were required to enter nonrevocable agreements to retire
L. The inequities of the Tier II pension legislation
has not been touched in this presentation
(e.g. the age to retire at 67)
Future Solvency
A. Illinois has not funded its obligations:
• Late payments to public agencies AND
• Payments are less than obligated amounts
B. Major retirement system pensions have not
been adequately funded by the state
C. State of Illinois financial shortfall estimates are
in the $BILLIONS
D. So…is P.A. 098-055 the solvency solution?
Solvency cont’d
Some think NOT
P.A. 098-0559 is hailed by some as historic and
groundbreaking and is expected to save Illinois
$160 million over 30 years
A University of Illinois study projects the state’s
major pension systems will eliminate their
unfunded liability by 2045
But, the state’s deficit is projected at $13
billion…only $1 billion less than if the “reform” did
not occur
Solvency cont’d
The U of I “Fiscal Futures” Project blames the
deficit on regular overspending by the Legislature
If the temporary income tax increase is rolled
over, the Illinois deficit will reach $7 billion by
2025 ( a reduction of ½)
The pension reduction act cuts benefits,
decreases employee contributions, increases the
retirement age and has caused the filing of
lawsuits to challenge
Solvency cont’d
Illinois Governor’s Office outlined deficits in early
January if the income tax increased is allowed to
sunset:
State deficit projection:
$1.9 billion in 2015;
$4.1 billion in 2016
State backlog of bills projection:
$5.6 billion in 2014
$16.2 billion in 2016
Lawsuits
Two lawsuits have been filed against the reform
legislation in Cook and Sangamon counties in IL
More are in the planning stages…
If they are successful in turning over the reform
legislation many believe the General Assembly
will look at legislation to pass pension costs on to
local districts (Referred to as “the Cost Shift”)
Currently this process for funding is used for IMRF
Increased School District Costs
The transfer or “Shift” of the State’s cost for
teacher pensions to the local districts will get the
state out of the teacher pension business
This increase in costs will challenge already cash
school districts unless there is some type of
“phase in”
In 2011 all school districts in Illinois had a
combined fund balance reserve of $13 billion
Coincidentally, Illinois had a deficit of $13 billion
The General Assembly knew that!!!
DISCUSSION
[email protected]
http://trs.illinois.gov
[email protected],illinois.gov
www.surs.org
https://www.srs.illinois.gov/Judges/history_jrs.ht
ml
(40ILCS) Illinois Pension Code

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