Pension Reform Shockwaves

Pension Reform Shockwaves
Andrew Malahowski, Franczek Radelet P.C.
Eric DePorter, LaGrange Highlands District 106
Wednesday, May 15, 2013, 11:30-12:30
• Current IMRF and TRS framework
• Proposed pension reforms and constitutional
• The latest proposals and implications for
school districts
Current IMRF and TRS Framework
• Eligibility:
– IMRF: Individuals who are employed in a position
normally requiring at least 600 hours of work per year,
in a position not requiring certification
– TRS: Teachers, support staff, and administrators in a
position requiring certification (also certain TRS, ISBE,
and other employees)
• Social Security Coordination:
– IMRF: Members participate in Social Security
– TRS: Members do not participate in Social Security
Current IMRF and TRS Framework
– Tier I = 1 and 2/3% x FRE x first 15 Years of Service + 2% x FRE x additional
Years of Service; unreduced pension at age 60 or with 35 years of service;
reduced pension at age 55.
– Tier II = 1 and 2/3% x FRE x first 15 Years of Service + 2% x FRE x additional
Years of Service; FRE capped at $109,971.43 adjusted for inflation;
unreduced pension at age 67 or with 35 years of service; reduced pension
at age 62.
• TRS:
– Tier I = 2.2% x FAS x Years of Service; unreduced pension at age 60 or
with 35 years of service; reduced pension at age 55.
– Tier II = 2.2% x FAS x Years of Service; FAS capped at $109,971.43
adjusted for inflation; unreduced pension at age 67; reduced pension
at age 62.
Current IMRF and TRS Framework
• “Bells and whistles”:
• Early Retirement Incentive; disability; sick days for service credit
– TRS:
• Early Retirement Option; disability; sick days for service credit
• Retiree health care:
• None; each employer must offer “extended COBRA” pursuant to
Section 367j of the Illinois Insurance Code
– TRS:
• The Teachers Health Insurance Security Fund provides state
subsidized coverage for retirees
TRS Early Retirement Option
• Set for legislative review in 2013
• If not renewed by 6/30/2013, automatically repealed
• If not renewed, only available for members who are age 55 on
or before 6/30/2013 (with one exception), and whose last day
of work is no later than 6/29/2013
• If renewed, member and employer contributions will likely
– Commission on Government Forecasting and Accountability (COGFA)
recommended that the member contribution increase from 11.5% per
year to 14.4% per year
– COGFA recommended that the employer contribution increase from
23.5% per year to 29.3% per year
Who Pays for IMRF and TRS
– Employee (4.5%; no retiree health care contribution)
– Employer (varying employer contribution rates set by actuary, average of
12.09% for 2012; no retiree health care contribution)
– Accelerated payments for end-of-career salary increases in excess of 6%
– No State contributions
• TRS:
– Employee (9.4% + 0.92% THIS)
– Employer (0.58% + 0.69% THIS)
– Additional employer contributions for end-of-career salary increases in
excess of 6%
– State contributions ($2.7 Billion in FY13)
Funding and Investment Returns
• Was 100% funded when the recession started in 2008 and already
has begun its recovery; funding at 70.4% at year-end 2008;
funding at 80.2% at year-end 2011.
• Experienced a 24.3% return in CY2009, 13.4% in CY2010, and
-0.5% in CY2011.
• IMRF utilizes an actuarial assumed rate of return of 7.5%.
• Was already in trouble prior to the recession, and continues to
slide; funding at 63.8% in 2007; 56.0% in 2008; 52.1% in 2009;
48.4% in 2010; 46.5% in 2011; 42.1% in 2012.
• Experienced a -22.7% return in FY2009, 12.9% in FY2010, 23.6% in
FY2011, and 0.76% in FY2012.
• TRS reduced its assumed rate of return from 8.5% to 8% in 2012.
Common Questions
• “Is there a real problem?”
• “Why don’t we just terminate/freeze the plan
and provide a defined contribution plan like
private companies?”
• “Why don’t we just raise taxes/start taxing
retirement income/raise revenue from other
• “Can this be fixed without benefit reductions?”
• “Who do we blame?”
• “What should we try?”
Constitutional Issues
Illinois Constitution
Article XIII, Section 5
“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.”
United States Constitution
Article 1, Section 10
“No State shall . . . pass any . . . Law impairing the Obligation of
Contracts. . .”.
Constitutional Issues
• In Peters v. City of Springfield, 57 Ill. 2d 142, 152
(1974), the Illinois Supreme Court noted that the
“purpose and intent of the constitutional provision was
to insure that pension rights of public employees which
had been earned should not be ‘diminished or
• On the other hand, there is a significant amount of
lower court and historical authority for the proposition
that benefits cannot be changed from the moment the
employee first enters the applicable pension system.
– Kraus v. Board of Trustees, 72 Ill. App. 3d 833, 849 (1st Dist.
1979) (applying constitutional protections as of the
moment the individual “became an employee”).
Constitutional Issues
• Illinois precedent supports the idea that pension
benefits are guaranteed under principles of
contract law.
– Felt v. Board of Trustees, 107 Ill. 2d 158, 162 (1985)
(“the general intendment of section 5 was to protect
the pension benefits of public employees by first
creating ‘a contractual relationship between the
employer and the employee….’”).
– 4 Proceedings 2925 (Mr. Green: “Now this
amendment does two things: It first mandates a
contractual relationship between the employer and
the employee; and secondly, it mandates the General
Assembly not to impair or diminish these rights.”).
Some Specific Questions
• May the State require employees to contribute a
greater portion of their salary in order to receive
the same pension benefits?
• May the State provide for a lesser benefit to be
earned in future years of service, or is the
employee guaranteed the formula of benefits in
place when she began employment?
• If a benefit (e.g., COLA) was increased after the
employee started working, may it be reduced to
its original level?
Some More Questions
• What constitutes the “diminishment” or “impairment”
of a benefit? Is there some threshold level?
• If the State wishes to reduce a pension benefit, must it
offer an additional benefit to compensate?
• Can the “contract” for pension benefits be modified if
necessary to allow adequate funding of pensions
without depriving the State of the ability to fund other
important programs (e.g., hospitals, prisons, roads,
Pension Reform Options
Employee Contributions
Automatic Annual Increase (“COLA”)
Retirement Age
Definition of “Salary” and Limitations on Pensionable
Rate of Accrual
Cash Balance or Defined Contribution Plans
Shift Funding Responsibility to School Districts
Retiree Health Care
State Funding “Guarantees”
Early Retirement Option
One Recent Proposal
• Senate Bill 1 (House Amendment 1):
– Pensionable salary cap
– COLA decrease and delay
– Increase in retirement age
– Increase in employee contributions
– “Funding guarantee” and other funding reforms
Other Proposal(s) and/or Solution(s)
*As of the publication date of this presentation,
there are over a dozen different reform
proposals that are being considered (some
seriously; others not so much). Therefore, this
will be the aleatoric portion of the presentation.
Contact Information
Andrew Malahowski
Franczek Radelet P.C.
[email protected]

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