For Future Tier II and Tier III Hires
“We can overturn any
law we pass within an hour.”
The most significant and everlasting words I received from a
legislator concerning pension reform bills and future promises came back in
2011, when my good friend Glen Brown and I met with Representative Elaine
Nekritz in Buffalo Grove area to discuss our concerns about the “pension
reform” being pressed by Governor Pat Quinn.
Representative Nekritz was thought to be the probable
successor to Michael Madigan before her announcement to retire from Illinois
politics this year.
Back then, as Tier One retirees, we realized the General
Assembly – facing an underfunded pension liability after decades of shirking
their payments – was about to move to some draconian diminishment of promises
made and benefits constitutionally protected.
The bill – SB1 – was not yet fully baked, but it was on it’s way.
We had an emotional discussion. One of many more…
We were such idealists.
She smiled when she replied to our question –
“We can overturn any
law we pass within an hour.”
On May 8, 2015, the Illinois Supreme Court echoed our hope
unanimously. Article XIII, section 5,
stands. There shall be no diminishment
of benefits earned upon the contractual entering of employment as a state
employee.
Earlier Tier Two passed quickly by the General Assembly for
those hired after January 1, 2011, and without any real objection by the
unions, requiring new hires to work toward a defined pension that is capped at
a CPI of about $110,000 and without a compounded cost of living
adjustment. With the caps and the lesser
benefits, Tier II workers started paying down much of the debt created by the
General Assembly and surrendered nearly 9.5% of their salaries for less than 6%
of a return in a defined benefit.
Glen Brown wrote in January of 2015:
“If
Tier II is left alone, it will accomplish its mission. The $61.6 billon TRS
unfunded liability will shrink over several decades and eventually be
eliminated because the state will pay less to the ever-growing number of Tier
II members. In fact, at some point in the future, we estimate that Tier II
members actually will help create a surplus of funds for TRS that effectively
could eliminate the need for any state government contribution to the System.
“But
the core of Tier II – the reduced benefits structure – is a problem the Teacher
Recruiting and Retention Task Force will review. The benefit structure is
unfair to all Tier II members. Right now, a Tier I member’s pension costs
roughly 20 percent of an active member’s salary. Because of the benefit
reductions in Tier II, a Tier II member’s pension is worth just 7 percent of an
active member’s salary. However, by law, active Tier II members of TRS, like
me, pay the same 9.4 percent salary contribution to the System that active Tier
I members pay.
“What
all this means is that Tier II members are paying the entire cost of their
pensions plus an extra 2.4 percent to TRS. That extra 2.4 percent subsidizes
the pensions of Tier I members” (https://teacherpoetmusicianglenbrown.blogspot.com/search?q=tier+II)
And
now, Tier II pension reserves are calculated to be at 151% funding.
But
now, suddenly, we have Tier Three.
Remember: “We can
overturn any law we pass within an hour.”
According to the IEA, Tier III offers a positive opportunity
to “fix” some of the problems with the Tier II design.
Among those problems was an unscored bill Tier II passed
which did not meet the Federal requirements for a qualified retirement plan or
“safe harbor” limit.
According
to IEA’s website, “ SURS and TRS members who first become participants of the
pension systems on or after a to-be-determined implementation date (likely no
earlier than July 1, 2018) will have the option to:
1)
Be in a new hybrid benefit, known as Tier III, or
2)
Elect to be part of the current Tier II.”
Elect. Choose.
Decide
to leave the benefits of a promised contractual agreement. This is a form of
long-sought-after consideration, wrapped in promises of personal ownership has
been part of Cullerton’s olive branch to Rauner and an earlier acceptance by a
collective of state workers’ unions.
“Tier
III offers a hybrid plan of a partial defined benefit (pension) and a defined
contribution plan (401k or etc.). While
none of this is fully formed yet, those Tier II people choosing to go with the irrevocable defined contribution (401K,
etc.) will pay minimally 4% of their salary, but see their pension contributions
drop from 9 percent to no more than 6.2 percent.
“Also,
existing Tier II members will have the option of joining Tier III. The
retirement systems shall establish procedures for making these elections which,
once made, will be irrevocable. The Tier III plan is a combined defined benefit
(DB), often referred to as a pension plan, and defined contribution (DC) plan.
Under the DB part, the member’s contribution will be no more than 6.2 percent
of salary, but may be less depending upon a system’s determination of the
annual normal cost of benefits. The member’s contribution drops from the 9
percent of salary required under Tiers I and II.
Entering finally stage right:
the 401K style retirement plan.
In
2011, the Civic Committee of the Commercial Club of Chicago urged the adoption
of a 401K program for teachers to replace the pension structure currently in
place – SB512. But 401k’s had their
birth in the Reagan era: Congress acted in 1986 (during the Reagan
presidency) to replace defined benefit plans for federal workers (CSRS) with a
less generous defined benefit plan (FERS) and a generous 401 (k) plan called a
TSP. This explicit endorsement by the
government from a single type defined-benefit plan to a possible combination of
defined-benefit/contribution plan to which employees could elect to contribute
amounts of their own choice became the starting point for a fast growing
industry in financial investing and personal portfolios for retirement
(Employee Benefit Research Institute, 2005).
Makes you wonder who will be managing these teacher
investments, doesn’t it? Maybe Ken
Griffin at Citadel?
Sorry. Couldn’t
resist.
“We can overturn any
law we pass within an hour.”
Beginning
with the 2020-21 year, all employer costs (normal and any unfunded liability)
for a Tier III member will be picked up by the member’s employer and not the
state (prior to that date, the state will contribute 2 percent of each Tier III
member’s salary to each system with the Tier III member’s employer picking up
the rest, if any exists). Under the DC part, the member must minimally
contribute 4 percent of salary, while his/her employer must contribute at least
2 percent and could contribute up to 6 percent of salary.
Your future 401K will likely
not be protected under Article XIII, Section 5.
I
repeat what I warned in 2014:
Note: Always remember
this. Were the State or Rauner ever able to move public workers to a 401k
retirement system, it would not be protected under the Pension
Clause. If the State found that matching contributions to a 401k plus the
need for Social Security were too much, the General Assembly could do away with
401k plans altogether.
"Your future 401K will likely not be protected under Article XIII, Section 5":
ReplyDeleteYour future 401K WILL NOT BE PROTECTED under Article XIII, Section 5!
What remains a critical issue is that redistributing the funding burden to the state’s school districts and to their teachers and property taxpayers is unreasonable and unwarranted, and that legislators bear in mind that offering a fair and sustainable pension plan for teachers is a priority, not only for teachers but for the public school districts in Illinois. What is also at stake here is whether “the best and brightest” possible teaching candidates become one of the state’s exigencies. The state will not attract or retain the “best” teaching aspirants without offering an equitable and solvent defined-benefit pension plan for them. Finally, what continues to be most crucial for all of us is that policymakers in Illinois guarantee a minimum level of payment to the public pension systems and pay the unfunded liability, thus, upholding the state’s constitutional obligation while maintaining their legal and moral responsibility.
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