IEA Leader Cinda Klickna Provides Information on SB 42 and Tier III

From Retired IEA Leader Cinda Klickna:

Latest information on Tier III.

1.     Were there pension changes in the new FY 18 State budget?

Yes, there were changes made to pensions in SB 42, one of the three budget bills that make up the FY18 State budget.

2.     How does SB 42 impact pensions?

Within Senate Bill 42, the budget implementation bill, the General Assembly created a third tier for new hires under most pension systems, including State Universities Retirement System (SURS), Teachers’ Retirement System (TRS) and State Employees’ Retirement System (SERS). The Illinois Municipal Retirement Fund (IMRF) is not included. This third tier attempts to fix some of Tier II’s problems. There are several other significant components of the proposal that improved upon the current pension system and several counterproductive ideas that were omitted, for example, a consideration option for Tier I members.

3.     Does the new pension proposal create a third tier?

Yes. 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.

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. 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.

4.     What are the benefits of Tier II or Tier III?

•   In both Tier II and Tier III, the cost of living adjustments (also known as COLA), retirement age and years of service are essentially the same.

•   The pensionable salary of a member that chooses Tier III is higher than the salary of a Tier II member. It is equal to the Social Security Wage Base — $127,200 in 2017 vs. Tier II being $112,408.42 in 2017.

•   Under Tier III, members’ DB contribution decreases to no more than 6.2 percent (so they are receiving equivalent benefit value for their contribution as opposed to Tier II), although each service year is worth 1.25 percent as opposed to 2.2 percent under Tier II.

•   In addition to the DB contributions, Tier III members will have the benefit of minimally 6 percent of salary/year going into a DC plan.

•   For some employees, depending on anticipated length of service and other factors, Tier II may be preferable to Tier III. For those who don’t want any stock market risk in their retirement, they can keep a strictly defined-benefit plan under Tier II.

•   For those who prefer the portability of a DC plan, or see the combined package as preferable, they can opt in to Tier III.

5.     How are Tier 1 participants and retirees impacted by the changes?

The pension legislation has no impact on Tier I members, including retirees. The creation of the Tier III plan does not divert state dollars from TRS or SURS to the defined contribution plan. It requires that the employers fund the defined contribution plan and any liabilities attributable to the DB plan for Tier III members, if any exists.

6.     What impact will this legislation have on local school districts?

For SURS and TRS, the bill contains language that local employers, rather than the state, would be responsible for the employer’s normal and any unfunded liability costs of the defined benefit plan for Tier III employees, plus at least 2 percent of salary for the employer DC contribution. See FAQ 3 above.

7.     Did the IEA support the pension changes?

The IEA and all the unions within the We Are One Illinois labor coalition took a position of neutrality. We knew pension legislation of some kind was going to have to pass for there to be a budget. So, we worked to ensure the unconstitutional consideration model, which had been a part of SB 16 was not included. Additionally, we worked to make sure end of career salary increases which could be used for calculating one’s pension were not reduced from 6 percent to the consumer price index. Such a reduction would minimally have impacted local bargaining.

8.     What role do the systems have in the creation of the DC option?

The legislation requires the systems to implement a DC option for Tier III participants. This option will provide future teachers the ability to invest their retirement savings in mutual funds and other investment options similar to their 403(b) savings plans. The Tier III option will not be available until the DC plan is approved by the IRS.

Cinda 

Bob Lyons Retires from TRS & Provides Perspective Looking Ahead

Bob Lyons’ First Report as Annuitant

I have retired from the TRS Board and I write this today as a fellow annuitant, not as a TRS trustee. This past fiscal year ended on June 30 2017 and  it is my understanding that TRS investments made something above 10% for the year As additional information comes  from TRS holdings in private equity and real estate, it is expected that the gains will only grow. And with TRS funding level firmly above 40%, Illinois is no longer the worst-funded pension state. Illinois has moved up and is now in 48th place, Kentucky 49th at 37.8%, and New Jersey is last with 37.5%. And that is not the only reason to celebrate; Illinois finally has a budget. 

According to the editorial writers and columnists across the state, Governor Rauner was the clear winner except for those that gave the victory to Speaker Madigan. For more than two years Governor Rauner tried to hold the budget hostage: first, for a set of union-busting demands, but in the end for several  measures, such as term-limits, a property-tax freeze, and workmen’s compensation changes that were more popular. In the end while Governor Rauner got nothing for his efforts, he can and will use the tax increase as a hammer against Madigan and company in the 2018 election. One thing is certain: the two years without a budget was a loss for the state. Even with the increased income tax, the state bond rating hovers just above junk. Illinois owes a total of over fifteen billion dollars to everyone it does business with. And the many candidates for governor and the legislature are all in full campaign-mode a year and four months before the election.  The political pundits have already given Illinois claim to be the most expensive campaign in the nation for who will be our governor.

Even without a budget, a combination of courts orders and continuing resolutions had the state of Illinois paying out $39 billion a year, or more accurately a combination of paying, or promising to pay a total of $39 billion. Now the increase in the state income tax from 3.75% to 4.95%, which is an increase of 1.2%, according  to Mike Madigan, or 32%, according to Bruce Rauner, is expected to bring in an additional $4.3 billion in revenue. The rise in the corporate tax from 5.25% to 7% should grow the state’s revenue by an additional $460 million. The bill that gave us the tax increase also allows the state to borrow $8 billion to pay down debt. Normally borrowing to deal with debt is not a good plan, but with some debts paying interest as high as 12% the state can borrow for far less and come out ahead.  In addition, paying off some debts will free up matching grants from the Federal government.

Illinois  needed the tax increases in order to fund TRS pensions. June 28, as the state headed into a third year without a budget, a federal judge ruled that Illinois was out of compliance with previous court orders to pay health care bills for low-income and other vulnerable groups  Judge Joan Lefkow ordered the state to come up with $586 million per month to make immediate payments and to start reducing the $2 billion debt which is owed to health care providers. Without additional revenue, State Comptroller Susana Mendoza would have obviously needed to take the money from somewhere else. The monthly payments from the state going into the pension funds could likely have been taken by Mendoza to help satisfy the judge’s demand.

Over the last several years, following the advice of its own investment people and its outside consultants the TRS Board has lowered its assumed rate of investment return in three steps from 8.5% down to 7%. Each decrease in assumed returns meant that the state of Illinois would need to increase its contributions to the pension fund. The last decrease in assumed returns caused the needed increased contribution from the state to TRS to grow by $402 million. The necessity of these increased payments was not well received by the Governor and the General Assembly and as part of the legislation recently passed TRS must now retroactively “smooth” the final effect of any changes made in the TRS assumed rate of investment in the last five years with 20% being phased in each year over the next five years.  Though the results of this calculation have yet to be announced by TRS,  the estimate is that it could significantly lower the state's FY 18 contribution  and it may mean that the annual payment from the state of Illinois would remain approximately $4 billion, or even less than it was for last year

The FY 2018 budget included changes to the Illinois Pension Code with the creation of a new Tier III.  None of the Pension Code changes enacted on July 6, 2017 affect Tier I members or retired members in any way. There will be no changes to benefits, active Tier I member contributions, or health insurance. Tier III will only affect Tier II members and those teachers yet to be hired only if they want to be a part of it. The optional Tier III calls for a “hybrid” retirement plan of two parts – a life-long-defined benefit pension and a defined contribution plan similar to a 401(K). Details on Tier III still need to be worked out and then the plans will be submitted to the Internal Revenue Service for their approval. It is a shame that that stipulation was not part of the creation of Tier II. Tier II members are paying 9% for a plan that is worth only 6% at best.   Tier I is funded at just over 40%, Tier II is currently funded 151%.

One other change to the Pension Code should be noted. Local school districts will pay for the cost of a member’s pension if the member's salary is equal to or greater that the governor’s statutory salary of $177,412 – only the portion that is equal or over. Also local school districts will be responsible for the “employer contributions” for both the DB and DC plans that will be part of Tier III. For those of you who look ahead and fear the state wants to get out of the pension business, you should know that the billions that Illinois owes to TRS are binds that will not break. They owe it and they have to pay it.

Larry Pfeiffer has taken my place on the TRS Board    E-mail: pfeiff4@gmail.com

 Bob Lyons 

Step Right Up

“Step Right Up”

HT: GB

A close friend of mine once turned me on to a song by Tom Waits of which I hadn’t been exposed.  I’m not totally square, Dude.  I mean “Small Change” and “The Piano Has Been Drinking” were always old favorites.  So, when my friend said, “You gotta get an earful of ‘Step Right Up,” I had to try it out.

I love it when you feel like someone behind your eyes is forcing open your senses: your pupils suddenly pushed open, your hearing laughing out loud, feeling wrinkles on my chuckling cheeks …

“Step right up, step right up, step right up,

Everyone's a winner, bargains galore

That's right, you too can be the proud owner

Of the quality goes in before the name goes on

One-tenth of a dollar, one-tenth of a dollar, we got service after sales”

For the last week, many of us have been asking what was the sweetener that brought the over-a-dozen Republican votes to the budget battle?  What did we (unions, etc.) give up to induce them into voting an override? 

Then, the answer:  Senate Bill 42.   Pages 270-283 of the same bill.  Not the budget bill.*** 

Step right up, new hires and Tier 2 teachers and state employees.  If you feel like you got suckered into paying down the unfunded liability caused by decades of not reimbursing the normal costs, we (the General Assembly) are going to give you an option to break free!   Captain of your own financial ship!

“Three for a dollar

We got a year-end clearance, we got a white sale

And a smoke-damaged furniture, you can drive it away today

Act now, act now, and receive as our gift, our gift to you

They come in all colors, one size fits all

No muss, no fuss, no spills, you're tired of kitchen drudgery”

Tier 3 now enters stage very far RIGHT!  An opportunity to provide the beginning of Governor Rauner’s plan to reduce, if not completely destroy, the state employee unions in Illinois.  A chance to give up your defined benefit (a pension) for an IRA. 

So, I looked through the legalese on those pages this evening.  Now mind you, I am not a lawyer or politician, but I do comprehend “Step Right Up,” so maybe that qualifies.

Here is what I see:

Here’s what I wonder:

·      Implementation to occur as soon as possible after passage; thus, January of 2018?

·      New members or old (Tier 2) have 30 days within which to make this selection.

·      To opt into the defined contribution or to opt to stay within Tier II is an irrevocable decision? 

·      Determination of a final average salary will be increased to the average of the last ten years of earnings.  

·      Such earnings cannot exceed the federal Social Security wage base in effect at that time.  Currently $127,200.

·      No retirement annuity unless the participant has attained 67 years of age and meets the other necessary criteria.                                                                                        

·      Multiplier is now at 1.25% for each year of service time’s final average salary.  No longer 2.2. 

·      Increases in annuity payouts are provided annually as measured by the BLS measurement of the consumer price index, but such payments will be 1/2 of the unadjusted measure of the consumer price increase. 

·      Survivors will be provided 66 and 2/3% of the dying spouse's retirement annuity at time of death.  

·      Employees not contributing to a defined contribution shall part with 6.2% of their salary to the retirement system.  And this cost will not be more than the 6.2% unless such employees have decided to make contributions to the defined contribution plans available under this act.

·      In addition, the 6.2% can be lowered by agreement of the State Actuary and CGFBA to a lesser amount if the "normal costs" are reduced.  If the normal costs increase, the rate shall be capped for employee at 6.2%.  Neither of these variations are involved in those who choose a defined contribution.

·      Tier 2 and new Tier 3 hires can choose to join a defined contribution plan that "aggregates " employer and employee contributions.  The term aggregate means to add together; i.e., participants pay in and are given a match or sweetener to do so by the employer.  This is likely a cost shift to districts.

·      Tier 2 or 3 members who join the defined contribution plan will pay 4% of salary to the plan.  The employer shall pay an additional amount, not beyond 6% of the employees salary and no lower than 2%.  I see no basis for the differences.  Is this a negotiated item??? 

·      The State Board of Investments and private sector companies will help plan investments.  Hello, Ken Griffin and Gov. Rauner’s friends. !

·      Earlier collected earnings in TRS may be rolled over into the plan based upon authorized federal law and the retirement system as long as qualified plans. The concept of “qualified plans” leaves much to be desired.  I remember that Bernie Madoff met ERSA requirements for “qualified plan” before later changes.

·      Each retirement system will reduce the employee's contributions to the contribution plan by the costs of administrative fees and costs of offerings (think advertising, 10b1's, etc.)

So, it would appear, a smattering of Republicans came forward to help the state of Illinois from falling into the fiscal abyss, but they and the Democrats also voted for a possible end of the unions they for whom have so long sworn allegiance.  Can’t win fair share?  Then, let’s offer a defined contribution.

Smart and clever move?  As a former member of TRS replied, “Let me remind you that any money that TRS would not receive from a active teacher needs to be make-up by the state of Illinois.  The money owed to TRS by the State must be paid and they should know that.”

“We need your business, we're going out of business

We'll give you the business

Get on the business end of our going-out-of-business sale

Receive our free brochure, free brochure

Read the easy-to-follow assembly instructions, batteries not included

Send before midnight tomorrow, terms available,

Step right up, step right up, step right up

You got it buddy: the large print giveth, and the small print taketh away”

You can count on guys like me and Bruce...

And that, my union friends, is the fine print of our budget deal. 

Fred Klonsky Calls Out Tier III

From Fred Klonsky:

What they just did to the Illinois Teacher Pension System

On Friday evening those of us who are members of the Illinois Teachers Retirement System received an email blast informing us that "significant changes" had taken place to the pension system as a result of the budget resolution, SB9.

The TRS notice explained that the legislature had created a new Tier III which would allow for younger teachers and future teachers (in Illinois but not Chicago) to opt to invest their retirement savings in a private annuity, like a 401k.

The conversion of our Defined Benefit system (DB) to a Defined Contribution (DC) has been a part of the Rauner Turnaround Agenda since he was elected.

Let's take a step back.

In order for there to be a "Tier III" there had to have been a "Tier II".

In 2010 the Illinois Democratic legislature, in a nearly secret vote pushed through in less than 24 hours with no hearings or input from anybody, a law that created Tier II for any teacher hired after January 1, 2011.

It was a disaster.

Pension blogger Glen Brown posted in 2015:

According to Bob Lyons, TRS Trustee, “the financial inequities of the Tier II funding and benefit structure must be fixed. Current law requires Tier II members to pay 9.4 percent of their salary and that subsidizes both Tier I and Tier II benefits. The Tier II contribution is 50 percent higher than the benefit’s value, which is 6 percent of their pay.
“In 20 years, when Tier II members are a significant majority in TRS, the subsidy they pay will cause a reduction in the state’s annual contribution. Eventually, the state will not owe any annual contribution to TRS because the members will be paying the entire cost. This is fundamentally unfair to Tier II members.

“These new positions will cost the state more money with an increase of the FY 13 contribution and a reduction of contributions from Tier II teachers. We believe that a funding requirement can be written that will make the payment guarantee a benefit that can be protected by the constitution, and that too will cost the state money” (Insolvency by Bob Lyons, TRS Board, March 2012). 

An actuarial analysis of Senate Bill 1 shows the bill would create Social Security chaos, eventually leading to massive local property tax hikes and making the proposal an unfunded mandate of historic proportions.

Take the time to read Glen's entire post.

It is widely assumed that when the first Tier II teacher reaches retirement age, law suits will fly and the "Social Security chaos" will ensue.

Meanwhile the current $130 billion state pension liability will grow.

Is the new Tier III some feeble attempt to address the Tier II fiasco?

I contacted my State Representative Will Guzzardi. He explained:

• Tier III is strictly optional, both for current Tier II members and future enrollees. Any new hire will have the option to choose Tier II if he / she so prefers.

• As I thought, the anticipated cost savings to the state come primarily from the fact that the employer contribution of the DC portion of Tier III will be picked up by local districts instead of the state.

• For some employees, depending on anticipated length of service and other factors, Tier II may be preferable to Tier III. For those who don't want any stock market risk in their retirement, they can keep a strictly defined-benefit plan under Tier II. For those who prefer the portability of a DC plan or see the combined package as preferable, they can opt in to Tier III.

I apologize for not contacting you sooner about this. As I began to say yesterday, some of these ideas have been kicking around the capitol for a while, but in the final few days of the special session they were included in the budget deal in an (ultimately successful) effort to get the mutinous Republicans on board. They felt they needed to do something on pensions; we were firm that we weren't going to diminish anyone's benefits. 

It was clear what had happened. The Republicans wanted to introduce a DC plan into the public pension system and in order to get the state's first budget in two years the Democrats needed Republican votes. Once again, pensions became a bargaining chip.

It is voluntary now. But who believes it will end there.

The thought is that perhaps offering Tier II teachers the Tier III investment option it will solve the problem Tier II teachers' pension will not meet the safe harbor requirement of the federal government - benefits equal to Social Security.

I talked to my colleague John Dillon yesterday. John blogs at Pension Vocabulary.

"If this is an option for the Tier II teachers who have been getting hoodwinked into paying down the unfunded liability to now jump to something that might promise a better retirement, we know all the research shows it will not be."

Speaker Madigan has been pushing for a pension cost shift to local district for years. Representative Guzzardi confirms that the cost of funding Tier III will be shifted away from the state to local school districts. That is where the so-called savings to the state are coming from.

As John Dillon pointed out to me, "Those poorer districts like Markham or Hillcrest or Ford Heights? Sorry. We have to pay those defined contributions to TRS and now no more track. Or Art. Or Music."

And the next time the teachers union sit down at the bargaining table, where will money come from in those already cash-strapped districts come from to pay for teacher salaries?

Now our younger active teachers and incoming teachers can play Wall Street casino. Even a guaranteed simple compound throws a bone to a starving retiree once in a while. But for Governor Rauner, even that is not enough. He took this opportunity to bring a major population into his field of play.

John Dillon:

"Fred. The General Assembly has taken every opportunity to avoid the costs of earlier theft by mostly Republican governors from the pension systems, as well as Blago and others. Instead of the hard work of real innovative and sensible fiscal changes - a progressive income tax, full funding payments, service taxes, etc - you drop the pathetic band-aids for devious and murky designs to avoid the moral path back to re-establish a retirement benefit promised in the Illinois Constitution."

Whether or not Representative Guzzardi is correct and that Tier III does not represent a diminishment or impairment of pension benefits may or may not be decided by judges in a court.

But when I asked retiring member of the TRS board of trustees Bob Lyons that question, he responded, "Considering we think that if the state would ask the IRS about Tier II - that it would not pass the safe harbor standard and that the only way Tier III goes into being (makes) it considered safe for retirees, can anyone argue (whether) it is a diminishment? You can oppose simply because it is not safe and it will take some amount of money away from TRS.  And even if the state will eventually have to replace those dollars, they certainly qualify as a 'slow pay.'"

Tier II made a mess of things.

Tier III took that mess and made it worse.

Governor Rauner is smiling.