By: Brittany Flaherty Theis
Early in December, the Illinois Legislature approved a Pension Reform Bill, the constitutionality of which many predict will be challenged in the courts. Proponents of the bill estimate that it will reduce the state’s pension liability by $160 billion over the next 30 years and fully fund the systems by 2044. House Speaker Michael Madigan has explained that over half of the pension deficit reduction is a result of new supplemental state spending (from the Pension Stabilization Fund), which will be required each year until the pension systems are fully funded. The rest of the deficit reduction is the result of changes in the pension benefits for current employees and annuitants. The unions argue that the legislation violates the Illinois Constitution’s prohibition that says pension benefits cannot be diminished. Regardless, Governor Pat Quinn made clear that he intended to sign the bill into law, which he did on December 5, 2013. The Pension Reform Bill is now Public Act 98-0599.
The Pension Reform Bill was the result of prolonged negotiations over the last several years and will become effective on June 1, 2014. The law pushes back the retirement age for employees ages 45 and younger based on a sliding scale. The cost-of-living adjustments (“COLAs”) have been revised. The new system provides COLAs based on a portion of pension benefits and years of service. Specifically, the 3 percent compounding COLA would only apply to $1,000, multiplied by the number of creditable years of service. This means that an employee who worked for 30 years would receive a 3 percent compounding COLA for the first $30,000 of pension. The $1,000 will increase each year by CPI. The law also suspends COLAs in certain years based on the age of current employees. For example, employees 50 years old or older will not receive an adjustment in year two and employees 47 to 49 years old would not receive adjustments in years two, four, and six. Schedules are set out for all age groups.
The law also increases the retirement age for certain employees. For all employees under the age of 46, the retirement age will increase by four months for ever year under the age of 46, for a maximum of five years added. Current employees 46 years old or older as of June 1, 2014, will not see their retirement age changed. Under the new law, Tier I employees will have a pensionable salary cap set at the same dollar value as Tier II employees, which are those hired after January 1, 2011. Additionally, for employees hired after June 1, 2014, salary may not include payment for unused sick or vacation days (for pensionable purposes).
On the other hand, the law reduces TRS employees’ contribution to the retirement system by 1 percent. It also requires the state to make supplemental payments from the Pension Stabilization Fund to the pension systems each year to assure 100 percent funding of the pension systems by 2044.
However, the much debated shift of pension costs from the state to local school districts is not in the current version of the law. Many speculate that the concept is not off the table and will likely be back up for debate in the spring.
Whitt Law will be following the developments of pension reform in Illinois including future debates, likely amendments, and the likely court battles that will ensue. The attorneys at Whitt Law have already responded to numerous inquiries regarding the impacts of the new laws. Please contact Whitt Law Partner Stuart Whitt if you have any questions regarding the impact of pension reform on your school district or other government body.