Public Pension Reform - Senate Bill 2404 - "We Are One Illinois" Coalition - Senate Democrats

Issue: On May 9 the Illinois Senate approved Senate Bill 2404 on a 40-16 vote with 30 needed for passage. The proposal was drafted by the We Are One Illinois Coalition and Senate President John Cullerton, D-Chicago, and is designed to help solve the state’s public pension financial problems over the long term.

The Coalition said this proposed solution involves benefit reductions and a strong guarantee in law that state government will make its annual pension contributions in the future.

Discussion: The bill requires all active and retired Tier I TRS members to make a choice about the future of their individual benefit structure. President Cullerton believes that the “choice” provisions ensure that the proposal does not violate the pension protection clause of the Illinois Constitution because members are part of the decision-making process.

Sponsors project that Senate Bill 2404, if enacted, would reduce the total unfunded liability of the five pension systems by $8.5 billion to $15.7 billion. The projection is that SB 2404 would save the state between $45 billion and $51 billion in future pension expenditures. The projections say that the bill would “free up” $850 million in the fiscal year 2015 state budget for other purposes.

TRS will not take a position on Senate Bill 2404. It is the legislature’s job to dictate the laws and rules that govern TRS and other public pension systems. The job of TRS is to administer those laws and work to secure the System’s finances so that the promises made to generations of teachers by the General Assembly can be kept.

Here are the choices outlined in the bill for active TRS Tier I members and retired TRS Tier I members:

Active Tier I members would choose between three options:

Active Option 1

The TRS Cost-of-Living Adjustment formula would be 3 percent annually calculated from the member’s original pension.

• Automatic forfeiture of two years of the member’s COLA once the member is eligible for a COLA.
• Access to state-subsidized health insurance in retirement.
• Access to an Early Retirement Option similar to the current ERO.
• Access to a new optional “cash balance” plan to supplement the member’s pension.

Active Option 2

• The TRS COLA would continue to be 3 percent annually calculated from the member’s current pension.
• No access to state-subsidized health insurance in retirement.
• All future salary increases from the effective date of the law will not count when the member’s future pension is calculated.
  • Salary increases included in personal or organized labor contracts at the time the law takes effect would be included in the pension calculation. Salary increases included in re-negotiated contracts or amendments to existing contracts would not be included in the pension calculation

Active Option 3

• Active member contributions would increase by one percentage point in the first year after enactment and increase by another one percentage point in the second year after enactment. The current active member contribution is 9.4 percent.
• The TRS COLA would continue to be 3 percent annually calculated from the member’s current pension.
• Automatic forfeiture of three years of the member’s COLA once the member is eligible for a COLA.
• Access to state-subsidized health insurance in retirement.
• All future salary increases from the effective date of the law would count when the member’s future pension is calculated.

Retired Tier I members would choose between two choices:

Retired Option 1

• The TRS COLA would continue to be compounded. The COLA would be 3 percent annually calculated from the member’s current pension.
• A staggered automatic forfeiture of two years of the member’s COLA after the effective date of the bill. A member that has not received their initial COLA will receive that accumulated COLA at age 61 before the staggered forfeiture begins.
• Access to state-subsidized health insurance in retirement.

Retired Option 2

• The TRS COLA would continue to be 3 percent annually calculated from the member’s current pension.
• No access to state-subsidized health insurance in retirement.

For school districts, there is no shift of the annual cost of pensions from the state to local school districts.

The bill contains language which all but requires state government to pay its full annual contribution to TRS and the other state pension systems. If the state does not pay its annual contribution to TRS within a set period of time, TRS could go to court to force the state to pay the contribution in the same way that the Illinois Municipal Retirement Fund can force local governments to pay their contributions.

The bill is designed to make TRS 90 percent funded by 2045.

Once the state’s outstanding pension obligation bonds are paid off in fiscal year 2020, the state will contribute an additional $1 billion each year above the regular annual pension contribution to help pay off the unfunded liability.

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Early Retirement Option Extension – Senate Bill 1366

Issue: Senate Bill 1366 was amended in the House on May 9, 2013 with language that extends the current Early Retirement Option to TRS members who are otherwise eligible for the program before June 30, 2013 but turn 55 between July 1 and December 31 of 2013. The bill also extends the basic ERO program until 2016 but dramatically changes the funding sources for the program by increasing the one-time contributions that members and school districts must pay in order to participate after 2013. The bill is sponsored by State Sen. Daniel Biss, D-Evanston and State Rep. Elaine Nekritz, D-Northbrook.

Discussion: Senate Bill 1366 allows members who are otherwise eligible for ERO but turn 55 in the six months after July 1, 2013 to participate in ERO this spring if they reach an ERO agreement with their school districts before June 30, 2013.

Senate Bill 1366 creates a new ERO that would take effect on July 1, 2013 and run through June 30, 2016. The major difference between the old ERO and this new ERO would be increases in the member and school district contributions. The increases were recommended by the General Assembly’s Commission on Government Forecasting and Accountability to cover the anticipated future cost of the program.

• For TRS members, the one-time contribution to participate in the new ERO would be 14.4 percent of salary for every year the member is under age 60 or for every year the member’s creditable service is less than 35 years, whichever is less. The member contribution rate in the current ERO program is 11.5 percent.
  
• For school districts, the one-time contribution to have an employee participate in ERO would be 29.3 percent of the member’s salary for every year the member is under age 60. The employer’s contribution rate in the current ERO program is 23.5 percent.

Senate Bill 1366 also would keep in place the current 0.4 percent payroll contribution paid by all active members to help fund the current ERO program.

Under Senate Bill 1366, the eligibility criteria for participating in ERO will be negotiated and set by each school district and the union representing TRS members in that district.

Under the current ERO law, if legislators do not renew the program by June 30, 2013, the ERO statute will be repealed automatically and TRS members will receive refunds of all contributions paid to date to fund the ERO program. The total cost of this refund is projected to be at least $204 million.

The automatic repeal would nullify on July 1 all provisions that govern eligibility for ERO, including language that allows some TRS members to take advantage of the ERO while they are 54 years of age.

• In previous years, a member could reach age 55 after June 30 and be “deemed to be 55” and participate in ERO with a retirement date prior to July 1 of that year, but only if his/her 55th birthday fell between July 1 and December 31 and the member was eligible for a pension of at least 74.6 percent of his/her final average salary.
  
• If the law sunsets this year, members who reach age 55 after June 30, 2013 but would not receive a pension of at least 74.6 percent of his/her final average salary would no longer be able to retire under ERO before June 30.
  

TRS will not take a position on Senate Bill 1366. It is the legislature’s job to dictate the laws and rules that govern TRS and other public pension systems. The job of TRS is to administer those laws and work to secure the System’s finances so that the promises made to generations of teachers by the General Assembly can be kept.

Public Pension Reform – Senate Bill 1

Issue: A new comprehensive pension reform proposal was amended onto Senate Bill 1 on May 1, 2013 by House Speaker Michael Madigan, D-Chicago. The proposal seeks to stabilize TRS finances and eliminate the System’s unfunded liability in 30 years.

TRS will not take a position on Senate Bill 1. It is the legislature’s job to dictate the laws and rules that govern TRS and other public pension systems. The job of TRS is to administer those laws and work to secure the System’s finances so that the promises made to generations of teachers by the General Assembly can be kept.

Discussion: Senate Bill 1, as amended, affects all active and retired Tier I and Tier II members and contains the following provisions:

COLA Formula

The bill outlines two formulas to calculate the size of each year’s COLA after enactment. For each TRS member, the formula to be used will be determined each year by the size of the member’s initial pension.

• Each member, upon retirement, will multiply their service credit by $1,000 to determine a “threshold” that will be used in the future to determine the annual COLA. For example, a member with 30 years of service upon retirement would have a “threshold” set at $30,000.
• If this member’s original pension in their first year of retirement is less than $30,000, then when the member is eligible for a COLA it will be 3 percent calculated from the member’s original pension. In every year that the member’s pension is below $30,000, the annual COLA will be 3 percent calculated from the member’s current pension.
• Once this member’s pension equals or exceeds $30,000, the COLA calculation changes. The COLA in every year then becomes 3 percent of $30,000, or $900. In every year thereafter, this member’s COLA is $900.
• If this member’s original pension equals or exceeds $30,000, then when the member is eligible for a COLA it will be 3 percent of $30,000, or $900. This member’s COLA in every year thereafter will be $900.

Right now, the average TRS pension is $48,216. With the current COLA that pension grows to $49,662 in the first year that member is eligible for a COLA and $51,152 in the second year. Under Senate Bill 1, a member with 30 years of service and a pension of $48,216 will see that pension grow by $900 to $49,116 in the first year the member is eligible for a COLA. In the second year, the member’s pension will increase by another $900 to $50,016.

COLA Eligibility

Members would not receive a COLA until age 67 or five years after they retire, whichever comes first. This would apply to all retired members already receiving a COLA under the old rules. These members could see their COLA suspended for a period of time, but would not lose any COLAs previously received.

Reportable Salary

The salary used to determine an active member’s final average salary would be capped at the maximum Social Security wage base in 2012, which is $110,100.

• This cap would grow every year by one-half of the urban Consumer Price Index in the previous year.
• However for a TRS member employed under an individual or union contract, the cap would be set at the member’s maximum salary under the contract at the time the law takes effect, if the salary exceeds the cap set in law. Contractual salaries that are below the cap when the bill takes effect would be allowed to rise to the cap.

Active Member Contributions

Payroll contributions would increase from 9.4 percent to 10 percent during the 2013-2014 school year and increase to 11 percent beginning in the 2014-2015 school year.

Retirement Age

The retirement age would be set on a sliding scale based on the member’s age and the time the law takes effect:

• 45 and older: Current rules apply. Retire between the ages of 55 and 59 with at least 20 years of service and receive a reduced benefit, or at 60 or more and receive a full benefit
• 40 to 44 years old: Retire at 56 to 60 with at least 20 years of service for a reduced benefit and at 61 for full benefits.
• 35 to 39 years old: Retire at 58 to 62 with at least 20 years of service for a reduced benefit and at 63 for full benefits.
• 34 and younger: Retire at 60 to 64 with at least 20 years of service for a reduced benefit and at 65 for full benefits.

Sick Time

TRS members hired after the effective date of the bill will not be able to add unused sick time to their total service credit when the time comes to calculate their initial pension.

For School Districts

There is no shift of the annual cost of pensions from the state to local school districts.

For State Government

• If the state does not pay its annual contribution to TRS within a set period of time, TRS could go to court to force the state to pay the contribution in the same way that the Illinois Municipal Retirement Fund can force local governments to pay their contributions.
• The law is designed to make TRS 100 percent funded in 30 years.
• Once the state’s outstanding pension obligation bonds are paid off in fiscal year 2019, the state will contribute an additional $1 billion each year above the regular annual pension contribution to help pay off the unfunded liability.

Capping COLA Increases – House Bill 1165

Issue: House Bill 1165, sponsored by House Speaker Michael Madigan, D-Chicago, was approved by the House on March 21. The House vote was 66-50 with 60 votes needed for passage. The bill now moves to the Senate for consideration.

Discussion: House Bill 1165 is designed to help eliminate the TRS unfunded liability by reducing the annual cost-of-living adjustments for all TRS Tier I members, active and retired.

House Bill 1165 affects all active and retired Tier I members (service before January 1, 2011)

The annual COLA would continue to be 3 percent annually, calculated from a member’s current pension.

All future COLAs after the bill takes effect would apply only to the first $25,000 of a pension.

• Effectively, with a $25,000 cap, the Tier I COLA is $750 every year if the member’s salary exceeds $25,000.
• For a member with a salary of $25,000 or less, the 3 percent COLA increase would apply to the entire pension – until the total pension exceeds $25,000.

Currently, the average TRS pension is $48,216.As an example, under the current COLA law, that $48,216 pension grows to $49,662 in the second year and $51,152 in the third year. Under HB 1165 with a capped COLA, the same pension would grow to $48,966 in the second year and $49,716 in the third year.

All members would not receive a COLA until age 67 or five years after they retire, whichever comes first. This would apply to all retired members already receiving a COLA under the current rules. These members could see their COLA suspended for a period of time until they meet the new COLA eligibility rules, but these members would not lose any COLAs previously received.

TRS will not take a position on House Bill 1165. It is the legislature’s job to dictate the laws and rules that govern TRS and other public pension systems. The job of TRS is to administer those laws and work to secure the System’s finances so that the promises made to generations of teachers by the General Assembly can be kept.

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Cap on Salaries Used to Determine Final Average Salary

Issue: On March 14, 2013, the Illinois House approved a proposal that would reduce the pensions of Tier I members by capping a member’s salary that is reportable to TRS and used in benefit calculations. The bill was sent to the Senate on a 101-15 vote.

Discussion: Under House Bill 1154, the salary reported for all active members and eventually used in benefit calculations would be capped at the maximum Social Security Wage Base, which is $113,700 in 2013. The Wage Base changes each year in response to economic conditions.

There are exemptions to the cap:

• A TRS member employed under an individual or union contract, the cap in the bill would not be set at the Social Security Wage Base, but would be set at the member’s maximum salary under the contract at the time the law takes effect – if that contractual salary exceeds the Social Security Wage Base. The Social Security Wage Base cap would apply to any member whose maximum contractual salary is below the Wage Base when the bill takes effect.
• For members who are not employed under a contract and have a current salary that exceeds the Social Security Wage Base, the cap is set at their current salary.

This proposal is similar to a wage cap currently in state law that affects the calculation of the final average salary for all Tier II members.

In fiscal year 2012, the average salary of active TRS members was $66,696.

TRS will not take a position on House Bill 1154. It is the legislature’s job to dictate the laws and rules that govern TRS and other public pension systems. The job of TRS is to administer those laws and work to secure the System’s finances so that the promises made to generations of teachers by the General Assembly can be kept.

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Increasing the Retirement Age – House Bill 1166

Issue: On March 14, 2013, the Illinois House approved a proposal that would increase the retirement age for all TRS members who are under the age of 45 in 2013. The House vote to send the bill to the Senate for consideration was 76-41. The proposal is sponsored by House Speaker Michael Madigan, D-Chicago.

Discussion: The retirement age would be set on a sliding scale based on the member’s age and the time the law takes effect:

• 45 and older: Current rules apply. Retire between the ages of 55 and 59 with at least 20 years of service and receive a reduced benefit, or at 60 or more and receive a full benefit.

• 40 to 44 years old: Retire at 56 to 60 with at least 20 years of service for a reduced benefit and at 61 for full benefits.
• 35 to 39 years old: Retire at 58 to 62 with at least 20 years of service for a reduced benefit and at 63 for full benefits.
• 34 and younger: Retire at 60 to 64 with at least 20 years of service for a reduced benefit and at 65 for full benefits.

TRS will not take a position on House Bill 1166. It is the legislature’s job to dictate the laws and rules that govern TRS and other public pension systems. The job of TRS is to administer those laws and work to secure the System’s finances so that the promises made to generations of teachers by the General Assembly can be kept.

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Early Retirement Option Renewal – House Bill 2900

Issue: House Bill 2900 was introduced in February 2013 by State Rep. Elaine Nekritz, D-Northbrook, and as originally written extended the state’s Early Retirement Option law beyond its scheduled automatic repeal on July 1, 2013. As currently drafted, however, House Bill 2900 proactively terminates ERO on July 1, 2013 but temporarily extends the program for some TRS members.

Discussion: The bill allows any TRS member to participate in ERO after July 1, 2013 if they reach an agreement with their school districts prior to July 1, 2013 to retire in the future under the provisions of ERO.

TRS members eligible to retire and participate in ERO before June 30, 2013 under the current law can still do so, but 2013 would be the last year in which ERO could be invoked.

If legislators do not act on House Bill 2900 or any other legislation to renew the ERO law by June 30, 2013, the ERO statute will be automatically repealed and TRS members will receive refunds of all contributions paid to date to fund the ERO program. The total cost of this refund is projected to be at least $200 million.

Under state law, TRS and its actuaries, Buck Consultants, completed an “actuarial investigation” of the program in 2012 that included recommendations about whether contributions from active members, as well as one-time contributions from retiring members and their employers are sufficient to fund the program.

• The Buck recommendations were forwarded to COGFA, which made a formal recommendation to the General Assembly on January 10, 2013.
• Lawmakers now have until June 30, 2013 to act on the COGFA recommendation.

TRS will not take a position on House Bill 2900. It is the legislature’s job to dictate the laws and rules that govern TRS and other public pension systems. The job of TRS is to administer those laws and work to secure the System’s finances so that the promises made to generations of teachers by the General Assembly can be kept.

Ralph Martire Plan to Re-Amortize Illinois’ Pension Debt Over 44 Years

Issue:In January, 2013, Ralph Martire, executive director of the Center for Tax and Budget Accountability, proposed a multi-year solution to the state’s pension financing problem that would replace the current 30-year full-funding plan with a 44-year payment plan. Essentially, he wants to re-finance the pension “mortgage” to lower the annual payment.

Martire points out correctly that the biggest and essential part of the pension problem is the $93 billion unfunded liability facing Teachers’ Retirement System and the four other state pension funds. The TRS share of this unfunded liability alone is $53 billion. Two-thirds or more of the state’s annual pension contribution is devoted to paying down the unfunded liability. The remainder is the cost of pension benefits earned by active teachers in that year.

Discussion: Martire’s proposal would “restructure” 90 percent of the $93 billion unfunded liability, or roughly $85 billion. All but 10 percent of the unfunded liability would be paid off by 2057, through equal annual contributions from state government. Martire estimates the payment would be approximately $6.9 billion every year for 44 years.

Currently, state law requires the government to pay off the pension systems’ unfunded liability by 2044 in annual contributions. These contributions, however, increase in size annually between 2013 and 2044. For TRS, the annual state contribution in 2014 is scheduled to be $3.4 billion. It is scheduled to increase over the next 31 years to $9.31 billion.

Legislators of both parties say that this continually rising “ramp” payment is too expensive and will be unaffordable in the future because it will re-direct money from other state budget priorities.

The TRS Board of Trustees’ resolution of 2012 calls for an actuarially-sound plan to pay off the unfunded liability. This means that:

• Normal actuarial practice calls for a 30-year payment plan. State law has required a 50-year plan and this proposal would be a 44-year plan.
• Normal actuarial practice calls for pension system to be 100 percent funded – to carry no unfunded liability. State law has required a 90 percent target, which would continue under this plan.
• Along with the annual payment toward the unfunded liability, the state also must pay the annual cost of pensions earned in that year. For TRS alone, that cost is roughly $1.1 billion in 2014 and it will grow to $3.1 billion by 2045.
• The state also would have to pay an annual amortized contribution to help pay off the 10 percent unfunded liability that is left over under the Martire plan, further increasing the state’s total pension contribution.

An alternative would be to pay off the unfunded liability in whole or in part by issuing State of Illinois bonds. It is not clear how successful such a bond issue would be.

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Facing Old Problems of Pension Funding and the Foundation of Pension Reform

Issue: The TRS Board of Trustees on March 30, 2012 approved a resolution which acknowledges that due to changing circumstances that call into question the General Assembly’s ability to meet the existing plan to fund TRS, drastic changes are needed to maintain the long-term viability of TRS and the other state pension systems.

Discussion: The Trustees directed TRS Executive Director Dick Ingram to inform TRS members, organized labor, legislators and other government officials that growing state budget deficits over the next five years could lead to insolvency for TRS in as little as 18 years, unless meaningful changes are made in the pension funding mechanism. There are five key elements to “meaningful” pension reform.

According to projections from TRS and other sources, the state’s backlog of unpaid bills is expected to grow from $9.2 billion this year to $34.8 billion by fiscal year 2017. Pension costs are expected to grow by 35 percent during the period of time to $7.8 billion.

This bad budget news is putting real pressure on legislators to make substantial cuts in the state’s $53 billion budget; now and in the future. One target many legislators have mentioned is a reduction in the statutorily-required contribution to the state’s pension systems. (The TRS share of that contribution is $2.7 billion.)

Up until 2012, TRS always operated under the assumption that state government will follow the law and make its entire payment. We no longer can count on this assumption and it is more likely that the General Assembly will change the law to lower the statutorily-required contribution.

If the state cuts its contribution to TRS in the future, sample “stress test” scenarios show that under the worst option TRS would become insolvent in 2030 when benefit obligations would exceed assets. Under the best option TRS is solvent until 2049. Here are the three sample stress tests:

• The TRS FY 2012 contribution grows by 3% each year for 37 years
  • TRS is insolvent in 2049 ($2.9 billion deficit)
    
• The TRS FY 2012 contribution of $2.4 billion is frozen at that level for 37 years
  • TRS is insolvent in 2038 ($8.4 billion deficit)
• The FY 2012 contribution is cut to 60% of the original level and stays frozen at $1.4 billion for 37 years
  • TRS is insolvent in 2030 ($434 million deficit)

In order to keep TRS solvent over the long-term, meaningful pension reform must be enacted to better balance expected revenues and anticipated benefit costs. The three key elements to pension reform are:

1) Use only actuarially-based math to determine contributions and liabilities. The Illinois pension math dictated in the pension code artificially lowers the state’s cost of funding pensions. These laws supersede the true calculation of the state’s annual pension contribution. We need to calculate the cost in the way the rest of the world does it. Here is a breakdown of the differences:

Illinois Political Math

• The state’s goal would be to have only 90 percent of the assets on hand to pay all future obligations and maintain a 10 percent unfunded liability
• The state’s annual contribution is reduced each year by the amount of debt service needed to pay off the bonds sold over the course of the last decade to finance the state’s annual contribution
• The state’s goal is to reach 90 percent funding in 50 years
• Future savings over several decades from reform measures are counted now before they are actually realized
• Total price tag for fiscal year 2013: $2.7 billion

Standard Actuarial Math

• The state’s goal would be to retire the unfunded liability and have 100 percent of the assets on hand to pay all future obligations
• The state’s annual contribution is not reduced each year by the amount of debt service needed to pay off the bonds sold over the course of the last decade to finance the state’s annual contribution
• Obligations are amortized over a 30 year period
• The annual cost of pensions to the state is based on what is needed to fund pensions now
• Total price tag for fiscal year 2013: $3.8 billion

2) Illinois must enact funding guarantees for the pension systems into law. A statutory funding guarantee would ensure that all future state government contributions are made in full when they are due. Most other states operate with these guarantees and in Illinois the Illinois Municipal Retirement Fund benefits from this type of mandated payments.

3) 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 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 majority in TRS, the subsidy they pay 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.

4) Any solution enacted by the General Assembly must be uncomplicated and easy to understand and administer.

5) Any solution must adhere to the Illinois Constitution’s Pension Protection Clause. Article XIII, Section 5 of the Illinois Constitution reads: “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.”

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Extending the Illinois Income Tax to Pensions and Retirement Income

Issue: Currently, Illinois citizens do not have to pay Illinois income tax on pensions and other retirement income. Legislative leaders have discussed changing the law to extend the income tax to pensions and all retirement income.

Discussion: No legislation has been drafted yet, but initial suggestions called for taxing pensions at 5 percent – which is the current state individual tax rate. He estimated that extending the income tax to retirement income would raise $1.6 billion annually for the state. Any extension of the income tax would exempt “modest pensions,” but that has yet to be defined.

TRS has not seen any specific language so it is difficult to analyze the concept. However, it is likely that extending the income tax to retirement income would be challenged in court. Taxing pensions and retirement income also will be very difficult to pass in the legislature because seniors are a large, active group of voters and they do go to the polls.

TRS cannot predict what the courts may do, but it is likely that extending the income tax to pensions is constitutional and would not violate the pension protection clause of the Illinois Constitution. Taxing pensions does not diminish or impair the benefit teachers and public employees receive, it is a tax on that benefit. In a practical sense, taxing pensions does diminish the retirement benefit. Legally, however, it would not be a diminishment.

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Placing Illinois Teachers in Social Security

Issue: Requiring newly-hired Illinois teachers to become part of Social Security would help ease the burden on TRS, lower the state’s contribution to public pension systems, help ease the long-term financial problems facing Social Security, and create more income stability for retired teachers.

Discussion: Making newly-hired teachers pay into Social Security and allowing them to be eligible for benefits would affect all current and retired teachers.

Illinois teachers have never been part of the Social Security system. Most teachers rely almost solely on a TRS pension during retirement. Active teachers contribute 9.4 percent of their paycheck to help fund TRS and school districts contribute 0.58 percent of every teacher’s salary to the System. Last year, all told, teachers contributed $917 million to TRS and school districts contributed $155 million.

For new teachers to become part of Social Security this scenario would mean a mandatory 12.4 percent payroll deduction split evenly between the member and the employer, which in the case of Illinois teachers is school districts and state government. Teachers would still be required to contribute 9.4 percent of salary to TRS.

For school districts, the cost of teacher pensions would immediately rise by a considerable amount. Instead of contributing 0.58 percent per new teacher, every district would have to contribute 6.2 percent per teacher. It is estimated that this increased cost would equal $41 million for Illinois school districts in the first year and more than $2.4 billion over 10 years. Plus, districts would still have to contribute 0.58 percent for each participant in the current system.

Finally, a 1999 study by the General Accounting Office found that adding teachers and other public employers from around the country who are not currently in Social Security would create, at best, a temporary surge in revenue for Social Security. Over the long term, adding teachers to Social Security would only increase the System’s total obligations and deepen the long-term funding problem.

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Public Schools Paying More of the “Normal Cost” of Teacher Pensions

Issue: This proposal would require all school districts outside of the City of Chicago to pay a greater share of the cost of pensions for TRS members.

Discussion: Currently active teachers, school districts and state government split the cost of what is owed this year to retired TRS members, as well as the cost of benefits for future retirees. These contributions are supplemented by TRS investment income. The proposal would not affect teacher contributions, but would require school districts to pay a greater share of the pension cost due each year – what is called the the “normal cost” – alleviating the state from paying current costs. The state would be responsible only for the future cost of TRS pensions. Estimates indicate that in fiscal year 2012, annual school district contributions would have risen from a total of $155 million per year to more that $800 million per year, while the state’s annual contribution would drop from $2.4 billion to $1.6 billion.

House Speaker Michael Madigan, D-Chicago and Senate President John Cullerton, D-Chicago, have said they do not believe it is fair that suburban and downstate school districts do not pay more of what is owed in a given year to retired teachers. They note that in the City of Chicago, a larger share of the annual cost of teacher pensions each year is funded by a property tax levy in the city – about 18.6 percent, compared to 2.3 percent in the rest of the state. Under legislation proposed in the spring of 2012, suburban and downstate school districts would be responsible, beginning in 2014, for paying an increased share of the annual costs of TRS pensions and the state would pay less toward these costs. Eventually, school districts would be responsible for paying the entire annual cost of benefits being earned every year.

Shifting the annual cost of pensions to local governments does nothing to lower costs for taxpayers. The proposal is just a transfer of responsibility for pensions costs from a larger group of taxpayers to a smaller group of taxpayers. The cost of the pensions remains the same. The shift means that the annual cost of pensions for a particular school district’s teachers would not be spread out statewide among millions of taxpayers, but only spread among thousands of people who live in that school district, much like the way municipalities pay for the pension costs for police and firefighters.

Under the latest proposal, between 2014 and 2019, the share of the annual cost paid by local school districts would increase by 1 percent each year and then by 0.5 percent in each year after 2019 until the total annual pension cost is paid by the districts.

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