SB512 Update
 May 26, 2011

This is an update of the Personnel and Pensions Hearing which ran for 3 hours this morning.  This bill could be heard yet this evening in the House of Representatives.  It is on a fast track.  Any help you can provide in calling legislators will be greatly appreciated.

This morning, House Amendment #1 to Senate Bill (SB) 512 passed the House Personnel & Pensions Committee by a vote of 6 Yeas, 2 No’s and 1 Present.  Those members voting No or Present in Committee were Representative Karen May (D-No), Representative Raymond Poe (R-No) and Representative Dan Biss (D-Present).

Those members voting “Yes” were Representatives Dan Burke (D), Representative, Kevin McCarthy (D), Representative Thomas Morrison (R), Representative Elaine Nekritz (D), Representative Darlene Senger (R), Representative David Winters (R).

This full Illinois House could vote on this bill as early as today.  Please contact your state representative immediately to oppose SB 512.

SUAA testified in Committee this morning, basing our opposition on State Constitutional law.  We were the only Annuitant’s Association to give testimony.  We were opposed by several of the most powerful individuals and institutions in Illinois, including Speaker of the House Michael Madigan (D), Minority Leader Tom Cross (R), The Civic Committee of the Commercial Club of Chicago, the law firm of Sidley & Austin and the Taxpayer’s Federation of Illinois.

No one refuted our testimony.  Please see attached.

We are now working to defeat this measure in the Illinois House.  Call your State Representative AND
 State Senator NOW to join us in this effort.

SB 512

Current and Future Participant Benefit Reform

SB 512 applies to every retirement system and fund under the Illinois Pension Code except for police and fire funds and IMRF.  The following analysis is SURS specific.

Please note that SB 512 does not apply to a participant who elects to participate in SMP prior to July 1, 2012.  Those SMP participants are essentially held harmless and will continue with their SMP plan as if
 no reform was passed.

Benefit Options

The bill requires participants who earned service prior to January 1, 2011 (Tier 1 participants) to make an election to participate under one of the following benefit formulas:

Option I:   The traditional or portable benefit package; 

Option II:  The revised benefit package (Tier 2); or

Option III:  The self-managed plan.

 

Persons who became or become participants on or after January 1, 2011 (Tier 2 participants) must make an election to participate under Option II or Option III.  Participants who elect Option I may elect to participate under Option II or Option III every 3 years as employee contributions are adjusted during a 6 month period prescribed by the System.  Similarly, participants who elect Option II may elect to participate under Option III every 3 years as employee contributions are adjusted during a 6 month period prescribed by the System.

Tier 1 and Tier 2 participants must make their initial elections by June 30, 2012 or within the first 6 months of employment.  Inactive participants must make their initial election within 6 months of returning to service. Participants who fail to make an election default into Option II.

Money Purchase Limitation

Money purchase eligible participants’ money purchase formula is limited with respect to employee contributions made under Option I.  Contributions credited to a participant’s account for the purposes of determining money purchase shall be 6.5% of payroll.  The cap will ensure that an eligible participant does not receive a benefit increase as a result of increased employee contributions under this legislation.

(Members hired prior to July 1, 2005 have a money purchase plan that accumulates employee contributions (currently at 6.5% of pay) and the System adds an employer match equal to $1.40 for every $1.00 contributed. Earnings are attributed (currently at 7.75%) and the benefit is annuitized at retirement based on the money purchase formula).

Reciprocity of Options I, II, and III

A participant who elects a separate benefit for subsequent service has “internal” reciprocal rights with regards to service but not salary.  Service under both the initial and subsequent benefit will count towards vesting and retirement eligibility. However, each benefit will be limited to the salary a participant received while earning service under that benefit.

For example, a Tier 1 participant who is 40 years old with 15 years of service elects Option II and earns 15 more years of service.  The participant is now 55 years old and has 30 years of combined service.  The participant may retire and receive their Tier 1 benefit at age 55, but the annuity would be based only upon the salary received prior to participation under Option II.  The participant would not be able to receive their Tier 2 benefit until age 67.  Furthermore, SURS cannot provide an annuity to someone who is currently earning service credit.  This, if the participant in the above example was to work until age 67, the participant would not be able to receive their Tier 1 benefit until age 67.

Employer Contributions   

The minimum state contribution each year for all benefit options shall be 6% of payroll.  The state must make additional contributions that will be sufficient to fund 90% of liabilities by 2045, expressed as a level percentage of revenue.  The current plan calculates contributions as a level percentage of payrolls.

State contributions for fiscal years 2013, 2014, and 2015 are determined as a percentage of revenue and shall be increased in equal annual increments so that the State is contributing a level percentage of revenue for fiscal years 2016 through 2045.  This is commonly referred to as a “ramp”.   No contribution shall be an amount less than the prior fiscal year’s contribution. 

The percentage of revenue is limited to a percentage of State income tax receipts, sales tax receipts and corporate income tax receipts. The System is to assume a 2.3% average annual growth rate in revenues from year to year.  GRS assumes payroll will grow at 3.75%. 

Commentary:  GRS can determine these contributions and has confirmed that contributions determined as a level percentage of revenue would front load funding to the System.  However, the 3 year ramp was not discussed with GRS. 

Ramping up retirement system contributions is bad public policy.  In 1988, the General Assembly adopted a 7 year ramp and found that it could not afford the year to year increases in state contributions.  In 1995, the General Assembly addressed its inability to fund a 7 year ramp by adopting a 15 year ramp.

Ramping up retirement system contributions has proven to not work in Illinois.  Annual increases in State tax receipts are not sufficient to fund the annual increases in state contributions under a ramp. 

We have not had a chance to have GRS run numbers on this proposal.  

Employee Contributions

Participants who elect to participate under Option I or Option II shall make contributions equal to the amount of total normal cost of the benefit not covered by the minimum state contribution.  Thus, the burden to make up any future increases in the normal cost has been shifted from the state to the employee. Please note that the normal costs of Option I will continue to increase as the population of Option I grows older with more years of service.

SB 512 fixes this cost for participants who elect to participate under Option I at 15.31% of pay for fiscal years 2013, 2014, and 2015.  Beginning in FY 2016 and every 3 years thereafter, the system shall update employee contributions based on updated normal cost figures.  Tier 1 and Tier 2 participants currently contribute 8% of pay.

Participants who elect Option III shall contribute 6% of pay, and participants may elect to increase employee contributions based on rules prescribed by the board. The board would likely establish an annual choice period to allow participants to increase contributions. SMP participants currently contribute 8% of pay.

Minimum Benefits

A participant who elects to participate in Option I or Option II shall qualify for a minimum benefit equal to the annual primary insurance amount the participant would have under Social Security.

A participant who elects to participate in Option III shall qualify for a minimum benefit equal to 7.5% of the employee’s compensation for that service.  The minimum allocation shall be calculated so that the system satisfies requirements necessary to be considered a retirement system under the Internal Revenue Code.

Maximum Benefit Limitation

In no circumstance shall this amendatory Act of the 97th General Assembly result in a defined benefit pension or annuity based on a combination of the traditional benefit package and the revised benefit package or reformed benefit package, as applicable, that would be greater than what the participant would have received by remaining in the traditional benefit package.

Actuarial Review

The Commission on Government Forecasting and Accountability is to retain an independent actuarial firm that does not provide actuarial services to any of the state retirement systems.  The firm shall review and comment on the assumptions and methodologies used by those systems in determining liabilities and contributions.

The actuarial firm shall report to the Commission by July 1, 2016 and every 3 years thereafter. The report shall include, but not be limited to: an evaluation of the sustainability of long-term funding schedules as compared to anticipated State revenues over the same projection period; a comparison of expected rates of asset returns among the various funds including comments on the rationale for any differences in such returns; and an evaluation of long-term payroll projections compared with anticipated individual salary growth and the revenue sources supporting such payrolls.

Qualified Plan Status

The legislation provides that no provision of Article 15 shall be interpreted in a way that would cause the system to cease to be a qualified plan under Section 401 (a) of the Internal Revenue Code.

Severability Clause

A severability clause has been added making the amendatory Act severable.  This means that if parts of the Act are held to be unconstitutional or otherwise illegal or unenforceable, the remainder of the Act shall still apply.