Part of the deal that ended the budget impasse in July called for creation of a new pension plan for many of those covered by state-funded pension plans.
But it’s going to be a while before that new pension plan is up and running. The head of the largest state-funded system, the Teachers’ Retirement System – the pension system for teachers outside of the city of Chicago — said it won’t be in place before the end of the state’s current fiscal year June 30.
TRS executive director Dick Ingram said the law authorizing the new system only directs that it be implemented “as soon as possible.” For TRS, that’s more than a year away.
“Our operating assumption is the earliest date we will be able to implement Tier 3 would be July 1, 2019,” Ingram said.
It’s not a matter of setting up the hybrid plan itself, Ingram said, but the fact that the system will have to produce monthly reports of earnings and contributions for members, not just annual reports as it does now.
“That will take us some time to put into place,” Ingram said. “That’s a major rewrite of our system.”
The new Tier 3 plan will apply mainly to newly hired employees who are members of TRS and the State Universities Retirement System. Judges and lawmakers – who have their own retirement systems – will not be part of Tier 3. Also, most jobs covered by the State Employees Retirement System are not affected. People already in the Tier 1 plans are not affected.
SERS said the Tier 3 plan would apply only to jobs where a person does not get Social Security benefits in addition to a state pension. Tim Blair, executive secretary of the State Retirement Systems, said that would be only about 2,400 of the roughly 61,000 active members SERS has at any time.
Currently, members of the various systems are part of a defined benefit plan. Both the employer and employee make contributions to it and on retirement benefits are based on a preset formula that includes length of service and the final average salary a person earned.
That will still be a part of Tier 3, although at a greatly reduced amount. For TRS, Ingram estimated the defined benefit portion under Tier 3 will be worth about half of what it is now, although detailed actuarial work hasn’t been done.
The rest of a person’s retirement benefits would come from a defined contribution plan that is commonly known as a 401(k)-style plan. Again, both the employer and employee contribute to it, but the final benefit depends on how much is saved and how much investment income those savings make.
There is also a provision in the bill that allows people now part of the Tier 2 system to elect to take the Tier 3 plan. Ingram said that the Internal Revenue Service has to sign off on the concept, which hasn’t happened yet. He also said people in Tier 2 have to carefully weigh if it is to their advantage to make the move.
“We’re very early in the process, but some of our rough early models would indicate in most circumstances a Tier 2 member would be better off staying in Tier 2,” he said.
There are a number of unresolved issues about creating the Tier 3 system that Ingram said he hopes can be cleared up with legislation during the upcoming veto session. As an example, he said it isn’t clear how to handle the pension of someone who has several years in the Tier 2 system and then elects to go into Tier 3, assuming the state gets permission to implement that.
“There were a lot of things that got overlooked in the process of drafting this bill,” he said.
One issue the creation of the Tier 3 system doesn’t address is dealing with the massive pension debt. A major part of that debt is years of underfunding of the systems by previous governors and General Assemblies.
The Center for Tax and Budget Accountability recently issued a report on an analysis SURS did on how the Tier 3 plan will affect the university retirement system. The organization concluded that Tier 3 “still leaves Illinois well short of resolving its pension debt problems in a meaningful way.” CTBA has long called for the state to re-amortize its pension debt to ease the pressure on the state budget.
“The reality is, the real fiscal issue is, the financial issue of trying to fix the pension funding problem is all related to Tier 1,” Ingram added. “It’s the unfunded liability related to Tier 1 members. It still exists and there’s nothing in this legislation that gets to that.”
— Contact Doug Finke: email@example.com, 788-1527, twitter.com/dougfinkesjr.