UPDATE ON Senate Bill 27 Public Act 94-0004

With information on Senate Bill 49 ILASBO 5/18/06 Peg Agnos Pat Masterton

Senate Bill 27

• Was approved in May, 2005 and sent to the governor where it became Public Act 94-0004 • Addresses TRS pension issues, as well as other public pension systems • Attempts to reduce State pension liability by reducing the amount of increases in salary that can be creditable during the years used for pension calculation.

How did it come to pass:

• Our Governor’s determination to raid the pension system in order to deal with a lackluster economy was hampered by the rising pension liability. His solution was to blame high salary increases for the pension deficit.

How did it come to pass:

• The Teachers’ Unions were unhappy with the sunset of the Early Retirement Option, and wanted a new ERO .

• Legislators made it clear there were to be no new pension benefits without full funding from employees & employers .

How did it come to pass:

“It all happened so fast, like most drive by legislation. SB 27 was “pre-filed” as a virtual shell bill just before Christmas in 2004, and was not amended until May 29 (a Sunday), by “voice vote” (no roll call). It then passed the House and was returned to the Senate where, after a quickie hearing, a motion to “concur” with the 83-page House amendment was approved. It went from first look to final action in just one day.”

How did it come to pass:

“It now appears that, to the extent SB 27 made it possible for the state to “save” pension funds, much of that saving will come, immediately and over the years, from the resources of nearly 900 school districts throughout Illinois.” By Jim Broadway, Publisher State School News Service

Provisions of the Act

• Establishes Pipeline ERO: If member is qualified for

old ERO and If member notified on or before 6/1/05 and If effective date is on or after 7/1/05 and on or before 7/1/07. Same rules as old ERO

• Establishes AERO: A modified ERO in effect on

7/1/05. No waiver for 34 years….must be under age 60 and under 35 years of service credit. Employer cost = 23.5% of highest salary x number of years member is under age 60. Member cost = 11.5% of highest salary x lesser of number of years under 35 yrs of service or the number of years under age 60.

Provisions of the Act

• Employer can limit to 10% eligible based on

seniority. Renewable with new rates established by actuary every 5 years starting 2012.

• Increases member contribution rates: from 9% to

9.4%. The .4% is refundable to the member if they do not retire under AERO. Also increases member THIS contribution rate from .75 to .80%

• Increases employer contribution rate: for THIS from

.5% to .6%. Reduces TRS matching contribution for federal funds from 10.5% to 7.06% this year, 9.78% next year, because of reduced TRS appropriation.

Provisions of the Act

• Sick Leave Awards in excess of member’s normal allotment:

Employer will be charged for the cost of the member’s annuity increase due to additional service credit earned because of sick leave awards in excess of member’s normal allotment.

• End of career salary increases over 6%: Employer will be

responsible for the cost of the pension increase due to salary increases over 6% in any year used for the average salary computation. Does not apply to salary increases awarded under a contract entered into, amended or renewed before 6/1/05. Employer has 30 days from the date of retirement to make payment to TRS.

Provisions of the Act

• Future Benefits must be Fully Funded: By an ID’d

funding source and new benefits will sunset after 5 years if not reauthorized by law. Public Pension Division must certify new benefit is full funded or benefit expires at the end of the fiscal year.

• TRS Funding: State contributions for 2006 and

2007 at 50%, for a total loss of approximately $1 billion.

• Advisory Commission on Pension Benefits and

Funding Established: 15 member advisory Board.

SB 27 becomes PA94-0004

• The Legislature sent the bill to the Governor on May 30. He signed it into law on June 1, 2005 and it became effective on 7/1/05. • Note: Average time it takes the Governor to sign a bill is 2 months.

After the Bill becomes law

• First Controversy: TRS has employers certify any employees who have given “written” notice of their intent to retire before July 1, 2007 • The law does not require “written” notice.

After the Bill becomes law

• Second Controversy: TRS proposed rules go well past what the law dictates and further limits some benefits.

• Issues regarding the inequalities of the bill continue to come forward from both the unions and the school districts.

JCAR Approves Rules 12/05

The Rules

Final Rules-Section 1650.351

Employer Contribution for Excess Sick Leave • Defines “normal annual sick leave allotment” as the amount granted to teachers under a collective bargaining agreement. This number applies to all TRS employees, including administrators.

• Defines the employer contribution for excess sick leave as the member’s highest salary rate in the 4 years used for retirement purposes times the normal cost rate in the member’s last year of service as defined by TRS each year times the portion of a year the member earned as a result of the excess sick leave. This year’s normal cost rate is 17.6%

Final Rules-Section 1650.351

Employer Contribution for Excess Sick Leave • Example: Member’s highest salary in the 4 years used to compute retirement is $100,000, and he has received 85 days in excess of the teacher contract. Employer contribution would be: $100,000 X .50 (85 days/170 days = .50) x.176

= $8800 • The change does not apply to sick leave granted under contracts or collective bargaining agreements entered into, amended, or renewed prior to June 1, 2005.

• •

Final Rules-Section 1650.351

Employer Contribution for Excess Sick Leave TRS has posted a calculator to compute the employer contribution for excess sick leave: http://trs.illinois.gov/subsections/employerservices/we bcalculators/SickLeaveCalculator.aspx

If the member does not receive service credit for the excess days, then no additional contribution is required. The excess sick leave rule only applies to the 4 years used for retirement computation purposes, and only if it was received after June, 2005.

Salary Increases over 6%

• •

Final Rules-Section 1650.481

Employer Contribution for Excess of 6% Salary Increase

Employer (and it must be employer) pays a penalty for any annual increase over 6% in a year that is used in the final average salary calculation for pension.

Calculation: The difference between the retirement pension calculated without the excess increase over 6% and the pension with the excess increase times TRS’ Actuarial Factor.

Final Rules-Section 1650.481

Employer Contribution for Excess of 6% Salary Increase

• • • TRS has a calculator to find out employer contributions for excess salary increases at http://trs.illinois.gov/subsections/employerservices/webcalc ulators/ExcessSalIncrCalculator.aspx

See handout for the actuarial factors Actuarial Factor is a factor representing the present value of future benefits

• •

Final Rules-Section 1650.481

Employer Contribution for Excess of 6% Salary Increase

Note: even if the employee receives less than 6% in some of the 4 years used for retirement calculation, if his increase goes over 6% in any of the years, the employer is subject to a penalty.

The penalty must be paid by the employer and cannot be bargained or negotiated as a member contribution.

Grandfathering

• • •

Final Rules-Section 1650.483

Exemptions from Employer Contribution for Excess of 6% Salary Increase and Excess Sick Leave (Grandfathering) Contracts or Collective Bargaining Agreements are exempt if they were entered into, amended or renewed prior to June 1, 2005 In the absence of a bargaining agreement or contract, TRS will accept employment policies as a contractual agreement if they were in effect before June 1, 2005 (Section 1650-484) If there are none of the above, there can be no exemption.

• •

Final Rules-Section 1650.483

Exemptions from Employer Contribution for Excess of 6% Salary Increase and Excess Sick Leave (Grandfathering) If the employee notifies the employer in writing of his intent to retire under the provisions of the grandfathered contract, and receives under those provisions salary increases in excess of 6%, and/or sick leave in excess of the normal annual allotment, even after the contract expires, the employer is exempt from contributions.

This exemption expires 3 years after the expiration date of the contract.

Examples:

• John Do gives notice in writing to retire on June 10, 2009. The contract in effect runs from 2003 through 2006, and contains salary increases over 6% as a retirement incentive and allows the retirement plans to be fulfilled through 2015.

• Jerry Don’t gives notice in writing to retire on June 30, 2012. The contract in effect runs from 2003 through 2006, and contains salary increases over 6% as a retirement incentive and allows the retirement plans to be fulfilled through 2015.

Examples:

• John Do’s salary increases are grandfathered and the employer will not have to pay excess contribution penalties because of his retirement plan.

• Jerry Don’t’s salary

increases are not grandfathered because he chose to retire more than 3 years after the expiration of the contract. The employer will pay a penalty.

Final Rules-Section 1650.482

Contracts And Collective Bargaining Agreements Loss of Exemption from Employer Contributions

•

Actions that will cause a loss of exemption: 1. During the exemption period, there is an increase in or addition of a salary and/or sick leave retirement incentive.

2. Unless there is a salary re-opener provision in the contract, there is a renegotiated increase in salary or sick leave provisions.

• •

Final Rules-Section 1650.482

Contracts And Collective Bargaining Agreements Loss of Exemption from Employer Contributions Actions that will cause a loss of exemption: Unless there is a salary re-opener provision in the contract, there is a renegotiated increase in salary or sick leave provisions. **** With the exception of the .4% additional pension payment if paid by the employer ****

Senate Bill 49

Exemptions from the Salary Excess Rules

Senate Bill 49

• Was passed by both houses on 5/3/06 • Attempts to correct inequities in PA94-004 for teachers. • Passes unanimously in the Senate

Senate Bill 49

• Provisions of Bill: 1. Provides exemptions from the 6% rule for increases: – Paid to a teacher who is 10 or more years from retirement eligibility, – Transfers due to school district consolidation – Increases due to overload work or summer school, as long as the salary rate is no more than the current salary rate

Senate Bill 49

– – – Paid to a teacher who is 10 or more years from retirement eligibility, Earning increases due to a promotion which requires a change in certification or supervisory endorsement, as long as the salary increase is consistent with others in the same or similar capacity or dictated in the collective bargaining agreement; and the position has existed in the district for at least one year.

Payment from the State of Illinois or the State Board of Education

Senate Bill 49

• What it does not exempt?

1. Payout of vacation days 2. Increases in salary due to change in number of days employee works 3. Inclusion of a new benefit, such as payment of TRS contribution or the addition of a cafeteria plan with a cash option.

Senate Bill 49

2. The school district will be required to provide an affidavit attesting that the salary falls under one of these exemptions 3. The school district may dispute the penalty in writing no later than 30 days from its receipt of the bill for the penalty.

4. The school district now has 90 days to pay the penalty, but can extend payments over 3 years with interest rate equal to TRS’ annual actuarial based assumed rate of return (currently 8+%)

Senate Bill 49

Does require TRS to annually certify the number of disputes filed, the result of those disputes, and the amount of penalties paid

Senate Bill 49

The exemption for pay increases associated with school consolidations does not expire under the legislation. The remaining exemptions apply to contracts entered into, amended, or renewed after June 1, 2005 but before July 1, 2011. Exemptions for these contracts will continue until on or after July 1, 2011 but before July 1, 2014. All pay increases of more than 6 percent that are used in a final average salary calculation after July 1, 2014 will result in a contribution from the school district

Confused?

• As you prepare to bargain new contracts and new retirement language, you would be smart to consider all the financial implications of the maze that is these rules and laws.

Need help?

• Talk to TRS; ask them to review your proposed contracts, amendments or language.

• Contact your school attorney, and if you have not used an attorney who specializes in school law, it might be time to get one.