Illinois Legislature Shifts High Salary TRS Pension Costs to Local Districts and Creates New Tier III TRS Pension Plan

By Adam Dauksas

 

July 31, 2017

           Earlier this month, the Illinois General Assembly voted to override Governor Bruce Rauner’s veto of – and thereby turn into law – three crucial bills: SB 6, giving Illinois a new $36 billion budget; SB 9, raising the State’s individual income tax rate from 3.75% to 4.95%; and SB 42, addressing the budget’s implementation.  While the fact of actually having a state budget and the income tax hike have garnered much of the media’s attention, it is SB 42, the budget implementation bill, that contains significant changes which will immediately affect newer TRS members and all school districts. The “cost-shift” that school districts have long been expecting is beginning.                                                              

 Highly Compensated Employees

             Starting with the 2017-2018 school year, school districts will be charged the full TRS employer contribution (most of which was previously picked up by the State) for any employee’s annual creditable earnings that exceed the Governor’s salary (i.e. $177,412 currently).  Specifically, districts must now pay to TRS the employer’s normal cost (i.e. a percentage figure determined each year by TRS that is typically between 8%-12) multiplied by the amount of creditable earnings that are in excess of $177,412.  So, for example, if an employee’s creditable earnings during the school year are $200,000 and we assume an “employer normal cost” of 10%, the district would receive a bill from TRS for $2,258.80.  While this new cost may only affect a handful of administrators within a district, business managers should begin preparing and budgeting accordingly based upon its impact.

 Tier III Option

             Moreover, SB 42 created a new Tier III pension system option, intended to lessen the State’s pension responsibility.  In particular, employees who first become TRS members on or after a yet to be determined date (likely no sooner than July 1, 2018) will have the option to either join the current Tier II system or join a new Tier III hybrid defined benefit/defined contribution system.  Current Tier II members will also have the option to join the new Tier III system, but the Tier III system has no effect on current Tier I members or retirees. 

          With respect to the defined benefit portion of the new Tier III plan, an employee’s member contribution will be no greater than 6.2% of salary, instead of the current 9% for Tier I and Tier II members.  Meanwhile, with respect to the defined contribution portion of the Tier III plan, an employee must contribute at least 4% of his or her salary, while school districts will be required to contribute at least 2%, but no more than 6%, of an employee’s salary.  To further incent movement to Tier III, the legislature increased the cap on creditable earnings to the Social Security Wage Base – or about $15,000 higher than the current Tier II cap. Tier III members, however, will see a reduction in the yearly service credit factor, from the current 2.2% down to 1.25%.

          As you know, these changes come amidst uncertainty surrounding the status of SB 1, the evidence-based school funding reform bill.  We are closely monitoring that bill as well, and will provide an analysis if and when it is passed into law.  In the meantime, should your district have any questions regarding SB 42’s impact, please contact your attorney at Scariano, Himes and Petrarca, Chtd.