Dissecting Illinois’ Pension Problem Part IV: History of Neglect (The 2010s)

The following is a continuation of Dissecting Illinois’ Pension Problem Part IV: History of Neglect (The 2000s)

Illinois Public Act 96-0889 (2010)

This legislation created a new tier of benefits for public employees hired after January 1, 2011 in lieu of the rising liabilities and was signed April 4, 2010 by Governor Quinn. Tier 1 membership refers to public employees who were hired before January 1, 2011, and Tier 2 members are those who were hired after. The intention was to slow the rising liabilities in the long-run as older employees retired as newer employees were hired. Most importantly, the changes to the Pension Code do not alter pension benefits for Tier 1 employees and changes the way benefits are calculated for those hired after Jan. 1, 2011. Notable changes include:

• An increase in the retirement age from 65 to 67;
• A reduction of final average salary from the highest 4 year average to the highest 8 year average;
• A $106,800 cap on pensionable earnings, and the reduction of the automatic cost of living adjustment from 3% compounded to the lesser of 3% or one half of the increase in Consumer Price Index not compounded.

House Bill 6258 (2012)

House Bill 6258 was proposed in 2012 by Elaine Nekritz (D – Northbrook), former chair of the Committee on Personnel and Pensions, and contained 20 additional sponsors. It focused on stabilizing the system by reforming three areas: Tier 1 membership, Tier 2 membership, and funding.

• Curbing Tier 1 membership: Reduced COLAs from $25,000 to $20,000 for employees eligible for social security; Delayed COLA benefits until the employees turns 67 or five years after their retirement; increases retirement age; Required employees to contribute more to their fund by two percent beginning in FY 14.
• Curbing Tier 2 membership: New employees were recipients of a new cash balance plan consisting of a define benefit/401 (k) hybrid.
• Employee Contribution and Funding Guarantees: Included a 30-year-funding level plan to achieve 100 percent funding.

H.B. 3411 Cross-Nekritz

This piece of legislation received bi-partisan support from 32 sponsors in the House. Among its notable components, the bill:

• Kept the define benefit system at its core.
• Created a separate Tier 3 system for public employees hired after Jan. 1, 2014. These employees would be moved into a hybrid defined benefit/contribution plan.
• Increase the retirement age
• Implement a two percent employee contribution increase over two years
• Created a 3 percent COLA to the first $25,000 of the employee’s pension.

SEIU Local 73 lobbied heavily against the bill, stating that it, “unilaterally diminishes benefits for all state retirement systems (except the Judges’), even though the Illinois Constitution specifically states that pension benefits are a contractual right that may not be diminished or impaired.” The bill died December 3, 2014 in House session.

Senate Bill 1 (2014)

Senate Bill 1 was passed in fall 2013 during the legislature’s “veto session” with the intention to reduce the state’s large debts and deficits, plummeting credit ratings, and imperiled discretionary spending programs to help shore up the long-term fiscal stability of both the state and its retirement systems. Referred to as Public Act 98-599, the legislation amended the Illinois Pension Code by reducing retirement benefits for individuals who first became members of four of Illinois’ five systems prior to January 1, 2011. The legislation specifically:

• Delayed, up to five years, when members under the age of 46 are eligible to begin receiving their retirement annuities;
• Capped the maximum salary that may be considered when calculating the amount of member’s retirement annuity;
• Jettisoned the current provisions under which retirees received a flat three percent annual increases to their annuities and replaced them with a system under which annual annuity increases are determined according to a variable formula and limited;
• Completely eliminated at least one and up to five annual annuity increases depending on the age of the pension system member at the time of the Act’s effective date;
• Altered how the base annuity amount is determined for purposes of what is known as the “money purchase” formula, something available to members of those two systems who began employment prior to July 1, 2005, as an alternative to the standard formula for calculating pensions.

Members of retirement systems affected by Public Act 98-599 and groups representing those members brought five separate actions challenging validity of these changes on the grounds that it violated article XIII, section 5, of the Illinois Constitution of 1970.

The groups argued that the reduction in retirement annuity benefits for Tier 1 employees was void and unenforceable as a violation of the constitution’s pension protection clause, which states that pension benefits shall not be “diminished or impaired.” In effect, the changes created by the legislation would cause recipients to have smaller pensions.

The state argued that because of its unsound financial condition, the reduction in Tier 1 retirement annuities by the General Assembly was justified as “an exercise of the State’s ‘reserved sovereign power.” As a result, (1) the state possesses inherent authority to override and modify obligations imposed on it by the Illinois Constitution, when, in its judgment, such action is reasonable and necessary to advance an important public purpose, (2) action was needed in the interest of the public good in lieu of the affects caused by the Great Recession, and (3) reductions in such benefits from the legislation was fair and reasonable under the circumstances.

The Illinois Supreme Court ultimately affirmed on the grounds that implementation of the legislation would diminish the benefits of recipients by reducing retirement annuities, violating Article XIII, Section 5, of the Illinois Pension Code. Moreover, Article XIII, Section 5, created an enforceable obligation on the state to pay the benefits and prohibited the benefits from subsequently being reduced was and is unquestioned.”