Public Act 94-004 and its Effect on Illinois’ Teachers

By Marc Ansay and Jill Kaner

Teachers’ Retirement System (TRS)

Background Largest of the 5 public employee retirement

systems in Illinois General Assembly Retirement System (GARS), State Employees’ Retirement System of Illinois (SERS) State Universities Retirement System (SURS), Teachers’ Retirement System of the State of Illinois

(TRS) Judges Retirement System of Illinois (JRS)

Nearly 50%

TRS: The Facts

~ 350,000 public school teachers and administrators

Do not contribute to Social Security Average gross salary of participant(2007):

$56,916

Avg. monthly benefit $3,173

Avg. retirement age and length of service 69 and 29 years of service

TRS: The History

1950: Beginning of being underfunded at only 23%

1974: Contributions based on expected payout of benefits vs. cost of benefits being earned.

Bottom line: pension liability growing!

TRS: The History

1989: Public Act 86-0273 Fully funded system in 40 years. 7 year phase-in period. Increased funding, but also 3% interest on the

current annuity vs. 3% on original pension plan

Bottom line: pension still underfunded!

TRS: The History

1994: Public Act 88-593 Funds secured based on the actuarial cost of the state’s

unfunded liabilities vs. a set amount based on state budget.

Gradually raise the pension system funding ratio to 90 percent by the year 2045

2003: Public Act 90-0002 Issuance of $10 billion pension obligation bonds

Need for Reform

On June 30, 2005: TRS’ unfunded liability=$22 billion TRS’ funded ratio=61%

Illinois state constitution prevents state government from decreasing benefits membership in any of the state’s retirement systems “shall

be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired”

Public Support for Reform

The state budget was strained by pension obligations

To gather support for pension reforms, the state government portrayed teacher pensions as “overly generous” Taxpayers were upset by end-of-career raises of up to

20%, which were included in pension calculations Instead of placing responsibility for the underfunded

pension liability on the state government, taxpayers viewed teachers as the culprits

Public Act 94-004

Public Act 94-004 undermines the 1994 attempt to decrease TRS’ unfunded pension liabilities The act provided for a fixed contribution to the fund in 2006

and 2007 The fixed contributions were less than 50% of the actuarial

estimates The act called for increased contributions between 2008

and 2010 to keep on track with the goal to be 90% funded by 2045 Unrealistic future contributions Loss of investment income (65% of TRS funding in 2005)

Public Act 94-004

The act also reduced pension benefits for Illinois’ current and future teachers Shifted responsibility away from the state

government and onto teachers and their districts The only teachers protected against the changes

were those who had declared their intent to retire prior to the act being passed

Public Act 94-004: Changes

Before the act: Teachers contributed 9% of their salaries to

retirement each year After the act:

Teachers are required to contribute an additional .4% of their salaries toward an early retirement option The additional money is returned to teachers if early

retirement option is not exercised

Public Act 94-004: Changes

Before the act: Teachers retiring with less than 34 years of TRS service

paid a one-time payment of 7% of their highest annual salaries for every year the teachers were below 60 years old

The teachers’ school districts paid a one-time payment of 20%

After the act: The teachers’ contributions increased to 11.5% if less than

35 years of service The school districts’ contributions rose to 23.5%

Public Act 94-004: Changes

Before the act: Teachers could include end-of-career raises of up

to 20% of their previous years’ salaries in pension calculations

After the act: School districts are now liable for any additional

pension costs resulting from salary increases of greater than 6%

Public Act 94-004: Changes

Before the act: Individual districts had discretion to grant sick

leave to teachers After the act:

If a district grants any teacher additional sick leave above the amount allotted to the district’s other teachers, the district is responsible for any pension costs arising from the additional sick leave awarded

Public Act 94-004: Changes

Before the act: School districts could limit the early retirement

option to 30% of teachers that were eligible to participate

After the act: School districts can limit participation to 10% of

eligible teachers

Immediate Impact

Teachers hit hardest by Public Act 94-004 were those close but not yet ready for retirement Will not receive expected end-of-career raises

May need to work longer to compensate for lower pension

May need to supplement pension with work during retirement

Impact on Teachers

The Bad Reduce the already low $38,000 annual benefit

less than $25,000 above the poverty level for family of two

No SS benefits Average annual income for teachers of $57,000

not enough to a high percentage for retirement

Can teachers have a comfortable retirement?

Impact on Education

Cutting pensions reduces the quality of education Teachers may leave Move to other states? Old laws still apply to teachers under current

contracts This leads to a DISINCENTIVE to continue work Pensions will only decrease New inexperienced teachers will be hired

Impact on Education

School spending will increase.1) Paying out earlier retirements under old law

2) To maintain a high quality on education, must hire experienced teachers at a high salary

Conversely, money for school programs and students will decrease.

Impact on Pension Fund

Long term effects still to be seen… And questions still remain

Can the state budget support the increased payments in 2008 to 2010?

Will the underfunded liability finally decrease? More problems?

Questions???