Author: Anthony J. Jacob

The General Assembly has passed and the Governor has signed into law significant changes to the Illinois Pension Code that affect all members of the Teachers' Retirement System ("TRS"). Illinois Senate Bill 27 ("SB 27"), now Public Act 94-004, amends the Illinois Pension Code with respect to the Early Retirement Option Without Discount ("ERO"), end-of-career salary increases over six percent (6%), members' TRS retirement contribution rate,  maximum sick leave used for service credit, and future benefit limitations and funding arrangements.

The General Assembly passed SB 27 on May 29, 2005. On June 1, 2005, Governor Blagojevich signed SB 27 into law. The provisions of SB 27 are effective June 1, 2005.

Early Retirement Without Discount

On or Before June 1, 2005. SB 27 permits a TRS member to elect ERO benefits, as existed prior to the enactment of SB 27, if the TRS member has met all of the following requirements:

• On or before June 1, 2005, the member must have notified his or her employer in writing of his or her intention to retire under the terms of a contract or collective bargaining agreement entered into, amended or renewed on or before June 1, 2005.
• The effective date of the member's retirement must be on or before July 1, 2007.
  The member's employer must give TRS evidence of a member's notification of election of ERO on or before June 1, 2005, by providing to TRS the following: (a) a copy of the member's written notification to the employer or the record of that written notification; (b) an affidavit signed by the member and employer verifying the written notification; and, (c) any additional documentation that TRS may require.

TRS considers these members to be in the "pipeline" to retire under ERO without modifications as enacted under SB 27. For these members, member and employer contributions continue to be waived for members with 34 years of service. Additionally, applicable only to this group of members, a member's contribution rate continues to be seven percent (7%) per year and the employer's contribution rate continues to be twenty percent (20%) per year.

After June 1, 2005. SB 27 provides a modified ERO benefit without discount for TRS members who elect ERO after June 1, 2005. SB 27 has modified ERO by increasing the ERO contribution rates for members and employers. For members, the ERO contribution rate is 11.5% (increased from 7%) of the highest salary used in the final average salary for the lesser of (i) each year that the member is under age 60 or (ii) the member's creditable service is less than 35 years.

For employers, the ERO contribution rate is 23.5% (increased from 20%) of the highest salary for each year that a member is under age 60.

Additionally, SB 27 eliminates the ERO contribution waiver for members who are 55 years old with 34 years of service. SB 27 requires that members and employers make ERO contributions for any member under the age of 60 who retires under ERO with less than 35 years of service.

Also, SB 27 allows employers to limit annual participation in the modified ERO program to 10% (decreased from 30%) of those members eligible to participate. This limit applies as long as the member's right to exercise early retirement is based on seniority.

End-Of-Career Salary Increases Over
Six Percent (6%)
Prior to SB 27, TRS determined a member's end-of-career average salary while recognizing increases of the annual salary at a rate of up to 20% per year. Under SB 27, TRS will recognize salary increases of up to 20% per year with the same employer for pension purposes, but the employer must make a substantial lump-sum contribution to fund the cost of this benefit in excess of six percent (6%) of any salary increase used to determine the end-of-career average salary. This means that an employer is required to pay the cost of pension benefits resulting from the end-of-career average salary increases over 6%. TRS will determine the lump-sum contribution the employer must pay to cover the cost of ERO benefits exceeding 6% of the end-of-career average salary and will require the employer to pay the lump-sum contribution within 30 days of receiving notice from TRS. It is important to note that the end-of-career salary increases over 6% do not apply to increases paid to members under contracts or collective bargaining agreements entered into, amended, or renewed before June 1, 2005. As a result, the employer does not have to pay the additional lump-sum contribution for salary increases exceeding 6% up to 20% that affect ERO benefits under contracts and collective bargaining agreements in effect prior to June 1, 2005. However, when the contracts and collective bargaining agreements are either newly entered into, amended or renewed on or after June 1, 2005, SB 27's 6% end-of-career salary limitation will apply.

Increase in Member TRS Retirement
Contribution Rate
Effective July 1, 2005, the member TRS retirement contribution rate is increased by 0.4% from 9% to 9.4%. SB 27 provides for this increase in the member TRS retirement contribution rate to help fund the modified ERO benefits. Generally, SB 27 goes on to state that members who do not use either the existing or modified ERO may receive a refund of the 0.4% member contribution without interest when they retire or may be refunded to a member's designated beneficiary if the member dies without having begun to receive a retirement annuity.

Creditable Service —
Required Contributions (Sick Days)
Prior legislation increased the number of uncompensated, unused sick days for TRS service credit from 170 (one year) to 340 (two years). Under SB 27, a maximum of two years of sick leave, equal to 340 days, can still be used for service credit. But, if the number of sick leave days granted is in excess of the member's normal annual allotment and is used for service credit, the employer for the member will pay an additional charge to fund the cost of granting the additional sick leave days. TRS will need to provide further guidance on this provision of SB 27 because the law lacks much specificity as to how a member's normal annual allotment of sick leave days is determined and how the additional charge to the employer will be determined. SB 27 does clarify that this limitation on use of sick leave days does not apply to additional sick leave granted pursuant to a contract or collective bargaining agreement entered into, amended or renewed before June 1, 2005.

Application and Expiration of New
Benefit Increases
SB 27 requires that any future law enacted by the General Assembly that increases the amount of any benefit or expands the conditions of eligibility for a benefit to TRS members, must identify the source of funding and provide payment to cover the increase in the cost to TRS. SB 27 provides that from now on, every new benefit increase adopted by the General Assembly will naturally expire after five years, but may be extended or re-created by the General Assembly.

Adopting Actuarial Assumptions
Beginning with the five-year period ending June 30, 2012, and every five years thereafter, an actuarial investigation must take place to consider the sufficiency of the employer and member contributions to adequately fund ERO generally. The results of these investigations must be reported to the Commission on Government Forecasting and Accountability, which must recommend to the General Assembly any necessary adjustments. If the General Assembly fails to make the necessary adjustments, SB 27 states ERO should be terminated.

Advisory Commission on Pension Benefits
This legislation creates an Advisory Commission on Pension Benefits, which is to be made up of 15 individuals, two of whom must represent labor organizations that primarily represent teachers. The purpose of the Commission is to consider and make recommendations concerning age and service requirements, automatic annual increase benefits, and employee contribution rates to State-funded retirement systems. The Commission must report its findings and recommendations to the Governor and General Assembly on or before November 1, 2005.