March 21, 2013
On March 21, 2013, the Illinois House passed a bill that would significantly reduce the State’s pension costs by limiting automatic annual benefit increases for retirees and employees.
House Bill 1165, approved by a vote of 66 to 50, addresses the largest single factor driving the State’s pension costs. Current retirees and employees hired before January 1, 2011 receive annual compounded increases of 3% in their pension benefits. Although the increase is often referred to as a cost of living adjustment, or COLA, it is not based on the inflation rate.
Under HB1165, automatic increases would apply only to the first $25,000 of a pension for those who do not receive Social Security ($20,000 for those who do). That would limit the annual increase to $750 (or $600). In addition, retirees would receive no annual increase until they reach age 67 or five years after they retire.
During the debate on the House floor, Representative Elaine Nekritz said limiting the automatic annual adjustment is expected to save the State approximately $100 billion over 30 years. Representative Nekritz said retirees account for 70% of the pension liability of the Teachers’ Retirement System (TRS), the State’s largest pension fund, making it impossible to significantly reduce pension costs without cutting payments to retirees.
As discussed here, several other states have passed laws to reduce automatic annual increases for retirees. Rhode Island, for example, suspended future annual benefit increases until the combined funded ratio of its pension funds exceeds 80%. An interim increase would be paid at five-year intervals, with the amount of the increase based on investment returns. The interim increase and any future annual increase would be applied only to the member’s first $25,000 of pension income, although that limit would grow at the same rate as the annual increase.
HB1165 is one of a series of pension changes sponsored by House Speaker Michael Madigan that were considered by the House since late February. Many of the proposed changes, such as a measure to eliminate all automatic annual increases, have been rejected decisively. However, the House approved two other Madigan-sponsored pension changes: a measure to cap pensionable salaries at the Social Security wage base or current salary level, whichever is higher, and a bill to phase in higher retirement ages for employees under 45. Speaker Madigan said during the House debate that after passage of HB1165 the House would be in a position to consider a comprehensive pension reform proposal.
The three Madigan-sponsored measures passed by the House are also components of HB3411, sponsored by Representative Nekritz and House Minority Leader Tom Cross. It is not clear whether the comprehensive pension legislation to be considered by the House will be HB3411 or another bill.
Both HB1165 and HB3411 apply to employees and retirees in four of the State’s five retirement systems: TRS, the State Universities Retirement System (SURS), the State Employees’ Retirement System (SERS) and the General Assembly Retirement System (GARS). The Judges’ Retirement System (JRS) is not affected.
On March 20, the Senate version of HB3411, Senate Bill 35, was rejected by a vote of 23 to 30. As discussed here, The Senate passed a narrower bill, Senate Bill 1, which covers only active teachers in TRS.