Historic Pension Reform Signed into Law by Governor Quinn

On December 3, 2013, The Illinois House of Representatives and the Illinois Senate narrowly approved Senate Bill 1 (as amended), thereby greatly overhauling the public retirement benefits provided for under the Teachers Retirement System, the State Employees Retirement System, the State Universities Retirement System and the General Assembly Retirement System.  The Illinois Municipal Retirement System and the Judges Retirement System were left unaffected by the General Assembly’s action.  The benefit changes are expected to save the State of Illinois $160 billion over the next thirty years and are intended to fund the state pension systems at 100% by 2044. 

Because the legislation was considered during a special session, the measure required a minimum number of 60 votes in the House and 30 votes in the Senate for passage.  The Illinois House approved the measure by a vote of 62‐53‐1, and the Illinois Senate approved the bill by the narrowest of margins, 30‐24‐3.  Governor Quinn signed the bill into law as soon as it arrived on his desk December 5th.  Illinois’ public sector unions have already promised an immediate constitutional challenge to the new bill, alleging the legislation deprives public employees of pension benefits guaranteed to them by the State Constitution.  It is expected that any legal challenge to the new legislation would include a temporary injunction, thereby barring implementation of the new changes until a court could rule on their constitutionality.

Summary of the Bill’s Key Provisions

Effective Date: The law is effective June 1, 2014.  Employment contracts and collective bargaining agreements would need to be in effect before this date in order to receive “grandfathered” protection under the pensionable salary cap provision for periods of service on or after the effective date of the Act.  The only exception to the effective date is the 1% reduction in employee pension contributions.  This reduction takes effect July 1, 2014.

Annual Cost of Living Adjustments: The annual COLA will be calculated by multiplying 3% of the lesser of the annuity payable at the time of the increase or $1,000 times the member’s years of creditable service.  For most members, the lower, and thus applicable, amount will be the $1,000 times the years of service.  For example, a retiree with 35 years of creditable service will receive a cost of living adjustment on the first $35,000 of his or her pension.  Beginning January 1, 2016, the $1,000 multiplier will increase annually by the increase in the Consumer Price Index for the 12 month period ending the previous September.  This adjustment shall be cumulative and compounding.  This provision applies to both current retirees receiving an annuity and active Tier 1 members, i.e., those members who became a participant before January 1, 2011.

Moreover, Tier 1 members who have not begun to receive a retirement annuity before July 1, 2014 will be subject to periodic COLA freezes.  The COLA freeze is dependent upon the member’s age as of the effective date of the Act and is structured as follows: employees 50 years of age or older on June 1, 2014 will not receive an adjustment in year 2 of their retirement; employees 47‐49 years of age on June 1, 2014 will not receive an adjustment in years 2, 4, and 6 of their retirement;  employees 44‐46 years of age on June 1, 2014 will not receive an adjustment in years 2, 4, 6, and 8 of their retirement, and, finally, employees under the age of 44 on June 1, 2014 will not receive an adjustment in years 2, 4, 6, 8, and 10 of their retirement. This provision only applies to Tier 1 members who have not started to receive an annuity before July 1, 2014.

Tier 2 members will have their pensions increased by a percentage equal to the lesser of 3% or one-half of the increase in the Consumer Price Index for the 12-month period ending the previous September.  This change applies to any COLA increases provided after the effective date of the Act regardless of whether the member terminated service prior to that date.

Pensionable Salary Cap: A Tier 1 member’s annual salary (creditable earnings) that is subsequently used by the retirement system to determine the member’s final average salary would be capped at the higher of 1) the Tier 2 salary cap as of June 1, 2014; 2) the member’s annual salary as of June 1, 2014; or 3) the member’s salary specified in the last year of an employment contract or collective bargaining agreement in effect prior to June 1, 2014.  The Tier 2 salary cap for fiscal year 2014 is $110,631.  This cap will be adjusted annually by one-half of the annual increase in the Consumer Price Index.  The pensionable salary cap, including its “grandfathering” provisions, applies only to active Tier 1 members and does not apply to current retirees receiving an annuity. 

Retirement Age: For members who are 46 years of age or older as of June 1, 2014, there is no change in their retirement age.  However, members who are under 46 years of age as of June 1, 2014 will have their retirement age increased by 4 months for every year that the member is less than 46 years of age, up to a maximum increase of 5 years.  A member’s increased retirement age would also apply for Early Retirement Option purposes.

Employee Contribution: The employee contribution for Tier 1 employees is lowered by 1% beginning July 1, 2014.

Cost Shift: The new legislation does not address the cost shift of the General Assembly’s “pick up” of educational employers’ contributions back to the educational entities.  Over the past several years this had become one of the more controversial issues of the pension reform debate.  Although the cost shift is not addressed in the current legislation, it may arise again during future legislative sessions.

Sick Leave: Employees hired after June 1, 2014 are prohibited from using accrued, unused sick or vacation leave to obtain additional service credit or to increase their creditable earnings.

Defined Contribution Plan: The new law creates a voluntary defined contribution plan for each retirement system and allows up to 5% of Tier 1 defined benefit members from each system to participate. Benefits earned through the current defined benefit plan would be frozen. The employee contribution for the new defined contribution plan would remain the same as for traditional defined benefit employees.  The employee is not allowed to elect how much to contribute. The employer would also contribute into the employee’s defined contribution account at a minimum of 3.0% of creditable earnings, but no greater than the employer’s costs for Tier 1 members in the defined benefit plan.  Employees electing to participate in the defined contribution plan will also be required to enroll in Social Security, requiring both the educational employer and the employee to contribute 6.2% of creditable earnings into Social Security.  Once an employee elects to participate in the defined contribution plan, the employee cannot revert back to the defined benefit plan unless the defined contribution plan is abolished.  The defined contribution plan is scheduled for implementation on July 1, 2015, if the State is able to qualify the plan by then under the Internal Revenue Code.

Collective Bargaining: The pension law amends the Illinois Educational Labor Relations Act (“IELRA”) to add a new section regarding an educational employer’s duty to bargain regarding the Illinois Pension Code changes. The IELRA amendments provide specific limitations regarding an employer’s bargaining obligation and add a “grandfather” provision for current collective bargaining agreements and employment contracts.

• Bargaining Limitations: The new law amends the IELRA to provide that employers cannot be required to bargain over matters affected by the Illinois Pension Code changes, including the impact and implementation of such changes. The legislation clarifies, however, that this restriction on the employer’s duty to bargain under the IELRA will be interpreted narrowly and limited exclusively to the specific Illinois Pension Code changes.

In addition, the IELRA amendment provides that the specific amended articles of the Illinois Pension Code are prohibited subjects of bargaining and cannot be negotiated by the parties. The amendment specifically allows employers and unions to negotiate the employer’s payment or “pick up” of the employee’s pension contribution. Accordingly, any elimination, reduction, or increase in an employer’s percentage payment of an employee’s mandatory pension contribution remains a negotiable issue. 

• “Grandfather” Provision: The legislation includes a “grandfather” provision which exempts and “grandfathers” any collective bargaining agreement in effect on June 1, 2014 from the Pension Code changes, including the salary cap provision. Any collective bargaining agreement which is modified, amended, or renewed after June 1, 2014 is not subject to the “grandfather” provision, and must conform to the new law. 

Accordingly, for collective bargaining agreements currently in effect that contain provisions contrary to the new law, those provisions will be allowed to continue until the agreement’s expiration.  We do not believe that an employer will be able to successfully claim that those provisions are immediately void.  However, upon expiration of the agreement, any provisions contrary to the new law will need to be removed or revised consistent with the new pension law changes.   Employers who seek to obtain the “grandfathered” protections of the Act (e.g., to avoid application of the pensionable earnings cap), may initiate mid-term bargaining if the contract allows to extend the effective date of the agreement.  For those employers who have employment contracts or collective bargaining agreements expiring in 2014, the employer may want to commence negotiations early in 2014 so that a successor agreement can be in effect before June 1, 2014.

If you have any further questions regarding this important new legislation, you may contact any Robbins Schwartz attorney.

Dennis L. Weedman of the firm’s Collinsville office, Todd K. Hayden of the firm’s Mokena office and Philip H. Gerner III of the firm’s Chicago office prepared this Law Alert.