The Tier II pension time bomb.

 

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Andrew Bodewes, legislative director for the Illinois Teacher Retirement System.

Andrew Bodewes, legislative director for the Illinois Teacher Retirement System, told a legislative panel back in March that Tier II pensions soon are likely to fail to meet the federal adequacy test.

“So that means once the Tier II teachers are retiring, each and every school district will have to perform a test on that member to see if they get a benefit at least as good as Social Security,” he said. “And if they don’t, they (the school districts) will have to enroll in Social Security. They’ll have to enroll going backwards.”

School districts would have to make as much as 10 years’ worth of back payments into Social Security.

Boom!

Local funding for staff salaries, programs and even pencils?

Fuhgetaboutit.

Last week Governor Pritzker’s pension task force issued a report mostly about pension consolidation of downstate fire and police pension systems.

But in a surprise to many, the report also talked about the Tier II time bomb.

“The Task Force also recognizes that there are some unique Tier II benefit issues that are particular to the work of first responders. Among the many changes to the pension plans for state and local government employees hired since 2011, Tier II members receive a substantially smaller benefit relative to Tier I members (those hired before 2011) and experience a pensionable salary cap that grows at a slower rate. While advantageous to the long-term financial health of the pension systems, these changes have received criticism from Tier II members as creating inequity in comparison to Tier I members. There have also been significant concerns that the slower Tier II pensionable salary cap growth and revised final average salary calculation will be in violation of the “safe harbor” standard of the Internal Revenue Code and Social Security Administration. Some state, county, and municipal employees covered by a public pension plan are not required to pay into the Social Security system; this includes teachers and almost all public safety personnel in Illinois, among others. Generally, the “safe harbor” standard requires that those employees exempted from Social Security receive a retirement benefit from their public pension plan that is at least equal to the benefit they would receive under Social Security, in order to continue being exempted from the program.  The annual cost of delaying this safe harbor fix to Tier II first responders is substantial, as it compresses great liabilities into a shorter timeframe to be paid down”

The scope of this task force was the police and fire pensions, but the Tier II pay cap and other benefit cuts affect all state and local workers.

And Tier II teachers are really screwed because their benefits are of less value due to their 10-year vesting and the age 67 retirement.

What is being done about this?

Nothing so far.

The legislature did create a Tier III that was claimed to be a fix.

The Tier III changes were passed in 2017.

In my opinion Tier III was mainly a foot in the door to move our defined benefit pensions into a privatized defined contribution plan.

Tier III was included in budget bill in July of 2017.

I’m guessing it was intended by Democrats to win over some Republicans in exchange for their help in overriding Gov. Bruce Rauner’s veto of the 2018 budget.

The Tier 3 hybrid plan hasn’t been implemented. And there’s little sign of any action on it.

You can decide if that’s a good thing or not.

 

 

 

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