December 2010
Pension Reform Overwhelmingly Clears General Assembly
After nearly three years of hard work, a critical first step to reforming public safety pensions overwhelmingly passed both legislative chambers earlier this month and has been sent to Governor Quinn for his consideration. Senate Bill 3538 was approved by the House 95-18 before clearing the Senate 46-4-2. Highlights of Senate Bill 3538 include:
Modified Pension Benefits for Police and Firefighters Hired After January 1, 2011
· Normal retirement age 55 (was age 50)
· Early retirement age 50 with ½% reduction for each month prior to age 55, up to 30% reduction if pension taken at age 50 (currently no early retirement penalty)
· 10 year vesting (current vesting 8 years for police and 10 year for fire)
· Earn 2.5% pension for each year of service with maximum of 75% at 30 years (slight change in formula for fire)
· Pension salary cap of $106,800 with annual CPI adjustments (no current cap)
· Final Average Salary for pension is average of final best 8 of 10 years of service (now final day/month salary)
· Cost of Living Adjustment is lesser of 3% or ½ CPI-U, non-compounded (was 3% compounded)
· COLA begins at age 60 (was age 55)
· Surviving spouse benefit 66 2/3% of pension at time of annuitant death with new COLA formula also beginning at age 60 (currently 100%)
Actuarial Changes
· 30 year closed amortization period with funding goal of 90% by the end of municipal fiscal year 2040 (was 40 year closed period with goal of 100% due by 2033)
· Level percent of payroll formula remains in effect
· Allows 5 year smoothing of actuarial gains and losses incurred after 2011
Expanded Investment Authority
· Allows funds with over $10 million in assets to expand investment opportunities
Funding Compliance Mechanism
· State-shared revenue diversions to pension funds beginning in fiscal year 2016 equaling any difference between the employer contribution and the required actuarial contribution
· Three year phase-in with up to 1/3 of state-shared revenue diverted in fiscal year 2016, up to 2/3 in fiscal year 2017 and up to the full contribution difference beginning in fiscal year 2018
Commission on Government Forecasting and Accountability Studies
· Investment pooling
· In-depth study on each pension fund including: fund balances, historical contribution rates, actuarial formulas used, available funding sources, impact of revenue limitations including tax caps and existing compliance measures
· Required to be released in 2013
Please see link below for the actual legislation:
Although the bill is far from perfect and does not address the burden of funding benefits for current public safety employees, the bill represents a major first step toward pension reform. The extension of the amortization deadline from the current 100% funded by 2033 to 90% funded by 2040 will initially produce a significant savings on unfunded liability payments thus providing a measure of relief for taxpayers. The introduction of modified benefits for new employees will produce growing savings in future years once new employees are brought on board. Two studies by the Commission on Government Forecasting and Accountability, due by 2013, will provide the basis for further reforms and possible investment pooling or fund consolidation. Pension funds with over $10 million in assets will be able to expand their asset investment opportunities.
The Northwest Municipal Conference is urging Governor Quinn to sign Senate Bill 3538 prior to its January 1, 2011 effective date.