The Teacher Retirement System, Illinois’s teacher pension fund, is possibly the most woefully underfunded state pension fund in Illinois. One way that it got that way, along with years of employer underfunding, is the “pension spikes” that were used as retirement incentives. The “buy now, pay later” mentality of legislators, school districts and labor unions afforded teachers and administrators the chance to boost their income significantly in their last few years of employment to increase their pension payments without either the employee or the employer contributing enough to TRS to actually fund that resulting increased pension payment. The problem, of course, is that the State doesn’t have the money to “pay later” for the cost of the inflated pensions.
TRS as well as other public pension funds have set a course to turn this Titanic ship of a pension problem around by penalizing employers for wage increases above a certain percentage for employees in the years of employment for which their salaries are used to determine their pension. Several years ago, TRS capped the increase at 6% which was met with general shock and outrage. In the State’s budget bill, signed into law last week by Gov. Rauner, the legislature reduced the wage cap before a penalty is assessed, by half. Now any TRS participating employer who increases wages beyond 3% in an employees final years of working will pay the hefty penalty of being liable for the accelerated payment of the increased cost of pension payments for the individual.
The penalty would apply if the amount of a TRS member’s salary for any school year used to determine the final average salary exceeds the prior year’s salary by more than 3 percent. TRS employers must be extra aware of this new cap for two reasons. First, many negotiated annual salary increases are hovering near the 3% mark. But the cap doesn’t just apply to straight wage increases. Creditable earnings include extracurricular pay, stipends, and contributions to tax-deferred retirement plans. For Tier I employees, pensions are calculated using the four highest, consecutive annual salary rates within the last 10 years of creditable service. For Tier II members, it is calculated using the average of the eight highest, consecutive annual salary rates within the last 10 years of creditable service. Exceeding the 3% salary cap could be relatively easy.
The new cap applies to any salary increase occurring after the effective date of the budget bill, which was June 5, 2018. Exceptions to the cap exist for any increases previously agreed upon contractually, such as union contract or individual employment agreements. It would not be surprising to see other state pension funds following suit.