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Proposed Pension Reform Plan

The four legislative leaders are proposing to reform the benefits and improve the State funding for four State retirement systems: Teachers, Universities (including community colleges), State Employees and eneral !ssembly" The plan includes a reduction in annual cost#of#living ad$ustments on pension benefits (but no reduction in base benefits), creation of an optional defined#contribution plan, and improvements in the State%s funding of the systems" SAVINGS: These proposed reforms are e&pected to reduce the State%s pension payments by $160 billion over the next 30 years" Under these reforms, our payments 'ill be almost half of 'hat 'e are pro$ected to pay under current la' ('ithout reforms) over the ne&t () years" The States pension debt o!r !n"!nded liabilities# $o!ld be red!%ed by over $&1 billion under this plan" That is a *)+ reduction in our ,-)) billion debt, bringing it do'n to ,./ billion" '!r savin(s red!%ed pay)ent# in the "irst year $o!ld be aro!nd $1*& billion , 'hich is about a *)+ cut in our current#la' payments" !nnual savings 'ould gro' over time" The State%s funding formula 'ould be strengthened to meet national standards, reaching -))+ funded (assets covering the liabilities for all earned benefits) in () years" +e expe%t to hit 100, "!nded in abo!t &- years, leaving room under the formula to easily accommodate changes in investment and other assumptions and still reach full funding in () years" 0ur current#la' funding formula is to hit $ust /)+ funded over 1) years (reaching that goal in (- years, 2341)" Right no', the State%s systems are only 4)+ funded" As $e pay o"" the States &010 and &011 pension bonds. $e $o!ld ta/e the )oney $e had been spendin( on those bond pay)ents and !se it to )a/e extra pay)ents to the pension syste)s" This 'ould be ,(54 million in 23-/ and ,- billion a year starting in 23*) until full funding is reached" (The State 'ill continue to ma6e the rising payments on the ,-) billion in pension bonds sold in *))( by ov" 7lago$evich" The *))( bonds are not paid off until *)((") The State $ill "!rther 0prepay its )ort(a(e1 be(innin( in 2316 by devotin( abo!t 10, o" the ann!al re"or) savin(s to another set o" extra pay)ents to the pension syste)s" (This funding improvement is a ne' idea, not included in any previous bills")

45N52IT 67ANG5S: !ll reforms apply to 8Tier -9 retirees and employees, 'ho are those first hired or elected before :an" -, *)--" Tier * employees (post#*)-)) have a different set of benefits 'hich are less generous than these Tier - benefits 'ill be under reforms" 8e"ined 6ontrib!tion 9lan: An optional de"ined:%ontrib!tion plan ;01/# $o!ld be %reated :uly -, *)-1 for all Tier - employees" The first 1+ of employees in each system 'ould be allo'ed to opt in" Those 'ho opt in 'ill 6eep their future defined benefits already earned (fro;en as of the date of the opt#in) and going for'ard 'ill get the investment value of their defined#contribution plan at retirement"

Employees 'ho opted in 'ould contribute to their account the same amount they 'ould pay as employee contributions under reforms" The State 'ould pay in a percentage of salary that each system determines 'ill be cost neutral<so our total State payments don%t go up and the defined#benefits plan is not harmed" Universities and State Employees pro$ect that the State%s contribution 'ould be .+ ('ith a minimum of (+)" Teachers e&pect a lo'er State match, 'ith a minimum that may go belo' (+" Employees 'ould get a 'ide range of investment options"

<ed!%tion in 6'=A: 6'=A %han(es deliver )ost o" the savin(s* Under the proposed reforms, the =0>! paid annually and current and future retirees% benefits 'ould be lo'ered" Right no' the systems pay (+ compounded on full benefits" Using the =0>! reform frame'or6 from S7-, going for'ard the State $o!ld pay 3, not %o)po!nded si)ple# on >!st a portion o" bene"its. not "!ll bene"its" The =0>! 'ould be paid only on a portion of benefits based on the retirees% years of public service" This frame'or6 'as suggested by >eader Radogno as a 'ay to target =0>! dollars at lo'er#'age, longer#term employees rather than high#'age earners and short timers" o 6'=As $o!ld be paid on bene"its e?!al to an initial $1.000 "or every year o" servi%e for those 'ithout Social Security (teachers, college and university employees, legislators, and some State employees)" 2or someone 'ith () years of service, the =0>! 'ould be paid on the first ,(),))) in benefits, 'ith no =0>! paid on benefits paid over that years#of#service base" (There is no limit on the years of service, so the base for someone 'ith, say, 4) years% service 'ould be ,4),)))" Short timers 'ould get a small =0>! ? for e&ample, 'ith 1 years% service, a =0>! only on ,1,)))" Those 'ith Social Security (most State employees) 'ould get a =0>! on benefits e@ual to ,A)) for every year of service" o These initial $1.000 and $@00 a)o!nts $o!ld (ro$ ea%h by "!ll in"lation" (Bn S7-, these amounts 'ere permanently set at ,-,))) and ,A)) and did not increase over time") Bn the first year of reforms, =0>!s 'ould be paid on ,-,))) or ,A)) per year, but in future years the =0>! 'ould be applied to these amounts as they have been increased by inflation" o 6'=A 5xa)ple: Using the e&ample of the average retired teacher 'ho has total benefits of ,1),))), 'ith a =0>! base of ,(),))) for () years of service, the first#year =0>! 'ould be ,/)) (,(),))) times (+), for total benefits paid of ,1),/))" Bf inflation in the ne&t year is *+, the base 'ould increase to ,(),5)) and the (+ =0>! 'ould be paid on ,(),5)) (or ,/-A), 'ith total benefits paid of ,1-,A-A" Each year%s ne' =0>! 'ill be paid on top of the previous year%s total benefits" Each year%s years#of# service base 'ill be compounded, 'ith any ne' inflation applied to the previous year%s base, but the =0>! 'ill not compound" So if there is -+ inflation in the third year, the =0>! base 'ould increase to ,(),/5) (the previous year%s base of ,(),5)) multiplied by -+) and the (+ =0>! paid 'ould be ,/*/ (,(),/5) multiplied by (+), 'ith total benefits paid of ,1*,.4." o Under current la', the =0>! is (+ compounded on full benefits, so compared to the reform e&ample above, the benefit 'ith =0>! in the ne&t (first) year 'ill be ,1-,1)) (compared to ,1),/)) under reforms), in the second year, ,1(,)41 the second year (compared to ,1-,A-A under reforms) and ,14,5(. in the third year (compared to ,1*,.4. under reform)" o The res!lt is that !nder re"or)s. the 6'=A rises (rad!ally over ti)e i" there is in"lation" Total benefits paid over the long term 'ill not 6eep up 'ith inflation, since no =0>! 'ould be paid on benefits over the years#of#service base" (Bn the rare case of initial benefits not reaching ,-,))) per year, the =0>! 'ill be compounded until the full benefits reach the years#of#service base") o This =0>! change applies to future benefits of current retirees and the benefits of current employees upon their retirement" The bill $ill provide that the red!%tion in 6'=A be(ins $ith the next 6'=A paid a"ter A!ly 1. &01;* 4!t liti(ation is expe%ted to delay that re"or) start date to Aan!ary 1. &01-. and perhaps lon(er" The unions plan to sue, and most li6ely 'ill obtain a court order preventing implementation of all reforms until the case is resolved"

6'=A S/ips B 8elays: 6'=As on "!t!re bene"its o" e)ployees not retirees# $o!ld be s/ipped every other year under the follo'ing schedule: !ge 1) as of the effective date: miss one =0>!C ages 4/#4., miss t'o =0>!s, ages 45#44, miss three =0>!s, age 4( and under, miss five =0>!s"

In%reased <etire)ent A(e: <etire)ent a(e $o!ld be raised by - years (rad!ally "or "!t!re bene"its o" e)ployees a(e ;- and yo!n(er as of the :une -, *)-4 effective date of the bill" Retirement age 'ill not change for those 45 and older" 2our months 'ould be added to retirement age for each year of the employee%s age, reaching a total of 5) months more (1 years) for those no' age (- and younger" The increase in retirement age 'ill apply to both full and early retirement ages 'hich no' range from 1) to 5) ('ith the vast ma$ority at age 5))" 7ere is the year:by:year s%ale. $ith exa)ples "or those $ith a %!rrent retire)ent a(e o" 60: o !ge 45 and above: Do change in retirement age" o !ge 41: current retirement age increased by four months, so employee 'ith a current#la' full retirement age of 5) could retire four months after their 5)th birthdayC o !ge 44: eight months addedC o !ge 4(: -* months added, so employee could retire at age 5-C o !ge 4*: -5 months addedC o !ge 4-: *) months addedC o !ge 4): *4 months added, so employee could retire at age 5*C o !ge (/: *A months addedC o !ge (A: (* months addedC o !ge (.: (5 months added, so employee could retire at age 5(C o !ge (5: 4) months addedC o !ge (1: 44 months addedC o !ge (4: 4A months added, so employee could retire at age 54C o !ge ((: 1* months addedC o !ge (*: 15 months addedC o !ge (-: 5) months added so employee could retire at age 51"

6ap on hi(h:dollar bene"its: The bill 'ould put a cap on high#dollar benefits (also 6no'n as the pensionable salary cap)" This cap 'ould say that benefits 'ould be paid only based on a final average salary of ,--),)) or less, even if the actual salary is higher" This ,--),))) 'ould gro' by the lesser of (+ or half inflation (same as the Tier * cap)" =o$erin( o" alternative bene"its: Under current la', colleges% staffers and teachers% retirement initial benefit is the higher of (-) the regular#formula benefits or (*) an alternative 8money purchase9 benefit" Eost colleges% retirees (and a fe' teachers) get the higher alternative benefits" The reform 'ould lo'er the 8effective rate of interest9 used to calculate the alternative benefits, 'hich 'ould in turn lo'er the alternative benefits to a level belo' regular benefits in most years" The ne' rate 'ould be .1 basis points above ()#year Treasuries" This is pro$ected to drop the current rate from .")+ do'n to 4")+ for colleges% retirees" 5)ployee %ontrib!tions $o!ld be red!%ed by 1, o" salary (so teachers go from /"4+ to A"4+, most State employees go from 4+ to (+, etc") This adds 8consideration9 and should improve the prospects of the reforms being upheld as constitutional"

'T75< ISSC5S: 2!ndin( G!arantee: There $o!ld be a $ea/ "!ndin( (!arantee* Each system (not individuals) could sue to enforce timely payment of the amount appropriated in each year by statute through the eneral !ssembly" The union bill had a much stronger guarantee, 'hich covered 'hatever the payments might be under the ne' funding formula of reaching -))+ funded in () years" This 'ea6er guarantee allo's the State to revamp the funding formula"

6olle%tive 4ar(ainin( o" 9ensions: The State 'ould no longer be re@uired to collectively bargain pension benefits" 2indin(s o" 2a%t: 2indings (legislative intent) 'ill be included in the bill" 9ension Ab!ses: Pension abuse reforms previously included in S7 - and S7*4)4 'ill be included" These include preventing future hires in several non#governmental organi;ations from getting public pension benefits" !lso, ne' hires 'ill not be able to include the value of travel vouchers in their final average salary, or have their years of service include unused vacation and sic6 days" Csin( 9ension 2!nds "or 7ealth%are: The State systems 'ill be specifically prohibited from using pension funds to pay for retiree health insurance"

N'T IN6=C858 IN T75 4I==: 7ealth%are G!arantee: Do guarantee of future retiree health care" There 'ere concerns that, under S7 *4)4, healthcare benefits 'ould be guaranteed as part of the choice process" That is not the case in this bill" Do changes in health care 'ill be included in this bill" 6ost:Shi"t: There is no pension cost shift to local school districts and universities in this bill"