Governor Quinn Signs Pension Reform Bill

The following alert was originally published January 4, 2011, by the law firm of Raysa & Zimmermann LLC, which merged with Tressler LLP effective March 31, 2012.

On December 30, 2010, Governor Quinn signed Senate Bill 3538 into law as Public Act 96-1495 (hereinafter the “Act”), which amends Articles 3, 4, 5, 6 and 7 of the Illinois Pension Code (hereinafter the “Code”). The Act affects police and firefighter pension funds for all municipalities.

Pension Benefits
A majority of the Act’s provisions affect the benefits for all police officers and fire fighters, as well as sheriff's law enforcement employees, hired on or after January 1, 2011. [1] The benefits that will apply to such hires include. [2]

1. A normal retirement age of 55 so long as the individual has at least 10 years of service.

Currently: a retirement age of 50 with at least 20 years of creditable service.

2. A monthly pension calculated by multiplying the “final average salary” by years of service and 2.5% à [final average salary] x [years of service] x [2.5%].

The “final average salary” is a monthly salary determined by dividing the total salary of the individual during the 96 consecutive months (8 years) of service within the last 120 months (10 years) of service in which the total salary was the highest by the number of months of service in that period à [highest total salary over a 96 month period] / [96].

Currently: Police officers and firefighters’ pension is 50% of the individual’s salary attached to the rank held on the last day of service or for one year prior to the last day, whichever is greater – the pension is increased by 2.5% of such salary for each additional year over 20 years of service through 30 years of service.

Sheriff’s law enforcement employees’ pension is calculated by multiplying 2.5% for each year of service by the individual’s annual final rate of earnings and dividing by 12 a ([2.5%] x [years of service] x [annual final rate of earnings]) / [12].

Pension Spiking: this amendment is aimed at combating what is commonly known as “Pension Spiking.” Currently, a pension is calculated using the individual’s salary on his or her last day of service, enabling individuals to receive large raises immediately prior to retirement, which is then used to calculate a larger pension. However, for individuals hired on or after January 1, 2011, the pension will be calculated using an individual’s average salary over an eight-year period. Such a large sample size of the individual’s salary will help to combat any large salary increases immediately preceding retirement.

3. An option to retire between the age of 50 and 54 so long as the individual has at least 10 years of service. The individual’s corresponding pension would be reduced by 6 percent for each year that the individual is under age 55.

Currently: police officers have a retirement age of 50 with at least 20 years of creditable service, while firefighters receive a percentage of salary depending on number of years of service – e.g. 15% of salary for 10 years of service. Sheriff’s law enforcement employees may have an early retirement incentive if the employer has adopted a resolution or ordinance pursuant to section 7-141.1 of the Pension Code.

4. An annual percentage pension increase that is equal to 3% or ½ the annual unadjusted percentage increase in the consumer price index-u, whichever is less, of the originally granted pension. This increase begins when the individual has reached age 60 or on the first anniversary of the pension start date, whichever is later.

Currently: police officers and firefighters have an annual increase of 3% of the pension amount at the time of each increase, which begins when the individual has reached age 55 or on the first anniversary of the pension start date, whichever is later. Sheriff’s law enforcement employees have an annual increase of 3% of the monthly retirement annuity amount, which is payable only if the individual agrees to pay the fund an amount equal to 1% of 1/12 of the individual’s annual final rate of earnings multiplied by the number of full years of service.

5. A maximum pension of 75% of the individual’s final average salary.

Currently: police officers and firefighters have a maximum pension of 75% of pensionable salary, while sheriff’s law enforcement employees have a maximum pension of 80% of pensionable salary.

6. For police officers and firefighters, a maximum pension of $106,800 a year, including benefits and employee contributions, plus the annual percentage increase of the originally granted pension.

Currently: No such maximum currently exists.

7. Exclusively under Article 7 of the Code, affecting sheriff's law enforcement employees, the annual earnings of a sheriff's law enforcement employee cannot include overtime and cannot exceed $106,800 a year, including benefits and employee contributions, plus the annual percentage increase of the originally granted pension.

Currently: Sheriff’s law enforcement employees currently have all earnings taken into account, including overtime, when calculating the “final rate of earnings” that is used to calculate the individual’s retirement annuity.

8. The survivor benefit will be 66 2/3% of the individual’s earned pension at the date of death, plus the annual percentage increase that takes effect at age 60.[3]

Currently: The survivor benefit for police officers and firefighters is 100% of the individual’s earned pension at the date of death. The survivor benefit for sheriff’s law enforcement employees is 50% of the retirement annuity which was or would have been payable to the employee, plus an amount equal to the annuity which could be provided from the total of his or her accumulated additional credits at date of death, with an annual 3% increase of the originally granted amount of the annuity.

Required Pension Fund Contributions of a Municipality
Another major impact the Act has is to amend Articles 3, 4, 5 and 6 of the Code,[4] which provides for the annual property tax levy to fund a municipality’s pension. The Act amends the Code to require that the annual tax be an amount sufficient to fund 90% of the municipality’s pension costs by the end of 2040. The Act also changes the calculation method for determining the required employer contribution.[5]

Moreover under the Act, beginning in 2016, the State Comptroller must withhold State funds to a municipality that fails to pay its required pension fund contributions.[6] In 2016, the State Comptroller can only deduct up to 1/3 of the municipality’s State funds. In 2017 that deduction increases to a maximum of 2/3, and in 2018 the State Comptroller can withhold the full amount of a municipality’s State funds to cover any amount of required pension fund contributions a municipality has failed to pay.

Miscellaneous Changes
Under the Act, there are a number of other changes to the Code, including:

1. Article 3 and 4 funds can invest in[7]:

a. interest bearing funds or pooled accounts of the Illinois Metropolitan Investment Fund,
b. corporate bonds managed through an investment advisor, if the bonds meet certain requirements.

2. Article 3 and 4 pension funds with net assets of at least $10 million are provided with additional permitted investments.[8]

3. The Commission on Government Forecasting and Accountability must conduct studies on:

a. all Article 3 and Article 4 pension funds to be reported by January 1, 2013,[9]
b. the feasibility of the creation of an investment pool,[10] and
c. the feasibility of enacting a contribution cost-share component wherein the employers and employees each contribute 50% of the normal cost of the defined-benefit plan.[11]

Home Rule Applicability: A home rule municipality has no power to change, alter, or amend in any way the provisions of Article 3 or 4. Moreover, if a home rule municipality has adopted Article 7, it must follow the provisions of Article 7, as amended.[12]

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[1] See § 3-111, § 4-109 and § 7-142.1 of the Code. Police officers who are participants in the self-managed plan under § 3-109.3 are excluded from § 3-111.
[2] The term “pension” is interchangeable with the term “retirement annuity” in regards to sheriff's law enforcement employees.
[3] Firefighters receiving a disability pension under § 4-110 or 4-110.1 are excluded from § 4-114.
[4] § 3-125, § 4-118, § 5-168 and § 6-165 of the Code.
[5] After March 30, 2011, to determine the required employer contribution, a fiscal year’s gains or losses are recognized in equal amounts over the following 5 years.
[6] Id.
[7] § 1-113.2 of the Code.
[8] § 1-113.4a of the Code.
[9] § 3-125 and § 4-118 of the Code.
[10] § 1-165 of the Code.
[11] Id.
[12] 40 ILCS 5/3-150; 40 ILCS 5/4-142.