As legal wrangling over the pension overhaul continues, University of Illinois officials briefed trustees Monday on the impact of the change to the so-called "money purchase" retirement formula.
Members of the State Universities Annuitants' Association last week asked a Sangamon County judge to prevent the law from taking effect until courts decide on its constitutionality. Several lawsuits have been filed challenging the law, which is set to take effect this summer.
The motion argues that allowing the law would force 17,000 members to retire to avoid financial losses under the changes, and if the law is later found to be unconstitutional they can't return to work.
The bill included a provision that changed the interest rate calculation for higher education employees who use the so-called "money purchase" annuity option when they retire.
To prevent a rush of retirements this spring, legislators added language to provide a "floor" so benefits would not be cut below what an employee would have earned as of June 30 of this year. The problem is, the way the language was written in effect pushed that date back to June 30, 2013. For some employees, losing that year of earnings will cost thousands of dollars each year in retirement.
Together, the changes could reduce an employee's annuity check by 20 to 30 percent, according to the State Universities Retirement System.
The money-purchase option offered through SURS affects only university employees, not members of the other four retirement systems included in the pension overhaul.
A bill to change the date was introduced last week by Republican Rep. Chad Hays of Catlin, and state Sen. Chapin Rose, R-Mahomet, introduced a similar amendment to an existing bill.
UI President Bob Easter said he met recently with state Senate President John Cullerton, D-Chicago, and "my sense is there's a clear understanding of the need to address this. The question is how soon can that be done."
Employees can get back to higher annuity levels by working a few more years, but some employees who were close to retirement are choosing to leave now, Easter said.
Here's a breakdown of the money purchase dilemma, from the UI:
University employees hired before July 1, 2005 have two options to calculate their retirement annuity:
— The "general formula" based on their age, years of service and average earnings.
— The "money purchase formula," based on age, total retirement contributions and effective rate of interest at retirement. Many employees use this formula because it tends to provide a higher monthly annuity payment.
— Under current law, the interest rate is set by the state comptroller and has ranged from roughly 7 to 8 percent.
— Under the new law (and for those who retire after June 30), the formula will be based on the 30-year U.S. Treasury bond rate on July 1, 2014, plus 0.75 percent. Currently, that is approximately 4.27 percent.
(An actuarial factor is applied, based on age, gender, and the interest rate multiplied by your life expectancy.)
A 60-year-old employee with $153,950 in retirement contributions and $215,531 in an employer match, or a total of $369,481 in contributions, would receive an annuity of:
— $2,843 a month under the current formula
— $2,126 a month under the new formula, a loss of $717 a month or $8,604 a year.
Because of the apparently inadvertent mistake:
— Retirement contributions made during fiscal 2014 would not be counted for those who retire after June 30.
— About 5,700 UI employees will be eligible for retirement by Aug. 31, and historically 60 to 70 percent of those retiring use the money purchase formula, meaning 3,420 to 3,990 employees could be affected.
Source: University of Illinois
(Note: This story was updated to correct information about the sponsors of the pension bills.)