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Statement on Optional Hybrid Plan Savings

October 11, 2017 - 14:51
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Recently, the Center for Tax and Budget Accountability published an article on the Optional Hybrid Plan (referred to as the "Tier 3 Plan") created by Public Act 100-0023. However, this article misrepresented some key issues.

First, there has always been a Tier II employer normal cost under SURS. Since inception, the total normal cost of Tier II has remained between 10-11 percent of payroll. Because of the projected unit credit actuarial cost method under Illinois law that allocates the costs for an employee towards the end of his or her career, the total normal cost of Tier II is expected to grow to roughly 14 percent of payroll by FY 2045. An employee typically pays 8 percent of payroll toward the total normal cost of Tier II through contributions from his or her paycheck to SURS. The difference between the total normal cost and the employee contributions is currently paid by the state. Under Public Act 100-0023, the portion of the total normal cost of Tier II that is currently paid by the state will be shifted to the actual employers for new Tier II members on or after the implementation date of the Optional Hybrid Plan. So, while there has always been a Tier II employer normal cost under SURS, the Optional Hybrid Plan employer normal cost is expected to be even less, given that the total normal cost of the Optional Hybrid Plan is projected to grow from roughly 8 percent to 9 percent of payroll by FY 2045 and the employee contributes 6.2 percent of payroll towards that amount.

Second, the revised fiscal year 2016 actuarial valuation provided by SURS' actuary only shows the reduction in defined benefits as a result of the Optional Hybrid Plan. The cost shift to the employers for new Tier II defined benefit and Tier II hybrid members on or after the implementation date will be factored into the state savings by SURS' actuary at a future date. Based on a preliminary analysis, such a cost shift could save the state an additional $19.1 million in the first year of implementation. SURS' actuary has not analyzed the cost savings associated with existing Tier II members shifting to the Optional Hybrid Plan, but has done preliminary modeling showing that higher paid Tier II members may benefit from the higher pensionable earnings limit under the Optional Hybrid Plan ($127,200 for fiscal year 2017). In fiscal year 2017, there were over 600 Tier II members who exceeded the Tier II pensionable earnings limit ($111,571.63 for fiscal year 2017). To the extent that such Tier II members elect to participate in the Optional Hybrid Plan for future service, the savings from both the benefit reduction and the cost shift under the Optional Hybrid Plan could be greater than those projected by SURS' actuary in the revised fiscal year 2016 valuation.

Finally, while SURS' revised fiscal year 2016 actuarial valuation showed that the Optional Hybrid Plan could save $61.2 million in fiscal year 2018, SURS' actuary performed an actuarial analysis earlier this year indicating that the "Tier 3 Plan" as originally proposed could have saved the state $166.7 million in the first year of implementation. This earlier analysis incorporated assumptions that differed from the final provisions of Public Act 100-0023. For example, it assumed that the 2 percent additional contributions from employers would be used to reduce the Tier I unfunded liability and that the actual employers would pay 7.6 percent of payroll to SURS for each future participant in the Self-Managed Plan. As these two provisions, among others, did not make it into Public Act 100-0023, the initial projection of $166.7 million in savings during the first year of implementation will not be realized. Because of these deviations from the governor's original proposal, the projected savings under Public Act 100-0023 are less than what was originally anticipated based on the analysis by SURS actuaries.

Statement on Optional Hybrid Plan Savings