Pension Updates from FY19 Budget Implementation

By Legally Speaking posted 06-04-2018 13:50


During the FY19 state budget negotiations, legislative leaders and budget negotiators discussed proposals intended to save on pension costs. These proposals were negotiated behind-the-scenes and only surfaced hours before the final budget and budget implementation bills were approved by the Senate and the House of Representatives. See below for more information about how the changes may affect you. Visit the Teachers Retirement System for more information as well.

It is important to note that no existing benefits were changed or diminished in these proposals. If you have any other questions, please contact Brian Schwartz or Alison Maley. This blog will be updated as needed. 

Reduced End-of-Career Salary Increases

Previously, a school district could offer 6% annual increases to teachers and administrators in their final years of service with no additional pension obligation to the district. However, if a school district wanted to grant more than 6% salary increases, the school district would have to pay the difference to the Teachers Retirement System for any amount greater than 6%. HB 3342, the Budget Implementation Plan for FY 19, reduces those same salary increases at 3%. 

  • 3% Increase Cap is effective immediately – With the Governor’s signature today (6/4/18), the cap applies to salaries paid to Tier I TRS members’ annual full-time salary rate with the same employer that exceed 3%, “under a contract or collective bargaining agreement entered into, amended, or renewed on or after the effective date.” The employer (school district) shall pay the System the value of any increases greater than 3% that are to become effective after July 1, 2018.
  • Contracts approved by the Board of Education and signed by the parties prior to June 4, 2018 are not subject to the new 3% cap.
  • A school district may still grant raises greater than 3% in any year, but if that raise contributes to the educator’s final pension calculation, the school district must pay for the long-term cost of any portions greater than 3%.
  • The law only applies to raises that would be calculated as “final average salaries,” usually the best 4 years of the last 10 years of service.
  • School districts and educators are exempt from these changes for new hires that receive raises greater than 3% upon service in a new district.

Voluntary Pension Buy-Out; Accelerated Benefit Plan

  • Until June 30, 2021, inactive Tier 1 and 2 members can opt for an “accelerated pension benefit payment.”
  • Inactive members would receive 60% of the present value of their anticipated pension benefits.
  • Eligibility includes: 5 years of TRS service for Tier I members and 10 years of TRS service for Tier 2 members.
  • The accelerated benefit pay-out must be deposited into a tax-qualified retirement plan. It will not be paid in cash.
  • Offers and information from TRS will include an estimate of how much the member will receive through the buyout.
  • Member proceeds cannot be used to buy back time for past service.

Voluntary Accelerated Annual Increase Payment

  • Until June 30, 2021, retiring Tier 1 members can opt into receiving a reduced automatic annual increase, in favor of 1.5% annual increases and a lump sum pay-out of a calculated difference.
  • Retiring members would have to revoke their rights to the current 3% annual increase to receive the accelerated benefit – 1.5% annual increases and a lump sum payment equaling 70% of the difference between the current value of the 3% annual increase and the estimated value of a 1.5% annual increase.
  • The accelerated benefit must be deposited into a tax-qualified retirement plan. It will not be paid as cash.