The House Personnel and Pension Committee and the House Appropriations-Pensions & Personnel Committee hold a joint meeting Wednesday to get an overview of the Illinois pension system. [BlueRoomStream] 

Illinois lawmakers are discussing possible Tier 2 pension reforms as the chance of “Safe Harbor” violations increases. 

Pension reform has been discussed in the statehouse for years, but there hasn’t been much action taken. The unfunded pension liability grew by $1.5 billion in fiscal year 2024 to $143.7 billion, according to a December report from the Commission on Government Forecasting and Accountability (COGFA).  

Illinois’ liability has grown since Tier 2 was implemented in the 2011 fiscal year. Tier 2 was created as a response to growing pension debt caused by Tier 1 benefits. The main difference between the two is retirement age, with Tier 2 benefit earners working about seven years longer, and the average salary calculation.  

Tier 2 has led to numerous issues since it was enacted, the largest being concerns about its compliance with federal law.  

The Social Security “Safe Harbor” test dictates whether a retirement plan meets the minimum standards to replace Social Security. If it falls short, the employer must make up the difference. At the current rate of growth established for Tier 2, it will eventually fall short of those minimum requirements, according to the Civic Federation.  

Kristen Houch, director of Legislative and Stakeholder Relations for the State Universities Retirement System (SURS), said during a committee meeting Wednesday that they have one employee who will fail that test in Fiscal Year 2025. She said the employee will need to be put into Social Security because of this failure but clarified that it is a unique situation.  

Houch said when there are “Safe Harbor” failures, the responsibility falls on the employer. In this case, the employer would be the public university or community college, not the State of Illinois. She said it would be the same if a teacher failed the test, the responsibility would fall to the school district.  

Andrew Bodewes, a consultant representing the Illinois Teachers Retirement System, said that on the current trajectory public school districts will eventually reach 100 percent noncompliance. He said they have more questions than answers on what that will mean for Illinois schools.  

“Will [Tier 2] be deemed to no longer be a Social Security replacement plan at all?” he said. “I mean, I'm going to, in an effort to avoid a total panic attack here in front of the committee, I'm not going to go too far down this, but we just don't have a lot of knowledge on how this thing looks.”  

He said he hasn’t heard of any “Safe Harbor” violations yet but said it’s reasonable to assume that they will have violations in the next couple years.  

A plan proposed in November by Rep. Stephanie Kifowit (D-Aurora) and Sen. Robert F. Martwick (D-Chicago), leaders of the chamber's respective pension committees, to reform Tier 2 did not pass before the end of the 103rd General Assembly.  

A COGFA analysis of the legislation found that plan would cost taxpayers almost $30 billion through 2045.  

The measure aims to fix the “Safe Harbor” concern by increasing the maximum salary used to determine pension benefits, aligning it with the average salary calculation used for Tier 1 benefits. The bill would also change how cost-of-living increases are determined and align the Tier 2 age of retirement to Tier 1.  

The bill has been reintroduced in the Senate, but it will likely require more negotiations if it’s going to pass both chambers and be signed by the governor.  

Other legislative action  

The House Personnel and Pension Committee approved two bills Thursday. The first, House Bill 1435, clarifies that Illinois Secure Choice accounts are IRAs.  

Illinois Secure Choice launched in 2018 as a state-affiliated retirement savings program. Illinois employers with five or more employees are required to provide a retirement savings plan, either through a private entity or through Illinois Secure Choice.  

Christine Cheng, executive director of Secure Choice, said the program has used Roth IRAs as its main “vehicle,” but doing so means the program has not been eligible for the Federal Savers Match, which was created in 2022.  

“This is the federal government saying that it wants to help fund some of these qualified retirement accounts,” she said. “The issue being that while a lot of our savers may be eligible, from an income perspective and because they are contributing to a qualified retirement account, the federal match cannot flow, by statute, into a Roth vehicle.”  

HB 1435 clarifies that participants can have both IRAs and Roth IRAs and that accounts are owned by enrollees.  

The measure also clarifies that employees can include contributions from multiple employers in one account. It also would allow the Illinois Secure Choice Savings Board, which oversees investments of the program's funds, to enter into agreements with other government entities to share resources.  

Finally, it would establish a penalty for an employer’s failure to remit an employee’s contribution or enroll an employee in the program. That change is needed to align the program with federal law. The penalty would be $250 per employee for the first calendar year of noncompliance and $500 per employee for subsequent years.  

Rep. Travis Weaver (R-Pekin) raised concerns about the addition of fines, questioning their purpose.  

Cheng said the fine is used to ensure employers comply with the law but provide a retirement savings account and educate employees on their options.  

“People are 15 times more likely to save if they're offered an option at work, and it's through payroll deduction,” she said. “So, the state law is that if you are a covered employer and you're not already offering or contributing to a qualified plan, you have to do something in the way of a workplace retirement savings option.”  

Employees would continue to have the right to opt out of the program.  

Rep. Steven Reick (R-Woodstock) also questioned the five-person threshold and how data is collected on that. Cheng said employers with high turnover can appear to have more employees. Reick said these could mean small businesses who typically employ less than five people might get fined for not offering the retirement savings account.  

“I just think that the employee threshold is too low, far too low for small employers,” he said. “No matter what, you're going to end up spending money and time and resources complying with this act.”  

Reick also asked how the federal match would impact a person’s tax liability and if it would be refunded as part of a person’s tax refund. He asked if it would lower a person’s taxable income and potentially cause a double benefit by both giving a person the match and lowering the taxes they must pay.  

The measure passed the committee 8-4. It now goes to the House floor for a second reading but will likely return with an amendment to address the questions regarding the federal match.  

The committee also passed House Bill 1648, sponsored by Rep. Brad Stephens (R-Norridge), which would allow downstate firefighters to transfer part of their pension to associations or organizations they are part of in their capacity as firefighters, such as their union.  

The measure passed unanimously with little debate. It now goes to the House floor for a second reading.