UNDERSTANDING THE TRS 6% CAP:

A PRACTICAL GUIDE TO NEGOTIATING PENALTY-FREE COLLECTIVE BARGAINING AGREEMENTS

Presented by Robert E. Riley

Illinois Association of School Business Officials May 15, 2008 I. A RECAP OF THE TRS REFORM LEGISLATION

A. Revised ERO Contributions: Increased Cost to Employers and Employees

1. Employees who retire after June 30, 2005 who are not “pipelined,” with less than 35 years of TRS creditable service must make a one- time payment equal to 11.5% of their highest annual multiplied by each year that the employee’s age is less than 60 or for each year that the member’s creditable service is less than 35 years, whichever is the lesser.

2. Employers must pay 23.5% per year for each year that the employee is under age 60, up from 20% per year, under the prior ERO program.

3. For employees retiring with 34 years of service, both the employee and the employer will owe one year’s contribution at the new rates.

4. Active employees must begin paying an additional .4% per year over their mandated TRS contribution rate. If the employee retires without accessing ERO, these amounts will be rebated to the teacher.

B. Employer Contributions for End-of- Increases in Creditable Earnings in Excess of 6%

1. If the amount of the teacher’s compensation used to determine the final average salary (usually the final four years of ) exceeds the creditable earnings with the same employer for the previous year by more than 6%, then the employer shall pay to TRS the net present value of the increase in benefit resulting from the portion of increase in salary in excess of 6%.

NOTE: The following generally are creditable earnings for determining the teacher’s retirement annuity:

• Salary for regular contractual teaching duties;

• for homebound teaching;

• Earnings for extra duties;

• Earnings for summer school;

• Bonuses; 1

• Longevity stipends;

• Wages while using vacation, and personal days;

• Severance payments received or becoming due and payable to a member prior to or with the final regular paycheck or the last day of work;

• Cash payout in lieu of vacation (paid before retirement);

• Contributions to qualified plans eligible for tax deferral under IRS §§ 401(a), 403(b) and 457(b);

• Contributions to flexible benefit plans; and

• Any portion of the 9% member contribution – and the additional .4% required under the reform legislation.

2. Safe Harbored Contracts

TRS will safe harbor earnings in excess of 6% so long as the benefits are paid under a collective bargaining agreement, contract or district policy entered into, amended or renewed before June 1, 2005 and:

• The teacher retires within three years of the expiration of the collective bargaining agreement; and

• The teacher retires by June 30, 2011 (See Rule 1650.483(a)).

3. Earnings specifically removed from the 6% cap:

a. Any salary increases resulting from overload work, including summer school, when the school district has certified the TRS and TRS has approved the certification, and:

(1) The overload work is for the sole purpose of classroom instruction in excess of the standard number of classes for a full-time teacher in a school district during a school year; and

(2) The salary increases are equal to or less than the rate of pay for classroom instruction computed under the teacher’s current salary and work . 2

NOTE: For summer school earnings to be exempt the member must be a full-load teacher at the district and the salary increase must be earned for classroom instruction at a rate no greater than the teacher’s regular rate. This exemption does not apply to duties which do not require teacher certification, such as attendance at workshops or curriculum writing.

b. Any salary increase that results from a promotion:

(1) For which the employee is required to hold a certificate of supervisory endorsement issued by the State certification board that is a different certification or supervisory endorsement and is required for the teacher’s previous position; and

(2) To a position that has existed and been filled by a member for no less than one complete academic year and a salary increase from the promotion is an increase that results in an amount no greater than the lesser of the average salary paid for other similar positions in the district requiring the same certification or the amount stipulated in the collective bargaining agreement for a similar position requiring the same certification.

4. Any payment to the teacher from the State of Illinois or State Board of or for which the employer does not have discretion, notwithstanding that the payment is included in the computation of final average salary.

5. Any salary increase given on or after July 1, 2011 but before July 1, 2014 under a contract or collective bargaining agreement entered into, amended, or renewed on or after June 1, 2005, but before July 1, 2011.

6. Any changes in employment due to a consolidation or reorganization constitutes a “change in employer” thereby exempting a salary increase as a result of the consolidation/reorganization from the 6% .

7. Any salary increases paid to a teacher from a time when a teacher is ten or more years from retirement eligibility.

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C. Grants of Sick Leave in Excess of the “Normal Annual Allotment.”

1. TRS rules require a school district pay a financial penalty to TRS for sick leave days granted to teachers during a teacher’s final four (4) school years before retirement if these days exceed the teacher’s “normal annual sick leave allotment,” which TRS defines as:

The phrase “normal annual sick leave allotment” shall mean the amount of annual sick leave granted by a TRS employer to its teachers under a collective bargaining agreement or employment policies including any personal days which may be used as sick leave.

2. TRS rules provide for calculation of the employer penalty as follows:

The member’s highest salary rate reported by the granting employer during the four-year sick leave review X the total normal cost rate applicable to the last fiscal year of contributing services X the portion of sick leave service credit attributed to sick days in excess of the normal annual allotment granted by that specific employer equals employer’s contribution.

II. TRENDS IN NEGOTIATING END-OF-CAREER CREDITABLE EARNINGS INCREASES UNDER THE 6% CAP

A. Typical Union Negotiation Proposals

1. 6% Salary Payments for 4-Year Period Before Retirement:

This type of union proposal is designed to afford teacher-retirees the maximum creditable earnings increases they can receive during their final four school years prior to retirement without obligating the school district to pay a financial penalty payment to TRS for exceeding the 6% cap. Some union proposals extend the 6% annual compensation increases to a fifth or sixth year, arguing that the teacher’s significant advance notice of retirement assists the district in staff planning and the additional 6% salary enhancements do not violate the annual 6% statutory limit.

District negotiators should be careful to avoid several potential pitfalls in this type of union proposal. First, the union’s proposed language should be reviewed carefully to make sure that the district

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will not be obligated to pay teacher-retirees the 6% salary increases in addition to the teacher’s annual salary and step increase, and any extra-duty stipend payments or other payments considered creditable earnings by TRS.

Second, the District should recognize that any “front-end” compensation payments to teacher-retirees which exceed 6% per year in the fifth or sixth year prior to the teacher’s retirement could result in an employer penalty payment obligation if the teacher subsequently decides to retire before their indicated retirement date and completion of the four school years prior to retirement. This could occur for a variety of reasons, including the teacher’s disability, changes in personal circumstances, a spouse’s early retirement or other reasons.

2. Retain Existing 20% Salary “Kickers” Before Retirement:

Some union proposals seek to retain the existing retirement benefits provisions which often provide 20% per year salary increases pre-retirement. Some union proposals to retain an existing 20%-20% pre-retirement benefit include a provision that the teacher will be responsible for any employer financial penalty payments to TRS, with the supporting rationale that the 20% salary increases will increase the teacher’s retirement annuity and provide the teacher-retiree with greater overall retirement compensation to offset the cost of the TRS penalty payment. District negotiators should be wary of this type of proposal for several reasons:

a. The statutory 6% earnings cap legislation provides a legitimate rationale for the employer to reject continuation of any retirement benefits provisions which would require the employer to pay an employer penalty payment to TRS; and

b. TRS has consistently taken the position that teachers cannot be required to pay an employer’s one-time ERO penalty payment to TRS and, most likely, would disallow teacher- retirees from being held responsible for any employer penalty payments for exceeding the 6% annual earnings cap.

3. 20% Per Year Salary “Bump” Pre-Retirement With Payments in Excess of 6% Paid Post-Retirement (“Chopping up a Pre- Determined Benefit”):

Some union proposals seek to retain the 20% salary “bumps” in the existing teacher-retirement benefit plan, but postpone payment of

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salary payments in excess of 6% until after the teacher’s effective retirement date in an attempt to avoid non-compliance with the 6% annual earnings cap. The union’s rationale for this retirement proposal is that it enables the teacher-retiree to receive the same total amount of retirement benefits without obligating the district to pay financial penalty payments to TRS for exceeding the 6% annual earnings cap. Unions typically note that TRS guidelines generally provide that severance payments by an employer to a teacher-retiree which are paid after the teacher’s retirement date are not considered creditable earnings and, therefore, are not subject to the 6% annual earnings cap.

The TRS general counsel has advised, however, that TRS would treat this type of deferred retirement payment differently than post- retirement severance payments by considering the 14% per year deferred salary payments subject to the 6% annual earnings cap because they are considered “earned” (“constructively received” under Section 1650.450, Subtitle D) by the teacher before retirement. Based upon this TRS opinion, we recommend that districts reject union proposals to maintain existing 20% per year salary “bumps,” even if the salary payments in excess of 6% per year are deferred and paid post-retirement.

Distinguish: Lump sum, post-retirement payments based on years of service are not creditable earnings.

B. District Counterproposal Options

There are a number of counterproposal alternatives which school districts should consider in responding to union negotiation proposals on retirement. For example, the district may consider any of the following alternative counterproposals:

1. District Pre-retirement Benefit Options:

a. Delete existing retirement benefits entirely.

This option should be considered by school districts, particularly in situations where there are few eligible teacher- retirees who could retire during the term of the successor collective bargaining agreement. This response is also warranted if the predecessor collective bargaining agreement included a limited “window” for teachers to take advantage of existing retirement plan benefits, or included a “sunset” provision which eliminated retirement benefits as of a specified date.

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b. 6.0% per year creditable earnings increases for the teacher’s FAS years.

This type of Board counterproposal is acceptable, provided the proposed contract language is clear and specifies that the teacher will receive a retirement payment equal to the difference between the teacher’s annual creditable earnings increase (including any vertical or horizontal step increases, extra-duty stipends or other creditable earnings increases), and 6% per year for each school year which will count toward the teacher-retirees’ final average salary for TRS retirement purposes. The district should consider language to address contingency situations, such as the teacher’s rescission of their retirement notice after they have begun to receive the retirement payments, and the impact of the teacher’s retirement prior to their effective retirement date. The district should also consider whether or not teachers should be eligible for the retirement payments if they retire under ERO with insufficient years of TRS creditable service to avoid an employee and employer penalty payment to TRS.

2. District Post-Retirement Benefit Options:

a. Post-Retirement Severance Payments.

Districts should consider the option of granting teacher post- retirement service bonus payments as an alternative to pre- retirement salary augmentation or retirement bonus payments. Although post-retirement service bonus or severance payments are not considered creditable earnings under TRS guidelines and, therefore, do not increase the teacher’s retirement annuity, this type of employer service bonus payments (e.g., $500 for each year of district service) enable the district to recognize teachers’ lengthy and noteworthy service and act as an incentive to retain senior, experienced teachers. If the district decides to grant teachers a post-retirement service bonus, eligibility for the service bonus should be contingent upon the teacher’s retirement not resulting in the district’s responsibility for an employer ERO penalty payment or any other payment obligation to TRS.

b. Payments Toward Teacher-Retirees’ Premiums.

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School districts should consider providing a fixed monetary amount to reimburse teacher-retirees for the cost of TRS single or dependent health insurance coverage post- retirement. This type of monetary benefit for teacher-retirees is not considered creditable earnings under TRS guidelines and, therefore, the district’s payments are not subject to the 6% annual earnings cap. Any employer contributions for teacher-retirees health insurance should be contingent on the teacher’s participation in the TRS health insurance program, rather than continuation on the district’s health insurance plan. Most unions recognize the need for districts to encourage retirees to discontinue participation in the district’s health plan and take advantage of the alternative TRS health insurance plan.

C. Incentive or Benefit: Refining the Retirement Programs.

1. Limit end-of-career retirement enhancements to teachers who may retire without any ERO penalty.

• Note that under the old ERO, the district was permitted to limit access to the ERO benefits to no less than 30% of eligible employees. Under the reform legislation, however, an employer may limit the number of employees accessing the program to no less than 10% of those eligible.

2. Limit end-of-career increases to employees who agree to retire upon first becoming eligible without an ERO penalty.

This approach encourages employees to retire at the earliest possible date and thereby save the district high , which was the original rationale for providing statutory early retirement incentives.

D. Problems on the Horizon – Anticipating Potential Issues.

1. Consider a planning meeting provision.

Teachers may retire as early as age 55 and the district may wish to include in the collective bargaining agreement a provision which requires teachers who are age 50 or older to meet annually with a superintendent to review retirement benefits under the district’s contract and to verify their eligibility to retire. Development of a retirement form which shows the number of years of creditable service the teacher has in TRS, the years which may be available

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for purchase from TRS, and the number of unused sick leave days which might be countable toward service credit should be included. The provision should make clear that one purpose of the meeting is to structure compensation to avoid the 6% penalty.

2. End-of-career retirement benefits should be conditioned on submission by the teacher of an irrevocable letter of .

Frequently, unions are concerned that an employee confronted with a major life change after submitting an irrevocable letter of resignation should be given an opportunity to rescind the resignation. The district may wish to include in the contract a provision which allows the board, in its discretion, and on a non- precedential basis, to grant a teacher’s request in such circumstances.

3. 6% maximum earnings and extra duty income.

Teachers in the retirement window period may try to assume additional extra-curriculars or extra duties. Provisions should be included in the contract which make clear that teachers will not be permitted to assume additional extra-curriculars or extra duties if, by doing so, the teacher’s salary would exceed the 6% cap.

4. Pay raises in inflationary times.

With the advent of $3-a-gallon (and possibly $4-a-gallon) gasoline and increasing inflation, contract settlements may increase and normal step movement on the salary schedule may result in teachers in the retirement window earning more than 6%. This will be particularly true if the teacher, late in his or her career, changes lanes as well as moves on step. A possible solution is to develop a program which:

• Limits employees in the retirement window (over the age of 50 with 16 or more years of service credit) to no more than 6% pay increases.

• Waives this 6% cap for employees in the retirement window if the teacher executes an agreement providing that if the teacher resigns within the four-year window period and the board becomes subject to TRS penalties for earnings in excess of 6%, the teacher must repay to the board all amounts of creditable earnings in excess of 6% needed to avoid the penalties.

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• Calls for repayment to be made by salary withholdings to the extent possible (the Illinois Repayment Act requires that such agreements be reduced to writing) within 30 days after the teacher’s resignation. The excess salary must be repaid to the district for TRS to recognize the adjustment.

• Requires the teacher to cooperate with the district to prepare an amended report to TRS.

• Holds the teacher responsible for attorneys fees and costs stemming from breach of these obligations.

D. 2011 Through 2014 Earnings Window.

1. The 6% cap does not apply to increases in creditable earnings given on or after July 1, 2011 but before July 1, 2014 under a contract or collective bargaining agreement entered into, amended, or renewed on or after June 1, 2005 but before July 1, 2011.

Strategic concern: A three-year collective bargaining agreement commencing in the 2008-2009 school year and ending before June 30, 2011 would coincide with the window period, making it likely the district will receive a demand in the successor negotiations to incorporate 20% increases in the retirement program. A four-year deal, commencing in the 2008-2009 school year, would not end until June 30, 2012, thereby effectively foreclosing incorporating 20% increases into a retirement program.

III. Employer Sick Leave Day Grants

A. Typical Union Proposals.

1. Graduated or “sliding scale” sick leave allocations: Many union proposals seek to increase teachers’ annual sick leave allotments based upon the teachers’ seniority or service in the district. Unions often propose this type of “sliding scale” approach to sick leave allocations (e.g., 0-9 years – 15 days; 10-19 years – 20 days; 20+ years – 25 days). This approach allows teachers to take advantage of TRS rules which provide for employer penalty payments to TRS for sick leave grants to teachers in excess of the “member’s annual sick leave allotment.”

2. TRS rules specify that a teacher’s normal annual allotment is based upon the annual sick leave allocation provided in the collective bargaining agreement (including any personal leave days which, if 10

used, accumulate as sick leave). Some of the union proposals utilize the same rationale for increasing the number of annual personal leave days and accumulated personal leave days available to teachers as a basis to increase the teacher’s available paid leave days without subjecting the district to an employer penalty payment under TRS rules.

3. Unions also tend to seek unlimited maximum accumulation of sick leave days based upon the TRS rules changes in January, 2003, which increased the number of unused sick leave days (from 170 to 340) which can be converted to additional retirement service credit under TRS rules. Finally, many union proposals seek to reinstate unused sick leave days forfeited by teachers due to imposition of a lower maximum sick leave accumulation amount in a predecessor collective bargaining agreement.

B. Possible District Options and Counterproposals.

1. Although the unions’ rationale for the graduated or “sliding scale” increase in teachers’ annual sick leave allocation is commonly presented by the union as a “cost neutral” proposal, districts should recognize that the additional sick leave granted to senior teachers must be “available for use” under TRS rules and, therefore, a senior teacher’s use of such additional sick leave days will be an additional per diem cost to the district. In addition, a district’s grant of additional sick leave days to senior teachers cannot be designated and limited solely to use for retirement service credit purposes under TRS rules.

2. Moreover, the TRS rules implementing the ERO reform statute do not directly address this type of graduated or “sliding scale” grant of additional sick leave days based upon a teacher’s service to the district. Accordingly, it is conceivable that TRS may penalize employers for sick leave allocations to senior teachers which exceed the annual sick leave allocation granted to other district teachers.

IV. NOTES ON ADMINISTRATOR CONTRACTS.

A. Reimbursement for Unused Vacation Days.

Many administrator contracts provide that the administrator may sell back all or part of his or her unused vacation days on an annual basis or that the administrator may accumulate a certain number of vacation days and sell them back to the district at the prevailing wage rate prior to retirement.

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Such provisions almost guarantee that the 6% cap will be exceeded and the district will pay a significant penalty.

The district wishing to avoid such penalties should either limit the number of days which can be sold to the district or provide that payment for such days will be made more than 30 days after the last day of employment, making the days not creditable for TRS purposes.

B. Contributions to Qualified Salary Deferral Plans Are TRS Creditable Earnings.

Contributions to plans such as 401(a), 403(b) and 457(b) plans are creditable earnings and will be used for the purpose of determining the administrator’s retirement annuity.

C. Sick Leave Days for Administrators.

Unless the district’s policy establishes that sick leave is to be granted to all certified employees on a proportional basis, TRS will find that days granted to administrators in excess of those granted to teachers are beyond the “normal annual allotment.” If such excess days are given in the last 4 years of employment, an additional penalty will result. Possible options include:

• Developing a district policy making clear that certified employees earn sick days proportionally based on their work year. To develop such a policy the district should convert the teachers’ annual sick leave allotment into a monthly rate and incorporate the monthly rate into a policy. Of course, if the administrators earn sick leave beyond the proportional monthly rate, there will be an additional penalty.

• Granting an administrator additional sick leave days beyond the “normal annual allotment” more than 4 years before the administrator will be eligible to retire.

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Although the information contained herein is considered accurate, it is not, nor should it be construed to be legal advice. If you have an individual problem or incident that involves a topic covered in this document, please seek a legal opinion that is based upon the facts of your particular case. © 2007 Robbins, Schwartz, Nicholas, Lifton & Taylor, Ltd.

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SAMPLE PENALTIES USING TRS WEBSITE CALCULATOR

$80,000 BASE SALARY WITH FOUR YEARS OF 20% SALARY INCREASES

$80,000 BASE SALARY WITH SALARY INCREASES OF 4% - 4% - 20% - 20%

$90,000 BASE SALARY WITH 180 SICK DAYS GRANTED IN EXCESS OF “NORMAL ANNUAL ALLOTMENT”