By Ted Schnell • BocaJump | Dec, 28, 2011
The Elgin City Council met Tuesday for one last time this year to make a change to city personnel policies in relation to a state law that seeks to rein in pension spiking, which can be used to artificially inflate an employee’s future pension payments.
Elgin Corporation Counsel Bill Cogley told the five City Council members present — John Prigge and Bob Gilliam were absent — that the state constitutionally cannot stop or reduce pension payments that have been inflated by a pension spike. Instead, lawmakers seeking to curb the practice simply set a benchmark that requires the municipality or other employer responsible for pension spiking to pay the difference in pension costs.
The new law and the related policy change he presented to the council, Cogley said, have no impact on people’s pension payments.
As a practical matter, Cogley said the new state law does not affect the city because the city does not engage in pension spiking. He said pension spiking typically occurs when an employer provides late-career pay raises to an employee to ensure the individual receives larger pension payouts than would be allowed otherwise. The pay spike pushes up the employee’s average salary for those final years; that average pay is used in calculating pension payments.
The statutory change kicks in when an employer raises a late-career employee’s pay by more than 6 percent or the consumer price index, whichever is larger, during the final years of employment, Cogley said. When that happens, he said, the employer becomes responsible for the increased pension payment the spike would trigger.
While Elgin does not engage in pension spiking, Cogley said the personnel policy change Is needed because there are other factors, although unlikely, that could serve to push an employee’s compensation above the 6 percent/CPI benchmark during the final year leading to retirement.
Those factors include payouts for accrued vacation or sick time in that final year, as well as step and other pay increases. Cogley said that as a practical matter, most Elgin employees peak out on step pay increases well before they retire. Still, if an employee receives a raise in the final year of employment, when combined with some of these other factors, it could push the employee’s pay above the 6 percent benchmark, which would require the city to contribute more to the pension fund.
The law pertains only to employees hired after the first of this year, Cogley said, but he said it includes a “safe harbor” provision that allows the city to protect itself from the potential of increased pension payment obligations. That safe harbor, he said, comes in the form of the policy change he presented to the council to ensure a retiring employee’s pay would not be increased beyond the 6 percent/CPI benchmark in that final year. Cogley said he believes the city’s liability under the new law is slim, but recommended the personnel policy change as precautionary.
The policy change he presented to the council pertains to more than 400 employees — or about two-thirds of the city’s employees — who are enrolled in the Illinois Municipal Retirement Fund. Excluded from the policy enacted Tuesday are police and firefighters, whose pensions are separate from the Illinois Municipal Retirement Fund.
The personnel policy amendment the council approved 5-0 essentially spells out those factors the city will not include in calculations for Illinois Municipal Retirement Fund pension payments. In other words, Cogley said, payouts for unused vacation time and sick leave would not count toward the employee’s final year of pay that is used to calculate Illinois Municipal Retirement Fund payments.
Cogley described the Illinois Municipal Retirement Fund as extremely well-funded, unlike state pension funds that have been in trouble in recent years, in part because of the legislature’s ability to declare pension holidays to divert funds to other uses. There are no pension holidays for the Illinois Municipal Retirement Fund. The statutory change is intended as one more layer of protection for that fund.
