Public Act No. 07-186 An Act Concerning adequate funding of the Teachers' Retirement System
The act authorizes enough state general obligation (GO) bonds to fund (1) $2 billion of the unfunded liability of the Teachers' Retirement System (TRS), (2) the cost of issuing the bonds, and (3) up to two years of interest on the bonds. It exempts the bonds from the state's debt limit. The maximum bond term is 30 years.
For each fiscal year in which the bonds are outstanding, the act automatically appropriates the actuarially required annual state contribution to the Teacher's Retirement Fund (TRF). It allows the state to reduce annual TRF contributions only if (1) it protects bondholders' rights in another way or (2) the governor declares an emergency or extraordinary circumstances, a supermajority of the legislature approves, and the reduction does not cause the TRF's funded ratio (assets versus liabilities) to fall below specified levels.
The act makes all TRS benefits contractual for all vested TRS members while the bonds are outstanding, thus barring the state from unilaterally reducing benefits during that time. Certain specified TRS benefits are already contractual for active teachers who were vested in the system on October 1, 2003 or who become vested or accumulate 10 years of credited service after that date.
The act eliminates the cost of living adjustment reserve account (CLARA) within the TRF and credits all CLARA's assets to the TRF. CLARA was used to fund annual cost of living adjustments (COLAs) for TRS members who retired on or after September 1, 1992 and their surviving beneficiaries. Under prior law, CLARA was funded by allocating to it any total annual TRF returns above 11.5%.
The act guarantees TRS members who retire on or after September 1, 1992 an annual COLA by eliminating a provision that barred TRS from paying them a COLA in any year that TRS actuaries determined CLARA did not have enough money to pay for it. The act also reduces promised retirement COLAs for members who join TRS on or after July 1, 2007.
Finally, the act automatically appropriates all the GO bond premiums the state receives from July 1, 2007 through June 30, 2009 for GO bond debt service in addition to budgeted debt service appropriations. Under the act, premium funds do not lapse at the end of those fiscal years and the treasurer can use them for debt service unless she determines they are no longer needed for that purpose. The treasurer usually deposits any bond premiums in the General Fund's debt service account. (A premium is an amount a bond purchaser pays for a bond that exceeds its face value. Buyers typically pay a premium to receive an above-market interest rate on a bond.)
This act was was signed by the Governor July 10, 2007.