End-of-Career Salary Cap Reduced to 3% in Budget Implementation Bill

Tucked inside the 763-page budget implementation bill adopted by the Illinois House today is a provision that imposes penalties on school districts entering into contracts and collective bargaining agreements that provide TRS members with end-of-career increases in excess of 3% per year. This reduces the current limit of 6% per year. The provision applies only to contracts or collective bargaining agreements entered into, amended, or renewed on or after the effective date of the legislation. However, given that the Senate already passed this bill and the effective date will be when the Governor signs the legislation, there may be a small window before the penalties go into effect.

There are multiple implications of this provision for employers to consider. The penalty applies if the amount of a TRS member’s salary for any school year used to determine the final average salary exceeds the prior year’s salary by more than 3%. If the salary increase exceeds the 3% limit, the employer must pay a penalty to TRS equal to the present value of the increase in benefits resulting from the portion of the salary increase in excess of 3%. Employers should also keep in mind that creditable earnings include more than salaries. They also include extracurricular pay, stipends, and contributions to tax-deferred retirement plans, among other payments. Finally, the average salary for Tier I employees is calculated using the four highest, consecutive annual salary rates within the last 10 years of creditable service. For Tier II members, the average salary is the average of the eight highest, consecutive annual salary rates within the last 10 years of creditable service.

Again, this legislation does not change the law for current employment contracts and collective bargaining agreements. Only new and modified contracts will incur the penalty. Therefore, employers should carefully review any new and modified contracts to ensure they are in compliance.