Fixing the future: Pensions
During the open discussion portion of a March 7, 2012, meeting on pension reform, Michael Peddle, assistant dean of academic administration, suggested the state start taxing all pensions in Illinois.
March 7, 2012
One man stood before a microphone, cleared his throat and faced a roomful of anxious NIU faculty and staff.
During Wednesday’s 90-minute meeting on pension reform, NIU President John Peters and Steve Cunningham, vice president of Human Resources and Compliance, sought to explain how Illinois’ government racked up $85 billion in unfunded liability and why NIU will see an estimated 200 to 400 faculty retirements this year.
“Welcome,” Cunningham said, stepping up to the microphone, “to the front line of pension reform.”
The System
All NIU faculty and staff are part of the State Universities Retirement System (SURS), which is one of five retirement systems used by the state.
According to the state constitution, Illinois’ government is obligated to pay benefits to those in the system – even if SURS goes bankrupt, as fear it will in the future. Distinguished Research Professor Sean Shesgreen, who is considering retiring this year, said he is not currently concerned but knows SURS is unstable.
“To date, SURS has the wherewithal to pay its obligations,” Shesgreen said. “There are some questions about its future.”
Cunningham said pension reform has become a national issue as states struggle to get out of debt and pay pensions.
Illinois is at the forefront of that issue – according to Cunningham and a report by the Institute of Government & Public Affairs (IGPA), Illinois ranks 50th out of 50 states when it comes to adequately financing public pensions.
Brain Drain
The effect of a changing pension system can be seen in several areas at NIU. Of great concern to Cunningham is how it will affect faculty.
In a normal year, 100 to 200 NIU staff members will retire. This year, Cunningham said that number has doubled, and he was told by SURS that the number of retirees statewide could be six to eight times what the system expected.
But the increase in retirements was not entirely unexpected. Cunningham said the university hired many employees in the ’70s and ’80s because of university-wide growth. The faculty hired then were expected to retire now as part of natural turnover.
However, Cunningham said, he thinks the uncertainty of the pension system has led to more retirements and will make recruitment of new employees more difficult.
“We are concerned,” Cunningham said. “It creates an environment where employees feel they have less incentive to stay. It affects our ability to recruit. Even in a poor economy, they have alternatives.”
Cunningham said recruitment of university employees is often competitive because professors and other staff members must have specialized skill sets. This increases their value, which means professors young and old have the opportunity to look elsewhere – like states with a more stable pension system.
Because SURS serves 65 public universities, community colleges and state agencies across Illinois, the entire state could soon see quality educators leaving for areas with better pension packages.
“Everyone is affected by the fact that there is extra uncertainty,” Shesgreen said. “Everyone in the system worries about the pension.”
Such an exodus of intellectuals is called a “brain drain.”
The Liability
Since 1967, the employer’s share of pension funding in Illinois has been assumed by the state. However, the state has not fulfilled its annual funding requirement for some time. In 2000, the state’s unfunded liability was estimated to be $15 billion. Now, Cunningham said it is around $85 billion.
“Decisions were made, budget after budget, to not pay or to underpay the normal cost,” Cunningham said.
According to a Powerpoint slide from the presentation, state funding lapses have historically resulted in the accrual of “extreme future unfunded liabilities.”
“The unfairness of the system, from my point of view, is that only SURS has been paying,” Shesgreen said.
If the annual payments of normal cost had been fulfilled, there would be no unfunded liability. Some feel there would be no need for pension reform if not for the government’s failure to meet its SURS funding requirement.
“It’s sad that this is called the Illinois pension crisis,” said Steve Mansfield, a College of DuPage annuitant and member of the States Universities Annuitant Association. “It’s the unfunded liability crisis. It’s not a pension crisis. There is nothing wrong with the pension system.”
Proposed Solutions
Currently, NIU is tracking about 20 legislative pieces that deal with pension reform in the state. Cunningham and Illinois State Representative Robert Pritchard said they believe pension reform will take place during the current session of the General Assembly.
“The problem is so big that it can’t be ignored or delayed,” Pritchard said. “That’s why I feel confident that there will be some changes in the programs that will make the pension system stable going into the future. Right now, there is risk that the pension system would run out of money, and I say that because the state is not able to make back payments that it is obligated to. What that means is that there wouldn’t be money to pay employees or retirees.”
Last year, Peters voiced his concerns about SB 512, a pension reform bill. Cunningham said SB 512 would have required employees to nearly double their annual contribution to SURS; currently, they contribute 8 percent of their pay. If SB 512 had been put into law, Cunningham said he thought it was likely employees would take their work elsewhere or, if eligible, elect to retire.
IGBA released its own proposal in February. Part of the proposal, which has been publicized and supported by Peters, includes the phased increase of employee contributions and the phased implementation of university contribution to SURS, and maintenance of the state as the residual contributor to the normal cost. This effectively means that employees, employers and the state would pay into SURS to ensure the system could provide for retirees.
“It’s a shared sacrifice,” Cunningham said. “It’s nothing near what SB 512 would have implemented.”
The end solution, Cunningham said, will probably be a hybrid between several different systems. IGPA’s proposal is a hybrid defined benefit (DB)/defined contribution (DC) system.
The proposal states, “The dominant form of retirement plan in the private sector in the U.S. today is a DC system plan (such as a 401(k)), but, importantly it is a DC system that is layered on top of a public-provided DB-system (social security). This mix of systems helps to balance the pros and cons of each system individually.”
According to the presentation, IGPA’s proposal would reduce the state’s contribution to the pension system by over $265 million per year.
Feedback
At the end of the meeting, Cunningham and Peters opened the floor to anyone who wanted to make a statement or ask a question. Some offered their opinion on what reforms should be enacted and expressed dissatisfaction with the government’s actions.
Michael Peddle, associate dean of Academic Administration, suggested the state start taxing all pensions in the state, including SURS and social security.
“We have all made our contributions, faithfully, forever,” said Ted Moen, coordinator of the office of external programs. “Yet every solution I see seems to be doubling our contribution, reducing our benefits – all the solutions impact us. And even if they double our contribution, what’s to say the state’s still going to underfund it? It doesn’t prevent them from doing it again.”
With Failure, There Is No Future
For all those who have paid into SURS and expect to use its benefits post-retirement, failure to reform is not an option.
Peters said one of the problems is that the public has suffered during the economic recession and has trouble identifying with professors.
“People are hurting out there,” Peters said. “And when people hurt, there’s not a lot of sympathy. They have respect, but not sympathy, for professors.”
Pritchard said that if reforms do not take place during this session of the General Assembly, SURS subscribers would suffer.
“I would come back talking about the individual: the retiree that has worked their life assuming they’re going to get a pension system,” Pritchard said. “And in the case of university employees, they do not have social security to back them up. They will have no pension if the system goes bankrupt.”