Friday, March 9, 2012

Panel on Pension Policy for SURS Participants

Author: The State Universities Annuitants Association (SUAA)
Title: SUAA Mini Briefing
Publication: SUAA Website
Date: March 9, 2012

The IGPA (Institute of Government & Public Affairs) presented a proposal for a hybrid retirement system for employees of public universities and community colleges at open forums held on the three University of Illinois campuses.

Panel members included: Robert Rich, Director of the IGPA; James Paul, Assistant Director of the IGPA; Fred Giertz, Professor of Economics at UIUC and SURS Board Member; Avijit Ghosh, Special Assistant to the President at UIUC; Kappy Laing, Executive Director, University of Illinois Office of Government Relations; William Mabe, Executive Director, State Universities Retirement System; and in Chicago and Urbana, Jeffrey Brown, Director of the Center for Business and Public Policy at UIUC.

In his 2013 Budget Address on February 22nd, Governor Pat Quinn appointed a Pension Working Group and called for input from stakeholders in the ongoing search for a sustainable pension system for the State of Illinois. The IGPA met that challenge by first rejecting SB 512 out of hand as “punitive” and offering a model pension plan of “shared sacrifice.”

There are four key elements to the IGPA proposal. They are brought together in a mixing of defined benefits and defined contributions that would apply to all new employees and all Tier II employees.

First, the IGPA hybrid plan reduces the defined benefit by about a third – from about 2.2% per year of service to 1.5% per year of service. Money to pay retirement benefits would be derived from a defined contribution plan that increases the contributions from employees, requires contributions from the public universities and community colleges that employ them, and contains safeguards that ensure the State pays its portion.

Second, the IGPA proposal would peg the Effective Rate of Interest guaranteed by pension investments to levels paid at market rates (an estimated 2%).

Next, the IGPA calls for a re-distribution of the funding burden. The State’s contribution would be no less than what it would have to pay if State Employees were a part of the Social Security System or 6.2%. Employees’ contributions would rise from 8% to 11.5% of the normal pension costs. Then, for the first time in the recent past, public universities and community colleges would contribute up to 2.25%. Increases to employee and employer contribution would be phased in at no more than 1% per year.

This proposal does not increase the State’s costs, but the State would be required to pay a minimum of 6.2% annually with no possibility of a “payment holiday.” This is approximately 50% of the State’s current funding level and would save the State of Illinois $240 million over time. However that money would be earmarked to cover the unfunded pension liabilities of years past.

The fourth and final element of the IGPA proposal aligns the vesting schedule more with private business. Current Tier II employees are fully vested in the system at 10 years. If they leave the system prior to 10 years of employment, they lose their contributions and have no Social Security benefits accrued for that time. The IGPA proposes that employee vesting be phased in over a 2-6 year period in a step system so that the employee would be fully vested at 6 years.

The IGPA Pension Proposal is just one of the pension initiatives on the table. Governor Quinn called for the Pension Working Group’s recommendations to be on his desk by April 14th.

The prospects for a vote in either the House or the Senate will likely be delayed until after the November election. As Kappy Laing pointed out, 9 Representatives and 6 Senators are not seeking reelection. Re-districting has left many more seats contested. The election results will create a sizable number of lame duck legislators who will be more likely to make the tough call when it comes to pension legislation.

Likening Illinois’s pension dilemma with challenges face by Social Security, Jeffrey Brown paraphrased former Chairman of the Federal Reserve Board Alan Greenspan, “There are only 3 solutions to this problem. Somebody has to pay more. Somebody has to get less. Or we must find a way to repeal the Laws of Arithmetic.”

You can click to view the webcasts below:

UIUC Webcast
UIC Webcast
UIS Webcast

The UIC webcast, power point slides, the full IGPA report and IGPA Pension Proposal are available at:

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