Professors pitch SURS pension reform ideas

By Jamey Dunn

As Gov. Pat Quinn and lawmakers say they want to reform the state’s pension systems, two university professors have presented a proposal to revamp the retirement system for the state’s higher education employees.

Jeffrey Brown, a finance professor at the University of Illinois Urbana-Champaign, and Robert Rich, director of the University of Illinois' Institute of Government and Public Affairs, created a proposal to reform the State University Retirement System (SURS). The plan was released by the Institute of Government and Public Affairs, with which Brown, a pension expert, also is affiliated. The authors said the proposal does not indicate any support from the university. The paper came with the disclaimer, “Any opinions expressed in this paper, as well as any errors, are those of the authors alone.” A call to the university for comment on the plan was not returned.

Rich and Brown looked at retirement plans in other states, as well as the private sector. Brown said they also consulted experts, academic studies, administrators and faculty when crafting their paper. When asked why he chose to tackle such a controversial topic, especially as a university employee who stands to collect SURS benefits someday, Brown said: “Why not? It’s an important issue. We’ve certainly never shied away from these kinds of things before in other contexts.”

The report contends that concerns over the state’s underfunded pension system threaten recruitment efforts at the state’s largest public university system. “Uncertainty about the viability of our public pension system is hurting the ability of public institutions to attract and retain employees. Universities — including our employer, the University of Illinois — compete in a global labor market in an effort to attract and retain many of the world’s leading scholars. The U of I’s ability to maintain its status as a world-class university hinges critically on its ability to make credible promises about employee compensation,” the paper says.

Rich said that he thinks it was important to present an alternative proposal to address what is shaping up to be one of the dominant debates of the spring legislative session. “The pension issue is one of the two most important budget issues facing Illinois; the other is Medicaid, of course. We felt that the debate in the last session of the General Assembly was dominated by Senate Bill 512, and there weren’t really alternatives on the table.” SB 512, sponsored by House Minority Leader Tom Cross, would require state employees to choose between paying substantially more for their current benefits, switching to the reduced Tier 2 benefit system that was approved for employees hired in 2011 and beyond or moving to a defined contributions plan much like a 401(k) account.

The report is critical of the Tier 2 pension plan, saying it is “widely viewed as inadequate.” The authors' plan proposes a so-called hybrid system for new employees, with the option for current employees to join voluntarily. They predict that many in Tier 2 would opt to move to such a hybrid plan.

Under the proposal, new employees could continue to receive defined benefits, but they would be reduced by about one-third. Those employees would also pay into a defined contribution plan, and employers would match contributions up to a capped percentage of employees’ salaries. The author’s say the hybrid plan would not cost more to the state than the current Tier 2 plan.

Brown said that while many argue that private sector employers have moved to defined contribution 401(k) plans, private sector employees still receive defined benefits through the Social Security system. “The SURS system is meant as a replacement for two different systems — the U.S. Social Security system and an employer-based retirement program. The dominant form of retirement plan in the private sector in the U.S. today is a [defined contribution] system plan (such as the 401(k)), but, importantly, it is a [defined contribution] system that is layered on top of a public-provided [defined benefits] system (Social Security). This mix of systems helps to balance the pros and cons of each system individually,” the paper says. The report says that a defined benefits plan allows for certainty because retirees would receive a set benefit that would continue until the end of their lives. However, it says including a defined contribution component “ensures full funding, provides participants with more control and allows individuals to tailor their investment options to match their lifestyle and risk preferences.”

The proposal calls for current employees to pay more for their benefits but recommends that the increase be phased in over time and total no more than an additional 3 percent of pay. University employees currently pay 8 percent of their salaries into SURS. “SB 512 would result in an immediate near-doubling of the contributions required by current [university] employees, a fact that would have substantial negative effects on our ability to attract and retain talented employees,” the plan says. The two professors agree with Quinn and House Speaker Michael Madigan that the university also should contribute to the retirement costs of its employees, but the authors said costs also should be phased in so they are not devastating to university budgets. The report said that the state should not be able to hand off the full costs of the pension system because lawmakers make decisions about pension benefits. It stressed that the state would be solely responsible for the existing pension liabilities.

“We realize that the extent of constitutional protection is controversial and open to some degree of interpretation. However, we believe that this very strong constitutional protection is important to take into account. Thus, we focus on reforms that change the system in ways that we believe may be constitutionally permissible,” the paper said.

However, labor leaders and some lawmakers say that the constitution bars the state from requiring workers to pay more for their benefits, and Brown and Rich’s report acknowledged that it may be a problem. “We recognize that there is some debate about the constitutionality of requiring additional pension contributions: On February 3, 2012, a lower court in Arizona (a state with a pension non-impairment clause like Illinois) published an opinion that public employees cannot be required to contribute more without additional benefits. Were a similar ruling to hold in Illinois, these costs would need to be reallocated among the state and the employers.”

The authors say they chose to focus on SURS and not the other state retirement systems because it was the one they know the best. However, Rich and Brown agree that their plan could be tweaked and applied to other retirement systems. Brown said he wanted to highlight the differences between SURS and the other systems. “I thought it was important to establish the fact that higher education in Illinois does have some unique needs. The university system competes in a much more globally competitive labor market than a lot of the other public pension systems do,” Brown said. He said that universities, unlike school districts, have no potential for raising tax revenues to handle the burden if the state decides to shift all or most of the SURS costs to them.

Both authors cautioned against lawmakers pulling pieces of their plan, which they say is a holistic approach, and discarding others. Brown said that any pension reform needs to address several goals, such as reducing costs, sharing funding burden and making sure that the benefits are attractive enough to recruit needed talent. “You’ve got to be careful not to treat this like a menu where you can take one little piece of it. On the other hand, we don’t expect that it’s all or nothing,” He adds, “If you only did one piece of it without addressing the other issues, you could create all kinds of problems.”

Rich said he hopes that some version of the plan will eventually be drafted into legislation and become part of the debate that is likely to occur soon in the General Assembly this session.

But so far, there is little feedback from legislative leaders and Quinn. Cross is still reviewing the plan. According to a prepared statement from Sara Wojcicki Jimenez, his spokeswoman, Cross “is open to looking more in depth at any ideas to reform our systems and is thankful when people and organizations bring them forward. Analyzing them just takes a little time.” Senate President John Cullerton, who has maintained that any changes to benefits for current workers are unconstitutional, has yet to read the plan. But Ronald Holmes, his spokesman, said in a written statement: “The Senate president is encouraged that the education community has stepped forward and offered ideas to begin tackling pension costs. He's looking forward to reading the report and hearing from other interested parties on how we can achieve a fair and constitutional remedy in the weeks ahead.” Quinn spokeswoman Brooke Anderson said in a prepared statement, "everything is on the table to strengthen and stabilize our pension system."

For a look at pension reforms in other states, see our three-part Illinois Issues blog series here, here and here.