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IGPA proposes six-step plan to reform pensions

March 14, 2013

SURS LogoAs Illinois’ public-employee pension liability soars toward $100 billion, a group of scholars that includes Northern Illinois University’s acting executive vice president Steven Cunningham, has developed a six-step proposal to stabilize pensions for employees of the state’s public colleges and universities.

The experts said the six steps can help the State Universities Retirement System (SURS) achieve financial stability while ensuring retirement security and honoring the constitutional guarantee against reducing employees’ already earned benefits. The proposal is contained in a white paper published on Wednesday, March 13 by the Institute of Government and Public Affairs (IGPA).

“The most important take-away is that we have constructed a sensible reform that we believe would be palatable to the employers, the employees, the retirees, the taxpayers, and the courts,” said Jeffrey R. Brown, the William G. Karnes professor of finance at the University of Illinois and a member of the IGPA faculty. “Our hope is that the General Assembly will see the wisdom of trying to do the same.”

The six steps are divided into three broader categories – reducing the normal cost and liabilities of the current defined benefit plan; how SURS pensions should be funded going forward; and reforming the so-called “Tier II” program instituted for employees hired after January 1, 2011.

The individual steps are outlined in detail in the paper, which is part of IGPA’s ongoing contribution to the dialogue on pension reform in Illinois. Generally, they would do the following:

    • Change the annual cost of living adjustment (COLA),
    • Change the value of the Effective Rate of Interest to eliminate what the authors say is a “hidden subsidy,”
    • Shift contributions to colleges and universities,
    • Increase employee contributions by an additional 2 percent,
    • Require the state to amortize the current SURS unfunded liability, and
    • Provide a new “hybrid” defined benefit/defined contribution plan for new employees.

Taken together the six steps will “significantly reduce SURS’ $19.3 billion unfunded liability as well as the annual cost of the pension system going forward,” the authors write. They challenge lawmakers to correct the state’s public pension problem, saying that each passing day without reform threatens the excellence of higher education at the 65 colleges and universities that are part of SURS.

Steve Cunningham

Steve Cunningham

“This six step proposal improves the financial stability of the system while balancing reasonable approaches toward cost containment, honoring constitutional guarantees, with strategies to stabilize pension plan funding and benefit security,” Cunningham said. “It allows universities like NIU to be competitive in the marketplace for attracting and retaining faculty and staff and provides a path to fair, equitable and feasible pension reform.”

In addition to Cunningham, Brown’s co-authors include U of I at Urbana-Champaign colleagues Avijit Ghosh and Scott Weisbenner, David Merriman of the University of Illinois at Chicago and IGPA.

“A key issue is that the needs of employers and employees in higher education are not the same as the needs of employers and employees covered by other systems,” Ghosh said. “We compete with public and private universities all over the world for the best faculty and staff. We need a retirement system that provides our public higher education institutions with the flexibility to compete in this environment.”