UI officials have concerns about new pension deal
URBANA — Scarce details about the state pension deal announced by legislative leaders Wednesday added to the anxiety that has been building for weeks at the University of Illinois about pension negotiations.
Legislative leaders said they had agreed on a proposal to address the $100 billion pension problem. But few specifics were released.
UI President Bob Easter and faculty leaders had expressed concerns in recent days about components rumored to be part of an impending pension deal, including a lower cap on how much of an employee's salary can be used to calculate pension benefits. UI officials had said that could reduce future pension payments for about 2,000 employees by as much as 50 percent, which Easter called "very troubling."
It was unclear Wednesday if that's part of the final package to be voted on next week.
UI spokesman Tom Hardy said the university had no details on the agreement, but the components reported Wednesday and the possible salary cap aren't new concepts. They had been part of discussions over the summer and fall on the pension system's $100 million unfunded liability — the difference between what is owed to retirees and the money available in the three major pension systems for teachers, state workers and public university employees.
"They're things that have always given us concern and certainly would do so if they wind up in a final proposal," Hardy said. "They are the things that go to the heart of public universities' concerns ... about our ability to recruit and retain talented faculty and staff and other employees in a national and international employment market."
UI finance Professor Jeffrey Brown, a Social Security expert who has been closely following pension developments, was "pleasantly surprised" that the new cost-of-living proposal was linked to inflation, though he said much would depend on whether the increases would be capped. "I hope not, as it saves the state little money to do so and yet exposes retirees to substantial risk."
Increasing the retirement age is "very good policy" and the first place to look for savings, said Brown, who co-authored an alternative pension reform proposal through the UI's Institute of Government and Public Affairs. But it likely wouldn't survive a constitutional challenge, he said.
The proposed salary cap discussed earlier would have applied pension benefits only to salaries up to the Social Security earnings limit, now at $113,700 — less than half of the current 2013 Internal Revenue Service earnings limit of $255,000. Pension benefits are based on an employee's years of employment and average final salary up to that cap.
About 2,000 faculty at the UI's three campuses earn more than $113,700, said Avijit Ghosh, senior adviser to Easter.
Employees would keep pension benefits earned to date, but that provision would disregard future salary increases when calculating benefits for those above the Social Security earnings limit, Brown said.
So a 40-year-old engineering professor with 25 years left in her career would see her annuity cut by nearly 50 percent when she retired, assuming a 3 percent annual salary increase, Brown said.
Illinois public employees are not covered by Social Security, so "these provisions would decimate their retirement security," Brown said.
"This is an excellent recipe for our faculty to flee or stay and become dead wood" with no incentive to be productive, said Professor Joyce Tolliver, a member of the University Senates Conference, which was briefed by Easter last week.
To make up some of those lost benefits, the university is considering a supplemental retirement package similar to a 401(k) plan, under which employees contribute a set amount of their pretax earnings to a retirement account. Ghosh said the simplest solution would be to expand a similar plan already in place for UI employees, but with a matching contribution from the university. How the university would fund that is still under study.
One lawmaker said the new state pension deal includes a defined-contribution plan, but no details were released. Brown said that news was encouraging.
In a mass email Tuesday warning employees about possible changes to the pension system, Easter said the new plan might also reduce employee contributions toward their retirement, from the current 8 percent of earnings to 7 percent. But that wouldn't offset the higher costs to employees from other changes, UI officials said.