UI expert: Plan flawed, but it's better than nothing

UI expert: Plan flawed, but it's better than nothing

A University of Illinois pension expert says the new legislative plan to address the state's pension crisis is a mixed bag but worth supporting — if nothing else, in order to move the issue to a resolution in state courts.

Jeffrey R. Brown, a UI business professor who had co-authored an alternative proposal, said some aspects may prove to be unconstitutional — especially the plan to push back the retirement age by up to 5 years for workers age 45 and under.

"I think there are much better plans out there, and I'm really disappointed we didn't do this differently. But if it really came down to us doing this versus nothing, I would do this," Brown said Friday.

A memo was sent to lawmakers Friday detailing the plan, which would allow the state's pension systems to be fully funded by 2044.

As UI officials expected, the plan imposes a cap (currently $109,971) on how much salary can be used to calculate pension benefits, a move that could affect 2,000 UI employees. Salaries that currently exceed that cap (or raises already promised in a labor agreement) would be grandfathered in, but no future raises would count.

Cost-of-living increases for retiree payments would be based on years of service and the consumer price index. The new formula would essentially provide about $30 for every year of employment, or a maximum of $900 annually for a 30-year employee, UI officials said.

Current employees would also have to skip some cost-of-living raises in their first 10 years of retirement, depending on their age — one year for those age 50 or over, three years for those ages 47 to 49, four years for those ages 44 to 46, and five years for those ages 43 and under.

"It contains all the aspects we had been concerned about for some time now," said Avijit Ghosh, senior adviser to UI President Bob Easter, though he emphasized he hadn't conferred with Easter since details were released.

"Pension reform is essential, and we need to do it. But pension reform shouldn't fundamentally alter the expectations under which people have taken employment," Ghosh said.

Brown said it will hit some parts of the university harder than others. In the colleges of Medicine, Engineering and Business, where faculty tend to be paid more because of market-based salaries, "it adds up to a very substantial reduction in future benefits for existing employees."

"The university is going to have no choice but to find a way to at least partially make up for these reductions, or we are going to see an outflow of some of our very best faculty," he said.

However, Brown said, the plan also provides "substantial reform" that could make a significant dent in the state's fiscal problems.

"There's good and there's bad in this," he said. "This is going to save an awful lot of money."

The plan commits the state to a strict funding schedule and gives the retirement systems a legal way to enforce that, something Brown, Ghosh and other co-authors had proposed in their six-point pension plan.

"If this works, this is arguably the single most important part of the plan, because it will bind future legislatures to actually make good on the funding plan," Brown said. "I suspect the bond markets, among others, will view this very favorably."

Legislators also adopted their suggestion to set the effective interest rate on retirement plans at .75 percent above the Treasury rate, rather than a rate determined by the governing board.

Brown said extending the retirement age is "good policy" but fears that provision is the most likely to be found unconstitutional. For each year a member is under 46, the retirement age would be increased by four months (up to five years total).

The state constitution says pension benefits represent a contract that can't be diminished or impaired, but legal experts interpret that clause differently.

The strictest interpretation says the state can't change anything in the pension code that would cut benefits. A more reasonable interpretation, Brown said, would protect any benefits earned to date but allow future benefits to be altered. Even under that scenario, however, pushing back the retirement age effectively reduces benefits already accrued, he said.

The new pension plan would also allow up to 5 percent of employees to switch to a defined-contribution plan, freezing their benefits accrued to date under the defined-benefit plan.

Brown said he can "guarantee" that more than 5 percent will want to make the switch.

"It is going to be a political and administrative nightmare to see how they tell some people they can switch and others that they cannot," Brown said.

The State Universities Retirement System gives employees a choice when they're hired between a defined-benefit plan, in which they receive a set annuity payment each year after retirement; or a defined-contribution plan, similar to a 401(k), in which employees manage their investments through companies that contract with the state (currently Fidelity and TIAA-CREF).

The reform plan does not appear to affect those in the self-managed plan, he said.

Brown, a trustee for TIAA-CREF, opted for the self-managed plan, "a decision that's looking better every day," he said.

Employee contributions would also drop from 8 percent of their pay to 7 percent, a move seen as a trade-off to help the plan pass a constitutional test.

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Sid Saltfork wrote on November 30, 2013 at 8:11 am

Academics in other fields giving a legal opinion, worrying about the "outflow" of faculty, and the how the theft impacts the higher paid on campus.  Nothing was mentioned about how the theft impacts a retired Building Service Worker, or Cook who made much, much less in their working career.  If I need an electrician, do I call a business professor?  I am sure that I could get one to give an opinion; but I would need an electrician to fix the problem.

Pension reform in the current version is just plain theft.  The four area legislators know it.  The retired state, and university employees know it.  The retired teachers know it.  The public who have been following the story know it is theft.  For every one dollar stolen from the retirees, one dollar will be spent.  Illinois has a spending problem; and Illinois has a corruption problem in both political parties.  The academics did not march, or do anything except acquiesce with the theft.  They even assisted with their own plans which were not chosen.  Another "UI expert" helping out?

kiel wrote on November 30, 2013 at 8:11 am

I think a lot of very good UIUC faculty members will be -- or already are -- looking around for positions at other universities. And hiring has definitely been hurt by the chronic mismanagement of the pension and other state finances. 

Sid Saltfork wrote on November 30, 2013 at 9:11 am

Yes; and there will be many state employees, and other university employees leaving key positions also.  It will impact future hires also.  Who in their right mind would accept a job in public service after seeing this?  Accountants, forensic technicians, and IT staff will eventually have to be contracted out which will assist "campaign donations", and raise costs.  Staff levels are low now in state agencies.  Instead of "take a number, and wait until it is called", it will be "wait until we have someone who knows how to do this, and cares enough about you to do it".

The hypocrisy of all of this is that ADM will get it's tax break approved by the General Assembly, and Mr. Fuddles after the theft.

Lostinspace wrote on November 30, 2013 at 11:11 am

It will encourage the administration to juggle the books in order to recruit and retain "essential" personnel (including administrators), the way it does now with off-the-books, tax-free "research accounts" (love to see those figures).

Local Yocal wrote on November 30, 2013 at 1:11 pm
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Is there any concern for this "process?" 4 people go into a backroom and hammer out a "deal" and the legislature will sign off on it because "the leadership" has recommended it? What is this, because the party leaders have control of the campaign cash, (which was donated by who?), the rank and file in the Senate and House "must" vote for what the party bosses want so they can have campaign cash later?

Sid Saltfork wrote on November 30, 2013 at 1:11 pm

Senator Christine Radogno made the announcement of the "deal" just after addressing the Chicago Civic Club.  Passing this theft right before Christmas insures that big "campaign donations" will be presents to the corrupt Illinois politicians from the corporate Santas.  Madigan controls the cash flow for the corrupt Democratic candidates.  The same applies for the Republicans from their counterpart.  They will do anything for money just like the World's Oldest Profession. 

How much does it take to get my dog recognized as Honorary Governor of the Day?

Local Yocal wrote on November 30, 2013 at 3:11 pm
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Be nice to Emperor Madigan and your dog will qualify for a 6-figure, lifetime pension for his day in office.

http://articles.chicagotribune.com/2012-02-26/news/ct-met-kass-0226-2012...

 

Sid Saltfork wrote on November 30, 2013 at 4:11 pm

My dog could do just as good of a job as Mr. Fuddles (the incompetent Quinn).

In regard to Madigan; he has been in office for over 30 years, and participated in the skipping of employer pension contributions.  His law firm has made beaucoup bucks defending tax dodgers over issues that Madigan pushed through the legislature.  It is the ultimate conflict of interests.  He is an equal opportunity crook pandering to the corrupt legislators, and governors of both parties.  In the future, nothing will grow on his grave thanks to the thousands of public service retirees seeking relief from a basic need.  Might as well bury him behind a state rest stop.

Local Yocal wrote on November 30, 2013 at 7:11 pm
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43 years Madigan has been speaker. And it's rather disingenuous of Frerichs, Jakobsson, Prussing, and H. Saitherwaitte or any Democrat to complain about the Emperor of Illinois since they voted FOR him to be speaker. Add up all the money His Majesty has sent to this district for the electoral races and the political advertising paid to WDWS and The News-Gazette, and a certain Media Foundation has to be pleased by His Highness' reign.

Sid Saltfork wrote on December 01, 2013 at 9:12 am

Regarding "pension reform"; I have to stand up for Frerichs, Rose, Jakobsson, and even Hays.  They so far have stood up against Madigan, and Cullerton.  Their votes this month will tell whether they opposed the theft, or supported it.  Either "no", or "yes" with no hedging by not voting.  I have faith that they will continue to do the right thing.

Bulldogmojo wrote on December 02, 2013 at 10:12 am

I thought the "Plan" was to honor the state constitution?

I'm glad I got into the self managed plan with Tiaa-Cref when it became available back in the 90's

IGPA's "Town Hall" on Pensions 3-5-2012 not exactly a wealth of answers

http://flash.atlas.illinois.edu/video.html?player=FLOW&src=ocA_vixEykiAU...

Sid Saltfork wrote on December 02, 2013 at 4:12 pm

Unfortunately, it was not available to most of us.  I noticed that only 5% of the current employees being effected by this theft will be allowed to enter a 401k type plan.  That leaves the other 95%, and the retirees still at the mercy of the politicians when the next cut comes.  There will be more cuts in the future until they have their hands on the pension systems balances.  

ADM will get it's tax welfare after the pension theft is completed.