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.