June 23, 2013
By: Doug Finke
In March, the Institute for Government and Public Affairs at the University of Illinois published a paper outlining a plan to reform state university pensions.
At the time, the paper got scant notice. Most attention was focused on a House pension reform plan that unilaterally imposed pension changes and a competing Senate plan that gave workers a choice of benefit changes.
However, as a bi-partisan conference committee of state lawmakers tries to forge a pension reform compromise by July 9, the university plan is being touted as a possible model for reforming pension systems covering downstate teachers, state workers and lawmakers.
“It’s one of the things for the conference committee to look at,” said Senate President John Cullerton, D-Chicago, after a hearing last week on the university plan.
One of the conference committee members, Sen. Daniel Biss, D-Evanston, said, “The university plan has a really intriguing set of concepts that could well provide a path forward.”
Significantly, Cullerton and Biss favor different approaches to solving the pension problem, but both said the university plan merits a closer look.
The U of I approach includes a number of changes for workers and retirees, including higher contributions, a changed cost of living adjustment to benefits and creation of a new type of retirement plan. It also contains an enforcement mechanism to ensure the state makes its required payments.
Proponents said the State Universities Retirement System did an actuarial analysis of the plan and determined it saves just as much money in university pension costs as does the House pension reform plan. It also gets the university pension system to 100 percent funding by 2044.
Supporters said that about 80 percent of the savings in the university plan comes from the change in cost of living adjustments to retirement benefits. Currently, retirees receive an automatic, 3 percent compounded increase in benefits each year, regardless of the inflation rate.
“The biggest driver of the unfunded (pension) liability is the 3 percent COLA increase, which is not attached to any measure of inflation or deflation,” said Southern Illinois University President Glenn Poshard while testifying in favor of the plan.
Under the university plan, retirement COLAs will still compound, but will be limited to one half the rate of inflation. In other words, inflation would have to reach 6 percent for retirees to get the 3 percent increase they now receive.
Biss said the consumer price index today is about 1.4 percent. If the university plan were in place now, that would mean a 0.7 percent increase in pension benefits.
When long-term savings from the plan were computed, it assumed an average inflation rate of 2.7 percent. That would produce a 1.35 percent increase in retirement benefits.
At the same time, if inflation were to spike at a much higher rate, retirees would be in line for a larger increase in benefits. If inflation hit 10 percent, for example, retirement COLAs would be 5 percent. In nine of the 10 years from 1973 to 1982, inflation was higher than 6 percent.
Cullerton said the fact workers could get a higher COLA from the plan means it fits with his theory that workers must be offered “consideration” when changing pension benefits.
“It has an actual enhancement of some benefits at the same time there’s a diminishment of benefits,” Cullerton said.
But that also raised some concerns from Republican senators.
“I think we can all agree the compounding of the COLA has been the largest cost driver in the pension system,” said Sen. Matt Murphy, R-Palatine. “This bill retains the compounded COLA. There is the potential the central problem we have today could be doubled if we have an extended period of inflation.”
Sen. Don Harmon, D-Oak Park, noted that during periods of inflation, investment returns are often better, which would help offset the higher costs to the pension systems.
However, Sen. Dave Syverson, R-Rockford, he’s not sure that would necessarily be the case. He also said higher inflation would likely lead to a demand for higher wage increases.
Senate Minority Leader Christine Radogno, R-Lemont, suggested there should be a pension cap above which a COLA would not apply.
“Universities have some very high pensions,” she said. “To compound above a certain amount doesn’t make a lot of sense to me.”
2% in four years
The university plan calls for workers to contribute 2 percent more of their salaries toward their pensions. However, it spreads the increase over four years. The House pension plan also calls for a 2 percent increase, but does it over two years.
The university plan also creates a new retirement benefit for new employees that combines parts of the traditional defined benefit plan with parts of a 401(k)-style defined contribution plan. It gives workers more control over their retirement savings while also guaranteeing they will receive at least some pension benefit for rest of their lives.
Where the university plan goes from here is open to conjecture. An attorney for the We Are One Illinois coalition of public employee unions was unable to appear at the Executive Committee hearing last week to answer questions. Will Lovett, a lobbyist for the Illinois Education Association, told the committee the organization is still concentrating on passing the union-backed pension reform bill.
Harmon, the committee chairman, strongly urged the union representatives to familiarize themselves with details of the university reform plan.
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