Poshard explains pension reform

More money may be coming out of university employees’ pockets for pensions.

In his Feb. 22 budget address, Gov. Pat Quinn indicated a reformation of the state’s pension system is needed in order to reduce the $85 billion the state owes for pensions. SIU President Glenn Poshard expressed concerns over state, employer and employee roles Wednesday at a presentation on pension reform.

The Student Center Auditorium was filled when Poshard spoke about the causes, effects and possible solutions to the state pension problem. Part of the problem, Quinn explained in his address, is that while pension costs have grown drastically over recent years, the state has had to borrow money to make payments.

Poshard based his presentation on information from a study by the Institute of Government and Public Affairs at the University of Illinois, which states the goals of pension reform are to provide retirement security for employees, maintain financial sustainability for the system and to be constitutionally legal.

All university employees receive their pension benefits under the State Universities Retirement System. A reformed SURS system, Poshard said, must have secure and reliable funding sources, which could come from employees, the employer, SIU and the state.

“The burden of fixing the system has to be shared,” he said. “There is no easier way to fix it.”

As a part of the IGPA study, the group formed a proposal to reform SURS that contrasts with current proposed legislation and a 2010 change to pensions.

Recent Reform

Poshard said all employees hired before Jan. 1, 2011 are Tier 1 employees. Tier 2 employees are those hired after Jan. 1.

Some of the differences, Poshard said, are that Tier 1 employees may retire at age 55, while the normal retirement age for Tier 2 employees is 67. The employees’ benefits are also calculated differently. Tier 1 employees’ final salaries are calculated based on the highest of four consecutive years out of the previous 10 years. For Tier 2 employees, an average of the top eight years, instead of four, will be used, Poshard said.

Senate Bill 512

While the Tier system is already in place because of 2010 legislation, Poshard said Senate Bill 512 would have Tier 1 employees pay about 15 percent toward pension benefits, an increase from 8 percent.

After fiscal year 2013, he said, the estimated percentage could reach 17.31 percent.

He said under the bill’s current proposal, Tier 1 employees may continue to pay the same amount, but will receive less benefits.

For employees not interested in either option, Poshard said there is also an option for a self-managed plan. Under this proposal, employees would contribute the same amount as before, but they would not gain benefits after they switch.

Although the proposed legislation may cause a change in the cost, some employees are paying for their pension plans, Poshard said one productive outcome that could come from the bill is a stable pension-funding system.

“There is a significant value to having a pension program that is largely fully funded,” he said. “It gives employees a degree of certainty about their future pension.”

The bill may propose a way to help the state deficit for pensions, but the cost it places on employees, Chancellor Rita Cheng said, is too great.

“It’s concerning because it is not about shared sacrifice,” she said. “It puts too much of a burden on our employees.”

Cheng said nearly doubling the employees’ contribution would create a hardship for employees, as well as create a burden for SIU. She said she would prefer the proposed reform for pensions from IGPA over Bill 512.

IGPA Proposal

The IGPA proposal would ask employees to pay more. Under the plan, Poshard said, the “Normal Cost,” or the portion of the costs of the participant’s anticipated pension benefits, would be 20.5 percent. Of that amount, 11 percent would be the employee cost, 6.2 percent would be the state cost and 3.3 percent would be the university cost.

The money from the state, Poshard said, would come out of its state appropriations, so if the state makes future cuts to higher education, the university may struggle to pay its percentage.

“We’ll just have to do it,” he said. “If that’s what passes, that will mean certain things to all of us that work at the university.”

He said this plan is a way to solve the $85-million deficit.

The IGPA proposal would also reduce the percentage of contribution for which Tier 1 and Tier 2 employees’ final salaries are calculated  from 2.2 percent to 1.5 percent.

“This would generate a lot of cost savings for the state,” Poshard said.

He said participants and employers would both contribute the savings from that reduction to the “defined contribution plan,” a retirement plan where a certain amount of a percentage each month is set aside each year by the company for the benefit of the employee.

Employers, such as SIU, would contribute a 50-percent match on all employee contributions, up to 11 percent of their salary.

“This would substantially enhance the security of pension funding, since individual employers would have legally binding responsibility to make annual contribution, which will reduce annual pension costs for the state,” he said.

A reduction in costs to the state, he said, would help the state reduce its pension debt.

 

Source of the Problem

Representative Mike Bost emphasized the state is not the only contributor toward the pension problem.

“It’s been painted for years that all of the problems exist because of the shorting of the state (money),” he said.

Poshard said in his presentation that the sources of pension problems are underfunding, the effects of the recent recession and the fact that a growing cost for benefits has not been matched by the state.

Bost said although attempted legislative changes have failed, it’s only about one-third fiscally responsible for the problem.

“When the numbers are ran, they say that probably 33 percent of the problem in pension is because of the state,” he said.

Underfunding, Poshard said, has resulted from the state not contributing to SURS.  He said if it had contributed over recent years, SURS might not have 17.2 billion in unfunded liability, or 54.7 percent of the pension cost for SURS.

“This ranks Illinois 50th among 50 states when it comes to adequately financing public pension,” he said.

Although Bost said he would like to see pension reform pass this spring, he said because it is an election year, he doubts it will happen this legislative session.

 

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