College of Business: University of Illinois at Urbana-Champaign

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Higher Education in Illinois on the Brink


5/16/2012

The following letter appeared in the News Gazette Commentary section on Sunday, May 13th.

By Jeffrey Brown and Avijit Ghosh

As this legislative session enters its last month, discussions regarding the state’s public pension systems have taken center stage. A broad consensus is emerging that “something must be done” as part of a broader attempt to restore the long-term fiscal health of the state of Illinois. This is an issue in which all citizens of Illinois have an important stake.

Those of us in public higher education in Illinois should view pension reform as both an opportunity and a threat. The opportunity is to design a fiscally sustainable and modern pension system essential in creating a compensation package that will allow universities to compete effectively in the global market for academic talent. The threat is that too many of our elected officials view pension reform solely as a financial exercise. In doing so, they risk tearing down the very foundation of academic excellence in public higher education that has taken Illinois over a century to build.

Take the University of Illinois. At the core of its stature as one of the world’s premiere universities is its ability to attract and retain some of the best academic minds in the world. Over the decades they have come here not for rivers and mountains; but for the world class research and teaching environment and, yes, a reasonably competitive compensation package.

And the entire state benefits from the economic engine that these people power. They help train and educate the state’s citizens to become the workers, entrepreneurs and leaders of tomorrow.     They generate new technologies, spin off businesses, and help solve some of the most pressing problems of our day. They make Illinois a desirable place for businesses and individuals alike.

Unfortunately, this economic engine is at risk of stalling.  Fears about the viability of the pension system are causing many university employees to leave. Retirement applications to the pension system are double the normal rate. Highly valued faculty members are taking jobs out of state. And our ability to hire the next generation of academic talent is hindered by our inability to make credible commitments about higher education funding or the state’s willingness to make good on promised employee benefits.

The financial challenge facing the State is real and cannot be ignored. For many decades politicians took the short-sighted approach of borrowing from future generations to avoid having to balance the budget. Illinois taxpayers benefited from this borrowing, by receiving more public services than they were paying for.

But the time has come to pay the piper.  So we must find a fair, equitable and sustainable solution to our state’s fiscal crisis, and credible pension reform must be part of that solution. The burden of stabilizing our pensions must be shared broadly across all stakeholders—participants, retirees, the state and the taxpayers and the universities themselves. Each must play its part.

What is an appropriate way to share this burden?

First, any solution must start with the recognition that university employees do not earn Social Security benefits. This was a decision that the state made; not the employees. Were university employees to participate in Social Security, federal law would require the state to contribute 6.2% of pay towards this program. So we should view this level of contribution as the minimum state contribution towards the ongoing “normal cost” of the State Universities Retirement System (SURS).

Second, reform must respect the undeniable reality that university employees have diligently paid their share of the pension cost every single year since the inception of the SURS system. So the burden of making up past shortfalls—today’s “unfunded liability”—must be solely the state’s responsibility.

Third, both participants and their university employers need to accept a greater share of the costs of future benefits. But such changes must be modest in scope and phased-in slowly so as not to severely diminish the university’s ability to attract and retain world-class teachers, researchers and staff; and they should preserve promised benefits.

So far, the proposed reforms coming out of Springfield fail any reasonable test of fairness. Senate Bill 512, introduced last year, proposed doubling employee contributions, simply to maintain the benefits that they had already been promised. This would have clearly led to an exodus of top talent and our inability to replace them.   

More recently, Governor Quinn has suggested that future pay increases be disregarded in calculating retirement benefit of employees who remain in the current pension system. This means that retirement benefit for an employee who retires 20 years from now will be calculated based on what they earn today; yet they will continue to pay 8% of their salary every year to the retirement fund. The result again would be an exodus of talent from the universities.

The Governor has also proposed that the normal pension cost that the state pays annually be shifted entirely onto the universities.  Coming on the heels of steep declines in appropriations to universities over the past few decades, the negative consequences of such a shift are not hard to visualize – salary freezes, an exodus of top talent, and significant tuition increases.  The upward pressure on tuition will close the doors of higher education to many low- and middle-income families.

Furthermore, under the proposal politicians will continue to have complete control over designing the system while the universities and employees pay all the cost. This is a well-proven way to generate bad policy decisions in the future.     

Pension reform must not only address the needs of current employees but future ones too. A recent position paper published by the Institute of Government and Public Affairs proposed a “hybrid” pension system for new employees that has many attractive features. This plan would allow universities to compete for talent, improve pension funding, and reduce the fiscal burden on taxpayers.

What we need is a more holistic view of pension reform. Yes, we need to reduce long-run pension costs. Yes, we need to partially redistribute the financing burden. But, above all, we need to ensure that any reform has a continued commitment to maintaining the excellence of higher education in Illinois.  The long-run vitality of the state of Illinois depends on it.

Jeffrey Brown and Avijit Ghosh are professors in the College of Business at the University of Illinois at Urbana-Champaign.

UIUC College of Business