PUBLICATIONS Inside Illinois Vol. 25, No. 11, Dec 1, 2005

Forum participants discuss pension changes

By Sharita Forrest, Assistant Editor
217-244-1072; slforres@uiuc.edu

The pension reforms enacted by the Illinois Legislature this fiscal year to balance the state budget may only defer the state’s financial problems rather than solve them, according to J. Fred Giertz, a faculty member in the Institute of Government and Public Affairs and former board member of the State Universities Retirement System.

Giertz was among the panelists who spoke during a forum about the pension changes held at the Illini Union on Nov. 15. The other speakers were Stephen J. Rugg, UI vice president of administration and comptroller; Mitchell Vogel, SURS retirement board president; Rep. Naomi Jakobsson; and Janette Weatherall, a lobbyist for the Illinois Education Association.

Under a new law, which took effect July 1, the state is reducing appropriations to SURS and its four other retirement systems by $1.2 billion each during FY06 and FY07 in hopes of diminishing the budget deficit, a move that would save a projected $30 billion over the next 40 years, according to Gov. Rod Blagojevich.

The new law eliminated the money-purchase formula as a means of calculating annuities for new hires after June 30, transferred responsibility for establishing the effective rate of interest for investments from the SURS board to State Comptroller Daniel Hynes, and made employing institutions responsible for funding end-of-career raises that exceed 6 percent. The law also placed a five-year sunset provision on new benefits and mandated that funding mechanisms be in place when establishing new benefit programs.

Under the new law, the state will reduce its contributions to SURS by $200 million in FY06 and nearly $180 million in FY07. Giertz said that to compensate for the “pension holiday” the state would have to increase its contributions by $600 million in 2008, $661 million in 2009 and $700 million in 2010.

“The fact is, we’re going to need a huge amount of money for our state pensions that simply isn’t there,” Giertz said. “Four years from now the state will have to contribute $2.4 billion more than it is currently contributing. So we’re basically facing another crisis that is embedded in this (law). The state is not going to be able to meet these demands unless it makes some changes,” such as across-the-board spending cuts and finding new sources of revenue.

Jakobsson disagreed, saying that the new law will help the plans achieve 90 percent solvency and positive cash flows of $1.9 billion in FY07 and $2.3 billion in FY08. The pension reform law was a compromise “that under the circumstances was the only feasible alternative” among the proposed changes that legislators considered for addressing the state deficit and curbing abuses of retirement benefits by some schools. Without the compromise, Jakobsson said she believed that legislators would have tried to amend the Illinois Constitution in order to reduce current employees’ pension benefits, which are guaranteed by the constitution.

Giertz said that pensions have become the “whipping boy” for the state’s fiscal imbalance and became under-funded only because the state used money that it should have used to match employees’ contributions to fund other programs. “The problem was not created by the pensions and should not be solved solely on the backs of the pensions,” Giertz said.

Hynes’ reducing the effective rate of interest on SURS accounts to 8 percent in FY06, versus the 8.5 percent set by the SURS board, ultimately could diminish a retiree’s pension by $100 a month or more, depending upon the person’s salary, Vogel said.

Giertz said that according to his calculations some recent retirees’ pensions would have been reduced by about 15 percent had they worked their entire careers under the revised pension program.

According to SURS’ current interpretation, the provision capping end-of-career raises at 6 percent would apply only to current employees who retire under the step formula – not the money-purchase formula, which has been used to determine annuities for approximately 60-90 percent of UI faculty members and a smaller number of staff members historically, Giertz said.

Approximately 60 people attended the forum. Dave Ward, a driver for the UI Housing Division, expressed concern that SURS had been changed into a two-tier system that will erode employee morale; other people said that the reduced pension benefits would hamper recruitment.

“This kind of smoke and mirrors, balancing the state budget off the backs of teachers and university professionals is probably the strongest argument for unionization,” said Stephen Kaufman, a professor of cell and structural biology. “Right now, I don’t feel any reason to have confidence that the administration is representing the worker.”

Rugg and Vogel urged faculty and staff members to contact them, state legislators, AAP and UPE representatives and other people with questions or concerns. Rugg also asked that people document negative effects of the new law, such as the loss of potential new hires.

The forum, sponsored by the Association of Academic Professionals and the Union of Professional Employees, was moderated by James R. Barrett, a professor of history and 22-year member of UPE’s executive committee.

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