May 15, 2012

IGPA Has Alternative to Governor’s Plan

THE INSTITUTE of Government and Public Affairs at the University of Illinois has proposed a new hybrid retirement system for employees of public colleges and universities that would be partially funded by additional contributions from workers and the universities that employ them. See

THE PLAN concentrates on the State Universities Retirement System (SURS) and is designed to reduce the State government’s payments into the system by billions of dollars over time.

“PENSIONS REPRESENT an important component of the overall compensation package for university employees and is key for us recruiting top-notch individuals,” said Robert F. Rich, director of the Institute of Government and Public Affairs, who developed the proposal with Jeffrey R. Brown, an IGPA professor and the William G. Karnes Professor of Finance at the U of I’s Urbana-Champaign campus.

THE PLAN is intended to stimulate discussion among policymakers and legislators and is not intended to reflect the position of the University of Illinois, the authors said. Although the authors consulted with a large number of experts, they stress that the opinions expressed in the plan are their own. The full proposal can be found here. It contains several components that reflect some of the ideas that have been publicly discussed by State leaders in recent weeks.

THE PROPOSAL has four basic components: 1.) Create a new hybrid retirement system for new employees that would combine a scaled-down version of the existing SURS defined benefit plan with a new defined contribution plan that would include contributions from both employee and employer; 2.) Peg the SURS “Effective Rate of Interest” to market rates; 3.) Redistribute the SURS funding burden to include a modest increase in employee contributions and new direct contributions from universities, thereby reducing state government’s burden on state government; and 4.) Align pension vesting rules with the private sector, which would decrease the years new employees hired after Jan. 1, 2011, would need to work for their pension benefit to be vested.

THE PROPOSED reforms assume that all accrued benefits of current employees would remain unchanged up to the point reforms are implemented and that changing from an existing plan to the new hybrid plan would be voluntary for current employees.

"THIS PROPOSAL is designed to reduce costs by approximately as much as Senate Bill 512 (another drastic pension-cutting bill that has come up in the General Assembly from time to time), but in a manner that does a much better job of providing secure retirement benefits to employees,” Brown said. The proposed reforms to SURS reduce costs to State government, provide a better approach to sharing the funding burden, and provide a balanced and attractive approach to retirement security for employees, Brown and Rich said.

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