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New Illinois pension law threatens wave of retirements at U of I
Trustees direct president to pursue correction in law

April 18, 2014

CHICAGO, Ill. — University of Illinois officials say thousands of faculty and staff across its three campuses could retire by the end of June because of an unintended glitch in the state’s new pension law that would significantly reduce their monthly retirement benefits if they stay.

At a special meeting Friday, the University’s Board of Trustees directed President Robert Easter to work with the state’s other public universities and the legislature to amend the law and avert a wave of retirements that would diminish academic quality.

Officials say potential retirements could reduce the University’s workforce by more than 10 percent, including faculty who are the core of its standing as one of the world’s premier public research universities. About 5,700 employees are currently eligible for retirement, and about 60 to 70 percent of them could be affected by the discrepancy.

Large-scale retirements, they say, could affect the quality of academic programs, course offerings, class sizes, the time it takes students to graduate, and research funding that has grown to more than $1 billion and fosters innovation that fuels progress and economic growth.

“The unintended consequences of what is widely accepted as a drafting error in the law is causing irreparable harm to this institution that will ultimately cause irreparable harm to the state,” Easter said. “Our excellence is at risk, and we need to act quickly to assure faculty and staff that the retirement benefits they have earned will be preserved. Every day we wait, we lose a few more people.”

The problem stems from a drafting error in the new pension law involving a retirement benefit option known as “money purchase,” one of two pension options available to employees hired prior to Jan. 1, 2011, said Avijit Ghosh, a senior advisor to the president and business administration professor.

Those employees can retire under a traditional defined benefit plan, based on a percentage of their final salary for each year of service. Or, if greater, they can opt for money purchase, which creates a monthly annuity based on the pool of money that both employees and the state have contributed toward retirement and the interest it earns.

Ghosh said the new state pension law will reduce the interest rate used to calculate the annuity effective July 1 – from the 7.75 percent used by the State Universities Retirement System to a percentage pinned to U.S. Treasury rates that currently amounts to about 4.5 percent.

He said that change would have significantly reduced benefits. For example, an employee who would have received a $2,540 monthly annuity on June 30 would see benefits drop to $1,640 the next day when the new formula took effect – a 35 percent decrease.

So a clause was added to the new pension law that sought to guarantee that employees eligible to retire on June 30 would be locked in under the old formula, Ghosh said. Employees eligible for $2,540 on June 30 would have received that amount even if they retired months or years later.

But as currently drafted the monthly annuity is being set as the level on June 30, 2013, rather than June 30, 2014, Ghosh said. That eliminates a year of pension contributions, meaning the employee eligible for a $2,540 monthly annuity would receive $1,810, or about 28 percent less.

“Unless the language in the bill is corrected, faculty and staff have an incentive to retire on June 30, whether they want to or not,” he said. “They’d have to work another two to three years just to get back to the monthly benefit that they’ll get if they retire on June 30.”

Supplemental employment program options

Trustees also heard a report on the impact of pending changes in the state’s pension system and potential options to help preserve the competitiveness of employee benefits. The Board authorized the review in January, saying a competitive compensation plan is vital to recruit and retain top faculty and staff.

Ghosh said public pension funding changes approved by the legislature in December will put the University at a disadvantage by reducing cost-of-living increases, increasing retirement ages and capping pensionable salaries.

He said a survey also found that the U of I trails its peers in the Big Ten Conference in overall funding for employee retirement. Big Ten employees, on average, contribute nearly 11 percent of their salaries toward retirement, with a 15 percent contribution from their employer, or a total of 26 percent. Under the new pension law, total funding at the U of I will be about 15 percent, with 7 to 8 percent from employees and about 8 percent from their employer.

An option to make the U of I more competitive would increase both University and employee contributions through its 403(b) retirement savings plan, a tax-deferred program created in 1964 that is similar to 401(k) plans in the private sector.

Currently, employees can funnel money into the optional program, but there are no University contributions. Under the supplemental program being explored, the University would provide some level of contributions to employee 403(b) accounts and also encourage employee contributions through a matching program.

Trustees are expected to consider supplemental employment benefit options at a regular meeting later this year.         

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The University of Illinois is a world leader in research and discovery, the largest educational institution in the state with more than 78,000 students, more than 23,000 faculty and staff, and campuses in Urbana-Champaign, Chicago and Springfield. The U of I awards more than 20,000 undergraduate, graduate and professional degrees annually.