University seeks amendment to pension law

Twenty-dollar bill stuffed in a nest

The seven professors attending a special meeting of the University of Illinois Board of Trustees Friday represented different campuses and disciplines, but they all came with the same message: they are not ready to leave the university, but a provision of the state’s new pension law means if they don’t retire by June 30, they will face a substantial loss in monthly benefits.

“I don’t want to leave the University of Illinois. I love my career here,” said David Cahill, Willett professor and head of materials science and engineering at Urbana-Champaign.

The sudden wave of retirements resulting from an unexpected glitch in the pension law could affect planning for fall semester classes and bring a sudden drop in research funding as faculty take their grants to other universities, the researchers said.

“I really do fear for what this rule is going to do immediately and in the long term,” said UIC chemistry department head Luke Hanley, whose unit stands to lose several active researchers.

At the meeting, the board directed University President Bob Easter and other university officials to lobby legislators for an amendment to the pension law.

“We need to act quickly or it will be simply too late,” said board chair Christopher Kennedy, who urged the university’s alumni association, foundation and campus faculty senates to contact legislators.

About 60 to 70 percent of the approximately 5,700 employees throughout the university now eligible for retirement could be affected, said Avijit Ghosh, senior adviser to the president and business administration professor.

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 before Jan. 1, 2011, Ghosh said.

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, currently 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 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.”

The problem affects not only the U of I, but all Illinois public universities.

Doug Baker, president of Northern Illinois University, told trustees NIU could lose 20 percent of its workforce because of this provision.

“This will have a fiscal impact; it will impact our admissions, our morale and our community,” he said.

“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.”

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