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Southern Illinois University* history professor Steve Hansen didn’t need an academic study to tell him his retirement income was at risk in a state struggling to narrow an estimated $111 billion shortfall in its public-employee pension fund.
So, in 2012, at 63, Hansen quit to lock in his benefits before they could be watered down. As did 408 fellow employees of the university’s two campuses, and another 1,008 at the University of Illinois system — twice the number who had left the year before.*
“We have started to lose faculty who normally would probably have stayed,” said Hansen, who has since been called back temporarily to face the budget and staffing issues from the other side: as interim dean of the college of arts and sciences during a search for a new permanent dean.
Along with proposed state budget cuts in Illinois this year of 6.5 percent for higher education, the exodus of faculty and others “has an obvious direct impact on the quality of instruction and the quality of education,” he said, adding that only an infusion of money can reverse it. “The obvious place to turn is higher tuition. It’s a terrible spiral.”
While massive state and city pension debts have gotten anxious scrutiny from lawmakers and the public, their effect on public universities and colleges has gone largely unnoticed. But new accounting rules just put into effect by an independent board overseeing state and local accounting standards nationwide, requiring more disclosure of how much is owed to universities’ retirees, are likely to draw back the curtain on huge liabilities that could drag slowly improving college and university balance sheets back into the red.
The pension problem could foil universities’ and colleges’ promises to contain their costs, experts warn, and instead result in continued upswings in tuition for fewer courses, programs, and services — especially at public universities.
“We’re no longer really funding students,” said Jane Wellman, a university financing expert and senior advisor to the College Futures Foundation, a California-based advocacy group that tries to remove barriers to higher education. “We’re funding benefits.”
Nor is the problem limited to Illinois. States are collectively on the hook for nearly $1.4 trillion in pension promises and retiree health care, according to the Pew Center on the States. Other estimates put the total debt at as much as $3 trillion. And while many states are scrambling to roll back those benefits for current and future employees — raising the age at which a pension can begin to be collected, increasing employee contributions, eliminating cost-of-living increases — pensions largely can’t be changed for people who have already retired, meaning there’s little that can be done about the costs already on the books.
Many of those retirees worked for universities and colleges. And while most fall under state pension plans, some are covered by their schools alone, which have similar troubles; the University of California Retirement Plan pension fund, for instance, has a shortfall of between $8 billion and $16 billion, depending on who’s making the estimate.
Even if their retirees are covered by state pension plans, many universities still have to contribute toward the cost — as much as 14 percent of their payrolls at Ohio University and the University of California system. And some observers speculate that states may eventually force universities to pay more toward unfunded pensions.
Some already have. In Texas, where the state previously paid the full employer pension contribution on behalf of its community colleges, the colleges are now being required to chip in 50 percent of the annual cost.
“Universities are worried about that,” said James Hyatt, associate director of the Center For Studies in Higher Education and former vice chancellor for budget and finance at the University of California, Berkeley, who is studying this issue. “They think the states will walk away from their obligations and the universities will have to solve the problem.”
In fact, the bond-rating agency Moody’s predicts “a high probability” that states will transfer more of the financial responsibility for pensions onto public universities.
The magnitude of this situation “hasn’t hit yet,” Hyatt said, “but with the changes in accounting rules, people are going to see an impact on the bottom line that will really make this a hotter topic. The pension costs are real costs. It’s an obligation. That’s a cost you have to meet. If you don’t reduce costs in other areas or increase revenue from other sources, then it will affect the cost of education.”
Retirement obligations, along with rising health care costs, mean colleges and universities will continue to see their expenses increase faster than the rate of inflation, Moody’s has predicted.
At the very least, universities stand to lose funding when states are forced to pay for pensions instead of contributing to services including higher education.
“To the extent that pensions and health care are increasing faster than everything else, that obviously means there’s going to be less left over for everything else,” said Robert Clark, a professor of economics at North Carolina State University’s Poole College of Management, who also studies this.
And as states pay more for pensions and less for universities, students may have to pay more.
“That’s a logical conclusion,” said John Barnshaw, senior higher education researcher at the American Association of University Professors. “You do have to raise revenue on some level, and tuition is where it’s coming from.”
A tuition increase of 25 percent over five years approved by the University of California Board of Regents was needed solely to preserve the pensions of its 60,000 retirees, according to Lawrence McQuillan, author of California Dreamin’: Resolving the Public Pension Crisis. The increase was averted in May by a deal under which the state pumped $436 million into the pension fund over three years.
That’s in addition to $2.7 billion that the university system has borrowed since 2011 to help close the pension gap, and the 14 percent of payroll the university is also putting into the account, which executive vice president Nathan Brostrom told the regents was “a huge drain on the campus and medical center operating budgets.”
But it’s far short of the $1 billion a year actuaries estimate is needed to make the pension fund solvent.
“It’s a massive bill they’re facing,” McQuillan said. “And this money’s got to come from somewhere. It either comes from tuition increases, or money from the state, or by diverting money out of other programs — more deferred maintenance, fewer slots for students. It’s going to show up one way or another. And if we don’t pay down this debt sooner rather than later it’s going to get pushed off onto future generations and future students and future parents of those students.”
Public and private universities and colleges alike are also contending with the cost of retiree health care — a benefit that has almost disappeared in the rest of the workforce, where fewer than one in five Americans receive it, according to the Employee Benefit Research Institute. But the financial services company TIAA-CREF says 90 percent of universities still offer it; more than one in 10 pays employees’ full premiums, and half share the cost with their retirees.
Unfunded liabilities for public-employee retiree health care come to another $1 trillion nationwide, separate and apart from pension obligations, the State Budget Crisis Task Force estimates.
Many public and private colleges and universities are cutting back on their retiree health care, or eliminating it altogether. Michigan State cut the perk for new hires after calculating that it came to a $1 billion obligation that would double every 15 years through 2040 if left in place, “increasing reliance on annual budget reductions and tuition income.”
But getting rid of benefits like these is tricky, and not only because they’re often part of union contracts. When Harvard last year added deductibles to its retiree healthcare plan for some services to save money, among other changes, the faculty voted unanimously in protest against it. (Though the university made some concessions, the changes took effect anyway.)
Some universities took steps long before the pension crisis heightened. The University of Nebraska, for instance, determined around 2000 that, within 12 or 13 years, its entire state budget allocation would be needed to pay for health benefits alone, with no money left over for anything else. So it split off its retiree health care into a separate plan with much higher premiums paid for by recipients, and not the university.
“We got truthful with people,” said David Lechner, Nebraska’s senior vice president for business and finance. “Whether it’s retirement or health care, it’s a set of promises we have to look at and decide, are we going to be able to keep those?”
Now, he said, with the new national accounting changes, “If you poke around on a few balance sheets, you’re going to see some really, really big numbers” where the pension and retiree health care shows up, Lechner said. For the first time, he said, “These obligations start to look a lot like debt. And that’s going to pull this more to the forefront.”
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*Correction: The university affiliation of Steve Hansen has been corrected in this story.