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Pensions vs. schools: Higher education

Pensions vs. schools: Higher education

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Published by: Illinois Policy Institute on Jan 06, 2012
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01/06/2012

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The problem
Higher education in Illinois is approaching afunding crisis. By scal year 2013, the state isset to appropriate more to public university pensions and other retirement costs than it will to support all other higher educationprograms. Illinois’ state pensions, whichrequire a signicant increase in state con-tributions in coming years, are set to drownout spending on core services. When statespending on higher education retirementssurpasses all other aid to public higher edu-cation institutions, education funding will beturned upside down.In November 2011, this problem was putinto focus when the State Universities Re-tirement System, or SURS, released updatedprojections of the state’s annual statutory pension contributions through 2045.
1
Thenumbers were adjusted after the pensionsystem made changes to their actuarial as-sumptions. The changes increased the state’sstatutory payment for scal year 2013 to$1.40 billion from the previous projectionof $1.06 billion.
 This nearly $350 millionjump in payments will almost certainlycause higher education retirement ex- penditures to eclipse other higher edu-cation support next year.
 As decades of scal irresponsibility catchup to Illinois’ budget, individual programs
 Amanda Grifn-Johnson
is a Senior Budget and Tax Policy Analyst with the Illinois Policy Institute.
College funding and tuition aid can’t compete with retirement spending 
   T  a  x   &    B  u   d  g  e  t
   B  r   i  e   f  
   J  a  n  u  a  r  y   4 ,   2   0   1   2
Source: Commission on Government Forecasting and Accountability, State Universi-ties Retirement System and Illinois Policy Institute calculations. Assumes 3 percent retiree health care spending growth. See appendix for more information.
Graphic 1. Projected higher education retirementspending vs. other higher education support
(Assumes total education spending grows at 1 percent annually)
 
Pensions vs. schools:
Higher education
 
Page 2 of 10
 will compete for funds. An expenditure that will cut into every area of state spending isthe increasing liabilities for state employeeretirements. To best understand how theseretirement expenditures will affect the state’sbudget, they should be tied to the relevantbudget areas where they are incurred. Thestate’s higher education budget, properly conceived, must include all the retirementexpenses paid by the state on behalf of employees of the public higher educationsystem. In addition to pension contribu-tions, the state must also pay for pensionobligation bond payments (POB) and retireehealth care. The annual pension bond andhealth care costs can be quite signicant, asGraphic 2 shows.
Source: Commission on Government Forecasting and Accountability, State Universities Retirement System and Illinois Policy Institute calcu-lations. Assumes retiree health care costs grow at 3 percent annually.
Graphic 2. Projected state higher educationretirement spending by expenditure
The nearly $350 million  jump in  payments will almost certainly cause higher education retirement expenditures to eclipse other higher education support next  year.
 
Page 3 of 10
In contrast to the steadily increasing retire-ment expenditures, it is unlikely that totalhigher education funding will signicantly increase in future years. Historical funding trends show that in recent years, other high-er education support has remained relatively stagnant (see Graphic 3). Retirement spending has already startedcrowding out higher education funding.Eighty cents out of every new state dollar forhigher education went to retirement spend-ing between 2005 and 2010 (see Graphic 4).But relief for public higher education insti-tutions won’t come soon. In fact, the situa-tion will only worsen.
Even though overall state education spending will grow,the amount allotted toclassrooms will be less and less as a percent of totaspending.
Source: Illinois State Budget Books, the Commission on Government Forecasting and Ac-countability, the Illinois Board of Higher Education and Illinois Policy Institute calculations.Source: Commission on Government Forecasting and Accountability, US Bureau of Economic Analysis and Illinois Policy Institute calculations.
Graphic 3. Non-retirement state spending onhigher education, nominal dollars(fiscal years 2004-2010)Graphic 4. Where new state dollars for highereducation were spent (fiscal years 2005-2010)
Retirement spending80%Other higher ed support20%

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