Fiscal Sustainability AND Retirement Security: A Reform Proposal for the Illinois State Universities Retirement System (SURS)

Filed Under (Retirement Policy, U.S. Fiscal Policy) by Jeffrey Brown on Feb 9, 2012

I have released a paper today that proposes a new plan for the State Universities Retirement System.  Co-authored with Robert Rich, the Director of IGPA, the paper proposes a hybrid system that would be partially funded by both workers and universities. 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 January 1, 2011 would need to work for their pension benefit to be vested.

The plan is intended to substantially reduce state expenditures on public pensions, while still providing a reasonable source of secure retirement income to university employees. 

Click here to read the full paper.

Can University Endowment Investment Policies Threaten Your Job?

Filed Under (Finance, Other Topics) by Jeffrey Brown on Apr 21, 2010

Earlier this year, I made  a post (click here) in which I suggested that universities might wish to increase their spending out of endowments to help maintain, during an economic downturn, their investment in high-value projects (such as recruiting and retaining top faculty and staff).  Such an approach would be consistent with one possible view of endowments – that they are to serve as a buffer stock or an insurance policy against bad economic times.  Some of the comments I received – as well as a post (click here) by my colleague David Ikenberry – were less enamored of this idea. 

Now, I have research to indicate that most universities, in fact, do NOT behave this way.  Rather, it appears that when universities suffer negative shocks to their endowments, they actually reduce the rate of spending from their endowment beyond what would be implied by their own spending rules.  In essence, they do not use endowments to protect their universities from larger spending cuts.  Instead, they appear to act in a manner consistent with trying to preserve the value of the endowment for its own sake.

Our research goes on to show that following endowment shocks, universities respond by cutting staff – including maintenance workers and secretaries.  Less prestigious schools tend to reduce tenured and tenure track faculty (most likely by not replacing those who retire or leave), whereas more selective institutions tend to do more to  protect their tenure-system faculty.  The only group that is unaffected by the shock is “administrators.”

We also find that when an endowment invests more of its resources in alternative asset classes – things like private equity, hedge funds, timber, commodities, and the like – universities make even larger cuts following a negative endowment shock.  This could be for one of two possible reasons.  First, these alternative asset classes are more illiquid, and thus not easy to access during down markets.  Second, it may be that the reported value of these assets – which are much harder to value than, say, publicly traded stocks – are overstated, and the endowment knows it (or at least suspects it).

These results suggest that university faculty and staff have a clear stake in decisions about how endowments are invested and in the payout policies. 

If you would like to read more about this, I can refer you to the paper itself (click here) or to a write-up about the paper that appeared in “Inside Higher Ed” (click here).