The Pension Crisis at Public Universities

Benefits for retirees could ratchet up tuition costs.

The Southern Illinois University history professor Steve Hansen didn’t need an academic analysis 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 his university job to lock in his benefits before they could be watered down. So did 408 fellow employees of the university’s two campuses, and another 1,008 at The University of Illinois—twice the number who had left the year before.

Perhaps ironically, Hansen has since been called back to the university for a temporary position and is now dealing with budget and staffing issues from the other side: as the interim dean of its liberal-arts college while administrators search for a permanent replacement. Nationally, the retirement rate is on the rise in part because the population is aging.  But “we have started to lose faculty who normally would probably have stayed,” Hansen said. Along with the proposed budget cuts in Illinois this year—6.5 percent for higher education—the exodus of faculty and others from the university “has an obvious direct impact on the quality of instruction and the quality of education,” Hansen said, adding that an infusion of money is the only thing that can reverse the trend. “The obvious place to turn is higher tuition. It’s a terrible spiral.”

While massive state- and city-pension debts across the country have gotten anxious scrutiny from lawmakers and the public, their effect on public universities and colleges has gone largely unnoticed. But an independent board that oversees state and local accounting standards nationwide has recently put into effect new rules, requiring more disclosure of how much the government owes to universities’ retirees. And these requirements are likely to draw back the curtain on huge liabilities that could drag colleges’ balance sheets—which have been slowly improving since the recession—back into the red.

Experts warn that the pension problem could foil the institutions’ promises to contain their costs, and instead result in continued upswings in tuition despite the fewer courses, programs, and services offered—especially at public universities. It also partially explains why such institutions are increasingly turning toward adjuncts.

“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 aimed at removing barriers to higher education. “We’re funding benefits.”

The crisis in Illinois is in some ways extreme because of how drastically the state mismanaged its pension system. But the problem is playing out across the country. 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 benefits for current and future employees—raising the age at which a pension can begin to be collected, increasing employee contributions, and eliminating cost-of-living increases, for example—rarely can pensions be changed for people who’ve already retired. That means 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. And these schools 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, those colleges are now being required to chip in 50 percent of the annual cost. “Universities are worried about that [contingency],” said the Center For Studies in Higher Education’s James Hyatt, 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,” said Hyatt, who formerly served as UC Berkeley’s vice chancellor for budget and finance. “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 [that need to be met]. It’s an obligation ... If you don’t reduce costs in other areas or increase revenue from other sources, then it will affect the cost of education.” According to Moody’s predictions, retirement obligations, along with rising health-care costs, mean higher-education institutions will continue to see their expenses increase faster than the rate of inflation.

At the very least, universities stand to lose funding when states are forced to pay for pensions instead of funding other expenditures including higher education. “To the extent that pensions and health-care [costs] are increasing faster than everything else, that obviously means there’s going to be less left over for everything else,” said Robert Clark, an economics professor at North Carolina State University, who also studies pension issues.

And as states pay more for pensions and less for universities, students could be the ones who have to pony up. “That’s a logical conclusion,” said John Barnshaw, the 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 was approved by the University of California Board of Regents on the grounds that the money was needed solely to preserve the pensions of its 60,000 retirees, according to Lawrence McQuillan, the author of California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis. The increase was averted in May by a deal in which the state will pump $436 million into the pension fund over three years. That’s in addition to the $2.7 billion that the university system has borrowed since 2011 to help close the pension gap. That’s also on top of the 14 percent of payroll the university is putting into the account, which the school’s executive vice president, Nathan Brostrom, told the regents was “a huge drain on the campus and medical center operating budgets.”

But all of those allocations are far short of the annual $1 billion 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 for the rest of the workforce, where fewer than one in five Americans receives it, according to the Employee Benefit Research Institute. That’s compared to the 90 percent of universities that still offer it, according to the financial-services company TIAA-CREF; more than one in 10 institutions pays employees’ full premiums, and half share the cost with their retirees. (Unfunded liabilities for public-employee retiree health care amount to another $1 trillion nationwide, separate and apart from pension obligations, the State Budget Crisis Task Force estimates.)

Many public and private higher-education institutions are cutting back on their retiree health care, or eliminating it altogether. Michigan State cut the perk for new hires after calculating that, if left in place, it would be a $1 billion obligation that would double every 15 years through 2040, “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 sought to save money by adding deductibles for some services to its retiree health-care plan, among other changes, the faculty voted unanimously in protest against it. (Though the university made some concessions, the changes took effect anyway.)

Meanwhile, some universities took steps long before the pension crisis heightened. Around 2000, the University of Nebraska, for instance, determined that within 12 or 13 years, it would need its entire state-budget allocation 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 in which recipients, not the university, paid for much higher premiums. “We got truthful with people,” said David Lechner, the university’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. 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.”

This story was produced in collaboration with The Hechinger Report.

* This article originally stated that Steve Hansen is affiliated with the University of Illinois. We regret the error.