Policy makers struggling to protect higher education appropriations may be surprised to learn this fact: The total cost of the State Universities Retirement System (SURS) in 2012 will exceed the amount of general funds appropriated to all other higher education agencies and institutions.

Years of overly generous pensions and delayed funding by the Illinois legislature have left the state with $86 billion in unfunded pension obligations. SURS alone has a $17 billion shortfall, and as these obligations come due in future years, higher education spending is likely to suffer.

In 2011, the state will spend $2.1 billion in general funds on Illinois’s state universities, community colleges, the Illinois Student Assistance Commission and the Illinois Board of Higher Education. These funds support the operating budgets of the higher learning institutions, as well as provide financial aid to Illinois students in postsecondary programs. Illinois community colleges and universities have experienced stagnant funding in recent years; it’s highly unlikely that funding for these agencies and schools will increase in 2012.

Meanwhile, SURS costs have nearly quadrupled since 2001, when the total cost was just $548 million. The most recent pension report issued by the Commission on Government Forecasting and Accountability shows that SURS pension costs reached $2 billion in 2011. There are three annual costs associated with SURS:

1. The annual “normal cost” of new benefits earned by employees during the current year;
2. The interest on SURS’ unfunded pension liabilities from past years; and
3. The repayments of bonds used in past years to generate cash for contributions to SURS.

State government must make its required, non-negotiable payments to bondholders. However, it often does not set aside enough money to cover annual normal costs and interest on funded debts – but that doesn’t mean the tab for those items won’t come due. Costs incurred in 2011 will have to be paid sometime.

This year alone, interest costs on SURS’ unfunded pension liabilities exceed $1.3 billion. A further $260 million must go toward repaying SURS’ share of the state’s pension obligation bonds issued in 2003 and 2010. Add to that the “normal cost” needed to cover the cost of new benefits earned by workers during 2011, and the year’s pension costs exceed $2 billion.

Consistent with the failure of the past decade, Illinois will shortchange SURS in 2011. This underfunding is done to free up short-term cash for existing programs including, paradoxically, higher education. But when the state can no longer short the pension fund of its annual costs, it will have to reduce funding from those existing programs. Under the most recent plan, the state government will contribute only $848 million. But make no mistake, the 2011 costs will have to be paid at some point. The remaining $900 million must come from future budgets.

State cash contributions to SURS are required to ramp-up significantly for the next 35 years in an attempt to reduce Illinois’s unfunded obligations. Next year, SURS’ total costs of $2.2 billion will almost certainly outstrip all non-pension higher ed appropriations – and the situation will only worsen.