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Sick leave cash payouts: growing 'monster' liability at state universities

In 2004 Cedric Sanskrit, professor of obscure languages at "Southwest Illinois State University," will face a decision: When he retires that year he can receive a lump sum cash payment of $32,183.91 or he can have $661.50 per year added to his pension. It doesn't take a rocket scientist to make this choice. Sanskrit will be delighted to grab the dough; he will see this as recouping some of the money he didn't get over several years of poor raises. Southwest State will not be happy; it will have to find the money within its personal services funds. Sanskrit's colleagues will not be happy either; this will mean less money in the pool available for their raises. This problem stems from an earlier attempt to solve a very different problem.

Back in 1980 prison guard Joe Turnkey felt like going fishing, so he used an earned sick day what the heck, he had plenty of days saved up in case he ever really needed them. Joe got paid for the day, and his fellow guard Bill was asked to fill in via a double shift, for which he got overtime pay. Joe's day off cost the state more than twice his normal daily salary, and this sort of behavior across the entire state work force was supposedly costing the state a bundle.

At the same time Sanskrit's predecessor missed a day because he was sick. He did not take a sick day but had a colleague as a professional courtesy teach the class or had a secretary deliver a library assignment to his class, and he saved the sick day for a future serious illness or for additional retirement service credit. The retirement service credits are the years of service a state employee has accumulated that are used in the determination of the retirement annuity. The professor's absence didn't cost the state anything now, and the actual cost got lost in the future chaos of the State Universities Retirement System.

All that changed in 1983 with the enactment of Public Act 83-976: State Employees-Accumulated Sick Days-Service Credit. With that law sick leave policy now stipulates that at the time of employees' death, retirement or resignation the state will compensate them via a lump sum cash payout for one-half of their unused sick days accumulated since January 1, 1984. Compensation is based on an employee's daily rate at the time of termination. This was an obvious attempt to decrease the number of sick days used by state employees. Employees would be compensated at a higher future pay rate, so there would be an incentive to accumulate rather than to use sick days for non-illness situations.

Accrued sick leave liablity Illinois public universities as of June 30, 1989

University of Illinois            $29,900,000
Southern Illinois University     10,091,462
Northern Illinois University      7,121,582
Illinois State University           6,643,855
Western Illinois University       6,254,170
Eastern Illinois University        4,677,502
Northeastern Illinois University 3,789,751
Chicago State University         2,610,297
Governors State University       1,928,764
Sangamon State University       1,349,006

Total                        $74,366,389

The policy was aimed particularly at departments or agencies which are required to maintain a minimum daily staffing level. For them, costs saved by not hiring a replacement may outweigh the costs of the sick leave cash payouts at a later date. However, the policy was applied to all state employees, even those who would not have to be replaced if their jobs during short-term absences. The policy may have created a monster: It certainly did for the universities.

At present, retiring employees usually have two pools of unused sick leave: pre-1984 sick days and post-1983 sick days. They can use pre-1984 days only to purchase service credits in the retirement system. They have a choice with the post-1983 days: They can receive a lump sum cash payment for half the days and use the other half to purchase retirement service credits, or they can use all the post-1983 days for retirement service credits. Let's see how it works now and in the future. In Example I (see box) Sanskrit's predecessor joined the faculty in 1968 and retired in 1988. Under Option 1 the employee chose not to take the cash payout and instead used all his accumulated sick days to purchase service credits. Under Option 2 the employee would use half of the post-1983 days to receive a cash payout and the rest for retirement service credits.

By selecting Option 2 the employee trades off $220.50 in retirement benefits per year for a lump sum payout of $8,367.82. Even if taxes and the time value of money are considered the choice is still clear: The employee should rationally chose Option 2. He would have to live 38 years after his retirement to collect an amount equivalent to the cash payout. He would gladly accept this golden handshake. Unfortunately, the university had to cough up the money out of its salary line item which is already stretched to the limit.

Universities with a large number of retiring employees an already confronted with large cash payouts to them, which

42/August & September 1990/Illinois Issues

reduces the funds available for current and future employees' needs. It will get much worse.

Consider Sanskrit, making the same decision in 2004. The composition of sick days has changed because he has accumulated only post-1983 days, for a total of 327.75 days under the present policy. His institution allows a maximum of 300 days accumulation, limiting the employee's payout to 150 days.

Sanskrit selects Option 2, a lump sum payout that is 76 percent of his current salary versus an extra $661.50 in his yearly retirement benefits. The difference between the retirement annuity and cash payout makes the consideration of taxes and the time value of money irrelevant.

Example II illustrates the dramatic growth of cash payments in the future as employees accumulate more post-1983 days. The payout in Example II is conservative in that there was no change in salary level or in the maximum number of accumulated sick days. Both are always under review, and there have been suggestions for increasing the maximum number of sick days an employee can accumulate. The future unfunded liability will be much higher as either increases.

Example I
Sanskrit's Predecessor

Year entered: 1968
Year retired: 1988 Sick days accumulated
        Pre-1984: 187
        Post-1983: 78
        Total: 265
Nine-month salary: $42,000
Current daily rate for sick leave payout (monthly salary/21.75): $214.56

Option 1. No lump sum cash payout
Yearly retirement payout:
Option 2. Lump sum cash payout
Post-1983 sick leave cash payout: $8,367.82
Yearly retirement payout:

Example II
Cedric Sanskrit

Year entered: 1984
Year retired: 2004
Sick days accumulated
        Post-1983: 327.75
        Total: 300 (limit)
Nine-month salary: $42,000
Current daily rate for sick leave payout (monthly salary/ 21.75): $214.56

Option 1. No lump sum cash payout

Yearly retirement payout:
Option 2. Lump sum cash payout
Post-1983 sick leave cash payout: $32,183.91
Yearly retirement payout: $15,655.50

Proponents may argue that employees who have given years of service and retire should be given a bonus for long steadfast service, but the law also applies to employees who resign. It is possible for an employee to leave after three years at Southwest Illinois State University and collect a cash payout on one-half of his 60 accumulated sick days. At Sanskrit's daily rate the cash payout would be $6,436.80. With the dismal projected salary increases, professors in high demand areas may well leave the state universities, putting a further strain on available salary funds. A solution might be to allow the cash payout benefit to go into effect after 5 or 10 years of service. It has been six years since Public Act 83-976 was put into effect. The state must determine how effective the payout policy has been in reducing sick day usage and what the actual past and projected future costs will be. The cost of the policy may not outweigh the benefits at state universities where there are rarely any costs for substitute employees. The costs may not outweigh the benefits for other state agencies either.

There is no easily accessible information available on the actual yearly sick leave cash payouts for state universities. The actual past and projected future cash payouts from all fund sources at Western Illinois University in Macomb are shown in the graph. The projections are based on estimated faculty retirements and resignations and on fiscal year 1990 salary levels, but the projections may get worse if future salary increases are minimal. Public Act 83-976 has created an incentive for faculty members to leave the state university system: a sick leave payout bonus, just about right to cover moving costs.

The unfunded liability is growing rapidly across the state universities in Illinois, and the public may not be aware of how large the sick leave liability has grown in the last six years. The accrued sick leave liability of state universities as of June 30, 1989, is listed in the table. It should be noted that sick leave accumulation policy does differ among the different state university systems, but the sick leave liabilities are still significant at each university. Universities disclose the accrued sick leave liability in their annual financial reports, but in many cases it is reported in an aggregate under total compensated absences, vacation and sick leave liabilities. (When annual reports did not report the separate liability for accrued sick leave, universities provided the information in response to telephone queries.)

What is clear from this discussion is that the sick leave cash payout policy and its financial implications must be reanalyzed. If the policy is to continue, the funding of this ever growing expenditure must be done directly by the state. The universities cannot afford to continue funding this growing liability without negatively affecting the ability to fulfill their educational, research and service missions to the state.

The authors are all at Western Illinois University. Lucia E. Peek and Nancy E. Smith are associate professors of accountancy, and Charles C. Gilbert is associate director for institutional research and planning.

August & September 1990/Illinois Issues/43

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