I just wanted to note a possible alternative to the port expander is the MPR121 I2C Capacitive touch 12 input chip, with some pins that can also be programmed as GPIO connections (with tricky looking code) , it could do the encoder interface as well as handling a row of panel buttons.
1 board delivered for $2.33 (4 for $4.60)
These boards might be handy for a controller project, you can have 48 inputs using the 4 different I2C addresses available. Adafruit Writeup . . . Sparkfun
If it did prove reliable handling rotary encoders, you could have web interface selectable touch switch or digital input options on the remaining pins