NIU's President on Pension Funding Crisis

Author: John G. Peters, President, NIU
Title: Peters emails campus on pension funding crisis
Publication: NIU Today

Link: http://tinyurl.com/niupres
Date Published: April 23, 2012

NIU President John G. Peters emailed this important message to faculty, staff and annuitants earlier today.

Dear Colleagues,

Friday afternoon Governor Quinn outlined the framework of his plan to resolve the state’s pension funding crisis. Briefly, the Governor’s proposal provides for 100% funding for pension systems by 2042 by making the following changes to the current plan:

• 3% increase in employee contributions

• Reduce COLA (cost of living adjustment) to lesser of 3% or ½ of CPI, simple interest

• Delay COLA to earlier of age 67 or 5 years after retirement

• Increase retirement age to 67 (to be phased in over several years)

• Establish 30-year closed ARC (actuarially required contribution) funding schedule

• Public sector pensions limited to public sector employment

In return for the changes above, employee pay increases would continue to be counted in the calculation of their pension, and employees would receive a subsidy for their health care in retirement.

The Governor’s plan also calls for phasing-in the responsibility for paying normal costs of pensions to each employer, including school districts, community colleges and public universities.

So what does the Governor’s plan mean for our faculty and staff at NIU who have never missed a contribution to their pension plan?

While there is no doubt the state’s pension plans are in terrible financial shape, the root cause of this problem is NOT the fault of the state employees. Nor is it the fault of the taxpayers of the state of Illinois. The root cause lies in decades of state underfunding of required pension obligations while redirecting resources to other priorities. To resolve this funding crisis, shared sacrifice is necessary.

Public university presidents and chancellors have indicated a willingness to assist the state in developing a viable, long-term solution to the pension funding conundrum. The state’s most analytical thinkers on public pension funding have been at the table offering expertise and assistance to political leaders to resolve this issue and put the state on solid financial footing once again.

The Illinois Institute on Government and Public Affairs recently released a plan to address the SURS system funding deficits, which to most public university leaders is considered fair and requires shared sacrifice on the part of the employees, the employers and the state.

The Governor’s Pension Working Group proposal appears inconsistent with these standards.

Under the Governor’s plan, NIU employees would pay 3% more each year in pension contributions, moving from an 8% annual contribution to an 11% annual contribution. The annual cost-of-living adjustments for retirees would be diminished and reformulated, and the retirement age would eventually be raised to 67. This is just the direct financial impact on each individual employee.

In addition, NIU’s contribution as the “employer” under this plan, if current normal cost obligations were fully transferred to the university, would amount to $24 million annually. To put this in context, this represents over 27% of our annual operating appropriation from Springfield. If we were forced to absorb this cost all at once, it would require a 44% increase in tuition for students entering the university this fall. This is unacceptable.

Compounding this imbalance, Illinois public university employees are not eligible for social security benefits unless they have worked outside the public university system. Every private sector and many public sector employers in the state and nation must consistently contribute 6.2% of payroll to Social Security on behalf of each employee. Using this standard, at a minimum, the state must contribute 6.2% of payroll for its employees who are NOT eligible for social security, as this is what is required for employers whose employees remain eligible for social security.

Public universities do not have the ability to increase property taxes to pay for increased employer pension contributions. We need the state to maintain at a minimum a 6.2% contribution rate as part of the employer costs, and over time, with a carefully planned and phased approach, we will be able to absorb the remainder of the employer costs without damaging our universities through program eliminations, lay-offs or tuition increases for our students.

Up until 1967, public universities paid the employer contribution to the pension program for employees. In 1967, the State of Illinois took over this obligation. It has taken 45 years to result in the fiscal mess the state is now facing, and public universities need at least a fraction of that time to help the state fix the problems.

It’s very true there is no quick and simple solution to the long-standing underfunding of the pension system, and clearly the problem must be resolved very soon to ensure that the retirement program public employees were guaranteed remains financially viable. NIU will continue to advocate for a solution similar to that put forth by the IGPA for the SURS system. Make no mistake, this plan will result in increased employer contributions and probable higher employee contributions as well. But I believe it is a fair and equitable solution and one that upholds the Illinois Constitution.

In all likelihood, any pension reform plan approved in Springfield will be subject to a court challenge. While the courts may be the final arbiter, if the legislative and funding solutions are not crafted with extreme care and due-diligence, consider the financial implications to the state should the courts decide the solution the General Assembly approves falls short of the Constitutional standard. Not only would the state be virtually insolvent overnight, but the financial integrity of the pension programs could be poised for collapse as well. This must be avoided at all costs.

My message to Illinois’ elected leaders is simple: Yes, the pension funding crisis is real. It is serious. It must be resolved soon. People’s livelihoods and futures depend on the decisions made by our elected officials. Many have no social security safety net, as they are ineligible for social security benefits. These people have faithfully contributed every single paycheck to their pension plan. Many have served the people of this state honorably and diligently for decades. They deserve our very best efforts to create a fair, stable pension reform package that will provide stability during their retirement years. We believe that employees are willing to make some additional sacrifices to stabilize their earned benefits, as is NIU as an employer.

However, if these shared commitments are made, employees should not be forced to accept a choice of reduced benefits to ensure continuity of a pension funding plan that is already an obligation of the state.

Instead, any increase in employee contributions should specifically be dedicated to funding and retaining current plan benefits. In this way, any increase in employee or university contributions would still assist the state in establishing a long-term, stable funding plan. Otherwise, escalated retirement rates will threaten both the integrity of our universities, and the long term funding status of the pension system.

This is a humbling responsibility and one that should bow the shoulders of all of us who are leaders of this state. It is a time to come together as Illinoisans for the best interests of the State of Illinois. After all, each of us chose this great state in which to live, work and raise our children.

We at NIU remain focused and engaged so that our voice will be heard, and every effort will be made to keep you informed. I ask for your support in this most critical matter.

Sincerely,

John G. Peters
President

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