Minutes of the
NIU Board of Trustees
ACADEMIC AFFAIRS,
STUDENT AFFAIRS AND PERSONNEL COMMITTEE
August 26, 1999

This joint meeting of the FFO Committee and the AASAP Committee was called for the specific purpose of discussing a major development affecting the State Universities Retirement System and the university.

Mr. Cunningham reported that in June 1999, the Board approved the total 5 percent merit increment guideline for Fiscal Year 2000. The university distributed the increment in accordance with that approved guideline. The total increment base for FY00 across all faculty, staff and civil service was $97 million, Mr. Cunningham reported. All increments were distributed according to merit evaluations. The university also implemented an increase to faculty promotional rates that added another four-tenths of a percent to the faculty increment, bringing the total increment for faculty to 5.4 percent. The annual increment is one of the most significant budgetary and employee relations issues that we undertake in any given year, Mr. Cunningham said, because we try to be very competitive with salaries at Northern, and that is always a challenge. Each year we try to maintain our market standing and an effective merit program. We also work to allocate resources to ameliorate the effect of cost-of-living increases, which we experience in this area as the region develops. The FY00 increment has already appeared in paychecks for those employees on 12-month contracts; it will appear in the September 1 paycheck for academic employees on 9-month contracts. In answer to an inquiry from Trustee Siegel, Mr. Cunningham replied that this increase is for nonnegotiated employees. However, negotiations with the instructors resulted in a 5 percent salary increment for Fiscal Year 2000.

Dr. Waldeland reminded the Board that the legislature allocated a 3 percent increment and then an additional one percent for the purpose of retaining critical faculty and staff, which the university matched. We are very appreciative to the Board members, Kathy Swanson and others who lobbied hard for that additional salary money as a key priority of the university. We matched that one percent with an internal reallocation to get to the 5 percent, she said. We are underscoring the high priority we assign to faculty and staff salaries.

Agenda Item 6.b. - Changes to SURS Early Retirement Without Discount Option (ERO)
Dr. Waldeland asked Anne Kaplan, Vice President for Administration, to provide some context for a recent development in the SURS early retirement program.

Dr. Kaplan noted that personnel issues are often dealt with in both the AASAP and FFO Committees. Most of the personnel items that require Board approval come up through the faculty governance system. They include things like tenure and promotion, sabbaticals and appointments with tenure. Those issues go first to the Academic Affairs, Student Affairs and Personnel Committee. Also, we typically take benefit changes or personnel policy changes to the AASAP Committee as employee relations issues. On the other hand, when those kinds of changes have an unusual financial impact, we try to present the same item to the Finance, Facilities and Operations Committee as an information item. Salary guidelines, as part of the budget, go to the FFO Committee for action and to the AASAP Committee for information. Certainly, this item affects both policy and budget, and it is entirely appropriate that we are discussing it as a joint committee.

In anticipation of the discussion of the SURS ERO item, Dr. Kaplan said, I think it is important for the Board to understand that you are about to receive more information on the details of this option and the legal issues surrounding it than is available at any other campus in the state. There are two reasons for that. One of them is that Northern, unlike any of the other campuses in the state, has a consolidated Human Resource Services unit, which means that unlike the other institutions, we deal with personnel issues affecting all classes of employees in one organization with one set of staff. So, when we try to react to something, we do not have to pull a cross-divisional committee together to figure out what to do. That is a great advantage, and it has been a particular advantage in this instance. Second, we are very fortunate in having three people on this campus, Mr. Davidson, Mr. Cunningham and Ms. Romano, who bring to retirement issues a great deal of expertise and experience. They have worked very hard for a number of weeks in putting this information together and getting it out to people on campus. It is an unusual degree of expertise on this kind of issue, Dr. Kaplan said, and I think we and the rest of the universities in the state owe them considerable appreciation. Dr. Kaplan then called on Mr. Cunningham to give a detailed explanation of the SURS ERO benefit option.

Mr. Cunningham also acknowledged the assistance of Kate Romano and Ken Davidson. Kate is the chair of the statewide SURS Member Advisory Committee. Ken Davidson has been of great assistance in helping interpret the many tangled legal issues surrounding this issue. Mr. Cunningham said he would provide a brief outline of the relevant provisions of the Pension Code, what the ERO is and how Mattis affects the ERO, and then briefly discuss the university’s management strategy.

The Illinois Pension Code has a section that is specific to SURS, and in this section there are a number of formulas that apply to participant retirements. Employees may retire under the Rule #1 formula, also known as the General Formula. This formula provides that the annuity calculation will be 2.2 percent per year of service multiplied by the highest four-year average salary of the participant. This formula was upgraded through Public Act 90-65, an initiative in which Northern was very involved in 1997. The General Formula represents the minimum benefit employees will receive under the SURS. An alternative calculation is called the Money Purchase Formula, Rule  #2 of the SURS Pension Code. This is a distinguishing benefit under the SURS. Not all public pension systems have a money purchase benefit, Mr. Cunningham said, and especially one that operates as this one does. State contributions are made to the employee‘s SURS account every year. Employee contributions are posted to the account, and employer contributions are posted at a rate of 1.4 times the employee contributions. The Retirement System then posts an annual rate of interest to the account. One of the good features about SURS for our employees is that our retirement system is allowed to post market rates to that account. This year a rate of 10 percent was applied. So these funds will compound over time, resulting in a sum of money in the account. At the time of retirement, the money purchase rate is calculated, and this sum is divided by an annuity factor. There is a table of denominators that vary by age. However, this calculation is independent of length of service. These are the two primary calculation methods under the SURS. When an employee retires, both of these calculations are undertaken, Mr. Cunningham said, and whichever one results in the highest amount becomes the annuity for the employee.

Because the Rule #1 provision, the General Formula, specifically relates to length of service and does not already have an age effect built into the actuarial table, there is a reduction of the annuity of one percent per month that the employee is less than age 60 should the retirement occur before age 60.

Also in Section 136.2 of the statute is the Early Retirement Without Discount Option, or the ERO. This is a provision that sunsets. It was initiated in 1981 and is renewed on a five-year basis, and the current authorization extends until September 2002. This provision establishes a method where employees contribute seven percent of their salary per year that they are less than age 60 or have less than 30 years of service, whichever is less. The employer then makes a contribution at the rate of 20 percent per year that the employee is less than age 60. For example, a 59-year-old retiree would generate a 7 percent employee and a 20 percent employer contribution. A 55-year-old retiree would need a 35 percent employee contribution and a 100 percent employer contribution at the employee's final salary. Thus, these contributions can result in considerable outlays for the employer. For that reason, this section of the Pension Code also has a provision where each employer can limit participation in the ERO during any given fiscal year to 15 percent of those eligible, allocated on the basis of seniority and service with the employer. That is the way the system has operated since 1981. Essentially, Mr. Cunningham explained, the ERO provided a means by which contributions would be made to the Retirement System to offset the liability, the increased length of time that the Retirement System would have to pay the pension in the case of an employee retiring without penalty or without a reduction prior to age 60.

The Mattis situation arose, Mr. Cunningham said, when an SIU law professor named Bryan Mattis elected the ERO. The 20 percent employer and 7 percent employee contributions were made to the SURS. Dr. Mattis argued that ERO contributions were no different than the normal contributions made in any given year by the employee and the employer and that once those contributions were posted to the account, a new money purchase calculation should be conducted including those contributions. SURS denied his request in its administrative review process. (The Pension Code also designates the SURS as the agency to interpret state statutes pertaining to the SURS.) Mr. Mattis appealed his case to the trial court, which affirmed the SURS decision. He then appealed it to the appellate court, where SURS was reversed, primarily because there was no provision in the Pension Code that specifically excluded ERO contributions from the types of calculations that apply to the normal contributions. On October 6, 1998, the Supreme Court refused to accept the SURS appeal of the appellate court decision, so that appellate court decision became active law, which meant that our ERO program changed from being simply payments made to avoid a penalty or a reduction to a potential enhancement for participants in ERO because these contributions would now be incorporated into the money purchase benefit.

The calculation methodology was sent back to the trial court to make final decisions, Mr. Cunningham said, and the court has yet to finalize the actual way the so-called Mattis calculation would be made. We know that it will probably at least include the methods that were asserted by Mattis and that were considered by the court — that the 20 percent and the 7 percent contributions would be included in a new money purchase calculation. This has considerable implications, Mr. Cunningham said, in that it could create increased employee participation in ERO. Formerly, we have had three or four participants in this program per year. Only a few people found it worthwhile to make the contributions to avoid the penalty. Now that there is a potential enhancement involved, the potential exists for a considerably larger participation, and this has a number of implications. First, it has considerable budgetary impact. Were we to experience a 15 percent rate of participation, we estimate that the employer contributions would amount to $3 million, he said, and the law requires that these come from our personal services budget during the fiscal year during which the retirements occur. In addition, those retirees would generate approximately $2 million in sick leave and vacation payouts. So, under the most limited participation assumptions, Mr. Cunningham said, we have potentially a $5 million issue, which is equal in magnitude to the Fiscal Year 2000 increment, as you saw from the last agenda item.

Mr. Cunningham said that there is considerable variation in outcomes among employees with respect to this Mattis calculation. We have undertaken extensive modeling, as has the SURS, and there is really not a pattern or a general principle that can be used. There are many variables that influence the effect of this new money purchase calculation — age, length of service, time in the system, time that has been purchased in the system, salary history, any variation of the salary history. So we will be working with each individual in this group to give each one a very informed picture of what this would mean for them based upon the latest information from the courts and from the SURS. Our policy would also give us an organized method to counsel with our employees, Mr. Cunningham said, and then to allocate participation in this program during Fiscal Year 2000. Mr. Cunningham stated that the university was seeking Board approval to implement the 15 percent limit on participation in accordance with Section 136.2 of the Pension Code.

Chair Boey wanted to make clear that the optimistic projection was the 15 percent cap, which could result in a $5 million impact on the budget. If more were to participate, Mr. Cunningham said, the picture would worsen.

Dr. Waldeland asked if Mr. Cunningham could give the Committee members an idea of the number of faculty and staff who are now within the parameters of the Mattis case as we understand them and how many we are talking about if it is limited to 15 percent. A number of criteria define eligibility, and these are fairly important because they specify the size of the pool, Mr. Cunningham said. First, the employee must be a General Formula retirement, because the penalty only applies to that group. SURS will assist the university in making those determinations. Second, they must be between ages 55 and 60 years in order for the penalty to apply, have at least eight years of service to be eligible to retire and not be covered by the so-called "30 and out" provision. The "30 and out" provision is a phased-in new provision of the Pension Code, which started as a calendar year phase-in in 1998, that allows employees to retire at any age without the penalty if they have 30 years of service. So, during 1999, it is 33 years with no penalty, and as of January 1, 2000, it will be 32 years. Once those thresholds are reached, the employee is no longer eligible to participate in the ERO. Based on those broad specifications, the largest pool at NIU would be approximately 476 people, and 15 percent of that would be about 71 individuals. Once we begin to go over employee records and research the time they may have in the Retirement System, as well as the elimination of the Money Purchase retirements from this group, that number may be reduced. We know that we would be looking at between 50 and 70 individuals under the best circumstances, Mr. Cunningham said.

President La Tourette said that if 400+ employees left, the budget impact would be somewhere around $30 million. That would be $20 million for the payouts to SURS and about $10 million for sick leave and vacation pay. This puts in context why the 15 percent cap is a necessity for our operation because you can imagine the damage that would be done to the university if that number of people was to leave all at once. If NIU’s budget is about $156 million between state funds and the income fund, as we just reviewed, he said, $30 million from that budget would be an enormous impact in one year. Even $5 million is a difficult challenge when the university has already begun the academic year and would have a very limited period of time to adjust the budget to meet the payouts that would be required by June 30, 2000. 

Chair Boey asked for a motion to approve the cap of 15 percent of eligible employees for participation in the ERO in FY00. Trustee Vella so moved, seconded by Trustee Siegel. The motion was approved. 

Trustee Joyce asked if this would be an ongoing problem if the legislation is renewed. President La Tourette answered that it would. If the legislation does not sunset on September 1, 2002, the university would have to deal with it through the year 2004. So, even if we are successful in holding to the 15 percent cap, we could still have a $5 million payout for each year. Mr. Cunningham stated that no university under the previous rules had ever approached 15 percent.

Dr. Sue Ouellette said the Faculty Senate would be meeting the following week to discuss this matter. I think that faculty is just now becoming fully informed on the issue, she said, and it seems to be imperative to stem the tide in any way that we possibly can. The steering committee of the University Council has expressed agreement that this is an important step to take. Dr. Ouellette said that UAC would give a full response later.

President La Tourette asked Interim Provost Lynne Waldeland to speak to the programmatic impact of this legislation. We have quickly focused on the potential financial impact, he said, and I think we should also understand the programmatic impact on academic programs because it will be severe in some situations.

Dr. Waldeland said that the President and other administrators had met first with the University Council Steering Committee composed of faculty representatives and representatives from the supportive professional staff and the operating staff. Since then, Mr. Cunningham and others have been going around to each college council to discuss the issue as well. Dr. Waldeland said that the faculty are very concerned because the university has just come out of a period of faculty downsizing to bring the budget of the university in line with enrollment and resources. We have only this year begun to be able to restore some positions, and we are doing it under very rigorous rules in which the departments and the colleges have to show that this is a position that meets the needs of the future. We are moving well beyond the idea that we need to replace the retiring faculty member with someone exactly like him or her. We are entering an extremely good period of departmental and college planning for staffing, and I think the matter has been a real blow to departments and colleges. One of the things that people who have been engaged in this consider is the fact that retirements do not occur evenly across the campus. They will not be spread across all of NIU’s 39 departments. Approximately half the eligible group that Mr. Cunningham referred to is faculty, so about 35 faculty will be in that top 15 percent. It could happen that a small department of seven or eight faculty could have two or three eligible for retirement. That would be a devastating blow for that department because there will be the payouts to handle, and we usually have to leave positions open to cover them. People seem anxious that we control this situation so that we do not lose our momentum in planning for faculty coverage of our programs.

One point I would like to share with the new Board members, President La Tourette said is that the decline in enrollment occurred at the end of the Baby Boom, and that was a statewide phenomenon. On Tuesday, the Board of Higher Education reported that between 1992 and 1995 there was a drop of 30,000 in enrollments in the public universities. NIU had its share of that drop. When that occurred, we had to cut back on some of our staffing, he said, and bring it in line with our enrollment and budget. It has taken some time to do that, so that we have now reached the point of an equilibrium situation. We are now prepared to fill in some gaps in our programs, as Dr. Waldeland indicated. At the same time, our enrollment is growing again. So, the Mattis problem comes at a time when we thought we had everything under control, the President said, and thought we would have a normal pattern of retirement to work with and adjust to over a period of time. You can see now that with this decision at the court level, we could have a bunching up of retirements that would cause us to have some real gaps in our academic programs. To meet that kind of budget figure, even if it is the 15 percent cap and the $5 million, positions will have to remain open for some period of time in order to cover the payouts and adjust our budget.

Dr. Waldeland stated that NIU’s enrollment and retention are both up this year. These are things we worked very hard to achieve, and if we do not have the faculty and staff in place to accommodate more students, all of that work could be rapidly undone.

Student Trustee Anderson asked what, if any, negative ramifications could arise from a 15 percent cap. Whenever you have any limited participation, obviously there are some, Mr. Cunningham replied. The program as designed will involve more than just the top 15 percent in the retirement counseling process. The variations will be great and affect individuals differently. We may work through the entire list and not reach 15 percent. We would like to have this option in place in case there is a great deal of interest. With the combination of the 15 percent rule and extensive counseling to inform each employee exactly what his or her individual situation will be, Mr. Cunningham said, we should be able to stem the rumors that they have to decide to participate before the statute sunsets.

Chair Boey said that was a good question. It is equally important, he said, to ask about the consequences if we do not have the 15 percent limit. The risk to the university becomes unacceptable since without any sort of limitation, we could be looking at numbers like 470 people and a $30 million exposure. Those are the pros and the cons that we, as Trustees, have to look at. 

Trustee Siegel asked what the procedure would be for determining the 15 percent. In allocating this eligibility, Mr. Cunningham replied, the statute requires that that we do it in order of seniority at the university. Once the pool is set in order of seniority starting with the first 15 percent, we will give them opportunities to counsel with our insurance staff. Following their decisions about participation, we will then move on down the list until we have either gone through the entire list or reached a level of 15 percent, whichever comes first.

President La Tourette asked Mr. Cunningham if he could indicate how much time this process would take. Mr. Cunningham stated that because of the variations in the way this affects employees, they will be provided customized information and counseling services. Also, preparation time is needed to receive information from the employees in the group, analyze that information and then conduct the sessions. Mr. Cunningham said that after consulting with Ms. Romano, they anticipated three hours or more per session.

It is obvious from our modeling of the potential pool of 400 some people, President La Tourette said, that the benefits from this decision vary greatly. I want to emphasize that because in some cases it is zero, and in some cases it is a very substantial increase in the pension. It all depends on several variables, he said, so it is very difficult to determine what the benefit will be without a great deal of information, analysis and calculation.

Dr. Williams commented that he would urge the Board and the Committees to view the 15 percent as a minimal action. Even under that scenario, he said, the institution facing a $5 million payout in a given fiscal year is a very serious crisis. To put this in context, when we had tuition shortfalls generated by the reduction in enrollment, we addressed a $5 to $6 million reduction over several years. Even under the 15 percent cap, we would still be in a serious position. I would suggest that this action be only the first of many steps that the Board may need to take in order to get the legislature and others to focus on this issue, Dr. Williams said. However the courts end up and however the class is defined and the calculation made, we must get the state legislature to focus on assisting the institutions in addressing these retirements. The $5 million per year is bad enough, Chair Boey said, but the most unkind act of all is to have it come out of this year's appropriated budget funds.

In reply to a question from Trustee Siegel, Mr. Cunningham said that the statute specifies no less than 15 percent. Trustee Vella asked how long he estimated it would take to find out how many people would take this option. Mr. Cunningham said they should complete the counseling for the first group within a five- to six-week period. January 1 is the anticipated date by which the members of that group would need to make their decisions. During the interim period, anticipating that not everyone in the first 15 percent will elect to retire, others farther down on the list would also be counseled. After counseling with our first group, Mr. Cunningham said, we will have a much better idea whether or not this is something in which employees are going to participate in great numbers. As we move down the list, the situation changes. Those people have fewer years of service and their Money Purchase accounts are proportionately less compared to the General Formula. Chair Boey asked for a motion to approve the SURS Early Retirement Without Discount Option 15 percent participation provision. Trustee Vella so moved, seconded by Trustee Siegel. The motion was approved. President La Tourette said the university would be calling on Board members to assist in getting this issue to the attention of the legislature.

Trustee Joyce asked when the trial judge was anticipated to reach his decision on how the calculations are to be figured. Mr. Cunningham said that the trial judge is going to retire and has announced that he does not anticipate this issue being resolved during his term. Recently, the SURS sought a motion for the court to accept the method of calculation that was considered by the Appellate court, which was simply putting the 20 percent and the seven percent into the Money Purchase calculation. The court did not accept that motion, he said, so that keeps the issue fluid, and SURS may appeal the outcome. Trustee Joyce also asked what the statewide implication would be. Mr. Cunningham said the court determined that this would be a class action, though they have yet to clarify the class. It would involve approximately 3,000 people who have retired between 1981 and October 6, 1998. Those pensions will eventually be recalculated. If there are additional benefits, those would come from the SURS fund because the employer and employee contributions have already been made in those cases. The extent to which this will affect those employees who have yet to retire or who retired during the interim will also depend on the final calculation method. As President La Tourette indicated, there are about 5,000 ERO-eligible employees statewide. This could amount to about $30 million a year during the remainder of the ERO authorization. One of the best methods to influence participation is fully informing employees and providing the counseling necessary for them to know exactly what this would mean to them. In many cases, I think we will find that they are not ready to retire and would realize the same benefit in a couple of years by staying.

Chair Boey asked for a motion to adjourn. Trustee Skoien so moved, seconded by Trustee Siegel. The motion was approved. The joint meeting of the Committees was adjourned at 12:10 p.m.

Respectfully submitted,

Sharon M. Mimms
Recording Secretary