Peters: NIU to make 'every possible effort'
to protect employee benefit pension programs

NIU President John Peters released the following statement earlier this month in response to Gov. Rod Blagojevich’s budget address.

Dear Colleagues,

Due to the significant amount of concern generated recently as a result of Governor Blagojevich’s budget address to the General Assembly outlining his proposals for state pension system reforms, I wanted to take this opportunity to provide you with a summary of the governor’s proposals. Let me emphasize that these ideas are proposals, not law at this time, and are encountering significant obstacles in the General Assembly. As always, I will keep you up to date as to the progress of legislative discourse related to the pension reforms throughout the spring session.

Governor Blagojevich recently submitted for General Assembly consideration, a set of far reaching pension benefit/funding plan revisions designed to reduce future unfunded liabilities and utilize part of these savings to reduce funding requirements in the current state budget. The governor’s budget proposal outlined six changes concerning the Illinois public retirement systems. All of these (except for one related to the State Employees Retirement System), significantly impact benefit programs under the SURS.

The proposed changes are briefly outlined below:

Future Employees

• Automatic Annual Increase. The automatic increase to retirement annuities (currently 3 percent compounded annually) would be limited to the lesser of the change in the Consumer Price Index or 3 percent and be applicable only to the first $24,000 in annual (SURS) pension payments.
• Money Purchase Option. (Most) members of the SURS are entitled to have their retirement benefit calculated under the basic plan (General Formula) and under the Money Purchase Option, and receive whichever calculation results in a higher benefit. The Money Purchase Option accumulates employee contributions with interest credit determined (annually) by the SURS Board. At retirement, the accumulated employee contributions plus interest are then matched by the state at 140 percent (the SURS then annuitizes this total amount to determine the monthly benefit calculation under the Money Purchase Formula). The governor’s proposal would eliminate the Money Purchase Option for newly hired employees since this option is guaranteed for existing members.
• Retirement Ages. Members of the SURS are currently eligible for unreduced retirement benefits upon attaining age 60 (or 30 years of service). The governor’s proposal would change eligibility for unreduced benefits to age 65, with 8 years or more of service; age 62 with 30 years or more of service; or age 60 with 35 years or more of service.

Current and Future Employees

• Money Purchase Interest Rates. The interest rate credited to employee retirement contribution accounts (for purposes of the Money Purchase Formula) is set (annually) by the SURS Board (following the guidelines of section 15-125 of the Pension Code). The governor’s proposal would limit the interest credited under the Money Purchase Option to the (SURS) long-term rate of return, but not to exceed either the most recent five or ten year rates of return.

State versus Employer Budget Obligations

• Pay Practices. The governor’s proposal would require employing organizations including local governments and universities to fund the cost of pension benefits due to pay increases that exceed 3 percent during the final four years of employment (Final Rate of Earnings).

The governor’s proposals would establish a two-tier system where future employees would participate in a substantially reduced pension benefit system under the SURS and where the university organizations would assume direct responsibility for significant new funding obligations.

Conceptually, Northern Illinois University does not agree with a strategy of reducing pension benefits for current or future employees, especially when competitive compensation continues to be a significant challenge for the Illinois public universities. Further, the state Constitution protects the pension benefits of current SURS participants. The unfunded liability crisis is not caused by a lapse in employee contributions. Instead, the liability crisis is solely related to the state’s failure in past years to meet the contribution requirements specified by the Pension Code. As outlined by Governor Blagojevich in his budget address, Illinois ranks last among all of the states in meeting these obligations. Had these contributions been made, then there would be no unfunded liability issue, according to the SURS actuaries.

A 50-year funding plan was approved in 1995 to resolve the unfunded liability. This plan requires state contributions that greatly affect the status of the current budget. There is no question about the magnitude of the budget crisis. Ultimately, difficult choices will need to be made and there may be some modification of benefits for future employees. However, the proposed FY06 budget strategy is reliant upon deep future pension benefit reductions and the distribution of a portion of assumed long-term savings (that accrue during the remaining 35-year span of the 1995 funding plan) into the current budget.

For now, these reforms are in the budget proposal stage. NIU will make every possible effort to assure that employee pension benefit programs are protected to the maximum extent possible. As we are only in the initial stages of the FY06 budgetary process, and actual legislation has yet to be introduced, I will remain diligent and keep you informed of new developments.

Sincerely,

John G. Peters
President