Cunningham testifies at pension committee

NIU Vice President of Human Resources is testifying this morning before the Personnel and Pension Committee regarding Senate Bill 512 which would significantly alter the way employee pensions are handled. Cunningham’s testimony, outlining our grave concern about these proposed changes, is below.

Personnel and Pensions Committee

Written Testimony of Steven D. Cunningham

Northern Illinois University

May 26, 2011

To the Chairman and Members of the Personnel and Pensions Committee: My name is Steve Cunningham, Vice President of Human Resources at Northern Illinois University and I appreciate the opportunity to offer this written testimony on behalf of President John Peters, Northern Illinois University, and the college and university employees and retirees that are participants in the State Universities Retirement System (SURS).

We wish first to acknowledge and recognize that we are faced with an unprecedented circumstance of a scale that is unparalleled in the history of our great State. We further understand that the General Assembly has worked diligently to fund pension obligations and that actions considered today are, in many respects, forced by circumstances set in motion many years ago.State Pension & Budget Update

However, we must express our grave concerns regarding the substantial changes to the pension code proposed in the amendments to Senate Bill 512. It is our recommendation that the committee carefully examine and weigh the likely affects that this legislation, if enacted, would have on human resource investments at Northern Illinois University, the Illinois system of public higher education, and related interests in economic development throughout the State of Illinois. Lifetimes of financial planning would be thrown into disarray and the State’s ability to attract and retain high quality employees would be severely damaged. Ultimately, it could weaken the capacity of the Illinois system of public higher education in its significant role as an economic engine for the state.

While the funding situation affects all of the public employee pension systems, my focus here is concerning the State universities pension system. The SURS represents an important sector of State government employment that extends throughout the Illinois public universities and community colleges. Illinois has made a significant investment in Human Capital to build and operate a state university system that has served the students, families, and citizens of the State of Illinois for more than 150 years. This sector competes and participates in national, regional, and statewide marketplaces across an exceptionally wide range of labor markets – from faculty and other professional personnel who maintain the academic, research, and student services enterprises – to the many other specialized and skilled staff personnel that contribute to the success of students educated on our campuses. Tens of thousands of students, families, communities, and businesses rely on the mission of NIU and the other State universities every year. This enterprise has served Illinois well, preparing many thousands of graduates to lead more productive lives, contributing significantly to the State economy.

We understand the difficult circumstances and challenges faced by this committee and the Illinois General Assembly with respect to funding pensions. Since 1967, when the State of Illinois assumed responsibility for employer pension payments, SURS participants have depended upon the state to be stewards of their retirement plan. For university employees, the normal costs (summation of annual benefits required under the retirement system) are known to be just average compared to comparable programs on a national basis, including Social Security1,2. Furthermore, SURS participants have sacrificed the right to participate in Social Security during their university careers and the State has not been required to pay the 6.2 percent OASDI employer match to the Social Security Administration. The funding crisis today is the result of circumstances set into motion many years ago by decisions not to fund normal costs leading to massive unfunded liabilities – thus, the challenges we now face3.

We do not consider Senate Bill 512 to be a viable solution. I call your attention to three major areas of concern:

  1. Retirement Security – Public Policy Implications: The Pension Protection Clause adopted in the 1970 Constitution was designed to assure future State employees, pension plan participants, and annuitants that they could plan their careers and retirement under a stable set of assumptions and circumstances. The historical basis of the Constitutional Pension Protection Clause predicts exactly the type of situation that we find ourselves in today4. Employees have relied upon the State’s representation to maintain a predictable and secure set of core pension benefits that serve as a replacement for the Social Security System. This is both an ethical and constitutional requirement. Under the proposed amendment, these assumptions are shattered and longer-term employees in the Tier 1 program have no means whatsoever of revising their long term plans financial assumptions, and career strategies. The retirement status of all such individuals is placed in great jeopardy. Furthermore, as we understand the amendment, it is apparent that the existing funding model, with predictable normal costs independent of the State’s unfunded liabilities, would now suddenly be destabilized and would soon disappear under the proposed terms of this statute. Under such a plan, the very livelihood of SURS participants is placed at risk. The forced choice will drive many to retire or move elsewhere as soon as possible, causing a severe loss of some of the most experienced and well established academic and professional personnel in the State system of higher education.
  2. Mid-Career, Professionally Mobile, Human Resource Investments: Illinois is not immune from the market based national and global competition for the best and the brightest teachers, faculty, technicians, and managers. Higher Education already faces unprecedented challenges in retirement activity and this legislation will only do more harm and exacerbate already serious retirement, recruitment, and retention challenges. Given the proposed amendment, shorter-term mid-career personnel (generally more than 10 years from a planned retirement date) would likely seek other employment options. This cohort of personnel is a cornerstone of the developing human capital framework that supports the Illinois system of higher education. Many of these individuals are highly marketable, and it is almost certain, under the proposals contained in Senate Bill 512, that many of them would pursue opportunities elsewhere. This would place the human capital investments of our college and university system at great risk. The future of the academic and research enterprises developed throughout the Illinois system of higher education is reliant upon retaining and recruiting such personnel from the wide range of national and regional labor markets that sustain our institutions.
  3. Pension Fund Status as a Function of State Government Fiscal Integrity: Assuming the probability of a massive forced migration away from the so-called Tier 1 fund, it is unclear how to sustain this system in the absence of a continuing stream of normal contributions from existing employees. Such contributions currently support a significant amount of the benefit funding requirements of this plan. The normal cost component can be predicted to escalate significantly as fewer participants are available to pay the continuing normal cost requirements. As the numbers of participants decline, the normal cost component would escalate significantly and the few remaining participants would have to pay those costs. It is hard to imagine a more precarious situation for current retirees and participants who have relied upon the SURS program. This represents well over 90 percent of current SURS participants whose future retirement benefits would soon become entirely funded by State resources under the Pension Code. Fund sources are hardly available to pay already existing unfunded liabilities. It is difficult to understand the public policy basis for risking destabilization of the consistent stream of contributions maintained by Tier 1 participants.

With these issues in mind, we recommend on behalf of Northern Illinois University, and the Illinois higher education community, that we take the time and opportunity to take a closer look at the longer-term systemic impact of this amendment. There is no denying the critical nature of our current fiscal situation. I am certain that higher education employees and institutions are prepared to contribute to a long-term solution. However, we should not take action now that is certain to make a bad situation worse, through forced choices or unconstitutional reductions in benefits on the very people we need as employees and SURS participants to preserve and enhance our economic viability. In whatever approach is taken, we urge that the committee and the General Assembly will be responsive to and reflect on:

  • The constitutional and ethical pension plan commitments that so many employees have counted on for their earned retirements.
  • The potential impact on students pursuing higher education as an avenue to success when so many dynamic faculty and staff will not only seriously consider opting out of pension programs, but may indeed choose to leave Illinois or never consider this State for employment.
  • The possibility of a severe disruption to the continuity of Tier 1 employee contributions and the potential for critically detrimental effects on funding remaining available for those already retired or forced to remain in Tier 1 simply because of the years already invested.

We appreciate the opportunity to submit this testimony and look forward to working with you toward a practical solution of this most critical matter. 1 Social Security Administration (2010). Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance 2010. Available at: http://www.ssa.gov/OACT/TR/2010/tr10.pdf (last visited May 18, 2011) 2 State Universities Retirement System Available at: http://www.surs.org 3 Commission on Government Forecasting and Accountability. Monthly Briefing (May 2010) Available at:http://www.ilga.gov/commission/cgfa2006/Upload/0510revenue.pdf (last visited May 18, 2011) 4 Madiar, Eric M. (2011) Is Welching On Public Pension Promises An Option for Illinois? An Analysis of Article XIII, Section 5 of the Illinois Constitution. Available at: http://www.illinoissenatedemocrats.com/images/pensions/D/Pension%20Clause%20Article%20Final.pdf (last visited May 18, 2011)

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