NIU submits opposition to proposed retiree health care changes

On behalf of the university Lori Clark from NIU’s Office of Governmental Relations submitted to the Senate Executive Committee on Sunday, May 29 a written position statement from NIU Vice President of Human Resources Steve Cunningham.  The statement outlines NIU’s opposition to Senate Bill 175 which would significantly alter retiree health care benefits.  Cunningham’s statement is below.

Senate Executive Committee

Written Testimony of Steven D. Cunningham

Northern Illinois University

May 29, 2011

To the Chairman and Members of the Senate Executive 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 the fiscal condition of our State. We further understand that the General Assembly has worked diligently to fund health insurance obligations and that actions considered today are within a fiscal context where difficult choices must be considered.

Money & ruler

We must express our grave concerns regarding the sudden and far-reaching alterations to long-standing public policy commitments concerning retiree health insurance costs proposed in the amendments to Senate Bill 175. Financial planning toward retirement is a lifetime and career-long endeavor. It is our recommendation that the Committee carefully consider the likely affects that this legislation, if enacted, would have on careers and 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.

Among the public employee pension systems covered under this section of the State Employees Group Insurance Act, my focus here is concerning the State university employees and retirees, which number over 220,000. 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. The amended healthcare contribution formula under the State Quality Care Health Insurance Program (QCHP) governed by the State Employees Group Insurance Act, represents a fundamental alteration of the State compensation system provided to affected participants. This amendment will especially impact academic and professional personnel in the State system of higher education because of the means testing provisions.

We do not consider the methods utilized to generate State cost savings under Senate Bill 175 to be in the best interests of the State of Illinois or its employees and retirees. I call your attention to at least three major areas of concern:

1. Retirement Welfare and Security – Public Policy Implications: Public policy is designed to assure future State employees, pension plan participants, and annuitants that they could plan their careers and retirement under a relatively stable set of assumptions and circumstances. Applicable sections of the State Employees Group Insurance Act express clear statutory expectations with respect to health insurance costs that participants and their dependents rely upon in making their career and retirement planning decisions. The current statutory health insurance cost structure was amended as of January 1, 1998 to reflect a reasonable accrual of cost offsets based upon years of service. This accrued future benefit (reflected in future earned retirement compensation standards) has been maintained since 1998 and is integrated into the current and future assumptions that employees have accounted for in their careers, retirements, and life-cycles. Employees have relied upon the State’s representation to maintain a predictable and secure set of core health insurance cost assumptions that serve as a central component of their established compensation system. Under the proposed amendments, these assumptions are more than simply modified; the assumptions are massively and suddenly altered. Longer-term employees, especially the 80% of SURS participants with 20 or more years of service – who have fulfilled the statutory formula for a 100% waiver of QCHP member health insurance costs in retirement – have no means whatsoever of revising their long term plans, financial assumptions, and career strategies. Under such a plan, the retirement security of many SURS participants is placed at substantial risk, due to the unplanned and substantial cost obligations for their health insurance. Furthermore, the rates may change with time providing no predictability for retirees to plan their financial affairs. Longer-term employees, retirees, and their dependents have already dedicated their careers to Illinois service and do not have the opportunity to go back and modify their already completed career and retirement decisions.

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. Given the proposed amendment, shorter-term mid-career personnel (generally more than 10 or 15 years from a planned retirement date) would have even more incentive 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 Illinois public higher education currently maintains a tenuous standing in national competitive compensation (fringe benefits) among peer group comparisons.1 These human capital investments of our college and university system are already at risk, and this amendment would take away a key incentive that mid-career professionals have to invest their careers with the State of Illinois. 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. Scope of Reduction of Benefit, Time-to-Retirement, and Retirement Security Implications: A quick review of the “Strawman” comparisons contained in “Appendix A” of the Mercer Report that was utilized as the basis for this amendment, demonstrates the extent of new QCHP retiree contributions contemplated under this amendment.2 For example, (under Scenario 4) an average Non-Medicare eligible participant with 22 years of service making an average salary of $40,000 seeking to retire at age 55, would need to work at least an additional 8 years of service to make up for the current differential in retirement compensation established under the proposed QCHP member contribution (not including a dependent).3 A longer-term employee or an individual already retired, who has relied on the existing statute, has no opportunity to adjust their time-to-retirement calculations. A very wide range of negative policy implications and unintended consequences relate to such a sudden and steep change in retirement compensation.

For example, the steep differential between existing retiree health insurance costs and the new obligations established under this amendment will necessitate the accrual of additional pension income, and a delay of retirement dates in order to accrue base pension earnings necessary to offset part of the losses in planned retirement compensation. The postponement of retirement dates has significant implications for individual and family life-cycle planning. Such postponements would likely become normalized generally in long-term career decisions to increase average retirement system service credit, leading to the accrual of new base pension liabilities for the applicable State retirement systems. Additionally, future rate changes in QCHP contribution rates would be likely to change without limit, exposing retirees to a great deal of financial risk.

The steep differential between Medicare and Non-Medicare retirees and their dependents will necessitate a delay of retirement dates until employee and dependent Medicare eligibility can be established. To a great extent, Medicare eligibility serves as a “circuit breaker” to relieve the extraordinary new monthly health insurance cost obligations for retirees and their dependents established under this amendment. The postponement of retirement dates has significant implications for individual life-cycle planning and State pension liabilities. Furthermore, at least 10,000 SURS participants have no Medicare eligibility, and these individuals are totally exposed to the full weight of the new QCHP contribution requirements established under this amendment.

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 evaluate the longer-term systemic impact of this amendment and alternative options. There is no denying the critical nature of our current fiscal situation for the State of Illinois. However, exposing individual retirees and long-term employees to this degree of new and unforeseen financial obligation in retirement is careless at best – especially with no accounting whatsoever for credit already earned under the existing statute. I am certain that higher education employees and retirees are prepared to engage in a reasonable dialogue with policy makers on this important topic and will contribute to longer-term solutions.

In whatever approach is taken, we urge that the Committee and the General Assembly will be responsive to and reflect on:

• The statutory and already earned QCHP retirement compensation commitments that employees and annuitants rely upon for their earned retirements. SURS participants do not participate in Social Security during their time in university service. The possibility of a severe disruption to the continuity of financial security in retirement for existing long-term employees and retirees who have dedicated their careers to the State of Illinois and have already earned, on a deferred or currently retired basis, a key aspect of their retirement compensation under the existing State Employees Group Insurance Act.

The potential impact on higher education as it is likely that this change in public policy will cause a great number of dynamic faculty and staff to consider other options in State and national markets for their human resource capacities.

We appreciate the opportunity to submit this testimony and look forward to working with you toward a practical solution this critical matter.

1 Illinois Board of Higher Education Available at: http://www.ibhe.state.il.us/Board/agendas/2010/December/ItemV-19.pdf (last visited May 29, 2011)
2 Commission on Government Forecasting and Accountability, Mercer Report on Retiree Healthcare Contributions Available at: http://www.ilga.gov/commission/cgfa2006/Upload/2011-MAY-17MercerRetireeHealthcareContributions.pdf (last visited May 29, 2011)
3 Assumes annual contribution requirements listed in Non-Medicare “Strawman” comparisons found in Appendix A of the Mercer Report in proportion to the per year increment in eligible annuity calculation and specified pension income under the SURS General Formula.

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