Exhibit A (page 1) - 18/20 Financing Committee Roster
Exhibit A (page 2) - 18/20 Financing Committee Roster
Exhibit B - Early Retirement Plans: Future $$'s (Print Copy)
Exhibit B - Early Retirement Plans: Future $$'s (Screen Copy)
Exhibit C - Survey of Big 10 Universities (Print Copy)
Exhibit C - Survey of Big 10 Universities (Screen Copy)
Exhibit D - Early Retirement Plans: W/Base Budget Growth, 10% Plan "Reallocation," etc. (Print Copy)
Exhibit D - Early Retirement Plans: W/Base Budget Growth, 10% Plan "Reallocation," etc. (Screen Copy)
Exhibit E - Early Retirement Funding Options (Print Copy)
Exhibit E - Early Retirement Funding Options (Screen Copy)

The committee reviewed background materials concerning the early retirement plans and the expected future financial obligations (Exhibit B). Assuming a 5% annual growth in salaries, the early retirement costs through 2031 will be about $2.4 billion. Current funding of these plans, with 5% growth, would fall $642 million short through 2021.

The committee organized itself into three subcommittees to consider various components of a future financing strategy. One subcommittee undertook the task of reviewing the current base retirement benefit structure, including contribution rates to the IU Retirement Plan and IUSERP. Another subcommittee considered a long range plan for budget reallocations to support the increasing costs of the 18-20 Plan. The third committee explored various long-term financing strategies with the goal of establishing a more level funding obligation over the remaining life of the plan. All three committees began to collect information and data which would be needed in order to present recommendations in each of their respective areas. The subcommittees were chaired by the following individuals: Benefits, Professor Richard Heinz; Budget, Co-Chairs Professors Al Ruesink and Robert Keck; and Long-Term Financing, Professor Robert Klemkosky.

The full committee and the various subcommittees met several times over the next six months reviewing ideas and exploring possible recommendations for addressing the significant financial burden imposed by the 18-20 Plan. As work progressed, it became evident that three major challenges were involved in recommending a solution to funding these early retirement benefits for current employees of the university. The first was to lower the overall costs of the university's base retirement benefit structure for the future Indiana University employees while maintaining our competitive position with peer institutions. The second challenge was to identify opportunities for reallocating and reducing current early retirement benefit costs without changing the 18-20 plan benefit for eligible employees. The final issue was how to spread out the projected steep rise in these benefit costs during the next 10-15 years with particular attention to the next five years. It was clear that a single action in any of these three areas would not solve the problem. Rather it was imperative for the committee to develop a recommendation having several component parts which taken together would result in a manageable financing obligation to meet these future costs. It must be underscored that the recommendations of the committee are based upon the best information and projections currently available concerning benefit utilization rates, expenditure/resource growth patterns, and financing costs. Given that this information is subject to change, it will be important for the university to establish a continuing monitoring process to determine if recommendations ultimately approved for implementation are accomplishing their desired goals.

The 18-20 Financing Committee is pleased to present its final report with a recommendation to President Brand for his consideration as provided for in the committee's charge. The committee recognizes the critical importance of establishing a viable future financing strategy which will reduce the enormous pressure for heavy budgetary reallocations or reductions for the purpose of funding these plans. It is recognized by this committee that the impact of these plans places at risk important investments in teaching and research activities which will be pivotal in future excellence of Indiana University across all its campuses.

The committee submits its recommendation along with the financial detail and revised projections which are attached to this report. As additional background, a brief summary of the findings and conclusions reached by each of the three subcommittees is also included with this report. The 18-20 Financing Committee underscores the importance of viewing these multiple actions as a single recommendation based upon the committee's finding that it was not feasible to undertake a single action to resolve this serious financial challenge. Members of the committee welcome the opportunity to discuss this recommendation and answer questions that may be raised about it.

Benefits Subcommittee

The Benefits Subcommittee explored a variety of retirement plan design considerations that would reduce overall associated costs to the university. Attention was given to thoroughly understanding any initiative that would potentially jeopardize the legal and tax status of the 18-20 Plan. The committee extended President Brand's protection of the 18-20 Plan to the participants of the IUSERP Plan, which was established for Academic and Administrative staff hired after 12/31/88.

This committee also engaged The Nyhart Company, an employee benefits and actuarial company based in Indianapolis, to review the assumptions applied to projecting expenses for the university's early retirement plans. The Nyhart Company confirmed that mortality and turnover assumptions were generally appropriate for university employees.

 A survey of the retirement plans provided to employees of other Big 10 universities indicated that a 10% defined contribution base retirement plan would be competitive with this labor market. As a result, and to generate real savings to offset 18-20 Plan expenses, this committee recommended a reduced retirement plan contribution rate for newly hired Academic and Professional staff employees. The new recommended rate for the defined contribution base retirement plan is 10%, which maintains the university's competitiveness in the retirement benefit area (Exhibit C).

This recommendation is estimated to reduce the university's projected base retirement future funding by about $894.3 million through the year 2031. Reallocation of these resources will be used to offset the early retirement funding gap.

Budget Subcommittee

The Budget Subcommittee explored a variety of internal budgeting strategies. These initiatives were focused on the possible reallocation of funds between retirement and salary expenses, in such a manner as to reduce the overall financial burden on the university.

Following in-depth considerations of other budget obligations and the academic mission of the university, an incentive initiative was formulated to encourage the retention of very productive individuals that otherwise would have retired with 18-20 Plan benefits. Basically, departments would be encouraged to retain productive individuals by a supplement to their base salary with funds reallocated from the 18-20 Plan account. These individuals would defacto forfeit 18-20 Plan benefits for the period of continued employment and supplemental pay, which would result in a net savings to the university. It was projected that approximately 40% of the 18-20 Plan eligible pool would be offered this Retention Incentive, with 80% of that group accepting it (32% of the total pool) for an average of 2.5 years. In addition to the supplemental pay, each retained employee would be granted a one-time $5,000 research/professional development account. If the supplemental pay is to continue beyond the original term of the 18-20 benefit period, the cost will be supported by the department.

Of course, the subcommittee acknowledged that, this incentive would need to be implemented in accordance with other existing personnel policies. The subcommittee also underscored that this incentive is to be offered selectively as evidenced by the methodology used in calculating the expected savings. It is estimated that this action will result in a $220.4 million reduction in early retirement plan costs.

In addition to the Benefit Subcommittee's recommended new 10% base retirement plan, along with the above Retention Incentive plan, this subcommittee also recommends a reallocation of base budget funds. This reallocation would only apply to departments with 18-20 Plan recipients. The recommendation is that 20% of the 18-20 retirees' final compensation be reallocated by the departments to the 18-20 fund for the period of time that the individual receives the 18-20 benefit. The resource reallocation potential generated by this initiative is estimated to be in the range of $269.5 million.

Long-Term Financing Subcommittee

The Financing Subcommittee evaluated a range of potential financing approaches using both external and internal resources. It was important to find ways to reduce the steep growth in funding during the next 3-5 years and to provide a more predictable funding plan for the future.

External funding would involve one of the following approaches:

• Issuing long-term zero-coupon bonds which would not be payable until some point in the future when the "peak" in early retirement funding will be past. Discussions with outside underwriting firms indicate that such an approach would be very expensive to IU, not only with respect to the debt service on the bonds, but because of the possible negative effects the approach might have on the university's bond ratings. Since such an approach would require the encumbrance of a significant cash flow stream as security for the bonds, IU's future operating and financing flexibility might be severely hampered. 

• Issuing commercial paper on an as-needed basis, with the goal of retiring the borrowings after the peak in early retirement costs. Again, the interest-on-interest aspect would be very costly and would add significantly to the debt load of the university.

This leaves the alternative of funding the benefit payments through a combination of increases in the budgets for annual benefits, and borrowing from the university's operating reserves. In order to maintain the level of interest income necessary to provide for University Administration funding and additions to campus general fund reserves, the operating reserves would have to be paid an interest at the level which would be earned on the alternative investments.

The recommended financing approach assumes approval and success implementation of all the initiatives presented in this report (Exhibit D). In Exhibit D, the dashed (green) line represents the total early retirement expenses from Exhibit B less the reduction in early retirement expenses stemming from the Retention Incentive. The solid (black) line with X's represents the sum of the 1) base budget, 2) 10% defined contribution retirement plan for new hires, and 3) 20% budget reallocation for those on 18-20. We note that these two plots nearly overlap through the year 2015 when the funding problem begins to go away. The subcommittee recognized the importance of providing future long-term planning information related to the expected growth in the early retirement portion of the pooled benefit rate which will be in addition to the reallocations generated by the aforementioned initiatives. This recommended financing strategy balances a realistic growth in pooled benefit costs and internal financing of the remaining gap between total resources available and projected plan costs.

A spreadsheet is included with this recommendation (Exhibit E) which displays the proposed financing strategy. Budgeted increases are estimated to be higher (8.0%) in the early years, when the increases in benefits costs are greatest, and the rates of increase decline as the other budget priorities on the campuses do increase. Interest is assumed at 7.5% (although it may well be lower than that) and is repaid by the departments on a current basis. It is anticipated that the interest expense would be charged to the departments by some agreed upon allocation formula. The penultimate column of Exhibit E shows the level of borrowing needed from university reserves. For illustration purposes, the university tax (system service charge) might need to be increased in certain years by an additional 5% - 7% to offset the loss of interest income. Total borrowings from operating reserves are kept at a minimum (approximately $24 million) and are repaid by 2015. After that time the net cost, as well as the required payments, begin to decrease.

 
Establish a 10% Base Retirement Plan for Academic and Professional Staff Employees
 

• provide an internal loan agreement to the 18-20 payout account
• fund loss of interesting earnings annually on the borrowed funds
• explore creation of an outside corporation financing vehicle if internal financing is insufficient to meet payout requirements