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Monday, November 22, 2010

Guest Op Ed: The UCRP Train Wreck

The UCRP Train Wreck

Professor Steven Lippman
George W. Robbins Chair in Management
UCLA Anderson School of Management

UCOP intends for the employers' contribution to UCRP be ratcheted up to 20% by July 1, 2017. The now-planned contribution of 20% from all employers of UC personnel (which includes NIH and other granting agencies as well as the hospitals and medical centers) and 7% from all employees falls short of preventing the current $13 Billion underfunding at UCRP from worsening. At present, employees plus employers pay in 6% of the $8 billion covered compensation (CC) which amounts to $480 million per year. This 6% contribution began May 15, 2010. [Covered compensation is that portion of earnings upon which your pension benefits are paid. It doesn't include summer salary and a small number of other items that apply to a few UC faculty members, but otherwise CC is total salary.]

UCOP's plan is for the employees to pay in 7% and for the employers to pay in 20%. This amount totals $2,160 million annually. Necessarily, the additional $1,680 million over and above this year's contribution must come from the UC operating budget, from hospital patients, from the granting agencies, from additional tuition increases, and from the pockets of UC employees.

And as if this situation isn't gloomy enough, the $13 billion underfunding of UCRP will grow not only during the seven year course of the build up to 27% of CC contributions, but it would grow even if the 27% contribution were to begin today. This circumstance results from the confluence of two factors. First, the normal cost of 17.6% is needed to keep a fully funded UCRP fully funded. Second, the missing $13 billion would, according to plan, earn 7.5% annually. This amounts to .075($13B) = $975 million. The earnings of $975 million will not materialize because the $13 billion is missing. [It is not missing because someone misappropriated it. It is missing because annual earnings on the UCRP portfolio have been less than 7.5% over the last few years and because contributions were not made for 20 years.]

When added to the normal cost of .176($8B) = $1,408 million, the amount needed to keep the underfunding from growing is $2,383 million or 29.79% of CC. Finally, on July 1, 2017, the day when the 27% contribution level is attained, the shortfall will exceed $22.8 billion so that a total contriubtion from employees and employers of more than 48% of CC will be needed to prevent the shortfall from growing even further. To make the obvious explicit: due to the current shortfall at UCRP, UC and its employees will soon find themselves in a world of hurt. Even with the planned upon 27% annual contribution, amortization of the shortfall over the next 40 years is exceedingly unlikely if not impossible.

UCOP understands and is well aware of this simple arithmetic. My holiday wish is that Governor Brown and the legislature will understand this arithmetic - - and then lend a helping hand to prevent the coming train wreck. Without substantial help from Governor Brown and the legislature, tuition will continue to rise markedly, employees will continue to receive 0% COLAs, and the underfunding at UCRP will continue to increase.

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