The Legislative Analyst has just released a report on the governor’s proposal for public pensions. The report states that the “Governor’s Proposal Is a Bold, Excellent Starting Point” and then goes into a detailed analysis. Most of the report is not about UC, although it does note that changing the UC plan might well involve amending the constitution. But it does have a section on UC reproduced below:
What About UC?
UCRP Also Has a Major Funding Problem. From 1990 to 2010, UC and its employees enjoyed a remarkable two–decade pension funding holiday due principally to (1) substantial overfunding of UCRP during the 1980s by the state and the university and (2) very strong investment returns for UCRP during the 1980s and 1990s. The state also benefited from the funding holiday, since it had contributed to UCRP regularly in prior decades and used the elimination of contributions as a budget solution during the fiscal crisis of the early 1990s. Given that UCRP continued to enroll new employees and provide additional service credit to existing employees, it would have been impossible for such a funding holiday to continue forever. The investment market downturn of 2008 caused the already dwindling surplus in UCRP to fade away, and now the system has an unfunded liability.
Unlike other systems, however, UC and its employees are struggling to find a way to cover normal costs, as well as unfunded liabilities, given that neither of them had contributed to the system for two decades. The university and its employees have already moved to change certain benefit commitments for current and future employees, and they continue to engage in hard talks on how to increase contributions to cover the costs of both past and future benefit commitments. The university, however, believes that it may have to raise tuition more or cut student services or other employee costs in order to fund its entire share of pension costs in the future. As a result, UC seeks several hundred million dollars of additional annual state funding beginning within a few years so that it can cover normal costs and retire unfunded liabilities over the next several decades. The state has no apparent legal commitment to provide such additional funding, and the state does not directly set benefit levels for UC employees. To date, the Legislature has chosen not to provide additional funding to UC for this purpose, despite the university’s requests.
UC May Well Need Additional State Funding for Retirement Costs. The magnitude of UC’s unfunded liability costs not covered from other funding sources (such as enterprise units and the federal government) is so large—hundreds of millions of dollars per year—that the university will face very difficult decisions in the coming years about how to cut costs or raise tuition further if the Legislature does not provide additional funding related to UCRP. Extending the Governor’s proposed pension changes for other public employees to UC employees as well may reduce UC’s future personnel costs and help the university address the UCRP funding problem over the long term. In the short run, however, costs to address existing benefit commitments will remain very difficult to address within existing resources of the university.
We urge the Legislature to consider the long–term funding strategy for UCRP during these legislative discussions on overall pension policy. Specifically, the Legislature could resubmit a request to UC that it provide a comprehensive, detailed proposal for a long–term funding strategy. (That same request was included in the 2010–11 Budget Bill, but was vetoed by Governor Schwarzenegger.) It will be very difficult for the state to consider a long–term UCRP funding policy without such a detailed proposal being submitted and without firm agreement on the plan from all UC employee groups.
The full report is at http://lao.ca.gov/reports/2011/stadm/pension_proposal/pension_proposal_110811.pdf
A video summary is at:
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