The state’s Legislative Analyst has released a lengthy
report on funding higher education which covers UC, CSU, and the community
colleges (as well as CalGrants). The
report is essentially a response to the governor’s January budget proposal with
regard to higher ed.
Generally, the report tends to disagree with the governor’s
approach which the Legislative Analyst views as giving too much autonomy to UC
and the other segments with regard to enrollment and other matters. On the other hand, it documents the trend
towards reduced state funding and thus seems to continue the pay-less/say-more
approach which is odd on its face.
The Legislative Analyst does raise questions about the
trigger cuts proposed by the governor in case his tax initiative does not pass
in November.
There is a lengthy section on pension matters, especially
for UC which has not received explicit state funding for its pension for over
two decades and which has had to divert other funding to deal with resumed
pension contributions. The report seems
to favor some state funding for the UC pension and – significantly - does not
condition it on UC being covered by the statewide plan proposed by the
governor. That is a step in the right
direction if followed by the legislature in the final budget. The report favors somewhat less of a pension
contribution than UC has requested. However,
establishing the principle of some state responsibility would be an advance.
Excerpts from the pension portion are below:
Retirement Costs
The Governor proposes major changes to the way in which some retirement costs are funded for higher education. For CSU, the Governor proposes to no longer make base adjustments to reflect changing retirement costs. For UC, the Governor proposes (1) a $90 million base augmentation that could be used for pension costs or other purposes, and (2) no out–year adjustments for retirement costs. The budget proposes no changes to the way retirement is funded for CCC.Background
CSU Pension Benefits. CSU employees are members of the California Public Employees Retirement System (CalPERS)—the same retirement system to which most state employees belong. Funding for this system comes from both employer contributions and employee contributions. Each year, as is the case with other state departments, CSU's employer contributions to CalPERS are charged against its main General Fund appropriation. The employer contribution is based on a percent of employee salaries and wages that is determined by CalPERS and specified in the annual budget act. The Governor's budget annually adjusts CSU's main appropriation to reflect any estimated changes in the employer contribution. For example, the Governor's budget reduces CSU's main appropriation by $38 million due to a lower employer rate and lower payroll costs in the current year. The CSU is expected to contribute $404 million to CalPERS in 2012–13.UC Pension Benefits. Employees of UC (and Hastings) are members of the University of California Retirement Plan (UCRP). This retirement plan is separate from CalPERS and under the control of UC. Prior to 1990, the state adjusted UC's General Fund appropriation to reflect increases and decreases in the employer's share of retirement contributions for state–funded UC employees. Starting in 1990, however, UC halted both employer and employee contributions to UCRP because the pension plan had become "superfunded." Specifically, the plan at that time was enjoying exceptionally strong investment returns, resulting in assets that exceeded liabilities by more than 50 percent. This "funding holiday" lasted nearly 20 years until the plan's assets had declined considerably and contributions once again became necessary. In April 2010, both UC and its employees resumed contributions to the plan. The state, however, has not provided UC with any additional funding specifically for that purpose.
Governor Proposes New Approach To Funding Retirement Costs
The Governor proposes two major changes related to funding for university retirement plans:- A $90 million base budget augmentation for UC that, according to the administration, "can be used to address costs related to retirement program contributions." The administration emphasizes that this funding is not being provided specifically to fund costs for UCRP. Rather, UC could use it for any purpose related to its state–related programs—including, but not limited to, UCRP.
- A new policy that the segments' budgets no longer be adjusted for changes in retirement costs in the future. Instead, state–related retirement costs would be funded entirely from the segments' unrestricted base appropriations.
UC Proposal Has More Merit,But Raises Several Questions
The request for pension–related funding for UC is more difficult and complicated than that for CSU. This is because (1) the state currently is not providing any pension–related funding to UC, and (2) UC has full control over its pension system. To address the Governor's proposal, the Legislature should consider the following questions:- What is the main justification for the state to provide funding for UC's retirement costs? In other words, why is funding for these costs a state responsibility?
- Given that UC controls its own pension plan, are UC's pension benefits reasonable? How do they compare to the pension benefits the state provides state employees?
- How much funding should the state provide UC in 2012–13? More specifically, what methodology or calculations support the request for $90 million?
- Finally, should the state lock in the pension amount provided UC at the 2012–13 contribution level or provide UC with budget adjustments for pension costs in future years? …
UC Pension Benefits Similar to State Employee Pension Benefits. Although the state does not control UC's pension system, actions taken to date by the Regents have largely mirrored recent changes to state employee pension benefits. For example, the Regents have taken action to reduce pension costs in the long term by increasing the minimum retirement age for new employees. In addition, …the Regents have approved increases to employee contribution rates that are beginning to bring them in line with state employee contribution rates, which are now generally 8 percent. (Some of UC's proposed employee contribution increases are still subject to collective bargaining.) Additional contribution increases beyond July 2013 will also likely be necessary to reduce the plan's significant unfunded liability that has accrued due to the decades–long pension funding holiday and recent market downturns.
UC's Estimate of State's Share of 2012–13 Pension
Costs Is Overstated. The $90 million that UC requested from the
administration is only a fraction of the $255.6 million that UC estimates to be
the state's share for 2012–13. The UC states it requested the lower amount in
recognition of the state's severe fiscal shortfall. The university further
indicates that it will likely seek the full amount of what it estimates to be
the state's share (which it calculates could rise to roughly $450 million) in
future years...
We find two issues that the Legislature should carefully consider with
respect to how the university has estimated the state's share of UC retirement
costs.- First, we find that the request for $90 million in 2012–13 is overstated. …UC's estimate of the state's share of its 2012–13 retirement cost increase totals about $78 million. The UC appears to be requesting a greater amount because it believes that the state should provide contributions to account not only for incremental retirement costs in 2012–13, but also for part of the cost increases in the two prior years. We take a different view. The UC has managed—by both redirecting internal resources as well as increasing student tuition—to fund all of its employer contributions in both 2010–11 and 2011–12. If the Legislature were to provide funding related to prior years, the funding would in effect free up existing UC base funding for other purposes. In our view, given the state's fiscal shortfall, such an augmentation would be unwise.
- Second, the university's calculation of the state's share of retirement contributions includes employer costs related to tuition–funded salaries. From a workload budgeting standpoint, the state portion of retirement costs should only be related to state–funded payroll costs. Given, however, that the Governor's budget assumes no increases for tuition in 2012–13, the Legislature may wish to consider providing the funding for pension costs related to tuition–funded salaries in 2012–13. In future years, higher pension costs—just like any other UC cost—presumably would be covered by the General Fund and tuition fees in proportion to their current funding levels.
Recommendations
…Recommend Restarting Budget Adjustments for UC. As discussed above, we find that there is sufficient justification on a workload budget basis to provide UC with an augmentation that the university could use to address its pension costs. We recommend, however, that the Legislature only provide funding for the incremental change in 2012–13 in UC's pension costs for state– and tuition–funded employees—which we estimate to be $78 million. This would mean reducing the Governor's request for $90 million in General Fund support by $12 million. In addition, we recommend that the Legislature adopt intent language in the budget specifying that in the future funding for UC retirement costs (1) shall be determined annually by the Legislature, (2) shall be contingent on such factors as the comparability of UC's pension benefits and contributions to those of state employees, and (3) shall not necessarily include funding for tuition–supported employee pension costs or pension costs incurred prior to 2012–13.
The full report is at http://lao.ca.gov/analysis/2012/highered/higher-ed-020812.pdf
A video presentation of the report highlights is available
below:
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