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(Michael Meranze forwarded this AFSCME media release.)
FOR IMMEDIATE RELEASE: May 25, 2016
CONTACT: Todd Stenhouse, 916-397-1131, todds
NEW LUXURY EXECUTIVE RETIREMENT BENEFITS TO COST UNIVERSITY OF CALIFORNIA OVER $500 MILLION
Assembly Budget Subcommittee Votes to Block Prop. 2 Funds Until UC rescinds Costly 401K Plan
Oakland: A new University of California retirement plan that encourages UC’s highest paid employees to circumvent the cap on pensionable compensation (also known as the PEPRA cap) required by the Governor as part of a 2015 budget deal to boost state funding for UC will cost the university over $500 million over the next fifteen years, according to a new actuarial study.
Yesterday, the State Assembly Budget Subcommittee on Education voted to withhold hundreds of millions of dollars in pension stabilization funding until UC rescinds the plan.
Under the terms of the 2015 State Budget, by imposing to cap pensionable compensation for new employees hired after July 1, 2016 at the IRS Limit of $117,000, the University of California would be eligible to receive $436 million (over three years) in Prop. 2 Funds from the state to pay down its unfunded pension liability.
While imposing this cap on its defined benefit participants, the UC Regents approved a plan in March to create an entirely new “401k” option for its employees. Under this plan, instead of limiting employer contributions to 8% of the first $117,000 of salary, UC would provide employer contributions of 8% on the first $265,000 in salary—or $7400 more in annual contributions to an employee making over $265,000 per year.
Unlike its defined benefit pension, which has a five year vesting period and is not portable, UC’s new 401k has just a one year vesting period, and is portable. As such, it provides clear incentives for UC’s highest paid employees to select a 401K in order to circumvent the state-imposed cap, and in doing so, could risk the financial stability of the defined benefit program on which lower wage workers rely.
“What UC has done is akin to a health insurance company incentivizing its healthiest participants to bail out of a plan that also helps people who happen to get sick, leaving the most vulnerable individuals behind to face ever-increasing costs and fewer benefits,” said AFSCME Local 3299 President Kathryn Lybarger. “Worse, in this case, it enables UC’s executives to circumvent the expressed wishes of State Legislative leaders, at a cost of more than $500 million over the next 15 years.”
A key issue behind the Legislature’s desire to impose a pension cap on UC had been the skyrocketing cost of compensation for UC’s highest paid employees—growth that has occurred alongside a tripling of student tuition and growing concerns about access for qualified California students.
Since 2004, the number of UC Employees receiving salaries in excess of $265,000 per year has grown by more than 500% and an annual cost of more than $1 billion. In 2004, 629 employees earned these salaries at an annual cost of $222 million, and in 2014, 3,343 received these high-end salaries at an annual cost of $1.3 billion.[i]
When factoring in the total cost of the new Retirement Benefits—including the 401K “opt out” approved by the Regents in March--UC is slated to save only $9 million per year. According to the actuarial analysis, if UC were to eliminate the Opt-Out program and keep all of its employees in the same defined benefit pool, the savings would jump to $49 million per year, or another $580 million over fifteen years.
“The Legislature is deeply troubled by not only the cost of UC’s new 401K plan, but by what appears to be an effort to circumvent the terms of the 2015 Budget Act,” said Assembly Budget Education Subcommittee Chair Kevin McCarty. “State taxpayers should not be expected to subsidize the destruction of UC’s defined benefit plan, nor the enrichment of UC’s growing executive class.”
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AFSCME 3299 is the University of California’s largest union, and represents more than 22,000 Service and Patient Care Technical Workers at the system’s 10 campuses, five medical centers, numerous clinics, research laboratories and UC Hastings College of the Law.
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