LAO Report on Higher Ed Contains Significant Pension Recommendations

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.

Unclear Which Retirement Costs Are Affected. The Governor's proposed language refers simply to "retirement costs." At the time this analysis was prepared, the administration had not provided sufficient clarity on whether this would include costs for retiree health and dental benefits. For example, funding for CSU's retiree health care costs are currently bundled together with funding for other CalPERS retiree health care costs. Since the administration has not yet indicated how it would split out funding for CSU, we are unsure whether the proposal applies to these costs. The administration also was unable to provide information regarding base funding for retiree health costs for UC. For these reasons, our budget analysis only focuses on funding for pension costs for UC and CSU.

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? …

Pension Costs Should Be Funded as Part of Workload Budget. The state currently provides funding for pension–related costs for all other state agencies as part of a normal, workload budget. In other words, the state provides funding to state agencies for the salaries and benefits (including pension benefits) related to their budgeted positions. Given that the state provides UC with funding for the salaries and benefits of some of its employees, it would make sense from a standard, workload budgeting perspective to also provide funding related to pension costs. As noted earlier, the state did provide such pension–related funding to UC for many years prior to the pension holiday that began in 1990. (As we discuss in the nearby text box, the state has repeatedly deferred a final budget increase for pension costs since that time.) Given that the university has had to restart its contributions to its pension plan in recent years, we find justification in its request that the state also resume providing pension–related funding.
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.

Timing Not Right to Lock In Base Funding for Pensions. As with the CSU proposal, now would be a poor time to choose to lock in a base funding level for UC pensions, given that the Governor is separately proposing to modify public employee pensions to reduce costs in the long run. In addition, as noted earlier, UC intends to increase its employer contributions over the next few years, although it has not yet reached agreement with all of its union–represented employees on the employee contribution rate. In our view, the Legislature should carefully evaluate future requests from UC for pension funding on a year–by–year basis in the context of the university's current pension benefit and contribution structure. In the long term, however, it could make sense to expect UC to fund its pension costs out of its base budget, given that the university's retirement system is separate from the state's. This could only work once a reasonable funding level has been identified and contribution amounts have stabilized.

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:

More History Lessons (from Faculty Association Chair Dwight Read)

As Chair of the Faculty Association at UCLA, I would like to emphasize again the point that was made in the Saturday, Jan. 21, 2012 Blog on this site, “Plenty of Nothing.”
 
The Governor wrote in his proposed budget: "The University of California (UC) will receive an increase of $90 million from the General Fund for base operating costs, which can be used to address costs related to retirement program contributions."
 
The main purpose of the public employee retirement law (PERL), passed in 1931, was to separate pension funding from all other kinds of funding. Early on, the state recognized that pension funding is long-term funding and must follow clear guidelines and sound actuarial principles to ensure that the state has the resources to keep its pension promises. Those principles require that the plan estimate many factors: the cost of service for the current year, the rate of return earned on investments, mortality rates, projected salary and benefit increases, etc. Based on these estimates and the plan design, the state can set the employee and employer contributions necessary to meet the funding requirements.
 
Each year public retirement plan sponsors need to ask the state to make a specific contribution to their retirement plan based on the actuarial principles agreed upon. This contribution is not lumped together with any other funding. Each year the State evaluates those requests and makes a separate allocation to the retirement plan, which can be used for nothing else. Retirement is and should be separate.
 
The same was always true for UC. In the past, before 1990 when contributions to UCRP were suspended or, one could say, dropped to "zero," the UC Regents like all other public pension plans in the state requested retirement funding from the state. And the state allocated UCRP funding annually as part of the budget category, "Fixed Costs and Economic Factors," a subcategory of "Unallocated Adjustments." The accounting categories were different for UCRP than they were for CSU or other public pension plans in California, but the principle was exactly the same: retirement funding is separate, not to be comingled with any other use of the funds.  Although the Regents can spend General Fund allocations as they wish, given their autonomy in the state, they never wavered in the past from using state contributions for UCRP for anything other than the employer contribution unless given specific permission by the Legislature to do otherwise. They honored the founding principle of public retirement funding.
 
Contrary to this principle, the Governor now wants to fund UCRP by way of an incremental increase to the General Fund. Although the Regents regarded the Governor’s gesture positively -- “This represents a major step forward in terms of securing the State’s participation in employer contributions for UC employee support which is automatically provided for employees of California’s other two higher education segments.”  -- it neither recognizes the obligation of the state to support retirement of the public employees at the University of California, nor does it provide actual funding for retirement based on actuarial principles. What the Governor awards can just as easily be removed by a legislative reduction in UC funding. How will budget decisions such as the minus $100 million trigger in the current budget affect long-term pension promises?

That is exactly why the forefathers and mothers of public pension funding in California knew that funding retirement is a serious business and must follow separate financial principles from all other kinds of funding in order to keep the state and the employee pension plans on a sound financial basis.
 
I urge clarity and transparency in talk about public pension funding. An augmentation to UC’s budget from the state General Fund is welcome, but it is not the same as state support allocated specifically for UCRP. And I urge the Legislature to do the right thing: fund $90 million to UCRP directly as part of the long tradition of supporting public employee retirement in California and in accordance with PERL principles of retirement funding.

 
Dwight Read,
Chair, UCLA Faculty Association  

Piggy-Back

Can UC piggy-back on CalSTRS? We are “education,” too. And we have pension funding issues. If you don't ask, you surely don't get. See below:

CalSTRS reported ready to seek more state funding

Sacramento Bee, 10/11/11, Dale Kasler

For more than two years, CalSTRS has been talking about asking state lawmakers for more money to plug its funding gap. Now the teachers' pension fund believes the Legislature is ready to listen. Pension fund Chief Executive Jack Ehnes said last week he wants Gov. Jerry Brown to include additional CalSTRS funding in a long-awaited pension reform proposal he's expected to release in the coming weeks. "We think we're at the right moment where it's time to move on the funding strategy politically," Ehnes said at a CalSTRS board meeting in Huntington Beach, according to Bloomberg news…

Full article at http://www.sacbee.com/2011/10/11/3973771/calstrs-reported-ready-to-seek.html

Something that could be done on the UC Budget: Time to Ask

On The Record (Excerpt)

Gov. Jerry Brown recently announced that he was ending talks with Republican legislators over a temporary tax increase. What can be done to prevent partisan standoffs in Sacramento and improve the UC’s financial circumstances?

Daniel 
Mitchell, 4-11-11, Daily Bruin

When the state legislature spends time in the midst of a major budget crisis debating about whether to ban shark fin soup, you know we’re in trouble.

The current focus on soup is not because legislators don’t know about the dire budget situation. Rather it means they don’t know what to do about it. And that is bad news for UC and its state funding. But there is something the state can do for UC, despite the fiscal crisis.

...(W)hat can UC ask from the governor, given these unfortunate circumstances? More cash is not going to be on the table. But if the governor were willing, the state might do what it did in 1984 and 1990 when cash was also in short supply. UC needs to contribute to its now-underfunded pension plan.

UC’s pension became overfunded in the early 1990s and the state stopped contributing. Before then, however, the state routinely made the annual employer pension contribution.

Now that contributions are needed again, the state is refusing to resume paying its share, placing an added burden on UC.

In 1984 and 1990, however, the state gave UC an IOU to put in the pension in lieu of scarce cash. The IOU was essentially a promise to pay interest and principal on the state contributions due for those two years over the subsequent three decades rather than upfront. If the state simply followed this earlier precedent, it would alleviate some of the pressure on UC’s operating budget. No immediate cash would be needed.

Would the state be willing to help UC absorb whatever budget cuts are coming next fiscal year by providing a pension IOU? There is only one way to find out: Ask the governor.

Full article at http://www.dailybruin.com/index.php/article/2011/04/on_the_record

If other folks can call Jerry, why can't UC?

LAO's Position is that State Pension Contributions to UC are Voluntary & Should Come With Conditions

The Legislative Analyst's Office has released a video of about 15 minutes on public pensions. Most of the discussion deals with CalPERS, CalSTRS, and other systems. There are occasional references to UC at various points in the video.

However, at the end it is stated that the state at some point should voluntarily contribute to UC but make that contribution conditional on the UC pension being more or less the same as other state systems. Put another way, the LAO's position is that the state has no legal obligation to contribute at any point. Moreover, the video describes a future two-tier for other state systems which does not appear to be the same as what the Regents adopted in December. Presumably, the voluntary contribution would be conditional on changing that decision. The position of the LAO with regard to UC starts at 13:59 on the video.

Keep in mind that we are in no immediate "danger" of the state making any pension contribution to UC.



UPDATE: A write-up about this video report from calpensions can be found at http://calpensions.com/2011/02/11/lao-recommends-sweeping-state-pension-reform/

UPDATE: PowerPoint slides related to the LAO video are now at http://www.lao.ca.gov/presentations/2011/pub_retirement_bens/pub_retirement_bens_021011.pdf The UC recommendations are on slide #31.

Video of Yudof Testimony on Budget Cut at State Assembly

UC President Yudof testified at the State Assembly Budget Subcommittee on Educational Finance last Monday. Below are videos of his testimony and questions-and-answers with assembly members. The video is divided into two parts because of time-limits on Facebook. As a previous post noted, he indicated that there would not be another tuition hike in response to the governor's proposed budget cut for UC. But that was contingent on, among other things, voter passage of the governor's proposed tax extensions.

Also notable was Yudof's remark that tuition hikes help low-income students because of the recycling of one third of tuition revenue into student aid, but that this comes at the expense of middle-income students.

Yudof also noted that while CSU is part of CalPERS and therefore gets a state contribution to its pension, UC is receiving no state pension contribution.

Part 1:


Part 2:

Moody’s Evidently Thinks the State Has an Obligation for the UC Pension

Calpensions.com is reporting that Moody’s is counting state (any state, not just California) pension debt, along with regular bond debt, in calculating total obligations. Presumably, this sum will be considered in rating bonds. I imagine most folks will take this as Bad News. But note that UC has struggled to get the state to acknowledge that it had a liability for the UC pension. The state is making contributions to its other major pension plans, CalPERS and CalSTRS, but it is not doing anything for UC, forcing the University to divert resources from its general operations.

Thanks to efforts of the UCLA Faculty Assn., the Legislative Analyst has begun acknowledging that the state has some liability for UC's pension system. But no dollars have flowed from that recognition. No dollars are included in Gov. Brown's budget proposal for 2011-12.

There is some ambiguity in the report as to what Moody’s is counting. But calpensions seems to think that UC is in the mix. That can be taken as Good News since it adds pressure on the state to do something affirmatively regarding the UC pension and its unfunded liability.

Below are excerpts from the calpensions report:

Moody’s begins treating pensions like bond debt

Ed Mendel, 1-31-11

A leading credit-rating agency, Moody’s, has begun treating unfunded pensions like bond debt, giving California a combined tax-supported debt of $136.9 billion that is well beyond other states but also may be understated.

The decision to add pensions to bond debt announced by Moody’s Investors Services last week reflects concern about public employee pension costs, which are growing as state budgets plunge deep into the red during a lengthy economic downturn.

…In the past, said Moody’s, pension funding levels were factored into state credit analysis. But the annual state debt reports were based only on the value of outstanding bonds as a percentage of income and other factors… California currently has one of the lowest bond ratings of any state, A1 from Moody’s.

…California’s combined bond and unfunded pension debt is 162.6 percent of annual state revenue, Moody’s said, ranking 19th among states. Oregon leads with debt equal to 316.8 percent of revenue, while Nebraska is the lowest, just 2.3 percent.

…The Moody’s report lists California’s combined debt as $136.9 billion ($87.3 billion bonds and $49.6 billion unfunded pensions).

…The Moody’s listing of California’s unfunded pension liability, $49.6 billion, apparently reflecting a lag in annual state reports, is similar to the total before major pension fund investment losses in the 2008 stock market crash. The unfunded liability separately reported by the three state pension funds as of June 30, 2009, totaled $91.5 billion: California Public Employees Retirement System $48.6 billion, California State Teachers Retirement System $40.5 billion, and the University of California Retirement Plan $2.4 billion.

The Moody’s report acknowledges a dispute over the way public pension funds estimate their unfunded liability. The funds use their investment earnings forecast, often about 7.75 percent, to offset or “discount” their future pension obligations.

Some economists argue that public pensions should use a lower discount rate based on “risk-free” government bonds because the pensions are “risk-free,” guaranteed by the taxpayer.

The Governmental Accounting Standards Board may adopt a blended discount rate. For any part of future pension obligations not covered by assets assumed to grow at the forecast earnings rate, a lower “risk-free” discount rate would be used…

Full report at http://calpensions.com/2011/01/31/moodys-begins-treating-pensions-like-bond-debt/

Anything that pushes the state to pay up is more Good News than bad:

The Ying and Yang of the UC Pension: Brown vs. LAO?

Two views on the UC budget (cut) and the UC pension. Jerry Brown’s flack says state won’t pay (sort of). In contrast, the LAO has no objection to the state paying in the abstract (reminder: Thanks to the UCLA Faculty Assn.!!!), but seems to want unspecified assurances.

From California’s Capitol:

UC Faces a Budget Hole of Not $500 Million But $700 Million

Jan. 25, 2011

The University of California faces a more than $200 million deeper reduction than the $500 million proposed in Gov. Jerry Brown’s budget – in part because the state refuses to make a contribution to the 10-campus system’s retirement system. UC says the state, as it has in the past, should pay a percentage of the employer payments the university makes to its retirement system based on the $3 billion general fund contribution the state makes to the system’s $6 billion instructional budget. Brown would reduce the $3 billion to $2.5 billion.

…“The governor’s budget treats the UC pension issue in a manner consistent with prior budgets – it proposes no state contribution to its independent retirement system,” said H.D. Palmer, a spokesman for Brown’s Department of Finance.

…Historically, the state has contributed to UC’s retirement system, which was created in 1961. Then Gov. Ronald Reagan’s 1969 budget shows a contribution of $14.1 million to the fund from two years earlier. Twice in the 1980s, the state has missed payments because of fiscal problems but agreed to repay what was owed over time. The state’s contribution is calculated and included in the budget request sent to Sacramento by UC’s Board of Regents.

…There is no such dispute with the 23-campus California University System. Its retirement system is part of PERS and the Brown administration has proposed a $75.2 million increase in employer payment in the budget.

…The Legislative Analyst, while not objecting to the state making a contribution, is concerned about safeguards. “These retirement costs are in part — I emphasis in part — costs of UC fulfilling its public mission and generally the state has supported UC’s core mission with general fund revenue,” said Steve Boilard, director of Higher Education for the analyst’s office. “There’s nothing inherently distinct about this particular cost with one exception: UC makes its own decisions about these retirement benefits and its own decisions, which determines what the out-year costs will be. Our concern is we wouldn’t want the state to be obligated for whatever amount, even a percentage, UC decides it independently wants to provide for retirement benefits.”

Full article at http://californiascapitol.com/blog/?p=5060

Yudof on Budget, Privatization, Pensions

There is an interview in the LA Times today (1-15-11) of President Yudof by Patt Morrison. Below are excerpts.

…Morrison: You've used the Ed Koch line, "How'm I doing?" After 2 ½ years, how're you doing?

Yudof: I think we're doing well, and I don't mean to be Pollyanna-ish. We have a $20-billion shortfall, long run, in the pension plan. I think it's going to take 20 years to dig our way out, but we have a plan. We put the new [student] eligibility standard into effect; it's going to be a less mechanical admission [process], looking at the whole student record. We're putting in place a 10-campus payroll system. The faculty has been very loyal; we haven't lost an untoward number of people…

Morrison: What do you think about Gov. Brown's proposed cuts to UC's funding?

Yudof: I don't blame Gov. Brown. I don't blame the Legislature. This is where we've been heading for a very long time, so it's sadness more than shock. In spite of all we've done to save money, raise fees, restructure our debt, this is going to cut into the muscle and sinew. A lot of people think there's a lot of fat. We don't have enough fat left to absorb a budget cut like this. We will set targets for reductions, and in March I'll present the whole thing to the Board of Regents. I'm not planning on asking for a fee increase, at least not at this time; I can't rule it out forever. We're probably looking at layoffs and program cuts and things like that.

Remember, it's not $500 million, it's really closer to a billion, because unlike community colleges and state colleges, the state doesn't give us money for employer contributions to the pension plan, so that raises the real cost [of the cuts] to $700 million; then you have union contracts, energy contracts, inflationary increases -- we really have a billion-dollar problem.

…Yudof: [Former Gov.] Schwarzenegger had a huge regard for higher education. He understood its role in economic development. Great research universities take a long time to build and can be destroyed in a very short period of time; he understood that.

Morrison: There's talk of privatizing parts of the system, like UCLA's Anderson School of Business.

Yudof: Well, I don't like the privatizing. Frankly, internally there's a lot of criticism of the proposal. But in this environment, if there were areas in which you could charge more to help balance the overall budget, it's very tempting. But I've not signed off on it, [and] it hasn't gone to the board.

Morrison: The governor once spoke of the "psychic rewards" of public service, as opposed to the dollar ones. That's an old statement; I don't know if the governor would stick by it. I think there's something to it, but I would put it two ways. Many university professors could pursue more lucrative careers. It took me virtually 10 years of law teaching to match the highest offer I got from a law firm coming out of law school. I didn't regret it; I'd made my choices. So there is psychic benefit. On the other hand we're in a competitive business. Like any industry, [faculty] get [other] offers. Compensation is a significant factor. They say, "What am I doing here if I can get 50% more money from a private institution"? You have to be competitive. [In] the nation's 62 top universities, our highest [paid] chancellor ranks 50th. And the chair of the group, from Santa Barbara, ranks dead last.

Morrison: Your predecessor resigned after accounts of secret bonuses and salary deals. Now some well-paid UC people claim they had a deal for bigger pensions. It's complicated -- a lot of the money wouldn't come from public dollars but from profit-making parts of UC. What's your stand on this? Isn't the timing awful?

Yudof: I don't do secret deals; everything's in the paper! It is a complicated problem. When I arrived I had no idea we had a ruling [on the pension deal] pending. We looked at it and said, this resolution was never implemented. [The potential beneficiaries] disagreed. They're not dishonorable people. That is a good-faith interpretation. We think it's wrong, and we think under the current financial circumstances it's difficult to justify. Perhaps it was the tone of [their] letter; I think that it hit overly hard.

Morrison: Is what we're going through an aberration, or the new normal?

It's probably the new normal. The truth is, the deterioration of [education] funding predates this horrendous Great Recession…

Full article at http://www.latimes.com/news/opinion/la-oe-morrison-yudof-20110115,0,4144979.column

Legislative Analyst Acknowledges UC Pension Issue for State

In his press conference on Jan. 12 on the state budget, Legislative Analyst Mac Taylor explicitly raised the issue of state funding for the UC pension. Those who follow that issue know that at one point, the Leg Analyst took the position that the state had no responsibility for the UC pension. After a meeting with UCLA Faculty Association reps, that position changed. The legislature dropped language asserting that it had no liability for the UC pension. Of course, so far, no actual funding has appeared.

The relevant part of the press conference is on the video below:

How High Can the Employee Contribution Climb in UCRP? A Message from Dwight Read

How High Can the Employee Contribution Climb in UCRP?

Dwight Read, Chair, UCLA Faculty Association

Now it is 2% of salary, next year, 3.5%, then 5%. But what will it be in 2017? …24%?

In a special meeting scheduled for Dec. 13, the Regents will decide whether to introduce a New Pension Tier at UC for all new hires as of July 1, 2013. At the November Regents’ meetings, President Yudof presented a proposal for the New Tier that set the annual cost of the plan at 15.1% of retirement covered compensation with contribution rates at 8.1% for employers and 7% for employees. The earliest age of retirement will be increased to 55, and there will be no lumpsum cashout option. Yudof also offered a proposal for amortizing the unfunded liability of UCRP.

Since the three November meetings, the Academic Council has endorsed Yudof’s choice for the New Tier and the proposal for fully funding UCRP as soon as possible by borrowing from internal UC sources. (See the UCLA Faculty Association Blog, Nov. 29, http://uclafacultyassociation.blogspot.com, click on November, and then click on “Academic Council Endorses Yudof Plan on Retirement.” See also the UC Post Employment Benefits PEB Taskforce Report at http://universityofcalifornia.edu/sites/ucrpfuture/ and click on “Task Force Report.”)

It is yet to be decided whether employees will have a choice among retirement tiers in 2013. The IRS is evaluating the tax status of the employee contribution if current UCRP members have the choice to opt out. The issue of choice in 2013 was not discussed in the November meetings, nor is it on the agenda for December. If employees are offered a choice between staying in the Old Tier UCRP or opting out, it may not be as easy a decision for younger employees as the University anticipates: opt into the New Tier with slightly lower benefits, but fewer liabilities, and a starting employee contribution of 7%; or remain in Old Tier UCRP with its somewhat more generous benefit structure, but growing unfunded liability, and an employee contribution that could increase to 50% of the total cost.

According to the UCRP funding policy, the Annual Required Contribution (ARC) calls for contributions to be set at the level of the Normal Cost plus an amount to amortize any unfunded liability over 30 years. The Normal Cost is an actuarial estimate of the cost to fund the benefits provided by the retirement system for the current year and is expressed as a percentage of the payroll covered by retirement benefits— called the Covered Compensation or CC. The Normal Cost of the New Tier UCRP would be 15.1%; old Tier UCRP, 17.6%. The unfunded liability is the shortfall in the amount necessary to pay out all the benefits promised to retired and active employees. The New Tier will begin with zero unfunded liability, but the unfunded liability of Old Tier UCRP on July 1, 2010 was $13 B, based on market value of assets. For 20 years of the contribution holiday, the investment earnings paid the Normal Cost without any contributions from employer or employee, but now the economic environment is different: total contributions are necessary to cover both the Normal Cost and the cost to amortize an unfunded liability that is almost as large as the Normal Cost.

On July 1, 2010, the ARC for UCRP was 31.32% of CC (17.6% Normal Cost plus 13.72% amortization cost). Current contributions to UCRP for 2010-11 are 6% of payroll, 2% from the employee and 4% from the employer, or about 11.6% short of the Normal Cost and 25.32% short of the full ARC. The 3-year stretch to 2013 should bring total contributions to the level of the Normal Cost, but it’s a costly stretch in which any amounts contributed less than the full ARC increase the unfunded liability.

President Yudof’s proposal to amortize the UCRP unfunded liability calls for the employer contribution to ramp up to 20% by 2017. Assuming an employee contribution of 7%, a total contribution of 27% by 2017 will still not be enough to cover the ARC or modified ARC (the Normal Cost plus the interest on the unfunded liability). According to FA Executive Board member Steven Lippman, AGSM, “On July 1, 2017, the day when the 27% contribution level is attained, the shortfall will exceed $22.8 billion so that a total contribution from employees and employers of more than 48% of CC will be needed to prevent the shortfall from growing even further. . . . amortization of the shortfall over the next 40 years is exceedingly unlikely if not impossible.” (See the Nov. 22 Faculty Association Blog “The UCRP Train Wreck,” at http://uclafacultyassociation.blogspot.com/2010/11/guest-op-ed-ucrp-train-wreck.html)

The question is: how much of that 48% must the employee contribute?

5% The Regents approved an employee contribution to UCRP in 2012-13 of 5%. Currently, participants in CalPERS pay 5% of their salary for retirement benefits, but this will likely go up to 10% in the near future.

7%? The PEB Taskforce members have assumed that by July 1, 2013, the employee contribution to Old Tier UCRP will be 7%, but some members think it might be higher.

10%? The Legislative Analyst (LA) has proposed that one option for the Regents is to set the UC employee contribution at the same level as other state employees pay, currently 5%, but likely heading up to 10%. It is possible that linking the employee contribution in UCRP with the employee contribution in other state-supported retirement plans, like CalPERS, will facilitate the restart of State contributions to UCRP.

Before the contribution holiday, the ratio of employee to employer contribution in UCRP was roughly 1 to 4.

24%? Approved by the Regents in September 2008, the current UCRP funding policy creates a backstop employee to employer contribution ratio: 1 to 1. The policy states that each year the Regents will determine the split in contributions between employees and employers. The only limit on the employee contribution is that it shall never be higher than the employer contribution. Setting a 1 to 1 ultimate contribution ratio poses a significant risk to members in Old Tier UCRP with its mounting unfunded liability. The ratio will not be 1 to 1 in 2013, but it might be in 2017.

A current ballot pension initiative is in the works in California that would require public employees to pay half their retirement benefit costs (See the Faculty Association Blog for Dec. 1). Sponsored by Californian Pension Reform, the initiative would apply to all public agencies in the state of California, including UC. It is not clear whether this initiative will actually get on the ballot, but it is clear that something like this initiative will eventually be implemented for public employees.

The current study on total remuneration at UC, updated Oct. 2009 for the PEB Taskforce, finds that a higher employee retirement contribution affects different employee segments at UC differently depending on the market comparison for that sector—Ladder Rank Faculty, General Campus, and Medical Centers. With a 5% employee retirement contribution, the total remuneration lag for Ladder Rank Faculty would be 6%, for the General Campus, 4%, and total remuneration for UC Medical Centers would be 4% higher than their competitors. (See

http://www.universityofcalifornia.edu/news/compensation/total_rem_report_nov2009.pdf for the PEB Final Report.)

If a 5% employee contribution to retirement drops total compensation for UC Ladder Rank Faculty down 6% with respect to their competitors, the comparison-8 (4 private institutions - Harvard, MIT, Stanford, and Yale - and 4 publics - U of Michigan (Ann Arbor), U of Illinois (Urbana), SUNY-Buffalo, U of Virginia - then an even higher employee contribution will have a much greater negative impact on total compensation.

As the Regents prepare to make decisions on retirement plans at UC, they should also consider the effect of increased employee contributions on total compensation for Ladder Rank faculty if they expect UC to hold its competitive level in recruiting and retaining faculty. UC staff employees covered by collective bargaining agreements have contractually outlined future salary increases, which include 10% for Medical Auxiliary Services, 4.5% for some maintenance sectors, 5% for technologists, and 5.1% for nurses. In the same way, faculty should have a plan of scheduled salary increases, independent of promotional increases, to help them achieve and maintain competitive total remuneration.

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.

The Daily Californian: UC Struggles to Fill Multi-Billion Dollar Pension Deficit

I couldn't find any write-ups on the Post-Employment Benefits Task Force report in the press so far, including in the Daily Bruin. However, UC-Berkeley student paper does have a write-up with the graph above as part of the article. Note that the article correctly identifies the long contribution holiday as the major source of the underfunding problem. For the text, see below:

The Daily Californian

UC Struggles to Fill Multi-Billion Dollar Pension Deficit

By Jordan Bach-Lombardo and Javier Panzar

Monday, August 30, 2010

http://www.dailycal.org/article/110146/uc_struggles_to_fill_multi-billion_dollar_pension_

A decision made nearly 20 years ago to stop paying into the University of California's pension program is coming back to haunt the university in the form of a potential $20 billion deficit, pitting UC officials and faculty against each other as they struggle to create a new pension model.

The decision, made in 1990 during a period of similar state budget woes, combined with the current sinking economy has eroded the pension program's value to the point that, without immediate change to the fund's management, the university will owe billions in benefits that it cannot afford to pay.

Though contributions to the fund resumed in April, a report released Friday by a university task force recommends the UC increase contributions while decreasing benefits to prevent insolvency of the program - a proposal sharply criticized by university employees who contend it would render the system uncompetitive.

"(The 1990 decision) was a serious error, and we're facing the cost of it now," said Robert Anderson, a UC Berkeley professor and member of the Post-Employment Benefits Task Force. "Unfortunately ... again the state budget is in very bad shape, and the decline in the stock market means instead of gradually increasing the funding, we have to do it in a big bang that is very painful to the university budget."

The vast problem now facing the UC began in 1990 with the decision by the UC Board of Regents to stop paying into the system altogether. With California struggling to bridge billion-dollar deficits during that recession, both UC and state leaders decided to save money by ceasing payments, instead banking on the assumption that the program - which had been so well managed in previous decades that it was significantly overfunded - would continue to pay for the thousands of pensions.

"It really is an amazing thing that this plan has gone along for 19 years without any contributions from anybody," said Dan Simmons, the incoming chair of the Academic Senate who also served on the task force's steering committee. "The problem with it is that the university ... kind of became addicted to paying people without having to put any money on the table."

Instead of paying into the fund for the last 20 years, the university channelled much of the money into its operational budget, growing in both size and scope, according to the report. During this time, the university expanded enrollment, founded its first new campus in decades and formed many new academic programs.

Even without any contributions, the fund was still about 50 percent overfunded in 2001, with roughly $30 billion in assets and $20 billion in liabilities, according to the report. But since then, the fund's liabilities have increased as the number of retirees has grown, and with the economic collapse of 2008 compounding the negative trend, the pension's liabilities outweighed its assets for the first time in 2009.

As of July 1, 2009, the pension plan was 95 percent funded.*

Following a $16 billion loss in assets in 2008 and 2009, UC President Mark Yudof assembled the task force last year to analyze the current pension system and propose new models that could not only sustain the university, but also compensate for almost 20 years of nonpayment.

Despite the general acknowledgment that contributions to the fund must increase to stave off insolvency, disagreements arose between members of the task force over how to balance future levels of contribution while still maintaining the university's competitiveness in today's job market.

Every faculty and staff member of the working groups signed a dissenting statement attached to the report, criticizing the steering committee's approach to reducing costs as ultimately detrimental to the university.

"(The report) failed in letting the desire to cut costs dominate the far more important objective, providing benefits that are competitive and designed to support the preservation of the university's excellence," read the closing lines of the statement. "Because of that failure, we cannot support the recommendations of the executive summary or the full report of the steering committee."

Anderson, a member of the task force's finance working group and professor of economics and mathematics, expressed concern that the lower total remuneration rates, the value of the pension's benefits, would erode the UC's quality by losing current faculty and the ability to recruit top talent.

The crux of the disagreement lies within the report's recommendations for future total remuneration. The dissenting statement calls the options proposed by the report "marginally competitive" only if employee salaries are increased to market levels.

UC Provost Lawrence Pitts, the chair of the steering committee, said that although total remuneration might be less under the new plan, it will cost both the university and its employees less money.

But while contention exists over the amount of employer, employee and state contributions to the pension fund, all sides agree that payments must increase as soon as possible.

"(The university) is clearly going towards a negative funding status," Pitts said. "We are now below 100 percent with a rapid downhill trajectory."

In a letter addressed to the UC community, Yudof welcomed input from "both within and outside the university about the best ways to restructure and fund our retirement programs."

The recommendations from the task force will be reviewed by the UC Office of the President over the coming months and sent to the regents, who will hold a single-issue meeting in December to vote on the issue, Pitts said.
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*EDITOR'S NOTE: The 95% figure is on a moving average basis used for smoothing. On a current market basis, the underfunding is much larger.

UPDATE: The Chronicle of Higher Ed has a story on pension problems at public universities which - not surprisingly - makes substantial reference to UC. Article is at:
http://chronicle.com/article/As-Pension-Costs-Rise-Public/124150/

UPDATE: The LA Times carries a brief story on the PEB report at http://www.latimes.com/news/local/la-me-uc-pension-20100831,0,5013982.story

UPDATE: Editorial on the PEB report in the San Diego Union-Tribune at http://www.signonsandiego.com/news/2010/sep/04/still-more-grim-news-on-pension-front/

Governor Uses Market Numbers to Set CalPERS Contribution Rate

Extra $$$s for CalPERS from State; zero for UCRP!

Governor uses market numbers to set the CalPERS contribution rate!

Governor to give CalPERS more funds than it asked for.

Dale Kasler,

Sacramento Bee, Dec. 06, 2009

With the State facing a $20.7 billion deficit over the next year and a half, Governor Schwarzenegger is willing to raise the State’s annual CalPERS contribution to $4.8 billion in the next fiscal year, even though CalPERS officials only asked for $4.1 billion.

Why give more? Because the Governor thinks it is more prudent to pay the CalPERS tab as quickly as possible and not allow “smoothing”  of the numbers to mask the extent of the problem--a huge unfunded liability.

Gov.Schwarzenegger, who has been trying to overhaul employee pension systems in the State, does not believe in allowing a smoothing mechanism to lower the cost of contribution and thereby “pass the buck to our kids.” Instead, he is willing to pay what he owes now, but start the process of creating a more sustainable pension system for the future.

See http://www.sacbee.com/arnold/story/2373499.html for the complete article.