Regents Meet Today But...

Regents visit future site of UC-Santa Cruz, 1963

...Yours truly will post when he has time. As usual, the Regents will "archive" the recording of their session for only one year. So we will have to record it in real time, i.e., one hour of meeting time = one hour of recording time. Much of today's meeting is closed. But yours truly has a variety of other obligations today so be patient. We'll get to it. And in the meantime, you can ponder why the Regents only archive for one year. Note that many other public California events such as legislative hearings are routinely archived indefinitely and are available on the calchannel.

One More Thing to Worry About

Yesterday, we posted about one less thing to worry about concerning UC retirement benefits.

But, of course, there is always something more, beyond the current problems with the pension and the Committee of Two bad deal. As we are reminded here...

http://www.newsobserver.com/news/business/article55264380.html

...the governor's next item of concern is retiree health. Note that UC always takes the position that retiree health is not a vested benefit, unlike some other public retirement plans. Nonetheless, if the pattern on pensions is followed, we are likely to get swept into whatever happens to other plans.

One Less Thing to Worry About

We have been blogging about the problems related to the Tier 3 pension proposal. It could have been worse if some anti-pension proponents had gotten their initiatives on the ballot for 2016. But as it turned out, they couldn't find a sugar daddy to pay for signature gathering and a later campaign. So they have given up for now:

For the third time in five years, an effort to put a government pension measure before voters has stalled for lack of money. Former San Jose Mayor Chuck Reed and former San Diego Councilman Carl DeMaio announced Monday that they are backing off plans to qualify a proposal for the November ballot. Instead, they said in a joint release, “we have decided to re-file at least one of our pension reform measures later this year for the November 2018 ballot.”...

Full story at http://www.sacbee.com/news/politics-government/the-state-worker/article55310175.html

Had a ballot initiative along the lines the proponents wanted, UC would have been faced with creating yet another pension tier (Tier 4).

What's the rush on Option B?

The Tier 3 pension proposal was set up to be rushed through the Academic Senate and the Regents without adequate consideration. What else can you say about a plan that was unveiled in mid-January for actual implementation on July 1? As it was unveiled, and as we have noted in prior posts, the proposal has two parts: There is Option A, a PEPRA-compliant defined-benefit plan with a defined-contribution supplement for pay over the PEPRA cap. And there is Option B, an alternative defined-contribution-only plan.

Given the bad deal that emerged from the Committee of Two, the task force charged with coming up with a Tier 3 plan did succeed with Option A in coming up with a plan that met the terms of the bad deal. Indeed, Option A was pretty much pre-ordained. Option A is all that is needed to get the $436 million pension contribution (assuming the legislature goes along with the governor). Option B is something extra.

As we have noted, Option B - with its feature allowing reversion to A after five years - raises a variety of concerns. Since Option A is the default in the proposal, UC will be shunting a lot of folks who optimally should pick B initially and then revert to A five years later into the wrong plan for them. On the other hand, if the default were B, we would risk turning the existing defined-benefit pension into an orphan plan over time.

While one can understand why B was created, it raises a lot of issues and, as noted above, is not required to get the $436 million pension contribution. If just Option A were approved now (and B were put aside for further consideration), nothing would preclude a study of adding some kind of Option B at a later date. Deferring consideration of B would allow adequate time for the matter to be properly considered by the Academic Senate and the Regents. Nothing in the Committee of Two deal says that UC can't consider adding later options down the road. Perhaps B should be a cash balance plan. Perhaps it could be combined with some type of annuity arrangement to deal with the problem of retirees outliving their savings. But none of these possibilities can be explored within the very abbreviated time-frame currently being imposed.

Right now, Option B is the source of controversy and of potential problems. In contrast, Option A - bad as it is - was more or less dictated by the Committee of Two. There really is no choice with regard to Option A. So maybe we should slow down and do a proper job in constructing an Option B that ameliorates as much as possible the strictures of Option A and which can be properly vetted. Put another way, what's the rush?

The Ever-So-Grand Hotel

 So imposing! So costly!

 But then, how can you have a great university without a Grand Hotel? Right?

The Default Pension Option is Not in Our Stars But in the Plan

We noted yesterday that the task force charged with coming up with a pension system that would meet the requirements of the Committee of Two deal released its report. (The link is on yesterday's posting.) We now also have a guide to reading that report penned by the chair and vice chair of the Academic Senate:
http://senate.universityofcalifornia.edu/underreview/documents/ROTFReportGuide.pdf.pdf
It is recommended reading.

Basically, the guide and the proposal itself are the outgrowths of a Bad Deal reached by the Committee of Two. Here is the basic problem. By itself, the PEPRA cap, currently around $117,000 doesn't matter for employees whose earnings will always be below the cap in terms of their eventual pensions. But for faculty, even those who start below the cap are likely to end up above it if they have any kind of career at UC. The cap is not just a cap on the final pension. It is a cap on the earnings that are counted toward the pension. So even newly-hired folks who might never have reached the cap amount under the current 2013 pension tier will be adversely affected. It is unclear that either member of the Committee of Two understood the difference between a simple cap and the PEPRA cap and its implications. (We are being polite by saying "unclear.") The whole thing was political symbolism: CalPERS does it so why shouldn't UC?

Given the Bad Deal and another political constraint - that the new tier for new hires after starting July 1, 2016 "save money" - whatever emerged from the task force was bound to be inferior to the current pension system facing employees hired before July 1. That is, if you dump enough money into a pension plan of any structure - defined contribution (DC), defined benefit (DB), hybrid, cash balance, whatever - you can always make the new plan better than some other. But the task force was not free to dump enough money into the new system to make it better. It had to be worse.

So the task force was dealt a bad starting hand. What it came up was a choice model between two alternatives: Option A is a PEPRA-capped DB plan plus a DC supplement for earnings above the cap. Option B is a DC-only plan. A new hire can elect A or B upon hiring but the default option is A. That is, if the new employee does nothing, he or she ends up in A. The task force believed that making a lifetime choice at hiring was too severe a decision, so it includes a kind of buyer's remorse five years down the road. But that second choice is only for those in B to revert to A. (There is no A-to-B choice.) Those who move from B to A at the second choice point are not retroactively put in A. But they do vest in A. And they keep whatever money they accumulated in B up to that point.

Note: Five years is not a good period for a second choice for newly hired assistant professors. Presumably, they will want to know if they have tenure before possibly deciding to move from B to A. The decision on tenure is likely to take place in the 6th or 7th year. There has been some assurance that the second-choice point for faculty in the final version will be adjusted to match the tenure decision timing. But if there is to be a second choice point for faculty, it should definitely be done at tenure.

The general rule is that DB plans (such as A) tend to favor long-service, career employees. DC plans (such as B) tend to favor short-timers, i.e., employees who leave (and take their money with them) after a relatively short period. Note also that offering the B-to-A switch after 5 years (or tenure) really tilts the optimal initial decision as seen by the new hire. No one starting out knows for sure that he/she is going to have a long career. So it seems clear that for most new hires, faculty or otherwise, the optimum choice is to start in B with the knowledge you can switch later to A if you want to do so. Put another way, a knowledgeable typical new hire should go for B. But the key is "knowledgeable." The new hire has to understand the implications of the initial choice. He/she has to understand that B is better than A if it turns out he/she leaves early and that starting in A forever blocks a move to B.

But under the proposal, UC makes the default choice A. It knowingly picks a default option that is likely to be inferior for new hires. That approach seems odd. But if the default were to be made B instead, UC would be channeling more and more new hires away from the DB pension, gradually making it an orphan plan over time.

The Senate guide notes that there is some adverse selection cost to the DB plan of offering any choice at all. (That is, in principle the proposal of the task force could have been just A and the result would have been more funding for the DB plan.) But apart from the accounting issues, orphan plans become progressively problematic from a political standpoint. They gradually have fewer and fewer defenders. Presumably, for that reason, the task force did not choose just B, i.e., abandoning DB in the future. And presumably, for that reason, the default initial choice is A.

Given the default of A, however, UC is in the legally questionable position of shunting employees into what is likely to be an inferior option for many of them. When you start with a Bad Deal, you only have bad options. Maybe that is the ultimate lesson.

What a great day to announce the new DC option!

The plan is at http://ucnet.universityofcalifornia.edu/compensation-and-benefits/2016-retirement-benefits/rotf-report.pdf

We'll have more to say later.