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 D
ec. 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.
