Ignorance May Be Bliss – But Ignoring Won’t Be

This post is going to be a bit complicated.  But note that you can think of ignorance in two ways.  One is just not knowing.  The other is a state of ignoring.  So here is what the powers-that-be at UC, systemwide and campus level, should know, and what they may be ignoring.  First, by now, everyone knows UC has an unfunded pension liability.  It grows over time unless adequate contributions are put into the pension fund.  Second, UC maintains a liquid cash reserve on hand to deal with ongoing needs for payments.  It maintains the reserve both for systemwide needs and for campus level needs.

The financial experts at UC think that there may be an excess of such liquid funds on hand which at current very low interest rates earnings very little.  So one idea is to put the assumed excess into a somewhat longer-term riskier fund.  Of course, risk comes as a price.  Those whose funds are held in these reserves would ostensibly get a higher return.  But the assets could vary in value.  The greater the risk, the less you can treat the reserves as a demand deposit with the principal returnable to the owner on demand guaranteed.  There would have to be some limit on access to prevent a run on the bank if there were a decline in asset value.  In other words, if you want the return that comes with risk, you get less of a guarantee.  Nonetheless, there seem to be some who think, or maybe are being told, that the extra return comes with no loss of liquidity.

There is a subcommittee of the systemwide Faculty Welfare committee known as TFIR (Task Force on Investment and Retirement).  (Full disclosure: Yours truly is a member although he was not involved in the particular report to which a link will be provided below.)  TFIR thinks a) the risk-liquidity matter is not being well presented to those who will make a decision, and – in any case – b) a better use of “excess” funds is to put them into the pension fund to offset the unfunded liability.  Shortchanging the pension fund means that eventually there will have to be higher contributions than would otherwise occur.  And the percent of payroll expected to be going to the pension fund under current circumstances is already quite high.

As this blog has pointed out umpteen times, the pension issue is not an old folks issue.  The old folks will be paid.  It is a young folks issue because the need to fund the pension will squeeze university budgets.  Neglecting contributions now will make the future – when today’s young folks are in mid-career – painful.  Meanwhile, older administrators will have passed the problem on to their successors.  Maybe this issue is not so complicated after all.  Let’s just avoid ignoring the facts that a risky return has costs – no free lunch – and that not contributing to the pension now will cause difficulty for the university in the future.

A recent TFIR report on this matter is at:
http://senate.universityofcalifornia.edu/committees/ucfw/TFIRLiquidityStatement050613.pdf