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.