SAN FRANCISCO — After two decades of getting by only on investment earnings, an apparent record for public pension funds, the University of California pension system faces what a task force calls a “frightening challenge.”
A retirement system that got no money from employers and employees during a contribution “holiday” that began in 1990 now needs about $1.6 billion this year, 20 percent of the payroll, to be properly funded.
It’s on track to get about $480 million in employer-employee contributions. The annual amount needed for proper funding could be more than $2 billion two years from now.
But the 10-campus UC system, with a $20 billion operating budget, is in a tight financial squeeze.
New money that UC puts into retirement has to come from borrowing, other programs or student fees. Hard times have already resulted in 2,600 layoffs and the elimination of another 1,400 positions and scores of programs.
Raising employee contributions is a pay cut, hitting low-income workers and others who have not had pay raises, while eroding generous retirement benefits that help UC attract top talent.
UC wants the state to resume contributions, a matter of equity since CSU and community college retirement programs get state money. But the state has a $19 billion deficit and lawmakers are in the third month of a budget deadlock.
Every $1 not received from the state, officials say, costs UC an additional $2 from other sources.
The state provides a third of the UC budget, the rest coming from medical centers, federal sources, grants and other operations. Without a state retirement contribution, UC cannot levy similar contributions on other budget sources.
After several years of pleading for state funds, UC restarted some pension contributions this year without aid from Sacramento. Alarmed by surging retirement program debt, UC officials say action is needed now.
“One thing is certain: UC must make changes to its retiree health and pension programs,” UC President Mark Yudof said in a letter last month with a report from a Post-Employment Benefits Task Force he appointed in March 2009.
“If we do nothing, in four years the university will be spending more on retirement programs each year than we do on classroom instruction,” he said. “And within five years, our unfunded liabilities will have ballooned to more than $40 billion. That scenario would be disastrous for UC.”
Contributions to the UC pension system, which has an investment portfolio currently valued at about $34 billion, resumed in April under action taken by the Regents last year.
Money that employees had been required to put into tax-deferred individual investment accounts, 2 percent of pay, was redirected to the pension system. UC contributed 4 percent of pay.
Last week, the Regents voted to increase the employee contribution to 5 percent of pay and the employer contribution to 10 percent by July 2012. The employee increase must be approved in bargaining with labor unions.
In November the Regents are scheduled to consider proposals to reduce pensions for new hires beginning in July 2013. Many retirees would be required to pay more for health coverage.
It may not be smooth sailing.
Protesters targeted Yudof with a demonstration and street theater outside the Regents meeting last week. Several dozen came inside and, after members of the audience spoke, disrupted the meeting.
“R F Yudof! R F Yudof!” they chanted, rising in unison from their chairs.
The Regents filed out. Campus police declared an unlawful assembly and cleared the room of protesters, who left peaceably. The Regents returned, resuming their meeting after a 10-minute delay.
A strong endorsement of Yudof from Regent Norman Pattiz drew a round of applause from the 26-member body.
“I think I speak for certainly a majority, if not all, of the Regents that we are really fortunate to have the president we have sitting at this table,” said Pattiz, “that the unfounded, inappropriate and wrong approach to personalizing this and attacking an individual is just not the right way to go.”
Protesters chant insult at UC president
UC police order protesters to leave
Protesters exit peaceably
Retirement benefits are an important competitive edge as UC seeks top talent. The task force said elite private universities — Harvard, Stanford and Yale — only offer 401(k)-style individual investment plans, common in the private sector.
A survey of UC employees done for the task force earlier this year found that 82 percent of respondents said the retirement program is an important reason they stay at UC. Results were similar among faculty and staff, campuses and medical facilities.
The UC pension formula is 2.5 percent of the highest 36-month pay for each year served at age 60. In comparison, the formula for the California State Teachers Retirement System serving kindergarten through community college is 2 percent at 60.
Unlike CalSTRS members, UC employees receive Social Security in addition to their pensions. The task force proposals to cut new-hire pensions would replace 80 percent or more of most salaries, when combined with Social Security.
Currently, long-term UC employees with salaries of less than $80,000 can receive a total retirement income from their pension and Social Security that exceeds 100 percent of their salary.
The task force proposals for new hires also would move the minimum age for retirement from 50 to 55 and the maximum benefit age from 60 to 65. For retiree health care, eligibility would be tightened and UC’s share of insurance costs reduced.
Roughly 40 percent of UC retirement program members would remain under the current retiree health care rules — “grandfathered” if they have at least five years of service and their age plus years of service equals 50 or more.
What the Regents will do later this year is unclear. The task force, unable to agree on a single plan, offered two options. Yudof has agreed to look at a third option the task force thinks is too costly.
Other proposals may come from employee groups. The Academic Senate has suggested that UC issue a $4.5 billion pension bond, which among other things might provide the state share needed to raise contributions from other budget sources.
The task force’s finance work team, looking at a number of options for putting more money into the pension system, gave some examples of what using the money for other purposes could buy.
A contribution of 1 percent of payroll is about $80 million, the equivalent of more than 630 new faculty (at $126,582 a year for salary and benefits), or a 5.65 percent increase in student fees not including related financial aid.
“The task force analyses began with an unfunded liability and UCRP (retirement program) benefit structure requiring total contributions at 37 percent of covered compensation by 2014-15,” said the report.
“Assuming a 5 percent employee contribution, this would have required a 32 percent university contribution. The task force finance recommendations reduce the university contribution to a maximum of 23 percent over time.
“While that number poses a frightening challenge to the university operating budget, it represents the collective best efforts of the task force, given the legal necessity of covering the unfunded liability and the need to provide competitive retirement benefits, essential to UC’s operating mission.”
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 22 Sep 10
Calpensions 
September 22, 2010 at 4:44 pm
If I read the UC Task Force Report correctly, one proposal calls for raising the salary cap for calculation of UCRS pensions from the federal limit of $250,000 to $360,000, an action that would potentially increase the guaranteed pension of the most highly compensated employees by over 40%. Amazingly, the UC administration has already requested and received an IRS waiver to make this change, even before the task force report was issued. While the UC already “makes whole” annuitants affected by the IRS limits, the funds to do so must come out of operating budgets, so the effect of this change will be to (a) provide a legal guarantee of a higher-than-normal pension, and (b) shift the costs of these pension benefits to UCRS at a time when the pension funds are already underfunded. While the fiscal effect of this change is not enormous, it indicates the priorities (and salary level) of the folks who will be making the final decision on the pension program. Please correct me if I’m wrong.
September 22, 2010 at 9:05 pm
Quoting … $24 Billion underfunded and “After two decades of getting by only on investment earnings, an apparent record for public pension funds, the University of California pension system faces what a task force calls a “frightening challenge.””
Not really, the University staff’s pensions & benefits should be reduced …SIGNIFICANTLY REDUCED … just like the those of Private Sector workers have been reduced.
Civil Servants are NOT “special”.
September 22, 2010 at 9:22 pm
Quoting …”The task force said elite private universities — Harvard, Stanford and Yale — only offer 401(k)-style individual investment plans, common in the private sector.
A survey of UC employees done for the task force earlier this year found that 82 percent of respondents said the retirement program is an important reason they stay at UC. Results were similar among faculty and staff, campuses and medical facilities.”
GEE … maybe the administrations at those “elite private universities — Harvard, Stanford and Yale — only offer 401(k)-style individual investment plans, common in the private sector….BECAUSE ….. the Defined Benefit Plan offered at UC is EXCESSIVE, unsustainable, and grossly unfair to anyone who has to contribute to it’s cost.
September 22, 2010 at 11:40 pm
Maybe, just maybe the pension being offered by the UC system is attracting the kind of people who believe that it is possible to get “something for nothing”. These are not the kind of employees who make great public servants or teachers.
If Stanford, Harvard, Princeton and Yale can attract top flight talent with a 401K program, than the UC should be able to as well. The UC board and president need to get real, and get some people with real world experience to hire for, and manage the total compensation for the UC systems and negotiate with the Unions.
The current model of promoting employees, former union members and pension system participants into the negotiation role is not working. As long as we continue to allow this conflict of interest, we will get benefit packages that make little sense out side of the UC ivory tower.
September 23, 2010 at 5:06 am
After twenty years of not paying in UC now has to pay in. After many years of paying less than required, including 4 years in the early 2000’s of paying virtually nothing, California now has to pay in. (Apologies to the writer’s of Casablanca and to my favorite actor Humphrey Bogart) ” I am shocked! There is gambling going on here!” “Arrest the usual suspects!”
September 23, 2010 at 5:09 am
What is your answer to that “Tough Love”? This the the obvious result of politicians playing CYA and not minding the store.
September 23, 2010 at 5:23 am
“Not really, the University staff’s pensions & benefits should be reduced …SIGNIFICANTLY REDUCED … just like the those of Private Sector workers have been reduced.”
And of course every American’s life style should be reduced to that of Sub Saharan Africa to make things “fair.”
“Fair” is what you go to where they award ribbons for pigs and pies and pumpkins.
The public sector, as in the tortoise and the hare, or the ant and the grasshopper, bet on the long term and took less during the running. Now they collect.
You bet wrong. So I collect. What is “unfair” about that?
September 23, 2010 at 5:39 am
Oh, and let me cut you off beforehand about “you”paying taxes for my wages and retirement. I worked for my wages and my benefits and my retirement. That the monies came from taxes makes no difference.
If I buy a gallon of gas or a light bulb I am paying someone’s wages. I assume you worked for your wages and benefits also. You walked in the door with an offered package of wages and benefits just like I did.
I took mine and you took yours.
You bet wrongly, but it could have easily been the other way around. Who was complaining ten years or twenty years or thirty years or forty years ago about public employees retirements? No one. The private sector was raking in their own money and weren’t concerned.
Now the dice have been cast and you don’t like the numbers which came up.
September 23, 2010 at 1:55 pm
Dear Charles Sainte Claire …I Still waiting for a direct answer (see below)……. you talk “around it” quite a bit, but won’t answer. Are you afraid that an affirmative answer (that this IS “fair”) will show just how greedy you are?
At EVERY (yes EVERY) pay level (from the $25K worker to the $300K executive), the value of the employer (meaning TAXPAYER ) paid-for share of the “typical” Civil Servants’ retirement package (pension & retiree healthcare) is 2-4 times greater in value than that of the employer paid-for share of a COMPARABLY PAID Private Sector worker retiring at the SAME age and with the SAME years of service …. and that 2-4 times rises to 4-6 times for “safety workers”.
Do you think this is “fair”, and if so, why ?
September 23, 2010 at 3:44 pm
“The task force said elite private universities — Harvard, Stanford and Yale — only offer 401(k)-style individual investment plans, common in the private sector”
The point of this quote is that they offer significantly higher salaries to offset this. Put up the top 5 Ivy League professor’s pay against the top 5 state professor’s pay and tell me who is on top. That’s the point… you take away benefits and you are going to have to increase salaries to stay competitive. Free market and all that…
September 23, 2010 at 5:36 pm
Quoting IT PRO …”Put up the top 5 Ivy League professor’s pay against the top 5 state professor’s pay and tell me who is on top. ”
And those from the 5 top Ivy League schools certainly deserve it.
And, I’d bet that on a “total compensation” basis (pay + Pension + benefits), that the Public Sector is still much higher than the Ivy Leagues …… the HUGH cost of these extraordinarily generous Defined Benefit Pension Plans is not widely understood.
September 23, 2010 at 5:36 pm
Common Charles ….still waiting for an answer …
November 4, 2010 at 12:05 am
Some actual numbers…. prior to the new
pension changes at UC.
Average UC employee gets $68,100 a year
in salary… the `Comparison 8′ including
4 privates and 4 other publics average $78,400
a year in salary.
Health & Welfare… $19,900 for UC, $18,800
for Comparison 8.
Retirement? $19,700 for UC, $10,800 for Comp 8.
$4,700 more at UC for its pension benefits,
$4,200 for retiree health. Most of the retiree
health cost comes for those who retire early and
get full health care coverage from UC until medicare
kicks in at 65… most faculty work until 66.
Total compensation… $107,700 for UC, $108,000
for Comparison-8. The new pension deals at UC
will reduce UC average total compensation down
to about $102,000.
None of that includes accounting for the fact that
California is a bit on the expensive side… the Comp-8
are Harvard, MIT, Stanford, Yale, SUNY Buffalo, UI Urbana,
UM Ann Arbor, and UVirginia. I’d say Harvard, MIT, and
Stanford are the only ones with comparable costs of
living to UC.
January 20, 2011 at 8:10 pm
J Martin, can you elaborate on this:
>already “makes whole” annuitants affected by the IRS limits
Are you saying that, if an employee makes more than $250,000, the extra pension amount they would have made in excess of the IRS limit is still given to them by UC?