After operating only on investment earnings for nearly two decades, the UC retirement system ended one of the great free rides in public pension history last month, when contributions resumed from employers and employees.
But the deficit-ridden state, covering a third of UC employees, is not among those who resumed pension contributions, a costly omission for the retirement system.
If the state made full pension contributions, even with promissory notes used in the past, the UC retirement plan could get hundreds of millions in additional contributions from other employers, mainly medical centers and research grants.
The University of California was given early independence to avoid political influence and is not directly controlled by the Legislature. A faculty group is warning that if the state does not help pay retirement costs, UC will be even more on its own.
“To fund the mounting pension debt plus the state’s share of the actuarial required contribution, the UC Regents will be pushed farther toward privatizing the university,” said a paper written by Susan Gallick, UCLA Faculty Association executive director.
The University of California Retirement Plan, formed in 1961, is California’s third largest public pension fund, trailing the giant California Public Employees Retirement System and the California State Teachers Retirement System.
The UC plan reported $32 billion in assets last June, down $8 billion in the stock market crash and recession. The plan with 116,000 active members was paying $1.6 billion a year in benefits to 43,000 retirees.
The state made annual contributions to the UC plan from 1961 to 1990, when a surge in investment earnings produced a pension fund surplus. The UC plan began what is called a contribution “holiday,” no annual payments from employers or employees.
“We didn’t think it would last more than a few years,” said Gary Schlimgen, UC pension director. “But it ended up lasting almost 20 years. Our funding status exceeded 150 percent for a few years.”
The UC plan is an extreme example of how modern public pension funds depend on investment earnings. CalPERS gets 75 percent of its money from investment earnings and had brief employer contribution holidays a decade ago.
The flip side, of course, is that if contributions can go down in good times, they go up in bad times to cover weak investment earnings or losses. The UC plan had begun to push for resuming contributions in 2007, a year before the historic stock market crash.
But the UC plan is in an unusual situation. The CalPERS board, like most local pension boards, has the power to set contribution rates that must be paid by employers. CalSTRS needs legislation to set employer contributions.
The UC plan had been relying on a state contribution to set the amount paid by medical centers and other self-supporting operations (40 percent of the employees) and research grants from federal, state and private sources (28 percent of employees).
When a preliminary version of the governor’s state budget proposal contained an employer contribution of 4 percent of payroll, Schlimgen said, the UC plan adopted the amount to begin “building the base,” even though it’s far short of the increase needed.
But the governor’s budget proposal last year was trimmed to $20 million beginning in the final quarter of the fiscal year, April 15. The Legislature rejected the token amount, providing no funding for the UC plan.
So what happened last month, said Schlimgen, is that UC began taking money from various programs and sources to pay the 4 percent employer pension contribution for its state-funded employees, an amount expected to total $100 million next fiscal year.
During the two-decade contribution holiday, employees were required to put 2 percent of their pay into a 401(k)-style individual investment plan. Last month the 2 percent employee contribution was switched to the UC retirement plan.
To meet the current normal cost projected by actuaries, said Schlimgen, the UC plan should be receiving 17.5 percent of payroll, presumably about 12 percent from employers and 5 percent from employees for a total of $1.4 billion.
From zero contributions to $1.4 billion would be a jolt in the best of times. But if contributions were to go beyond normal costs and begin paying off the current unfunded liability over 15 years, the UC plan should be receiving 20.5 percent of payroll.
Meanwhile, the 4 percent employer contribution made by UC is matched by the medical centers and research grants. But if the state were paying an amount nearer to the needed 12 percent, the other employers would contribute hundreds of millions more.
“The lack of state funding has hurt our funded status and has left a lot of money on the table,” said Schlimgen.
In previous budget crunches, he said, the state gave the UC plan 30-year promissory notes in the early 1980s and again in about 1990. The notes are still being paid at $11 million a year.
Giving the UC plan promissory notes now would enable the collection of additional contributions from the medical centers and research grants that employ two-thirds of the UC workforce.
“We would be thrilled to take a promissory note,” said Schlimgen. “I know they have a resistance to debt.”
Since the last promissory note, a ballot measure approved by voters, Proposition 58 in 2004, may prevent that kind of debt, said Jason Sisney of the nonpartisan Legislative Analyst’s Office.
He said a more workable solution might be legislation enacting a long-term contractual commitment, such as the “full funding” plan for CalSTRS pushed by former Assemblyman Dave Elder, D-Long Beach, two decades ago.
But that would require a reversal of the Legislature’s policy last year that rejected not only the governor’s proposal of token funding for the UC plan, but also the analyst’s suggestion to develop a plan for state funding of UC retirement in the future.
A UCLA professor emeritus, Daniel Mitchell, argued in an op-ed article in UCLA Today last November that a Legislative Analyst’s report assuming no state funding for UC retirement for the next five years implies support for “privatizing” UC.
Legislative Analyst Mac Taylor strongly rejected that interpretation, saying he is on record publicly as saying he does not think the Legislature wants to privatize the UC system.
Still, the analyst’s office says legislation and the courts have created firm state funding obligations for CalPERS and CalSTRS, but not for the UC plan. And the Regents set benefits for the UC plan, something the Legislature does for the other retirement systems.
The UCLA Faculty Association paper points out that the Regents chose independence for the UC plan. The UC faculty voted in 1951 to leave the previous UC plan and join CalPERS, which had been serving non-academic UC employees.
Legislation passed in 1957 authorizing the transfer to CalPERS was put on hold while the Regents considered the issue. Then in 1961 the Regents created the current independent retirement plan that covers all of the UC employees.
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 10 May 10