Union actuary says UC overstates pension costs

A large technical-worker union that plans a strike at five University of California hospitals next week opposes the next phase of a pension reform, arguing that costs have been overstated to get workers to pay more toward their pensions.

Public pension systems, such as CalPERS and CalSTRS, are often accused by critics of using overly optimistic investment earnings forecast to keep employer costs low and conceal massive “unsustainable” long-term debt.

In a contrarian view, an actuarial consultant hired by unions contends the other large state pension system, the UC Retirement Plan, uses conservative methods that keep short-term pension costs high to justify employee rate increases.

The consultant suggests, among other things, that the UC plan’s “conservative” investment earnings forecast, 7.5 percent, could be increased to 7.75 percent. Some critics say pension funds should use a bond-based forecast, around 5 percent or even lower.

One of the unions that hired the consultant, AFSCME Local 3299 representing nearly 13,000 UC patient care technical workers, issued a notice last week of a two-day strike planned May 21 and 22.

“UC’s increasingly unsafe staffing practices and growing culture of executive entitlement are undermining patient care quality and unnecessarily putting lives at risk,” the union president, Kathryn Lybarger, said in a news release. “We will not rest until UC gets its priorities straight.”

A UC spokeswoman, Dianne Klein, said the union’s concern about patient care puts a good public face on a struggle over higher pension contributions and other bread-and-butter issues.

“If we don’t get the pension system in shape, there is not going to be a payoff for anybody, including AFSCME,” said Klein.

Pensions topped the list of issues on a bargaining update on the union’s website last week that included wages, health care coverage and a push for “industry standards” on job security and staffing.

The union opposes the next phase of a 2010 pension reform scheduled to begin July 1: employee contributions go from 5 percent of pay to 6.5 percent, new hires get lower pensions and (with some current workers) lower retiree health coverage.

Pension bargaining update on AFSCME Local 3299 website

Pension bargaining update on AFSCME Local 3299 website

Once the UC plan was the envy of the pension world, going two decades with no contributions from employers or employees. The remarkable contribution “holiday” began in 1990 when the plan was 137 percent funded.

The peak came around 2000, during a high-tech boom, when the funding level reached 156 percent. But lush investment earnings enabling the contribution holiday wilted during the last decade.

Plan officials talked about restarting contributions before the stock market crashed in 2008, doing major damage to the investment fund. Along with the new debt or growing “unfunded liability” came a hint of holiday remorse.

“Hypothetically, had contributions been made to UCRP during each of the prior 20 years at the Normal Cost level, UCRP would be approximately 120 percent funded today,” a UC staff report said in September 2010.

Pension contributions were restarted in April 2010 with 2 percent of pay for most employees and 4 percent for employers. A reform plan emerged from a task force of active and retired members after town halls, web chats and surveys.

Now on July 1 the plan calls for employer contributions to go from 10 percent of pay to 12 percent. Eight unions representing 14 bargaining units have agreed to the scheduled employee increase, going from 5 percent of pay to 6.5 percent, said Klein.

In addition to AFSCME, other unions that have not agreed to the next phase of pension reforms are UPTE Local 9119, representing 12,000 UC technical nnd professional employees, and the California Nurses Association.

The AFSCME president’s reference to a “growing culture of executive entitlement” includes a cap of $250,000 on pay used to calculate UC pensions, an IRS limit adjusted for inflation each year.

Using the cap in a new reform for CalPERS, the limit on pay taxed for Social Security ($113,700 this year), could reduce the UC plan’s $12 billion unfunded liability, rather than asking low-wage workers to pay more, said Todd Stenhouse, an AFSCME spokesman.

Last year 36 of UC’s highest-paid executives threatened a lawsuit because UC, allegedly breaking a promise made in 1999, did not lift the IRS cap after federal approval finally came in 2007. No lawsuit has been filed.

In the competition for top academic talent, a UC pension is regarded by some as an advantage over major private universities that, like businesses fearing risk and long-term debt, have switched to 401(k)-style individual investment plans.

A UC fact sheet notes that Stanford and Harvard do not offer pensions and that UC retirement benefits, even after the cost- cutting reforms, compare favorably with other major public universities and corporations.

And a favorable comparison is shown with California Public Employees Retirement System pensions for new hires after the cost-cutting reform pushed through the Legislature last year by Gov. Brown.

The reform (AB 340) also covered the California State Teachers Retirement System and the 20 independent county retirement systems operating under a 1937 act. UC was excluded, apparently due to its own reform and semi-independent status.

After years of trying, UC got the state to resume its contributions with $90 million in the state budget this fiscal year. Contributions also are flowing again from the grants and non-state sources that pay roughly two-thirds of UC salaries.

But the unions (AFSCME, UPTE and CNA) that hired an outside actuarial consultant to review the UC retirement plan have a talking point to use against the next phase of the reforms, even if management may not be persuaded.

“As actuaries, we generally applaud somewhat more conservative methods and assumptions,” William Fornia of Pension Trustee Advisors said in a briefing paper prepared with Dan McM Consulting for the labor coalition last October.

“Used properly, they result in well-funded, secure retirement plans,” Fornia said. “But in a case where they have no linkage to actual contributions, their use seems to have no purpose other than to increase the apparent cost of benefits for labor negotiations.”

Contribution increases under the plan are “well short” of amounts called for by a new funding policy, the paper said. So the resulting funding gap apparently is a “bogey” illustrating high costs to make the contribution increases seem urgent.

Three ways the UC plan is said to use “conservative” methods:

1) UC may be the only one of the nation’s 32 largest public pension funds that uses the “level dollar” method to pay off or amortize debt, increasing costs in early years. Most funds use a “level percentage” method that grows with payrolls.

2) UC (and CalPERS and CalSTRS) uses a 7.5 percent investment earnings forecast to discount future debt. More than half of the 128 largest pension funds use 8 percent and more than 20 funds use 8.25 or 8.5 percent.

3) UC assumes future salary growth that may be too high, given future expectations and recent salary growth that was much lower than actuarial assumptions. This is more of a “judgment call” than the first two points.

The paper said that switching to “level percentage” amortization could cut total pension costs by about 3 percent of pay in the first year. Switching to a 7.75 percent discount rate could reduce first-year costs by more than 6 percent of pay.

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 13 May 13

16 Responses to “Union actuary says UC overstates pension costs”

  1. Captain Says:

    “A large technical-worker union that plans a strike at five University of California hospitals next week opposes the next phase of a pension reform, arguing that costs have been overstated to get workers to pay more toward their pensions.

    Public pension systems, such as CalPERS and CalSTRS, are often accused by critics of using overly optimistic investment earnings forecast to keep employer costs low and conceal massive “unsustainable” long-term debt.

    In a contrarian view, an actuarial consultant hired by unions contends the other large state pension system, the UC Retirement Plan, uses conservative methods that keep short-term pension costs high to justify employee rate increases.

    The consultant suggests, among other things, that the UC plan’s “conservative” investment earnings forecast, 7.5 percent, could be increased to 7.75 percent.”

    – Unbelievable! You just can’t make this stuff up – but you can pay an actuarial consultant to do it for you!

    (I”n a contrarian view, an actuarial consultant hired by unions contends …”)

  2. Captain Says:

    “One of the unions that hired the consultant, AFSCME Local 3299 representing nearly 13,000 UC patient care technical workers, issued a notice last week of a two-day strike planned May 21 and 22.

    “UC’s increasingly unsafe staffing practices and growing culture of executive entitlement are undermining patient care quality and unnecessarily putting lives at risk,” the union president, Kathryn Lybarger, said in a news release. “We will not rest until UC gets its priorities straight.””

    – As someone that has recently had two family members spend significant time in UC medical centers, and I’ve spent significant time as a visitor, I can say that (A) the service wasn’t that good – especially relative to the cost, and (B) the problem, IMO, has more to do with cultural/work ethic issues as opposed to staffing issues. The people were nice but they seemed to work on an “Island Time”.

    Based on what some Hospital Executives are being paid (Fremont Hospital-which isn’t a part of the UC system but is local to myself) I wont disagree with the unions claim of “executive entitlement”. I think that’s clearly an issue but it doesn’t justify “AFSCME entitlement“.

  3. astounded Says:

    Somebody really really mismanged this pension fund,

  4. Tough Love Says:

    William Fornia’s supposed justification that since the Plan isn’t funded to standards anyway seems to justify INCREASING the earnings rate ….. used for BOTH asset returns and discounting Plan liabilities is ludicrous.

    Sounds like his just doing his employer’s bidding. I wonder if raising that rate was discussed before the engagement letter was signed.

  5. WmJSheffler Says:

    the author fails to point out that “level percentage” amortization of unfunded liabilities proposed by the unions can result in a growing unfunded amount (“negative amortization”) and continually increasing annual costs.

  6. spension Says:

    UC messed up big time by taking a 20 year holiday from employer pension contributions. The normal cost should always be covered, no matter what. What they did was take credit for an illusory long term surplus, a surplus that was a mirage.

    UC also let lots of its employees take early retirement in the 1990’s with three `VERIP’ programs… you could retire early and get 8 extra years of service or age credit…almost like 3% at 50.

    In effect, lots of the current UC pension deficit is a self-incurred wound. Most UC employees are not even unionized… union pressure was not the main culprit. It was pure hubris on the part of the UC pension management.

  7. Captain Says:

    “The paper said that switching to “level percentage” amortization could cut total pension costs by about 3 percent of pay in the first year. Switching to a 7.75 percent discount rate could reduce first-year costs by more than 6 percent of pay.”

    Payments do NOT equal cost. If they did there wouldn’t be an unfunded liability. What’s being suggested is most likely an attempt to keep funds in the GF, which can then be used to increase compensation with money that doesn’t really exist.

  8. Tough Love Says:

    Captain. That’s exactly correct. While it sounds counter-intuitive that Public Sector Unions would also loudly object to decreases in the invest return assumption (also used for discounting Plan liabilities) as such changes increase funding requirement and hence funding ratios, thereby enhancing Plan security, doing so either (1) uses up GF revenue … which the Unions would prefer be available for increases in pay and benefits, or (2) requires tax increases which my piss-off the Taxpayers who might up their demands for pension reform.

  9. spension Says:

    I agree with Captain and Tough Love that costs are independent of *assumptions* of discount/return rates. Costs are primarily determined by salaries and payout rates, and then also by *actual* return rates.

    The big issue is… when the stock market was doing well in the 1980s and 1990s UC and other California pension systems should have said, `These high returns will eventually be compensated later by low returns. Hold tight with contributions that at least cover the normal cost and don’t change payout rates.’

    Instead, UC cancelled all employer contributions (employee contributions were still made, but redirected to their DC plan), and `blew the top’ on payout rates, raising them and also doing the 3 VERIP programs.

    And now the bill is due. In this case, it is college students who will pay, maybe with college loans. The young can go in debt to subsidize the older folks’ pensions.

    A number of smart students I know of are deciding to go to college in Canada, still a lot cheaper…

  10. Captain Says:

    “Instead, UC cancelled all employer contributions (employee contributions were still made, but redirected to their DC plan), and `blew the top’ on payout rates, raising them and also doing the 3 VERIP programs.”

    So the employee portion of the contribution was NOT made. Spension,do you have a link to anything regarding the 3 VERIP programs you’ve mentioned? I would like to understand what was given.

  11. Tough Love Says:

    The laws should be changed so that this one-way pension ratcheting effect (upward) can be reversed for anyone receiving such increases.

    Interesting … the laws governing Public Sector Pensions are even STRONGER than the Laws of Nature (what goes up, must come down).

  12. spension Says:

    http://ucrpfuture.universityofcalifornia.edu/files/2010/09/peb_ax_l-13-ucrs-historical-perspective_0910.pdf

    Employees still got 2% deducted from their paychecks, but it was deposited to an in-house DC Plan instead of to the main pension fund, between 1990-2010. Now contribution is up, to 5%?

    Employer (UC) contributed nothing 1990-2010, but didn’t put that money into a DC match or anything else… pure savings for UC.

  13. Captain Says:

    5%, now? “While employees were contributing 2% from paychecks the money went to a seperate DC plan between 1990-2010?”. I would think some of our best minds in academia would have sounded alarm bells. Apparently that didn’t happen but early retirement bonuses did. Sorry, but the whole thing stinks.

    “Employer (UC) contributed nothing 1990-2010, but didn’t put that money into a DC match or anything else… pure savings for UC.”

    – doubtful, spension. The money most likely went toward increased compensation which increased the stress on the very same pension plan they weren’t funding. And now UC costs are going through hthe roof probably, in part, due to the pension fiasco and the 3 VERIP programs you’ve mentioned. I find it appalling that: “you could retire early and get 8 extra years of service or age credit…almost like 3% at 50.”

    Who provides 8 extra years of service credit and thinks this is in anyway justifiable?

    Spension, thanks for both the comments and the link. I’ll read it soon.

  14. spension Says:

    Smart people definitely become dumb when it comes to managing their money. I have no idea what UC did with the money they should have been using to cover their normal cost… and they definitely never should have had the VERIPS, nor should they have increased payout rates. The stock market is volatile, a funding ratio of 130% or 150% is truly meaningless.. 15 years later you’ll be at a funding ratio of 60% just from stock market fluctuations.

    That is also why smooth 7.75% or 7.5% or whatever is a red herring. Making it through the ups without blowing the top and through the downs without digging into taxpayers is the real challenge.

  15. Bjorne Pedersen,OD Says:

    Same old dull choir preaching out here…zzzz

  16. Tough Love Says:

    Bjorne, “Dull” is a public Sector worker with a sever case of “entitlement mentality”.

    Sound familiar ?

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