Monday, November 15, 2010

The UC's Path to Financial Suicide

Due to three actions taken by the Regents, the University of California is headed towards a total financial meltdown. These three actions are the nearly twenty-year contribution “holiday” for the pension plan, the outsourcing of the management of the investment funds, and the pending decision to support President Yudof’s pension solution. While many people have been involved in these moves, the Regents are responsible for the fiscal health of the system.

The Problem
The Post-Employment Task Force and President Yudof have both endorsed a funding plan for the pension that will require the university to eventually spend at least $1.7 billion a year on pension costs alone. This level of employer contributions dwarfs any cut the UC system has received from the state. We must remember that when the state cut the UC budget by $670 million in 2008-10, the university turned to layoffs, furloughs, huge fee increases, enrollment reductions, and a whole host of cost cutting measures that shook the university at its foundation. Imagine if the university has to spend close to $2 billion several years in a row.

The fact that no one has questioned this path to financial suicide just means that either no one understands how the university is financed or no one wants to deal with the real problem. Instead, we get Yudof's pension proposal for saving money in thirty years by changing the retirement age for new hires. This impotent gesture may placate the bond raters and some Republican legislators, but it does not address the central problem, which is that we need to move to fully funding the normal cost of the pension program now.

The Union Coalition Criticism of the New Pension Tier
The Union Coalition (UCUC) is protesting Yudof’s plan since: 1) the new tier will hurt many staff and manual workers who will not be able to work until 65; 2) the new tier and current contribution rates have to be accepted by the unions, but the university for the most part has ignored the input of the unions representing close to half of all UC employees; 3) the new tier does not help to deal with the current problems facing UCRP; 4) the ratio of employer-to-employee contributions for the new tier is much higher than any past ratio (the ratio in the 1980s averaged 5:1, and the new ratio is almost 1:1); 5) the large pension contributions combined with the shifting of costs for retiree healthcare puts most employee groups below market value; and 6) there is no stated plan to address the decrease in total compensation.

While the unions are willing to work with the university to help fund the pension in a more effective manner, the university has refused to include the unions in the decision-making process. In fact, when the union coalition asked President Yudof to allow us to make a presentation about our concerns during the official discussion of his pension proposals at the November 18th Regents meeting, we were told that the Regents cannot have every outside group take up the time of the meetings, and so we can have our one minute during public comment time. Our response is that we represent close to half of the employees, and we are not just some outside group. Furthermore, at the start of public comments, we are always told that the Regents will not be responding to any questions posed by the speakers; this is a great example of fake democracy in action.

An Impossible Funding Plan

Instead of acknowledging and correcting all of the mistakes that the Regents have made in relation to UCRP, President Yudof gives this summary of why the pension plan is in trouble: “Costs are increasing, UC and its employees are facing increasing contribution levels, and the state has not resumed its funding to be applied to the University's pension fund.” There is no mention here of losing $16 billion in investments or the Regents’ decision to suspend contributions for 20 years; instead the blame is placed squarely on cost increases and the failure of the state to support the university. When Yudof does get to the plan to fund UCRP, this is what we are told: “Under the current Plan, total contributions to UCRP are on track to increase to above 30 percent of covered compensation in 10 years, by fiscal year (FY) 2020 . . . University contributions are assumed to be 7 percent in Plan Years beginning FY 2011 and 10 percent in FY 2012, with a two percent increase annually thereafter.” In plain English, this means that if employee contributions peek at 8% of their salary in 2013, and the university pays 12% of covered compensation in 2013, the employer contribution will move to 22% by 2018 (after 2012, the employer contribution rate increases 2% each year). However, it is highly unlikely that the university will be able to require all grants, medical services, and core functions to pay 22% of salary in 2018, and so we are left asking, why didn’t the university simply bite the bullet and move immediately by requiring the employees to pay 5% and the employers 12% to fund the full normal cost and therefore reduce the need to pay so much in the future. Moreover, if the university intends to borrow money from itself to pay down the liability, it could do this right away if it fully funded the normal cost with higher contribution rates.

The reason why the university did not want to move to full funding of the normal cost right off the bat is that it knew that it could not get the medical centers and the research grants to pay their full share, and it was afraid of letting the state off the hook for its part. However, by not putting in 12% from all sources now, it will have to put in at least 22% later. Meanwhile, the grants and the medical services are not paying their fair share, and the administration is alienating the unions who represent close to half of all of the employees in the pension plan. Instead of working with the unions to move to full funding, the administration has removed most represented employees from the process and has pushed for a new pension tier that is supposed to save $8.4 billion over a 25-year period, which turns out to be $336 million a year. However, the university has also promised faculty and unrepresented staff that these savings will go to pay for salary increases to cover increased employee contributions and benefit reductions. In other words, the new tier will save nothing and do nothing to solve the immediate problem.

The way that Yudof’s proposal attempts to address the current funding of UCRP is through borrowing and debt restructuring: “Based on the suggestions of the Finance Team, the President recommends that The Regents delegate authority to the President to fully fund the UCRP ARC as quickly as practical by paying UCRP “modified” ARC (Normal Cost plus interest only on the UAAL) from 2011 until 2018 and using other University resources to make up the gap between Normal Cost and modified ARC, including borrowing from the Short Term Investment Pool (STIP) and restructuring of University debt using STIP interest.” This policy is full of loopholes because it calls to fully fund the normal cost “as quickly as practical,” which is legalese for “whenever we want to do it.” Furthermore, the idea of funding UCRP by “using other University resources” means that the President will be given the power to raid any part of the university including student fees and departmental budgets.

Why We All Should be Concerned
If you are not worried about the university having to come up with 22% of covered compensation to fund UCRP, imagine if your department or program would have to take a 22% reduction in its budget every year. Just as departments are assessed a 3% tax to fund retiree healthcare, it is likely that each department will be taxed 20% for UCRP each year. In fact, UCLA has already moved to a decentralized budget system that forces individual departments to pay for all benefit costs.

The only solution is to bring all of the stakeholders to the table, including the unions, and figure out a rational and doable plan to fund the pension and maintain the university without increasing student fees at a high rate or closing down departments or even campuses. By ramping up employee and employer contributions now and eliminating any new tier, the university can put itself on a more stable financial ground, but it will take the agreement of all parties. Furthermore, the Regents have to be held accountable for their failure to protect the financial interests of the university.

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