Friday, April 9, 2010

Reasons Why UC Faculty Should Not Buy into the Pension Scare

The main reason why UC faculty and employees should question the current claims concerning the underfunding of the pension plan and retiree healthcare is that these accounting predictions are based on a whole series of economic guesses. In order to determine the future funding and liability of the plan, the accountants have to look into the future and estimate how well the UC’s investments will do, who is going to retire, what salaries will look like down the road, the number of employees getting benefits, and the cost of healthcare premiums, among other major variables. In the recent past, the actuaries have been wrong on predicting most of these variables, and so while we should restart contributions, we should not be scared into accepting a high level of employee contributions, and we should stop the process of changing the benefits for present and future employees.

Currently, UC has over $35 billion in the pension plan, and last year, it paid out $1.5 billion. It was a huge mistake to stop contributions in 1990, and so it is good to go with the current policy of 4% from the employer and 2% from the employee; however, it is unclear if we need to contribute much more, and dire predictions based on projected liabilities do not help anyone. What we should be arguing for is shared governance over the investments.

In response to the recent study done by a couple of Stanford grad students about CalPERS, CalSTIRS, and UCRP, CalPERS has made the following observations: 1) even with the recent stock losses, over the long haul, the plans have all averaged higher than the 7.5% rate of return, and the Stanford model uses a very low rate of 4.4%; 2) all of the future predictions are tainted by the current low interest rate that is sure to go up, which would help increase income from the bonds that are in UCRP; 3) most pension plans remain healthy by being funded at 80%; UCRP is still at 95%.

As Dean Baker has written, people are simply exaggerating the bad health of the Californian pension plans in order call for their abolition. In this context, it is strange than no one in the UC is calling for the capping of special executive pension payouts. Did you know that if Yudof stays for at least 4 years, he is guaranteed a yearly pension of over $250,000. Capping pension payouts at some level, like $125,000, as many other plans do, would save a ton of money.

In an article for the Huffington Post, I show that a new accounting rule from 2004 might have been a Republican ploy to bust unions, pensions, and public institutions by having them declare on their books, all of their future healthcare liability. The UC faculty and staff should not buy into this conservative attempt to undermine our interests.

63 comments:

  1. Bob, I agree with a lot you say, including the capping of pension payouts. But I notice a tension between your lack of confidence in actuaries' projections into the future and your relying (like CalPERS) on the historical rate of return of these plans. You need to decide if these projections are reliable or not, but you can't pick and choose.

    The GASB rules might have had political motivation, but it seems to me that they still enforce good accounting practices: pension plans need to report assets as well as liabilities, and project the impact of unfunded liabilities into the future. Wouldn't you want to know that?

    As to contributions, I doubt very much that 6% combined will be enough. CalPERS member pay about 5%, I believe, with twice as much put in by the employer.

    ReplyDelete
  2. I think if we look at the long-term returns on the UC's investments, they average much higher than the 4% the Stanford study applied. While there has been the recent downturn, followed by a large increase, the average over a 10 year span is above15%. I am not looking at projections, I am looking at historical facts.

    Their are several problems with the need to declare the healthcare liability. The major thing is that it decreases the university's assets on the books, which hurts their credit ratings and drives up interest on their debt and future borrowing. I am not saying that we should not pay into the system, but we do not have to pay the next fifteen years today. In fact, the UC has declared $3 billion of healthcare liability in the last two years, but has only spent $400 million. So declaring a higher liability does not help make the plan funded.

    The simple fact is that few employees understand any of these issues, and they are being scared into higher contributions and downsized benefits.

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  3. Capping pension payouts would only be a small step in the direction of solving the problem, but it seems to me to be a necessary one. Administrators (in particular) have been helping themselves to an overly generous slice of the pension plan for too long.

    ReplyDelete
  4. Bob, you have got me thinking. The math behind the pension funding is just not that hard so I'll probably take a look.

    Yes, the 4.14% assumption in the Stanford study is low. But there is something deeper that they tried to get right... use the 200-year history of american securities to do simulations. For example, UCRP info has called the 2009 downturn `unprecedented'. Unprecedented except for 1929, 1932, and 1937. And maybe 1974, and I bet the 1800's had its share of panics too.

    I think the heart of the matter is the hubris in thinking contributions could/should be tinkered with from year to year. A much smarter strategy is just stick with 16 or 17% funding *no matter what*. If UCRP manages smarter and better, salt the proceeds away for future downturns.

    If you read the UCLA FA website, you find that in the past the State of California threatened to take away money from UCRP when UCRP was apparently overfunded. In 1983, and I've heard also in the 1990's. Now that was mindless and destructive. I'd love to get documentation of those threats.

    BTW, according to the UCLA FA:
    http://www.uclafaculty.org/FASite/Home_files/UCRPMARKET%20NUMBERS_1.pdf

    UCRP is right now 78.8% funded.

    ReplyDelete
  5. Well, I did do a little investigation into the pension... I think Bob is basically right that the current downturn is being used for political purposes.

    The heart of the matter is that stocks are volatile... they always have been and always will be. The worst problem, documented for certain economic situations in the recent book `This Time is Different', is that during good times planners get sloppy. Although that book covers borrowing that leads to defaults by entire countries, the principles are the same.

    When the stock market was up, UC pension planners didn't think, `This is a bubble, better squirrel away $ for the inevitable downturn.', and in doing so they ignored 200 years of economic history. Instead, UC pension planners suspended contributions to the pension fund.

    Now, they had some reasons, such as apparent threats by the State to raid the UC pension fund because it was overfunded, and also, a budget problem in the early 1990's. There will always be reasons.

    But the educated view is to take the long-term view, the really, really, long-term view, like, the 200-year view. Pity that in the UC system, where economic history is well known and taught, our own pension planners ignored the knowledge available.

    And the long-term view, in my opinion... use the 200-year stock returns as a guide (but do stress tests too, which is the real value of the recent Stanford study). I think the conclusion is: put 20% of payroll into the pension fund each year *no matter what*.

    The weird thing is that pension contributions have fluctuated all over the place. That variability is a capitulation to political forces and a lack of humility. We think we can calculate better from year to year than the 200-year average. It's hubris.

    But just as one should not get overconfident in good times, one should not get too depressed in bad times like now. But we need to get back into iron-clad, absolute, regular contributions to the pension fund. Although UCRP usually estimates 17%, I don't trust their ability to estimate that precisely... 20% is a nice round number. The recent calcs of 30+ percent are short-term thinking, just like the suspension of contributions was.

    Ideally, risk is reduced by pooling the money together, which is usually a property of `defined benefit' plans. I think the only reason defined benefit plans have fallen by the wayside is that hubris mentioned above... the pension managers get cocky and drop the ball. The way to go is to have an iron-clad contribution, and very carefully set the defined benefit so that it is always within the envelope of funds available. Such care has not been followed for California pension systems... in UC, we forget to contribute starting in the 1990s; in other California systems the benefits were increased in the late 1990s.

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