Monday, April 5, 2010

Warning: Tricky Accounting is Threatening Our Benefits

The UC system has embarked in the process of downsizing retiree benefits, and it looks like their manipulative campaign is working. Last week, The Council of UC Faculty Associations made the following statement: "UCRP is badly underfunded in terms of its liability for future benefits that employees began accruing after June 30, 2008. Moreover, the unfunded future liabilities are increasing very rapidly. In 2009, UCOP and TFIR estimated that if contributions were not immediately restarted, the percentage of funded liabilities would fall to 61% and the dollar amount of the unfunded liability would increase to $18 billion by 2013 – 3 years from now!" This focus on unfunded liability for the pension plan is in part a scare tactic to force the older faculty to push for higher employee contributions and may help the administration gut the plan for new hires.

Like the Commission on the Future of the University, the faculty association is buying all of the administration’s questionable accounting moves. First of all, as I discussed in relation to the Executive Summary of the Commission’s initial recommendations, due to an accounting change from 2006, the UC has been forced to declare as a liability on its books all of the future costs for pension and retiree healthcare. This means that while the UC is still funding the healthcare for retirees on a “pay as you go” basis, they are declaring a multi-billion dollar liability. Thus last year, as they spent $279 million on healthcare for retirees, they declared a $1.5 billion liability, which helped them to claim a budget deficit as they moved funds from unrestricted to restricted accounts. Once again, it is important to stress, the UC did not actually spend $1.5 billion, it only moved the money on its books. The UC currently has over $6 billion of retiree healthcare liability on its book, which means that the university looks a lot poorer than it actually is.

The council’s claim that the UC faces an $18 billion liability echoes the Commission’s claim that an $18 billion liability will threaten the basic mission of the university: “The funding gap is exacerbated by a significant unfunded post-retirement benefit liability, which is currently $1.9 billion and expected to reach $18 billion by 2013. Similarly, the University’s unfunded post-retirement healthcare liability is projected to grow from $13 billion today to $18 billion by 2013 . . . Because the PEB Task Force is scheduled to finalize recommendations by this summer, we do not address PEB issues in this report, but recognize that more than any financial challenge facing the University, the cost of providing these benefits has the potential to overwhelm our ability to continue our tripartite mission of teaching, research, and public service.” In other words, the crisis in the university is being driven by the university’s commitment to pension and retiree healthcare.

Moreover, the Council has also accepted the administration’s argument that the underfunding of the pension plan has nothing to do with the bad management of the UC’s investments: “Although the 2007-09 stock market crash was responsible for some of this unfunded liability, most of it results from the fact that no employee or employer contributions have been made for nearly 20 years. While the recent rise in the financial markets has eased the problem, the gap is still enormous.” The truth is that the UC’s pension investment record went from being one of the best to being one of the worst after the management of the funds was outsourced in 2000. Moreover, in the middle of the global financial meltdown, UC increased its holdings in real estate and mortgage-backed securities, and these moves may have been motivated by several regents who have strong investments in real estate and securities. It is irresponsible for the council to not call for direct employee oversight over the UC’s pension investments.

Since our university is full of famous economists and accountants, it should be possible for someone to challenge the university’s accounting mechanisms. If we do not question their assumptions, we will all see our benefits and compensation go down, as the core mission is threatened. While it is necessary to protect our pension plan and healthcare for retirees, we need to know the truth about the UC’s finances.

54 comments:

  1. Thanks Bob. I think the liability for future medical care is simply good accounting... trying to prepare for predictable future costs. Similarly for future pension costs. I don't those as accounting tricks, just solid accounting.

    I tend to agree that the pension fund has been mismanaged, including the elimination of Patricia Small and the use of consultants.

    --Harry Nelson

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  2. http://www.stanford.edu/group/siepr/cgi-bin/siepr/?q=/system/files/shared/GoingforBroke_pb.pdf

    half a TRILLION DOLLARS?!

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  3. Grad Students as Higher Ed Senior Administration-Stanford report: Shortfall for California's pension systems as much as a half a trillion dollars
    Thankful for Grad Students doing the real work:

    Going For Broke: Reforming California’s Public
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    By Howard Bornstein, Stan Markuze, Cameron Percy, Lisha Wang, and Moritz Zander.
    Faculty Advisor: Joe Nation

    Stanford report: Shortfall for California's pension systems as much as a half a trillion dollars

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