Tuesday, August 31, 2010

Let the Great Pension Scare Begin

Throughout the last year, I have discussed many of the ways universities are scaring faculty and workers into accepting lower salaries and benefits as their workloads increase. This great squeeze echoes the general move of our “winner-takes-all” economy; workers are being asked to do more for less as the wealthiest among us continue to increase their earnings and political power. In the case of the UC system, I have documented how an exaggerated fiscal crisis helped to usher in furloughs, layoffs, and increased fees and tuitions, and I have warned that the retiree liabilities will be used to institute a permanent state of fiscal crisis. We have now entered fully into the great pension scare.

My argument is not that UC employees should reject any increase in their contributions to the retirement plan; however, I have stressed that we need to understand the truth about the financial status of the university and the pension plan. Unfortunately, university officials cannot stop themselves from circulating half-truths as they hope to force more concessions from workers. To begin my analysis of this administrative strategy, we can look at a recent article from the Chronicle of Higher Education entitled, “As Pension Costs Rise, Public Colleges Pay the Price.”

This article opens with the usual rhetoric of panic and crisis that we find in most pieces dealing with public pensions: “Pension costs are spiraling out of control at the University of California, which, unlike most college systems, runs its own pension plan. Within two years, the 10-campus system expects to contribute $700-million per year just to keep its plan afloat—nearly as much as the cuts in state support last year that generated protests and threw the system into crisis.” The first thing to point out about this statement is that it does not distinguish between the amount the university itself has to pay and the amount it will make external grants and services contribute. Since the UC itself claims two thirds of the employer contributions will come from external sources and services, the $700 figure can be reduced to $230 million. Moreover, the university is asking the state to pay for the $230 million, and while this funding from the state does not seem likely this year, it could be arranged in the future.

We also have to question why The Chronicle sought to compare last year’s protests over the state reductions to the pension issue. It appears that they are fueling the idea that the greedy workers are making tuition costs go up because they refuse to give up their great pension deals. This common discourse of pension envy is coupled with a repression of the true cause for the university’s financial woes: “But the recession reduced the university's investment by $16-billion, or a third of the plan's value. Now, in order to keep the fund solvent, the system and its employees must contribute billions of dollars in the coming years just as the system struggles to survive deep cuts in state support. Workers will most likely be paid less over all, and campuses will need to divert.” The first thing to note about this passage is that it begins by simply blaming the loss of $16 billion on the “recession.” There is no acknowledgment here that perhaps bad investment strategies are the real cause for the pension’s underfunding. Furthermore, the article predicts that the need to fund the pension plan will inevitably result in the decrease in workers’ salaries and a diversion of university funds.

In a now repeated view, Peter Taylor, the head budget person for the UC system, argues that the university will have to spend more money on the pension than it does on instruction: “Unless it makes changes, the system is on track to spend more on retiree pensions and health care than it does on instruction by 2014, says Peter J. Taylor, the system's chief financial officer.” What Taylor does not say here is how little the university currently spends on instruction, but the rhetorical strategy is to pit the students against the faculty and workers and blame the employees for both the increase in student fees (tuition) and the decrease in instructional budgets.

To help clarify the reality of the pension situation, we should keep in mind several important facts. The first is that many of the long-term projections for the pension liability and underfunding were made during the lowest point of the global financial meltdown. In fact, after the UC pension lost $16 billion in 2008 and 2009, it gained back $10 billion in 2010. This fact is important because many of UC’s projections do not take into account these recent investment increases. Moreover, we see that even if the UC employees contribute 5% of their earnings to the pension plan, they will only be adding $400 million to the fund, while a good investment year can bring in $10 billion. Thus, the most important issue is how the UC invests its money, and how it can protect against major losses.

The simple fact of the matter is that the huge swing in investment losses and gains makes it impossible to make any long-term predictions with any accuracy, and yet current accounting requirements force the university to predict future returns, interest rates, faculty salaries, and other unpredictable elements far into the future. Given that these accounting projections are always wrong, I have suggested that the university sets up a system to negotiate every year or every year the needed employee and employer contribution rate.

Another important fact is that, currently, the university calculates the normal yearly cost of the pension plan to be $1.4 billion, and as of March 30th, 2010, we had $37 billion in the pension investment accounts. To cover the $1.4 billion cost each year, the UC needs to put in about 17% of payroll (the total covered payroll is $8 billion). If employees contribute 5% of their salaries ($400 million), and the university only pays for the state-funded workers (one third of all employees), the university needs to pay out $320 million, and if the state does not pay this $320 million, the university can either take out a bond or borrow money from its own short-term investment fund to pay some or all of the amount.

While $320 million is not a small amount, we have to remember that the UC operating budget is over $20 billion. The rhetoric of crisis thus seems to be misplaced, and what we really have to look at is how the UC invests its money, and why it is trying to scare workers into accepting lower pay and benefits for more work. We also have to pay attention to the temptation for current employees and administrators to sacrifice future workers in order to keep their own pension benefits.

The university has now entered into a giant media campaign to convince workers that the UC system faces an immediate crisis caused by retirement issues. For instance, in the Los Angeles Times article, “UC retirement funds face a shortfall of more than $20 billion, report says,” we are told that “Yudof has warned of terrible consequences if the problem is not tackled quickly. ‘If we do nothing, in four years, the University will be spending more on retirement programs each year than we do on classroom instruction.’” Once again, the public media strategy is to oppose the interests of the workers against the interests of the students.

By repeating the claim that the university now faces a $20 billion liability, which will soon balloon into a $40 billion liability, UC administrators follow the right-wing attack on public pensions. Since virtually no one understands how these long-term liabilities are calculated, the university feels that it can use this scary number to turn the people against public workers and defined benefit plans. While I am not claiming that the UC system does not face a future problem, the extreme exaggeration of the problem makes it hard to determine the right solution. We should all keep in mind that the UC is currently only spending about $240 million on retiree healthcare and $200 million on the pension plan, and so it is absurd to make it seem that the UC will be $40 billion in the hole in just three years.

By using the huge future liability number, the Post-Retirement Benefits Task Force justifies moving the minimum retirement age move from 50 to 55 and the age for receiving a full pension from 60 to 65. The plan for people hired after 2013 would also reduce pensions by the amount of an employee’s social security. This change would reduce some people’s pension allowance by more than 50%. It is important to stress that the dissenting senate faculty report rejected the use of social security to reduce the pension payout. The dissenting report also did not support the Task Force’s suggestion to to have a second tier where employees could choose to pay a lower contribution rate and receive a reduced pension.

While some of the unions have endorsed the need to increase employee and employer contributions to keep the pension well funded, they have also rejected the need to adjust the age requirements and payout calculations. In fact, UC-AFT and AFSCME have been in conversation with senate faculty members in order to push for a united front against a two-tier system. Finally, after years of negotiating, President Yudof has offered the unions the chance to have one union representative to sit on the investment advisory board. The unions have decided to forward the name of Bob Samuels to Yudof. Let’s see what he says.


  1. Fantastic article. (I just found your blog and feel like cheering.) This constant state of fiscal crisis reminds me of the tactics of a certain presidential administration, which used fear to confuse people into acquiescence. Thank you for offering a dissenting, intelligent voice.

  2. "President Yudof has offered the unions the chance to have one union representative to sit on the investment advisory board. The unions have decided to forward the name of Bob Samuels to Yudof."

    You get to see how the sausage is made, Bob. It's important to have someone with the right sort of allegiance on the board.

  3. wow, ditto to 1st post... i will be coping & pasting large portions of your blog and sending it out members of my union to create talking-points, agitate, and mobilize. i hope your archived blogs are as informative, i'm about to dive in... thanks again

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