I write this post with great urgency. The University of California is about to decide on a path that will determine its future, and if the university's employees don't wake up and do some math, there may be no turning back. The basic truth is that the UC administration is misinforming its employees in order to get them to accept a reduction of pay and benefits; however to understand how the university is misleading its workers, one must first comprehend how the system is financed.
In its effort to convince employees that they should either choose a permanent 7% pay reduction or see their retirement benefits be reduced by close to 50%, the UC administration is simply misrepresenting the following issues: 1) why a high level of contributions is currently needed; 2) how the UC has historically funded retirement; 3) what are the most effective ways of dealing with the problem; and 4) how the problem will affect the future of the university. To respond to these issues, we can simply go to the videotape and look at the recent Post-Employment Benefits Town Hall (click here to see the video ).
The first major area of contention is the question of how we got into this mess. The university's simple response is that we were all on a contribution holiday for the last twenty years, and now we are paying the price. It is interesting that by using the term “holiday,” it sounds like we have all been partying, and now not only do we have hangovers, but we have to pay for the damage we all have done to ourselves and those around us. In response to this depiction, we must remember that it is the regents who have ultimate authority over UCRP, and so it is the regents, and not the employees or the state, who are responsible. Moreover, in Nathan Brostrom's Town Hall response to what happened to the pension fund, he does not even mention that the university lost $16 billion in its retirement investments during 2008-09, and he also does not state that it is the regents who have responsibility for these investments. And of course, the administration is turning to the regents to correct the problem after they have caused it.
To counter the fact that investment losses are in part driving the pension’s growing unfunded liability, the university argues that if we never stopped contributing, we would be over-funded. My response to this defense is that, yes, the regents were wrong to stop contributions, but we have to ask, where did the money go that the UC once put into our retirement system? Moreover, even if we did continue our contributions, the regents might have lost funds through high-risk investments.
As a recent study of the UC regents shows, the UC has placed much of its retirement investments in high-risk areas because the regents themselves stand to profit from certain types of investment. Thus, the move to private equity, hedge funds, and real estate was pushed by regents who have strong stakes in these areas. If this true, and no one has been able to disprove it, it is a very scary thought that the same regents will decide the fate of not only our retirement system but the entire UC budget.
Due to the massive investment losses and the failure to continue contributions, the university now faces the strong possibility of having to contribute over 20% of its budget to the pension for the next twenty years. This means that the pension problem is not just a retirement issue, but it is a system-wide problem. We are talking here about a permanent crisis coupled with permanent furloughs. After all, when the UC lost just 1% of its funding during the last two years, the administration imposed layoffs, furloughs, departmental reductions, and a major reduction of spending on instruction. Imagine what will happen when the UC has to put 20% of its budget into the pension program.
This frightening scenario doesn't have to become reality. The UC does not have to reduce its budget, and we can force the regents to do the right thing, but first we must counter several misrepresentations, including how the UC really spends its money.
In terms of pension contributions, we need to remember that only a third of the employer costs comes from the core budget, and the university itself argues that the state is obligated to pay that part. Since only one third of the UC employees covered by UCRP are state funded, the other two thirds of the employer contributions should be paid by the medical centers, external research grants, and other services. This means that even if the employer had to contribute 20% of covered compensation to the plan, it would only really be less than 7% out of the general budget, and if the state paid its share, we would lose nothing from our core budget.
It is also essential to point out that the administration misrepresented the facts during its Town Hall when Duaine Duckett argued that the UC would try to keep the historical contribution split of the employer paying twice as much as the employee. In fact, during the last decade of contributions (the 1980s), the employer contributed an average of 12% and the employees averaged 2.4% (a 5:1 ratio). This division is obviously nowhere near a two-to-one ratio, and so I must declare that the university is intent on lying about the past.
So as many people have asked me, why would the UC lie about this? The simple answer is that they want the employees to feel that they must pay a much higher part of their salary into the system to keep it healthy. However, the more complicated response returns us to how the UC budget works. Currently, most of the budget comes from the medical centers and external grants, and as we have discovered this year, the grants on the whole lose hundreds of million dollars each year , and the medical services make billions of dollars of profits annually. However, as we learned from the furlough fiasco, the medical centers do not want to pay their fair share, and the people being paid from external grants are afraid that if they ask the grant-giving agencies, primarily the federal government, to pay their fair share, the UC will lose many of its grants.
While for the last few years, the university has justified not starting contributions on the grounds that the state has to pay its part in order for the grants and services to pay their share, now we hear that the medical centers do not think they can pay their part even though they had over $5 billion of net profit last year. Due to their enormous wealth, the medical services are not only delaying the employer contributions, but they are calling for a defined contribution plan that the university is now considering.
As several faculty senate committees have argued and some of the unions now support, the first thing that has to be done to stabilize the retirement plan is to fund the full normal cost, which is about 17% of covered compensation. Moreover, we have to start paying down the unfunded liability, and by a total contribution of about 23% for the next several years, we could accomplish both of these goals. If we maintain the historical division of contributions, the university should contribute 19% (roughly a third from the state, a third from medical centers, and a third from grants and other services); meanwhile, the employees should contribute 4% of their salary. If we moved this year to this type of funding level, we would not have to change the retirement calculations or offer a new tier or a defined contribution plan.
Instead of accepting this type of rational funding plan, the UC administration is intent on creating a new system that redistributes wealth to the top, and if employees think that it is only the new employees who will be screwed, please think again. In order to motivate people to opt into the plan in 2013, the university plans to increase the employee contributions to at least 7%, while the new plan will offer a cheaper benefit for a lower contribution level. It is therefore untrue when university officials insist that the new changes will not affect current employees. Furthermore, by creating new plans, you pull people out of the current system, when what we need is more people paying into the common fund.
According to the university’s own account, the new tiers will not reduce the unfunded liability for the next twenty years, and the plan will only become fully funded in thirty years. Their suggested solutions are not only morally unfair, but they do not make financial sense. In one of the typical university misrepresentations, Brostrom simply says “When we look at the next 30 to 40 years, we have too few assets.” The real truth is that no one can predict what will happen with the financial markets in thirty years, and therefore we must have a system where we continue to monitor our investments so that we can readjust our contribution levels. Of course, we also have to make sure we are making the best investment decisions, and this is why the unions have argued for shared governance over the pension plan.
In response to the union coalition’s request for employee representation on the pension investment board, President Yudof wrote that it is unnecessary because the UC has been outperforming its competitors by averaging an 8.9% rate of return during the last twenty years. However, Charles Schwartz has shown that the UC has been underperforming since 2000 when it started to outsource the management of many of its investments. While it may not be a lie to proclaim that the UC has outperformed its “benchmarks,” the question remains concerning the value of the benchmarks UC continues to use for comparison. Moreover, while many large investment funds lost 30% of their value during the global fiscal meltdown, most of these funds used the same questionable practice of moving funds into high-risks assets. What we need for the university to do is to at least acknowledge that their investment policies may have contributed to the under-funding status of the pension plan because without this acknowledgment, it will be impossible to make better decisions in the future.
One possible hope from the PEB Town Hall is that the university promises to listen to the faculty senates, and so it is necessary for faculty to make their voices heard on their local campuses. Faculty have to clearly reject the new proposed plans, and they have to push for a more equitable and effective funding policy. Unfortunately, things are moving fast, and the administration plans to discuss the new changes at the next regents meeting in November and then possibly vote on them in December. If staff, faculty, and unions work together to fight for a better plan, we can reverse the administration’s intended changes.