Thursday, August 30, 2012

Pension Politics

It looks like the legislature and the governor are close to a deal on pensions. While they have decided to exclude the University of California from the reforms, everyone inside and outside of the UC system should be concerned about the politics behind this move to rein in public pensions. First of all, one of the main motivations to make this deal now is that many Democrats feel that the best way to coax voters to support the governor’s tax initiative is to show citizens that the Dems are serious about controlling future governmental expenditures. Also, many Democrats in the legislature believe that they can win a super-majority in both houses, and so they are going after seats in swing districts.

However, there are several broad issues concerning this pension reform that we should consider. First of all, what does it say about unions and the Democratic party when they lead the way in reducing benefits for future workers. In the proposed new system, many workers will have a hard time waiting until 65-67 to retire, and the change in retirement age will reduce their retirement checks by a large amount (during a time when retiree healthcare costs will continue to increase). While it looks like the Dems are being responsible, who is protecting the most vulnerable workers? Another major problem is that the deal undermines collective bargaining and the ability of workers to trade wage increases for retirement security.

What the current discussion of pension reform fails to mention is that the major cause for the underfunding of pension plans is investment losses, and this reform puts all of the blame on the cost of benefits. What we need is real Wall Street reform, which would protect pension funds against huge losses. It also does not help that the Fed is keeping interest rates so low that pension funds have to move almost all of their money from bonds to stocks and other higher risk asset classes. Moreover, the recent Libor scandal shows that pension funds have lost significant value because banks have manipulated interest rates.

History may remember this period as a time when all of the major liberal institutions—unions, the Democratic party, and public employees—accomplished the goals of the conservative revolution. While it may seem that we are only trying to show the public that we are fair and rational, we are actually feeding the Romney-Ryan rhetoric that the only solutions to our problems is to cut the benefits of the next generation.

Wednesday, August 8, 2012

The state of UC

The stakes have gone up for Prop 30, the governor's tax initiative, which will cost the UC $375 million in state funding if it does not pass. In turn, the UC will discuss at the next regents meeting a plan to raise tuition by 20% in case the voters do not support the proposition. It should be clear to the citizens of California that a small tax increase will help protect higher education in California; however, the proposition is only polling at 52%.

A related issue is how the UC spends the money it does get from the state. As last year's state audit showed, state funds are distributed to the campuses on an unequal basis, and the result is that the smaller campuses without medical schools and law schools are poorly funded. Also, the campuses with the highest number of under-represented minority students receive the lowest funding.

In order to correct this problem of unequal funding, a task force has been working on increasing campus equality, but they have run up against several hurdles. First of all, UCOP refuses to provide an estimate of how much it costs to educate undergraduates versus graduates versus medical students. Instead, they have helped to develop a weighted system where each resident undergraduate and masters level student counts as 1, each doctoral student counts as 2.5 and each medical student counts as 5. The current level of state funding per campus is then divided by the student enrollment level for each of these student groups. Even when we take into account the fact that some campuses have more medical and doctoral students, there is still an uneven distribution of funds.

The major problem with this whole methodology is that it does not prevent some campuses from simply increasing their number of highly funded medical and doctoral students. Moreover, campuses are now able to keep their tuition dollars, and the same campuses with medical centers and/or high levels of doctoral students are also the ones with the highest number of out-of-state students. The end result will thus be that rich campuses will get richer, while the poor campuses will get poorer.

While the task force does recommend a slow process of increasing the funding of some of the campuses to keep up with the weighted average of UCLA per student funding, the task force failed to justify its calculation of the weighted averages. Since no one is even trying to estimate how much it actually costs to educate different types of students, it is unclear how the task force is making its calculations. While it is very possible that we will see a growing inequality of funding among the campuses, it is not clear that the campuses with more funding will increase their support for undergraduate education. For example, if a campus brings in more medical and doctoral students to increase their share of state funding, and these students cost much more to educate than the assumed weighted averages represent, then the wealthier campuses will have to continue the process of using undergraduate tuition to subsidize expensive graduate and professional program. Until UCOP decides to actually estimate the actual cost of education, all of the decision makers will be making important choices in the dark.