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BFA Report on Pension Crisis

BFA Member Alert: Saving UC’s Pension Plan

October 14, 2010

As most faculty know, UC’s pension plan, the University of California Retirement Plan (UCRP), faces a dire problem of a growing unfunded liability, as funds have not been contributed to it for nearly twenty years now, leaving investment income as its only source of growth. As most faculty also know all too well, at their meeting in September 2010 the Regents adopted a schedule for the resumption of contributions by plan members not represented by unions (including faculty) and by UC itself. However, these contributions address only one small piece of the problem — costs that the plan is incurring right now — but not costs associated with the plan’s problematic recent history and other current pressures against traditional pension plans. At their meeting in December 2010, the Regents will be considering changes to UCRP to address these larger issues.

The Board of the BFA strongly objects to many of the changes that are being discussed, and urgently wants BFA members and other faculty to be informed about the issue. Our objections, and also our own suggestions for dealing with the problem, are outlined in a report available by clicking on the following link: BFA Response to PEB Task Force Recommendations, 10-14-2010

Its key points are as follows.

The President’s Task Force on Post Employment Benefits (PEB Task Force), appointed in March 2009 to review all such benefits and develop a plan to restore UCRP to financial health, has put forward two preferred plans, “Option A” and “Option B.” Seven Task Force members issued a dissenting statement arguing for “Option C,” a plan considered by the Task Force but not ultimately put forward. The Berkeley Division of the Academic Senate reviewed all three plans at a special meeting October 6, and expressed opposition to A, conditional tolerance of B and a preference for C.

The Board of the BFA, however, finds neither A, B nor C acceptable. A and B are severely regressive, discriminating against plan members in lower and middle income ranges by reducing benefits according to income received from Social Security. C does not do this, and so is preferable to them. However, A, B and C all discriminate against future employees by putting them in a “new tier” of the plan which would require lower contributions but also offer reduced benefits; current plan members could exercise a one time “choice” to remain in the “main tier” or opt into the new tier, and increases in contributions in the main tier would pressure them to do the latter. The new tiers in A, B and C also save money by pushing back by ten years the age factors on which benefits are based. The new tiers in A and B (but not C) also save money (a great deal of money) by “integrating” UCRP benefits with Social Security benefits – i.e. by subtracting each retired member’s social security income from their UCRP pension check – and by linking the age factor to salary scale.

Astonishingly, these degradations of UCRP would not even solve the problem of its unfunded liability. All of them conflate two fundamentally different costs. One is the Normal Cost of the plan (the present value of service credit accrued by members in any given year; i.e., the amount needed to be set aside now to enable the plan to pay the benefits associated with that service in the future), a cost which is routinely and reasonably funded by contributions from both employees and employers. The other is what we call the “Abnormal Cost” threatening our plan, the special financial burden it now bears because of the ongoing failure to adequately fund it. That failure has multiple, complex causes, including, most fundamentally, the political failure of the state of California to support its own system of public higher education. The effects of this on UCRP have been especially dramatic, not only because pension plans by their nature depend on long time spans between when contributions are made and benefits paid, but also because, when the state has not contributed to the plan, neither have the many other funding sources which pay the salaries of many UC employees, even as those employees have accrued benefits under the plan. It is in this way that UC’s liability for its pension obligations, which it can neither morally nor legally walk away from, have snowballed out of control and become a threat to UC as a whole. Recent attempts to find money to pay down the liability by raising in-state student fees and by increasing enrollment of out-of-state students paying even higher fees only replace one threat to UC with another, and put the burden of solving the problem on those who had no role in creating it.

We believe that the complexity of the problem for UCRP of the Abnormal Cost, and the fact that that cost is not simply a financial problem, require an entirely new approach, taking full account of the interaction of UCRP with broader issues of compensation. Further negotiation will be necessary in any case, because for the many plan members represented by unions, plan changes, including any resumption of contributions by employees, are subject to collective bargaining as well as litigation. In recent years, progress has been made on complex environmental problems through a new kind of professionally mediated process which brings together all the parties who, whatever their historical grievances, have an urgent stake in resolution of the problem. We believe that solving UCRP’s problem requires such a mediated process, as outlined in our report. We call that process, and the fundamental principles of fairness we insist that it respect, “Process D.”

We call on President Yudof and the Regents to reject Options A, B, and C, and instead initiate Process D to develop an effective and equitable plan for a financially sustainable UCRP.

Note: A letter (which you can read by clicking here: BFA Letter to Yudof Re: Pension Crisis, along with this report, was sent to the UC Office of the President on 10/14/2010.

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