Statement on Pension Reform at UC
Presented to UC Regents, Dec. 13, 2010 by Richard Walker, Vice-Chair of the Berkeley Faculty Association
The Berkeley Faculty Association (BFA) is deeply concerned about the state of the University of California Retirement Plan (UCRP). The UCRP’s Defined Benefit Plan is billions of dollars in arrears because contributions were suspended twenty years ago.
The failure to fund UCRP has several causes, the most fundamental of which is the permanent fiscal crisis of the state of California and the political failure to support our system of public higher education – including the pension fund. The University made things worse by halting contributions to the fund over the same 20-year period. The effects of these failures have been multiplied because other funding sources, such as federal agencies and private foundations, followed suit and suspended their contributions. Thus, the university’s liability for its pension obligations, which it can neither morally nor legally walk away from, has snowballed out of control to become a threat to UC’s future.
UC and its employees must resume contributions to avert disaster. The President’s Task Force on Post Employment Benefits put forward three proposals for how to deal with the pension fund shortfall: Options A, B and C. President Yudof selected the best of these, Option C. Nonetheless, BFA still has severe reservations about the President’s plan. We therefore urge the Regents to adopt an alternative plan, Process D, outlined below.
We object to the President’s plan on three primary grounds. The first is that it fails to close UCRP’s remaining unfunded liability. The university needs to raise $4.5 billion to bridge the gap between the funds raised by increased contributions and the sum needed to fully fund UCRP prior to 2018. The plan fails because it addresses “Normal Cost”, i.e., the amount set aside now to enable the fund to pay benefits in the future, but does not solve the problem of “Abnormal Cost”, i.e., the deficit in the pension fund because of past failures to contribute. UC must ramp up its contribution more quickly to the proposed 20%, and more. The President’s proposal to borrow from UC’s Short-Term Investment Pool (STIP) and/or restructure debt using STIP appears inadequate to the job.
A shortfall of this sort paves the way for a continuing cycle of more contribution increases, more benefit cuts, lagging salaries, more student fee increases, more layoffs – and eventually the collapse of UCRP. It is simply not an option to let the funding gap carry over to an unnamed future in the hopes that something will be done to save us.
BFA’s second objection to the President’s Plan is that it shifts too much of the burden of restitution for UCRP onto faculty and staff. The plan requires the majority of UC employees to make higher contributions in return for greatly reduced benefits. The aim is to increase contributions to UCRP from the current 3.5% to 10% of salaries. On top of this, UC intends to raise the employee contribution for health insurance from 11% to 30% of the premium (and no one knows how high insurance premiums will go). The result is that the ratio between UC’s employer contribution and employees contribution is shrinking, from as much as 4 to 1 in the past to less than 2 to 1.
These increased contributions represent a substantial cut in take-home pay for most employees and a big hit to ordinary faculty – who will take it much harder than top executives and superstar professors earning $200,000 to $800,000 a year. This inequality will become more egregious with the two-tier plan. Be forewarned that the effect on faculty recruitment and retention will be severe, which will hurt the university. UC’s excellent health and retirement benefits have, in the past, been a bulwark of the public university against the higher salaries and other assets of the private universities.
The third reason BFA objects to the President’s Plan is because of its regressive impact. The flat-rate increase in contributions discriminates against low and mid-wage UCRP members. Moreover, it harms future employees (from 2013) by putting them in a “new tier” which requires lower contributions but offers reduced benefits. Current plan members may exercise a one-time choice to remain in the main tier or opt into the new tier; higher contributions in the main tier would pressure them to do the latter – a short-sighted decision that could harm their retirement incomes. The new tier plan saves even more money – and further reduce pensions – by pushing back by 10 years the age factors on which benefits are based. It creates a gross new inequality among UC employees.
Such two-tier systems have been foisted on many workers over the last thirty years, and the result is too many Americans with insufficient pensions to enjoy a normal retirement after a lifetime of work. It will not go down well with UC employees and certainly not with the majority of faculty who are not in business or medical schools, not making big consulting fees, nor among the superstars earning $200-$600,000. [Options A and B are even more regressive because they propose to save money by “integrating” UCRP benefits with Social Security, by subtracting each retiree’s Social Security income from her UCRP pension and linking the age factor to salary scale. We reject this outright].
BFA urges the Regents to adopt an alternative strategy for restoring UCRP to financial health: Process D. Process D is not a financial blueprint but a means of developing one – because the crisis facing the university is not just financial but one of institutional viability. If the Regents and UCOP impose a bad solution on their employees, they are likely to run into a wall of dissent, internal division, and delay due to litigation; alienation of an ever more financially burdened public and student; and a crippling flight of faculty from a declining institution to private and public universities offering better deals.
What is needed at this point is an entirely new approach to developing a solution to the pension crisis: a professionally-facilitated process that brings together all the parties who have an urgent stake in resolution of the problem, including administration, faculty, staff and students. The aim must be to educate all parties about the depth of the crisis and the sacrifice that is demanded, and to create trust that the eventual Pension Plan worked out will be in the best interests of all in terms of fairness and future security.
We therefore call on the Regents to reject Options A, B, and C, and to initiate Process D to develop an effective and equitable plan for a financially sustainable UCRP. Our full reasoning is provided in a longer report, available on our website, ucbfa.org.