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Fixing the UC retirement system time bomb

By and

http://www.dailycal.org/2013/08/12/fixing-retirement-something-something/

UC students appreciate that faculty achievements have made their university among the very best in the world. Many also know that UC faculty members have long been underpaid compared to faculty members at our peer universities. Historically, however, lower salaries were balanced by a superb retirement system. In return for smaller monthly paychecks, faculty members received proportionally large contributions from the state for investment in a pension plan that ensured them a comfortable retirement. This “deferred compensation” was not a “perk” or a “bonus” or a “golden parachute.” It is real income earned by faculty members and owed to them. And it is a key reason that great scholars accepted positions at the university.

Today, we hear constantly that “taxpayers” shouldn’t fund such “entitlements” because they represent cave-ins to powerful unions. This is certainly not the case with the UC retirement system. The current problems with the retirement plan began back in 1991: During a state financial crisis, the regents and the state decided to suspend all contributions to what was then a technically overfunded retirement plan, hoping that its investment income would fill the gap.

Not contributing saved the tax-starved state of California hundreds of millions of dollars and softened the impact of state budget cuts on university operations. But it impoverished the UC retirement system. Within little more than a decade, as the disastrous consequences became clear, the UC Academic Senate began calling for the resumption of contributions. The state refused. Without state funding, the regents declined to restart either the employer or employee contribution.

The situation worsened with the financial crisis of 2008 and the Federal Reserve System’s policy of keeping interest rates at historically low levels. The financial managers of the retirement plan began to borrow from future retirees to honor the pensions of those who had already retired. They spent funds that they had counted on to generate the investment income needed to cover the cost of financing future pensions. The percentage of funded liabilities began to plunge, beginning a downward spiral that could have led to the plan’s financial implosion.

To forestall this, the regents boldly agreed to self-finance the employer contribution in 2010. To reduce the financial shock, however, they approved a plan to ramp up contributions gradually over eight years. The slow ramp-up meant that the unfunded liability continued to grow — to roughly $10 billion (yes, billion!) in 2011. Even with this year’s contribution increases and the start of a tiered system in which new employees receive reduced pension benefits, our combined employer and employee contributions don’t yet come close to covering the interest on this huge unfunded liability. We won’t begin the long, costly process of paying off the interest on this debt until 2018, when the employer contributions rise to 18 percent and total contributions reach 26 percent.

The state’s decision to shift the entire cost of funding the university’s retirement plan onto the university itself has had a terrible impact on students, faculty and staff members. Together with repeated state budget cuts, it has forced the university to keep raising tuition, pushing more students and their families into debt. It’s degraded operations by necessitating massive staff layoffs. Because the 3 percent and 2 percent salary increases that went into effect in October 2011 and July 2013 only partly offset the increase of employee contributions to 8 percent and the skyrocketing cost of health benefits, the decision has also created hardship for many employees raising families in our state, which has a high cost of living. It’s also put the university’s ability to maintain the quality of its faculty at risk by adding to the cost of recruiting and retaining world-class scholars. (Berkeley now ranks 24th in faculty salaries at elite research universities.)

Our new president, Janet Napolitano, should make correcting this situation one of her top priorities. She could start by urging the regents to reduce the current $250,000 cap on retirement plan pensions to $200,000 until the unfunded liability is extinguished. Except for top administrators — whose bloated salaries are so unpopular with many Californians — and some medical and professional school faculty members, very few UC employees are close to reaching this cap. Reducing it would ensure that the pensions of the best-paid few will not drain the retirement funds of the rest while the retirement plan is being restored to financial health.

Above all, Napolitano must use her political skills to remind those in Sacramento that the state’s refusal to fund the employer contribution threatens the university’s historic mission to provide world-class, affordable education to all qualified Californians. It is a shameful retreat from a legal obligation that it continues to honor with all other state pension plans. Napolitano needs to convince the legislators and citizens of California that the refunding of the current retirement plan is in the public interest. UC faculty and staff members serve the public. They are already doing their part to restore the retirement plan’s fiscal health. So are UC students. It’s time for the state to share the burden.

Christine Rosen is an associate professor at Haas School of Business and vice chair of the Berkeley Faculty Association. James Vernon is a campus professor in the department of history and a co-chair of the Berkeley Faculty Association.

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