November 2010
President Issues Post-Employment Benefits Recommendations
Senate Chair says Faculty Have Been Key to Effort
President Yudof has decided to recommend a modified version of a new UC retirement benefits plan proposed by the faculty members of the President’s Task Force on Post-Employment Benefits.
The President will ask the Board of Regents to adopt a modified “Option C,” which was highlighted in a Dissenting Statement to the August 30 Task Force report. A new UC Retirement Plan tier will apply to employees hired after July 1, 2013 and include a 2.5% maximum age factor for all employees at age 65, an employer contribution of 8.1% of covered compensation, and an employee contribution of 7%. The President will bring his recommendations to the November meeting of the Board of Regents, who are expected to act on them at a special meeting on December 13. The November pension recommendations will not affect the contribution levels for current employees.
Faculty should be pleased with the President’s decision, says Academic Senate Chair Daniel Simmons, because it adheres to the broad parameters of the options for pension and retiree health benefits redesign currently under review and is consistent with the majority of positions expressed by Senate agencies in their review of the recommendations. “I am pleased that the Senate was able to come together around a common set of principles and views,” he said. “This outcome is a good example of the Senate working effectively to advise the President and influence UC policy.”
Chair Simmons says that while the President made his decision in advance of a formal expression of opinion by the Senate on the specifics of the proposal, the Senate has been deeply involved in the PEB process from its outset 18 months ago; the President was fully informed of the Senate's views on the various options and their component parts. During the past two months that the UC community has been reviewing the Task Force’s recommendations, the Senate chair and vice chair have been engaged in intense discussions with the Administration in Oakland about the three options on the table.
“The PEB process has been an exemplar of shared governance, given the degree to which the Senate has been involved and influential throughout the process,” Simmons said. “Vice Chair Anderson and I have been meeting with President Yudof and other senior administrators at least once weekly to discuss PEBs, where we communicate the views and concerns of the faculty and remind them of the stages of the Senate’s review process. Members of the UC Senior Administration meet regularly with the Academic Council and with systemwide faculty committees, and Senate leadership has been closely involved in the process of negotiation over the various options to be presented to the Regents. I am confident that this recommendation reflects the views of the Senate faculty who have been involved in the process and addresses their concerns.”
Chair Simmons says that informing the faculty about the very complex benefits issues and communicating the role of the Senate has been a challenge. “The PEB process has been difficult, but it has also been highly consultative. Of course, the Senate will not get its every wish, and whatever the Regents decide is likely to be unpopular. That is not a failure of shared governance. I promise you that President Yudof listens to the Senate and has respect for the faculty voice and for the exercise of that voice through the Senate. Shared governance does not always mean that the Senate gets its way, but that it has a significant influence on the course of decision-making. I think that has been honored.”
Senate Vice Chair Robert Anderson agrees that the President did the right thing by rejecting Options A and B. “President Yudof made a decision that is good for the University and good for faculty and staff,” he said.
Despite the President’s recommendation, nothing is final until the Regents act. On October 27, the Academic Council endorsed a broad resolution about the Task Force recommendations that incorporates feedback from the Senate review and recognizes that the University needs to focus on competitive remuneration for both faculty and staff. “I think it is important to memorialize the Senate’s recommendations on the various options presented as a reflection of all of the hard work that has gone into examining those positions,” said Chair Simmons.
Systemwide Review Began September 1
Throughout September and October, campuses have been holding fora to help inform their faculty and staff. Several major concerns have emerged at the campuses and among systemwide committees, including the effect of Options A and B on lower income employees, the unpredictability of the “integrated plan” concept that would integrate Social Security with the UC Retirement Program (UCRP); the difficulty of enforcing a 7% cap on employee contributions in the “choice” provision, and the increased cost to grants as employer contributions ramp up, which could decrease funds for research and salaries. In September, Council voted to circulate a University Committee on Faculty Welfare (UCFW) resolution to Senate divisions and systemwide committees to help inform their consideration of the issues. Several Senate divisions and systemwide committees focused on UCFW’s resolutions, which oppose “Option A”; recommend Option C over Option B; and oppose an employee contribution over 7% for those who choose to remain under the current UCRP terms. UCFW also states that it will not support any option without a plan to raise faculty and staff salaries. UCFW later released two additional positions, one opposing the adoption of any plan integrated with Social Security; the other requesting a written guarantee from UCOP codifying the plan’s target of maintaining 80% purchasing power in the pension, or if that is not possible, maintaining the current UCRP COLA provision formula moving forward.
In September, Provost Lawrence Pitts, CFO Peter Taylor, and EVC Nathan Brostrom responded to the arguments made in the Dissenting Statement. Senate Vice Chair Robert Anderson followed that with A Critique of “Response to ‘A Dissenting Statement by Staff and Academic Senate Members of the Work Groups of The President’s Task Force on Post-Employment Benefits, which argues forcefully against their arguments. This was followed by a Response to the Critique. Professor James A. Chalfant and Professor Emerita Helen L. Henry, who both served on the President’s Task Force and helped author the Dissenting Statement, released an op-ed entitled, Saving UC and its Pension Plan, which further details their objections to Options A and B.
The authors of the Dissenting Statement note that Options A and B are both uncompetitive and will erode the quality of UC. James Chalfant, UC Davis Professor of Agricultural and Resource Economics and chair of the University Committee on Planning and Budget, was a member of the Task Force’s Finance Team. In addition to being one of the authors of the Dissenting Statement, he is also a former UCFW chair and a member of UCFW’s Task Force on Investment and Retirement (TFIR).
“None of the three plans would be competitive,” he says. “Option A would be wildly uncompetitive, even with higher salaries. Options B and C could be competitive, but only with substantial salary increases. Option C is the most generous of the three plans, based on the Total Remuneration results. It largely reproduces the current Plan, but delays the maximum age factor by five years, to age 65. The difference between Option A and Option C is only 1.7% in employer cost; employees would also contribute more in exchange for a better pension benefit and more secure retirement. The cost to the employer of Options B and C is the same.”
Chalfant says an important aspect of the recommendations is that all options would require the same level of employer contributions until 2030. In comparing plans, he indicated that most faculty would experience about the same level of benefits under Options B or C, and that the choice between the two Options matters more for employees with lower salaries. Employees in every group would receive more generous retirement benefits under either Option B or Option C than under Option A, unless the employee’s salary exceeds three times Social Security Covered Compensation (around $180,000).
Joel Dimsdale, UC San Diego Professor of Psychiatry and UCFW Chair, says UCFW opposed the integrated plan concept because it involves a high amount of uncertainty, is too complicated to understand, and too difficult to implement and administer. “Pension systems need to be transparent so that employees can make retirement decisions thoughtfully,” he said. “While there is some theoretical appeal to integrated plans, they are enormously complex. They are linked to a social security system which is beleaguered in its own right. Finally, while integrated plans are put forward as less expensive for lower salaried employees, the bitter truth is that the benefits for such lower paid employees are also considerably reduced.“
The Senate is likely to prefer the modified version of C over A and B, because of its similarities to Option C. The difference between Option C as proposed and the president’s modification of it is that employees pay more (7% rather than 6.1%) and the employer pays less (8.1% rather than 9%), although both are more favorable than Option A.
Chair Simmons said the faculty on the Task Force opposed segmentation of faculty and staff, believing that the faculty position and the University as a whole are stronger if all employees are covered by a single Plan. “This is a longstanding Senate position. Moreover, faculty depend on excellent staff to achieve their teaching and research mission. Option A is equally uncompetitive for faculty and staff across the board. The decision, then, should be based in part on which plan is better for recruiting and retaining staff.”
Chair Simmons says the Senate should consider the Task Force recommendations in the context of the total remuneration study (TRS) released in mid-June, which shows that total remuneration for UC faculty (cash, current benefits, and retirement benefits) is already 6% below market. The Senate has emphasized that competitive total remuneration is its top budget priority and has warned that UC quality will decline if the University is not competitive in recruiting and retaining the best faculty and staff.
Unfunded Liability Crisis Pushing Present Discussion
UCRP has a large and growing unfunded liability because there have been no contributions to the Plan for nearly 20 years. Even with the market downturn in 2008-09, UCRP would have been more than 100% funded had the Plan’s full “normal cost” been contributed over that period. “Normal cost” refers to the amount that must be invested now to cover the future benefits liability accrued as a result of employees’ additional service credit in the current year. Normal cost is currently equal to 17.6% of covered compensation, and each of the PEB proposals aims to lower that cost in the long term to a more “sustainable” level. In addition to fully funding the plan’s normal cost, The Regents’ funding policy requires payments to amortize the deficit in the Plan; the proposals suggest debt restructuring and internal STIP borrowing to help make these payments. Today however, UCRP’s total liability grows by an additional 7.5% annually.
The approved resumption of employee and employer contributions through 2011 and 2012 is a first step toward this goal, but is insufficient to keep the Plan healthy and meet the policy requirements. Even under the current contribution ramp up plan, which does not factor in the PEB proposals going to the Regents in November and December, UCRP will run a structural deficit of nearly $1.7B in 2010-11, the actuarial value of its assets will continue to decline, and the total unfunded liability for pensions and employee health could grow to $40B by 2014.
In September, the Regents acted on proposals to set UCRP contribution levels for 2011-12 and to amortize UCRP’s current unfunded liability over a longer time (30 years) than required by current policy (15 years). The Regents also increased UC’s employer contributions to 7% beginning July 1, 2011 and 10% beginning July 1, 2012, with the employee contribution rising to 3.5% on July 1, 2011 and 5% on July 1, 2012. The Senate supported these actions, but even in 2012, the 15% total falls short. 17.6% is the normal cost of the current plan. To keep from falling further behind, we need to contribute normal cost plus interest on the unfunded liability, which is close to 10% of covered compensation.
The UCFW Task Force on Investment and Retirement (TFIR) had previously recommended that UC cover the employer contribution gap by issuing Pension Obligation Bonds, but the PEB Task Force is now recommending, and TFIR agrees, that UC supplement funding to UCRP from the operating budget with money borrowed from the University’s Short-Term Investments Pool (STIP), from which UC can borrow at a significantly lower interest rate than from the open market.
In November, President Yudof will not ask the Regents to act on contribution levels for current employees continuing under the current UCRP plan provisions. He will recommend maintaining the existing COLA provisions for current employees and the new tier. He will also recommend against implementation of “Appendix E,” which would have increased pension benefits for the most highly compensated faculty and staff, rejecting the recommendation in the task force report.
The Regents meet November 16-18 at UCSF Mission Bay.