February 2013

TFIR Urges UC to Hold Course on UCRP Funding

The Academic Council has unanimously endorsed a letter from the University Committee on Faculty Welfare’s Task Force on Investment and Retirement (TFIR) urging the University to maintain its current plan for funding UCRP.

Some stakeholders are asking UC to curtail and cap the employer contribution rate at 14% of covered compensation – short of the full 18.8% level recommended by the Post Employment Benefits Task Force and approved by the Regents in 2010 – over concern that the near-term cost of a full ramp-up to 18.8% could harm the academic enterprise, particularly the medical centers.

Regental funding policy calls for increasing the employer contribution by 2% annually until it reaches 18.8% in 2018. TFIR warns that an employer contribution of 18.8% is needed to fully fund the Annual Required Contribution (ARC), which includes the Normal Cost of operating the plan, additional contributions to reduce the unfunded liability, plus interest on the unfunded liability. UCRP currently has a funded ratio of 78% and an unfunded liability of $11 billion. The unfunded liability grows at 7.5% per year, the actuarially assumed rate of return for UCRP. Failure to contribute at least Normal Cost plus the interest on the unfunded liability means that the unfunded liability grows. The University’s actuaries consider the plan fully funded if the ratio of its assets to liabilities is between 95 and 105%.

TFIR Chair and UCLA Professor of Dentistry Shane White says UCRP should remain one of the highest funding priorities for campuses even as campuses face growing budgetary pressures.

“The temptation to finance current operations or even new ones by shortchanging UCRP contributions is great,” he says. “The recent PEB reform effort, coupled with the Regents’ funding policy, puts UCRP on a sustainable path, but only if we remain committed to dealing with the unfunded liability without delay.”

Employer and employee contributions to UCRP resumed in April 2010, after a 20-year holiday. The Regents have approved increasing the current 10% employer/5% employee contribution rates to 12% and 6.5%, respectively, effective July 1, 2013. (Employees hired on or after July 1 will contribute 7% to the "New Tier".) The combined increased total employer and employee contributions are projected to exceed the normal cost and allow UC to begin chipping away at the unfunded liability. An actuarial report scheduled for November 2013 will help the Regents set future contribution rates.

Chair White says since the unfunded UCRP liability grows at 7.5% per year, the University is, in effect, financing its current operations using UCRP as a credit card - i.e., borrowing at 7.5%. Council also has supported using short-term debt, if necessary, borrowing internally or externally at a substantially lower cost than the 7.5% UCRP unfunded liability interest rate, to maintain Regental funding policy, as previously authorized.

“These funds must be put into the plan,” he says, “either now or in still higher amounts later, if we let the unfunded liability grow. We do not want to see the burden represented by the unfunded liability become even greater for future students, staff, and faculty.”

“The failure to fund UCRP does not threaten pensions, which must be paid,” he adds. “It threatens future students, access, affordability, and the University's ability to restore excellence in carrying out every aspect of its teaching, research and service mission.”

Academic Council Chair Robert Powell says, “While there are opportunity costs to funneling so much money to UCRP, the long-term health of the retirement system depends on it. This is an area in which a long view is essential.”