UCRP implosion

Please take a look at Chris Newfield's post on the current dire predicament of UCRP and at the report of the Task Force on Investment and Retirement (a task force convened by system-wide Faculty welfare).

The TFIR predicts that even with the gradual resumption of contributions to UCRP and the optimistic 7.5% expected rate of return, by 2022 UC would have to contribute 50% of covered salary to meet its obligations. And of course the State has already made it clear that they do not intend to fund UC's share of contributions (although they do so for CalPERS).

A few considerations can be added to Chris Newfield's analysis.

For the first time, this has the potential to hit UC in what they refer to as "revenue centers," i.e., clinical enterprises and externally supported research. The reason is that funding agencies and health insurers will only pay the employer's contributions to UCRP up to the level UC pays, and only up to six months following the closing of fiscal year when they are due. Since only one out of three UC salaries comes from general fund moneys, each deferred contribution dollar by UC results in two dollars that are lost forever. UC would then be in the position of having to insist that funding agencies and health insurers pay much higher contributions than the university at large (with the risk of losing grants and business contracts), or else make up for the difference from internal funds, if not now in the future.

The TFIR recommends that UC resume contributions immediately at the full "normal cost" level (or 17% of covered salary, divided between employees at 5% and UC at 12%), instead of the gradual ramp-up implemented by the Regents. By definition, "normal cost" does not make up for accrued liabilities, so TFIR recommends that the university (or the state) float "pension bonds" to finance repayment of liabilities. As long as UC can borrow money at lower interest than the UCRP expected rate of return, this is better than allowing those liabilities to balloon.

The alternative to these pension bonds would be a sudden dramatic increase of contributions, upwards of 20% of covered salary.

It's highly likely that UC will take a long hard look at benefits levels, with an eye to a drastic reduction. There has been a lot rumors about a "2 tier" system, in which new hires' retirement is a "defined contribution" plan (403(b) or 457(b)). But this is too little, as the big hurdle are the already accrued benefits and the liabilities originating from their underfunding.

What else can UC do? One thing they cannot do is reduce benefits that are already accrued for current employees. Such benefits are regarded as deferred compensation and UC is contractually obligated to provide them. But one thing they probably can do is reduce current employees' benefits yet to be accrued in the future. Employees would keep all the benefits in their current UCRP statements, but any future contributions would be redirected to a 403(b) or 547(b) plan, or similar. Ordinarily, this would lead to litigation, but since UC faculty don't have collective representation, UC is probably not too worried about this.

Anyway, go read Chris Newfield's post and the TFIR report. Although it's not clear that much can be done about this, the more UC faculty and staff are aware of the issues and involved in discussion, the better we are all going to be.