30 August 2010

PBE Task Force Report

The UC task force on Post-Employment Benefits has now released its report, which was preceded by a letter by President Yudof outlining the main recommendations (Chris Newfield speculates about the unusual timing of the letter). An informative piece appears in the Daily Californian.

The starting point is well-known: UCRP suffers from two particularly short-sighted decisions: the suspensions of employee and employer contributions in 1990 and the outsourcing of the UCRP portfolio in 2000. The combined effect of these two factors on UCRP funding levels are easily summarized:

UCRP is going from 150% funding in 2001 to projected 60% funding in 2014.

The contribution "vacation" was particularly dumb not only because it was (and is) unreasonable to expect the retirement plan to be able to coast forever without further injections of cash, but also because suspension of contributions applied to the two-thirds of employees on external grants as well. While funding agencies were all too happy not to have pay for retirement benefits, this was money that was lost forever to the University, money that UC might have to make up for with its own resources at some point (i.e., now). Had there not been a contribution vacation, UCRP would be funded at 120% today, even with the substantial declines of 2008-09.

The decision to outsource the UCRP portfolio to external managers and concomitant blacklisting of UC Treasurer Patricia Small also contributed to the decline in the funding ratio. It marked a shift from safe financial instruments to much riskier ones — stock, private equity etc. — with millions of dollars paid out in brokerage fees, while trying to chase higher rates of return that never materialized.

UCRP's unfunded liability was $13 billion in 2009 (at market value, lower on an actuarial basis); catching up would require immediate and steep resumption of contributions (about 20% this year, and as much as 37% of covered compensation in 2014  — contributions are traditionally paid one-third by employees and two-thirds by the University: how would you like to pay 12% contributions in four years?).

So UCRP is in deep shit, and the PBE task force report was developed to address the situation.  The report centers around a rapid increase in contributions (15% by 2012, divided in the usual way one-third for employees and two-thirds for the University) and the institution of a New Tier with substantially reduced contributions and benefits for new employees. Current employees would be grandfathered into the old UCRP, although with higher contribtions.

The New Tier would not have an option for a lump-sum cash out, and would raise the minimum retirement age to 55 (with maximum benefits at 65). Anther option being considered is Social Security "integration," i.e., the taking into account of Social Security benefits towards the theoretical goal of replacing 100% of a retiree's income. In fact, two "designs" are being considered for the New Tier, with different levels of benefit and contributions. Finally, current employees would also be given a one-time option to switch to the New Tier.

UC consultants Hewitt and Mercer were asked to assess the competitiveness of the New Tier with respect to peer institutions and, somewhat to the task force's surprise, found it non-competitive across all salary levels (even when UC's lower salaries are taken into account): in other words, a recipe for UC quality decline. The task force recognizes that in the face of these reduction in benefits, it is all the more urgent that UC regain salary equity with peer institutions.

Even with the New Tier in place for new employees and ramped-up contributions for old ones, there would remains huge funding gap that needs to be filled to cover UCRP's unfunded liability. Here the task force recommends a number of options, from the emission of Pension Obligation Bonds to borrowing from the University's Short-Term Investment Pool (STIP).

Perhaps most notably, the faculty on the task force decided to issue a "minority report" (while faculty and staff were well represented on the task force, their presence was minimal on the Steering Committee that formulated the final recommendations). The dissenting opinion is signed by Edward Abeyta, Robert Anderson, James Chalfant, Helen Henry, Lin King, Robert May, and Shane White, according to whom the Task Force
has made a number of recommendations, including some that we believe would be very harmful to the University. While we agree with many of the specific recommendations made, the overall emphasis on the part of the Steering Committee has been to promote cost cutting over the preservation of sustainable, competitive retirement benefits.
In particular, the minority report finds that of the two options for the New Tier proposed by the Task force, one is clearly uncompetitive (option A), and the other one is marginally competitive but only after sizable salary increases (option B):
Option A would reduce the UCRP benefit of an employee retiring at age 60 with a salary of $55,000 by 56.8%, while Option B would reduce it by 42.4%.
The dissenting opinion clearly
oppose[s] adoption of any pension plan, including Option B, which is competitive only after future hypothetical salary increases. [...] Experience suggests extreme skepticism that UC will follow through with any such salary increases. We urge that the President prepare a credible plan for salary increases to take effect simultaneously with the adoption of the new tier.
Moreover, the steep rise in current employee contributions (to 7% or above) is viewed as a way to "coerce" current employees to switch to the New Tier, in violation of the California Vested Rights Doctrine. Needless to say, the proposed "restoration" of benefits to highest paid employees (as recommended by the task force) is also viewed as an attempt to exempt Senior Management and Medical Faculty from the more draconian cuts aimed at the rest of us, the hoi polloi

The dissenting faculty and staff put forward a third otion for the New Tier, "Option C" which was considered but not endorsed by the steering committee. The desire to pre-empt serious discussion of Option C is viewed by some as the rationale behind Yudof's letter on UCRP changes.  In sum, the dissenting opinion
advocate[s]  (1) removing Option A from further consideration; (2) continuing consideration of Option C; (3) limiting employee contributions to 7% under “Choice” for current employees to keep the current UCRP benefit terms; (4) careful evaluation of the consequences of all recommendations for total remuneration, using the methodology that we have worked with since 2007.
As the report implies, these proposals are an effort to replace the furloughs with permanent cuts in total compensation. If this does not wake up the faculty and staff to UCOP's real priorities, nothing will.

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