31 August 2010

The end of furloughs

UC furloughs end today, not a minute too soon. Paychecks will return to "normal" as of October 1.

Furloughs were  a bad idea to begin with (achieving savings of about 200 million, or 1% of UC's overall budget), the majority of employees (those not paid out of the general fund) were exempted from them, thereby creating a group of second class employees bearing the brunt of the cuts, and were hugely unpopular.

In addition to being a bad idea, the furloughs were badly executed. All will remember the infamous "Pitts memo," dictating that — contrary to the preferences of a majority of the faculty — furloughs were not to be taken on instructional days. Not being able to take furloughs on teaching days meant the furloughs were really just as straight pay cut, as faculty do not stop doing research on furlough days. The apparent reason for Pitt's edict was "bad optics:" it would have looked bad with the governor, the legislature and the public at large (a concern that apparently Cal State did not share).

Funny how there is no consideration of bad optics when it comes to extravagant executive compensation, $700,000 in housing expenses for the UC President (in just two years), or the "restoration" of retirement benefits for senior management at the same time as UC plans to cut those benefits for everyone else.

Even on the numbers there was never any clarity. It took the University a long time to admit that the furlough program would result in savings far greater than the advertised $200 million (about $500 million), with the extra savings to remain with the units that generated them (a clearly obfuscatory formula). 

So, good riddance to the furloughs, as we brace for the next bright idea to come out of UCOP.

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.

11 August 2010

Mandatory reading

Charles Schwartz's latest installment on the UCRP is mandatory reading for anyone worried about the performance of UC's pension fund.  President Yudof has been rebutting calls for more "shared governance" in the management of UCRP investments by pointing out that UCRP is doing just fine, thank you, and that UC faculty and staff have nothing to worry about. In particular, Yudof points out that
For the decade ended June 30, 2009, UCRP’s total return exceeded that of the benchmark by 30 percent, whereas for the previous decade the return exceeded benchmarks by only 4 percent.

This is because the 2001-2009 annualized return was  2.30% against a 1.77% benchmark (+.53%), whereas the 1991-2001 return was 13.9% against a 13.3% benchmark (+.6%).

This way of representing the annualized return is just meaningless crap: if the benchmark had been 0% even a .001 return would have been infinitely better (no doubt justifying even higher incentive pay for the Treasurer and even more astronomical fees for the external investment managers).

In fact, Schwartz compares UCRP's performance against that of a peer group  (the way it used to be before UC Treasurer Patricia Small was forced to resign so that the University could retain brokerage firms earning fat fees and commissions). Schwartz's conclusion:
The overall picture from this data is that there was much better performance, relative to peers, in the earlier years than there has been in the last decade.
So, if anybody needed any more reason to be worried about the way the University plays with our retirement money, look no further.

08 August 2010

Oh Canada

The College Board recently released new figures for college completion rates. The percentage of 25-34 year olds  holding college degrees especially attracted attention (Bob Herbert in the NYT, for instance):

The US, having long held spot number one in the world, has now fallen to number 12. But just as interesting is the fact that Canada, where higher education has long been subsidized, is leading with 55.8%. Annual fees and tuition for an arts and sciences degree are about CAD 5,000 at the University of Toronto (half as much as at UC), and about CAD 3,600 at McGill (about 1/3 of UC fees). If there ever was any doubt that tuition is inversely correlated with completion rates, this should give everybody pause.

Among the College Board recommendations:
Keep college affordable by controlling college costs, using available aid and  resources wisely, and insisting that state governments meet their obligations  for funding higher education.

07 August 2010

State budget and UC

The Legislature and Governor are apparently getting close to a budget agreement, with the respective proposals now only about $4 billion apart. The centerpiece of the Democrat's proposal, approved by the budget conference committee, is a tax swap increasing income taxes but reducing sales taxes. While it's not clear what the net result of the swap would be, whether it will result in lower or higher revenue for the State, it does seem to go in the right direction by replacing a regressive tax with a progressive one (but revenue from income taxes tends to be more volatile than that from sales taxes). We will see. In the meanwhile, the Governor has put State employees back on 3-days-a-month furloughs until a budget agreement is reached (the fact that employee unions that play nice with the Governor were exempted shows that this was dictated more by politics than fiscal emergency).

As far as the University of California is concerned, the proposal approved in committee maintains the $305 million in restored funding for UC, supplemented by $355 million for capital construction, and $51.3 million  to support (past) enrollment growth.

It's clear that the news could have been much worse, and the fact that both the Governor and the Legislature have proposed no further cuts is certainly welcome. But it should also be clear that this is  a drop in the bucket, which does nothing to address years of decline. The $305 million are just about the amount that was being saved last year through furloughs, so we should — God willing — see an end to furlough program. But one of the reason the furlough program was so unpopular was that it hurt a lot of people for a relatively small amount of savings (about 1% of the University's $20 billion budget).

Needless to say, UCOP's was quick to release a statement by Patrick Lenz (UC's vice president for budget) praising the Legislature for going along with the Governor's proposal. The statement says nothing about general fund money lost in the last twenty years, and makes it look like everything would just fine at UC if the State restores those $305 million. Except, of course, that UC reserves the right to further increase fees:
The proposed budget recommendations... reduce the potential for significant additional increases in student fee.
I am not sure students and their families will find the nuanced statement very reassuring.