The University of California Board of Regents today (Sept. 16) voted unanimously to increase the amount UC and its employees contribute to the pension plan, taking an important step towards putting it on solid financial footing.Of course, further changes to the Retirement Plan might be forthcoming at the Regents' meeting in November.
Beginning in July 2011, employee members of the UC Retirement Plan (UCRP) will begin contributing 3.5 percent of salary into the plan; UC will contribute 7 percent. The amount will increase again in July 2012, with employees paying 5 percent and UC paying 10 percent.
16 September 2010
UC Regents vote to increase UCRP contributions
We knew this was coming. From UCOP's official announcement:
14 September 2010
The Bain Berkeley model for faculty: the sequel
First of all, here's why we should all care about what happens at Berkeley. The model being pushed at UCB by the administration on the basis of their Operational Excellence initiative and the report commissioned from Bain is bound to be a benchmark for the whole system. The other nine campuses will be under increased pressure either to take similar measures or to be relegated to second-tier teaching institutions. It's important therefore that faculty and staff through the system respond to the more extreme distortions of the Berkeley-Bain model, on pain of seeing that model pushed on them as well.
We already commented on the two main components of the proposed model, i.e., the push to both centralize and standardize, and Chris Newfield now has a detailed analysis. In particular, Newfiled points out how the solutions proposed by the Bain report do not align with the problems they identify. Their diagnosis of the administrative problems at Berkeley should rather recommend a bottom-up, distributed organizational model (which is characteristic of organizations with a capacity to innovate), not the top-down, authoritarian model that Bain imported wholesale from corporate culture – and an outdated one at that.
The most disturbing aspect of the report, of course, is the proposed staff reorganization based on the concept of supervisory span (the target here is a 6.6 span, meaning that each supervisor should have on average 6.6 position immediately below in the organizational chart). Moreover, the advertised 6% to 8% cut in their $700M payroll would translate in laying off close to 10% of the staff. Berkeley staff are understandably worried, especially in absence of any meaningful and organized response (see the comments to Michael Meranze's Staffing the Downsize).
Faculty should not be lulled in the conviction that the proposed reorganization does not affect them. It does and it will. If the recommendations of the Bain report are implemented, this would make life much more difficult for faculty as well (as also Chris Newfield points out). Let's not make any mistakes about this: until and unless the faculty speak up about this and support, even lead, the staff in their push-back, this what the future will look like at UCB and across the system.
But there is more: the Berkeley administration has, of course, a particular vision for the faculty as well (we would not expect anything less from them). It's just that it's easier to deal with staff first. The documents posted in preparation for the Aug 19 "Retreat" for Deans and Chairs spells it all out. A handout ominously entitled "Beyond Compromise" (written by two Berkeley faculty and an administrator) explains the implications of the Commission on the Future recommendations for Berkeley. Beside the by-now old chestnuts of online instruction and non-resident tuition, the presentation introduces "alternative faculty compensation plans." The handout does not go into much detail about these compensation plans, but it does indicate clearly that it would involve a "two-tiered status of faculty." The top tier supposedly would be comprised of research faculty (bringing in copious amounts of grant money under increased overhead rates), while the bottom tier would be comprised of mainly teaching faculty, including a "greater proportion of courses to be taught be lecturers and GSIs." The proposed shift would naturally result in "fewer ladder rank faculty, more lecturers."
Not a lot of reflection is needed to see just how bad an idea this is. The two-tiered model for faculty runs counter to very idea of a research institutions and undermines shared governance. The whole point a student coming to Berkeley is the opportunity to be taught by world-class faculty and, for instance, learn physics from a Nobel laureate. Conversely, our top faculty should relish the opportunity to teach introductory-level courses. Expanding the roles of lecturers and GSIs would greatly damage the idea of an institution such as Berkeley. Graduate students are not here to provide cheap labor but to learn the trade and develop their research skills.
One also has to wonder how exactly Berkeley plans to reduce the ratio of ladder faculty to lecturers and GSIs. Attrition through a hiring freeze? Tightening tenure standards? Encouraging people to leave by not matching outside offers?
Again, if the faculty at Berkeley and elsewhere do not speak up and develop an articulated response to these guidelines, this is what the future will look like.
We already commented on the two main components of the proposed model, i.e., the push to both centralize and standardize, and Chris Newfield now has a detailed analysis. In particular, Newfiled points out how the solutions proposed by the Bain report do not align with the problems they identify. Their diagnosis of the administrative problems at Berkeley should rather recommend a bottom-up, distributed organizational model (which is characteristic of organizations with a capacity to innovate), not the top-down, authoritarian model that Bain imported wholesale from corporate culture – and an outdated one at that.
The most disturbing aspect of the report, of course, is the proposed staff reorganization based on the concept of supervisory span (the target here is a 6.6 span, meaning that each supervisor should have on average 6.6 position immediately below in the organizational chart). Moreover, the advertised 6% to 8% cut in their $700M payroll would translate in laying off close to 10% of the staff. Berkeley staff are understandably worried, especially in absence of any meaningful and organized response (see the comments to Michael Meranze's Staffing the Downsize).
Faculty should not be lulled in the conviction that the proposed reorganization does not affect them. It does and it will. If the recommendations of the Bain report are implemented, this would make life much more difficult for faculty as well (as also Chris Newfield points out). Let's not make any mistakes about this: until and unless the faculty speak up about this and support, even lead, the staff in their push-back, this what the future will look like at UCB and across the system.
But there is more: the Berkeley administration has, of course, a particular vision for the faculty as well (we would not expect anything less from them). It's just that it's easier to deal with staff first. The documents posted in preparation for the Aug 19 "Retreat" for Deans and Chairs spells it all out. A handout ominously entitled "Beyond Compromise" (written by two Berkeley faculty and an administrator) explains the implications of the Commission on the Future recommendations for Berkeley. Beside the by-now old chestnuts of online instruction and non-resident tuition, the presentation introduces "alternative faculty compensation plans." The handout does not go into much detail about these compensation plans, but it does indicate clearly that it would involve a "two-tiered status of faculty." The top tier supposedly would be comprised of research faculty (bringing in copious amounts of grant money under increased overhead rates), while the bottom tier would be comprised of mainly teaching faculty, including a "greater proportion of courses to be taught be lecturers and GSIs." The proposed shift would naturally result in "fewer ladder rank faculty, more lecturers."
Not a lot of reflection is needed to see just how bad an idea this is. The two-tiered model for faculty runs counter to very idea of a research institutions and undermines shared governance. The whole point a student coming to Berkeley is the opportunity to be taught by world-class faculty and, for instance, learn physics from a Nobel laureate. Conversely, our top faculty should relish the opportunity to teach introductory-level courses. Expanding the roles of lecturers and GSIs would greatly damage the idea of an institution such as Berkeley. Graduate students are not here to provide cheap labor but to learn the trade and develop their research skills.
One also has to wonder how exactly Berkeley plans to reduce the ratio of ladder faculty to lecturers and GSIs. Attrition through a hiring freeze? Tightening tenure standards? Encouraging people to leave by not matching outside offers?
Again, if the faculty at Berkeley and elsewhere do not speak up and develop an articulated response to these guidelines, this is what the future will look like.
09 September 2010
The Berkeley Bain Report
The consulting firm of Bain & Co. has finally released their Operational Excellence report commissioned by Chancellor Birgeneau. It's chok-full of organizational jargon and catch phrases, not excluding crimes against the English language (who knew that to "incent" is now a verb?). I have taken only the most cursory of looks at the 205 slides of the report, and here are some first-hand impressions.
There are, of course, some commendable ideas in the report, for instance when it comes to energy savings (yes, it's a good idea to turn off the lights when you leave your office). But the rest of the recommendations are informed by just two principles: centralize and standardize. The distributed nature of many services at UCB, along with the diversification it entails, are identified as cost sources. The proposed solution is to centralize as much as possible the delivery of services, not just to achieve economies of scale but also to bring about increased efficiencies when the units reach a given critical mass – the appropriate size (measured in FTEs) to allow for a more rational allocation of tasks.
The report addresses several areas:
The main thrust of the report seems to be that about $100M of potential savings can be achieved by reducing diversification in the delivery of services, downsizing and re-organizing lower-level staff, and centralizing many functions. (I also could not help noticing how the report makes no mention of the extravagant expenses incurred by the supposedly self-sufficient UCB Athletics department, which, have been consistently backfilled with campus funds for many years.)
It is also important to take notice not just of the substance of the recommendations, but also the manner of their implementation. Bain envisages these changes to be brought about in a completely top-down manner (the word they use, of course, is "cascaded"), with no participation by the staff and faculty that would bear the brunt of these measures.
And all this, of course, cost Berkeley about three million dollars. I am sure many of our own faculty at business schools across the system could have come up with better solutions for a lot less.
There are, of course, some commendable ideas in the report, for instance when it comes to energy savings (yes, it's a good idea to turn off the lights when you leave your office). But the rest of the recommendations are informed by just two principles: centralize and standardize. The distributed nature of many services at UCB, along with the diversification it entails, are identified as cost sources. The proposed solution is to centralize as much as possible the delivery of services, not just to achieve economies of scale but also to bring about increased efficiencies when the units reach a given critical mass – the appropriate size (measured in FTEs) to allow for a more rational allocation of tasks.
The report addresses several areas:
- Procurement
- Organizational simplification (including HR, Finance)
- IT
- Energy management
- Student services
- Space management
The main thrust of the report seems to be that about $100M of potential savings can be achieved by reducing diversification in the delivery of services, downsizing and re-organizing lower-level staff, and centralizing many functions. (I also could not help noticing how the report makes no mention of the extravagant expenses incurred by the supposedly self-sufficient UCB Athletics department, which, have been consistently backfilled with campus funds for many years.)
It is also important to take notice not just of the substance of the recommendations, but also the manner of their implementation. Bain envisages these changes to be brought about in a completely top-down manner (the word they use, of course, is "cascaded"), with no participation by the staff and faculty that would bear the brunt of these measures.
And all this, of course, cost Berkeley about three million dollars. I am sure many of our own faculty at business schools across the system could have come up with better solutions for a lot less.
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.
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
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
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
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%
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:
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%
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:
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.
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