Borenstein: UC changes barely touch retirement cost problem

(posted without permission of the author)

Daniel Borenstein, MediaNews columnist

 

GENEROUS retirement programs that have been irresponsibly managed for decades are pushing the University of California off a financial cliff.

President Mark Yudof will ask regents this week to change the employee pension plan for new hires and reduce UC's contribution to health care costs for current and future retirees. But rather than reform retirement programs that are sucking money away from the classroom, Yudof is timidly fiddling on the margins, ensuring UC will be strangled by tens of billions of dollars of debt for decades to come.

Yudof's proposals are based on recommendations of a 28-member task force of UC administrators and faculty, most with a vested interest in the status quo, who quickly concluded that the current system must be maintained to attract and retain top-quality faculty.

UC could not, and should not, tamper with pension benefits employees have already earned. But, unlike most California public employers, it could, like the private sector, reduce, or even end, accrual of pension benefits for future work. That was never seriously considered, even though, for example, Harvard, Stanford, Yale and the University of Michigan don't provide guaranteed pension plans. Those schools instead offer faculty 401(k)-style retirement plans that avoid the risk of billions of dollars in unfunded liabilities.

Nor did the task force question why providing top-level pensions to attract coveted faculty members should determine the benefits for the much larger number of other university employees, who are more easily replaceable.


Instead, the task force proposed preserving the system for all employees with only minor tweaks. Yudof, in turn, echoes that in his recommendations to the regents in which he promotes inadequate solutions that will push the problem onto future generations.

Retiree health care

Since 1962, UC has promised health care coverage to retired workers. But rather than set aside money to cover the costs, the university has only paid the health insurance premiums when they come due. It's like promising a pension but failing to save money to fund it. It's a financial time bomb.

To adequately cover the retiree health benefits current and former workers have earned, UC should have set aside $16.1 billion by July 1, 2011. That "unfunded liability" is equal to more than two-thirds of the university's annual budget.

Yudof proposes two changes. First, he would reduce for all retirees the university's standard contribution to health care premiums from 89 percent of the cost to 70 percent over about the next six years.

Second, he would change the eligibility rules. UC currently makes the full standard contribution for 20-year employees who are at least age 50 when they retire. Under the new rules, 20-year employees would have to be 65 when they retire in order to receive the full benefit. Younger employees and those with less experience would receive smaller amounts.

But Yudof chose not to apply the second change to about half the current employees, thereby significantly reducing the potential savings. Consequently, the university would still be left with an unfunded liability of $13.4 billion by next year. Moreover, since Yudof has no plans to set aside money for future costs, the debt would continue to grow, reaching $21.9 billion in 2020.

Pension benefits

Most UC employees can retire starting at age 60 with 2.5 percent of top salary for every year on the job. So a 30-year veteran can collect 75 percent of salary. (The university and its employees also contribute to Social Security, which adds to those retirement payments.)

But the university's pension plan is underfunded by at least $6.3 billion because neither the university nor its employees made payments into the system for two decades -- while, at the same time, sweetening benefits. Blame regents, management and employee groups who agreed to this.

The contribution "holiday" started in 1990, when the UC retirement system had surplus funds, which ended this year. If the university and its workers had made payments over the past two decades, there would still be more than enough money in the pension system today.

Instead, the retirement program is underfunded and getting worse. The $6.3 billion liability does not yet account for most of the 2008 investment losses. To climb out of the hole, two things must happen.

First, UC and employees must contribute enough to cover the liability increase created each year as employees earn more future pension benefits. Right now, that liability increase is about $1.4 billion a year, or, put another way, about 17.6 cents for every dollar of salary.

UC policies adopted earlier this year require UC and its employees to start contributing again, but not enough to cover the liability increase. Employees are now paying 2 to 4 percent of payroll, and the university is contributing 4 percent. By 2012, that will ramp up to 5 percent and 10 percent respectively, shy of the needed total 17.6 percent. That shortfall means the system underfunding will worsen.

Second, the university must start paying off the total debt, which continues to increase. The problem has gotten so bad that regents have recently decided to repay the shortfall over 30 years rather than 15 years.
Think about it: For the next 30 years, future generations will pay off a mortgage created because UC and its employees failed to act responsibly during the past 20 years. Or, put another way, future students will have fewer instructors and support staff because money will be diverted for the next three decades to help pay costs the university and its employees should have been paying during the past two.

Looking to the future, the university is expecting its total share of pension costs to increase fivefold from today, reaching about 20 percent of payroll during a 10-year peak starting in 2018. It's unclear how UC, which is struggling to pay 4 percent now, will manage 20 percent in the future. Today, that would cost the university about $1.6 billion a year. UC will also need employees to kick in more.

To keep those numbers from getting even worse, Yudof proposes pushing back the retirement age for maximum pension benefits from 60 to 65 for new hires starting in 2013, and requiring them to pay more into the system. The so-called two-tier system is a marginal step in the right direction, but the savings are small and won't be realized for decades.

So, if UC officials this week try to sell this plan as reform, know that it's really only a minuscule down payment on a huge debt.

Daniel Borenstein is a staff columnist and editorial writer. Reach him at 925-943-8248 or dborenstein@bayareanewsgroup.com.

http://www.contracostatimes.com/daniel-borenstein/ci_16598906?nclick_check=1

http://www.pensiontsunami.com/