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UCRP’s unfunded liability proves burdensome to employees, taxpayers

By Kevin Truong

Jan. 14, 2015 2:55 a.m.

The University of California Retirement Plan, long-touted as a vital benefit received through UC employment, has become a strain on the University’s financial health and a backseat driver of the system’s fiscal policy.

The pension plan ranks among the top 50 largest pension funds in the world, controlling more than $50 billion in assets and providing benefits for more than 60,000 retired employees, but it is also vastly underfunded.

The UCRP has more than $12 billion in unfunded liabilities, the result of a 20-year contribution freeze from the University and the state, which may prove costly for students, employees and taxpayers.

While no tuition funds pay for the retirement program, Nathan Brostrom, the UC’s chief financial officer, said he thinks if the state paid for what he considers its fair share of the UCRP’s liability, the controversial tuition hike plan probably wouldn’t be proposed.

“Look at the numbers. The state owes us about $400 million (this year in pension costs) and we get about $100 million (a year) from the tuition increases,” Brostrom said. “It’s all a part of our larger funding needs.”

Brostrom also contends that the state helps to fund the California Public Employees Retirement System, or CalPERS, which provides pension benefits for California State University faculty and staff. Last year, the CalPERS administrative board approved new contribution rates, which sees the state paying $4.3 billion in pension costs.

“What we’ve observed is that for over 20 years neither the UC nor its employees have contributed to the UCRP,” said California Department of Finance spokesperson H.D. Palmer. “As opposed to CalPERS, the state has no say in how the UC runs its retirement system and the level of benefits received by employees.”

In 1990, both the state and the University chose to stop contributing into the retirement plan because of a surplus of funds, electing to keep it afloat only using the returns on investments.

At that point, the pension plan was vastly overfunded, meaning the value of its assets was higher than its future payment obligations, said Paul Golaszewski, a higher education specialist at the Legislative Analyst’s Office, a nonpartisan organization that advises the state legislature.

Strong markets led to high returns throughout the 1990s. However, according to a November UC report, University officials saw the need to restart University and employee contributions to the pension plan as early as 2005.

“Typically, pension plans can’t be funded on just the rate of return from investments and need contribution from employees and employers,” Golaszewski said. “What’s really unusual is that (the UC and its employees) weren’t paying for 20 years.”

In 2006, then-UC President Mark Yudof called for a committee to explore the possibility of restarting contributions. But it took three years – and a worldwide financial meltdown – to put plans into practice.

“It took the Great Recession to light a fire under people to restart contributions,” said Dan Hare, vice chair of the Universitywide Academic Senate.

In April 2010, the UC started to contribute to the fund again, quickly raising contributions to their current levels of 14 percent of total employee payroll by the University and 8 percent by employees.

Unions pushed back on the ramping up of contributions, which cut into the paychecks and raises given into staff.

“Staff were concerned that we were getting nominal increases (in pay) and a large portion was going back into the retirement fund,” said UC Staff Assembly member Rejeana Mathis. “For staff who have been there a long time, they understand intellectually why it’s happened but emotionally it still hurts.”

Alongside the resumption of contributions, the UC made a number of cost-saving procedures, including raising the retirement age by five years where newly hired employees gain full retirement benefits. The University also borrowed money from itself by shifting money from one fund, called the Short Term Investment Pool, into the higher-earning pension plan.

While these measures have worked to boost the funding level of the plan to 87 percent from 71 percent in 2010, University officials are now saying it’s time for the state to start ponying up funds.

Since 2012, the state has provided less than $200 million to pay down a liability that has ballooned to north of $12 billion during the same time period. The 2014-2015 state budget and 2015-2016 budget proposal provided no earmarked funds to help with UCRP.

Brostrom said he thinks a fair portion for the state to pay annually would be around $386 million, which would cover the pension costs for roughly 30 percent of University employees, the same proportion of employees paid through state funds.

“We’ve taken a lot of efforts to stabilize the plan, and we’re proud of those efforts, but we think it’s a matter of public policy and fairness that the state contributes its share,” Brostrom said.

But the state argues that the UC’s autonomy comes with the trade-off of having to fund some of those programs which it has control over. UCRP is also not subject to the stipulations that CalPERS has under the Public Employees’ Pension Reform Act of 2013.

“There are differences between (the) UC’s plan and what is required of other public pension funds,” Golaszewski said.

Brostrom said the provisions in the Pension Reform Act served to make state pension funds more similar to the UCRP, and one of the only major differences between CalPERS and UCRP was the maximum amount of income that receives a pension benefit.

Brostrom pointed to Proposition 2, which has a provision that requires half of the rainy day fund it creates to go toward paying off state debt and unfunded liability, as a possible funding source.

“There’s scores of things the state used to fund that they don’t,” Brostrom said. “But this would push us into parity with the CSUs and the CCs.”

The current status of the fund is stable, and at its current estimated annual rate of return of 7.5 percent, UCRP will be completely funded in 20 years.

But annual fluctuations threaten that balance, and without state funding to help secure the pension plan, Mathis said some employees are worried the University might have to look to other avenues to make up the cost, including taking a bigger chunk of their paychecks.

“Rent is high, gas prices are high and other expenses are going up. The question is how these costs are offset, how much the staff actually takes home to pay their bills,” Mathis said. “I just hope at some point there’s an epiphany by the state of the value of this top-tier university system and its workers.”

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