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Tuesday, April 13, 2010

Tuesday, April 13, 2010
By Michael Meranze

The UC faculty needs to assert their own vision of the core functions of the University. For too long we have accepted the conventional understanding of a multiversity—that the definition of the institution must proceed from the top down; that the incredible complexity of knowledge demands that faculty can only tend their own gardens; that broad discussions about the aims of higher education will devolve into banality or irresolvable conflict. But whatever the conditions of the recent past, these assumptions can no longer be sustained. If the faculty do not become more involved and assertive in defining the University, its definition will be made by market-share and balance sheets.

If the UC Commission on the Future has made anything clear, it is how marginal the faculty—and especially the College faculty—have become in the governance of the University. Despite the serious efforts of faculty on the working groups, the Commission has been weighted from the beginning towards the administration and the professional schools. Of the Commission itself only two members are active members of college faculties (and both either are or have been Deans) while in the additional working group co-chairs one is an active member of one of the college faculties. By contrast, 15 members of the Commission and Co-Chairs of the work groups are either from UCOP, Campus Administrations or the Professional Schools. Indeed, even the professional school faculties have been, for the most part ignored, with Harry Powell and Mary Croughan their only representatives. The end result, not surprisingly, has been faculty alienation and dismay. This effect may have been inevitable once Croughan and Yudof decided that the Senate could not handle the task of thinking through the future of the University. I will leave aside the question of whether this alienation and demoralization was intentional; but it has been the clearest success of the Commission so far.

There is nothing surprising or unreasonable about having administrators involved in the Commission’s activities. But the particular configuration of authority is telling. The distance between UCOP and the Regents on the one hand, and faculty on the other has been growing for decades. The most recent attempt (in 2007-2008) to reform UCOP merely institutionalized that distance by failing to include any direct linkages between faculty members, UCOP, and the Regents. The fact that only the student regent attended any of the public UCOF forums and the tightly limited time allowed to individuals to present alternative approaches at the forums reveals how far the UCOF campus visits were from true opportunities for serious discussion and sharing of responsibility and insight.

Just as importantly, the marginalization of faculty has sidelined what we might have thought would be the central question facing the Commission: how best to preserve the educational core of the University. Instead, the Commission has been primarily concerned with how best to produce revenue lines and lower costs. Increasing revenue and effectively spending money are obviously central concerns; but they can only be addressed once we have made clear what the central ends of the University itself are. The danger is that the question of the purposes of the University will be decided without real debate. If this seems alarmist consider the offhanded way that the UCOF executive summary of the first round of Working Group reports transformed UC’s traditional tripartite mission (teaching, research, service) into a four-legged one: teaching, research, service and health care.

But it is important to recognize that the Faculty also bears responsibility for this situation. Since the budget crisis began, of course, we have been forced to react and play defense. Given the way that the last year has played out faculty have focused their efforts on preventing the implementation of the most damaging restructuring proposals and supporting student opposition to fee increases, indeed on having to support student free-speech rights in the face of efforts to suppress protests themselves. But these immediate pressures build on long-standing problems.

The faculty has reached the breaking point of a long-standing division of labor with the upper administration; that in exchange for allowing us to go about our normal everyday academic business the Administrators would be left to make basic budget decisions with minimal faculty input. Whether this compromise made sense in the past (and I have my doubts given the ways that the core functions have been increasingly displaced) it clearly is no longer tenable. The budgetary crisis has meant that unless we do a better job of defining what we think to be the core mission of the university, the financial managers will do it for us. And we have yet to do that in a systematic way.

Any such effort should start with the Senate. Again, many faculty members have been working on Senate committees to develop priorities and protect core programs. And the recent system-wide Senate Planning and Budget Committee “Choices Report” has attempted to put forward Senate perspective on priorities. But that is not what I have in mind. The Senate, both system-wide and the Campus Divisions, must take the lead in pressing for far greater transparency in the budget than now exists. The faculty throughout the system is being asked, or will be asked, to reexamine priorities, administrators are looking for ways to cut costs, and the burdens will ultimately fall upon departments and programs. But if real budget reform is to occur it has to be through knowing participating and shared responsibility between administration and faculty.

The only way this shared governance can occur is if the Senate succeeds in lifting the veil over the budget realities and choices that are being made every day. In fact, given the demoralization that has occurred as a result of the organization of UCOF, budgetary transparency is a necessary first step towards getting the faculty at large to believe that they have any real say in the matters at hand.

But budgetary transparency can only accomplish so much. It can make clear the structures of funding and costs, and clarify the choices that are being made. But in order to reverse the relationship between educational and budgetary decisions faculty will need to do a better job of indicating what we believe the core goals and functions of the University should be. That vision ultimately may be voiced through the Senate; but the Senate is not going to do so unless it is pushed from below. How we can start a discussion that could lead to pushing the Senate is of fundamental importance.

It may be, of course, that the faculty has not agreed on such a vision because they cannot agree on such a vision. Disagreements between Humanities, Social Science, Physical Science and Life Sciences are well known—they go back to early modern conflicts between the champions of the Ancients and the Moderns, the Utilitarian and the Classical. But the reduction of intellectual activity to the marketable and immediate should motivate us all to begin to rethink those divisions (indeed the recent displacement of the physical by the life sciences as the central recipient of funding should remind all disciplines how unstable predominance in the eyes of the market or state can be).

The defense of the core educational functions of the University, I would argue, begins with a renewed vision for undergraduate education. To reformulate undergraduate education the University must revalue its commitment to the place of General Education in the curriculum. It is essential that the long-standing division between “science” and the “arts” be addressed and overcome. Students (and faculty of course) need to able to link both sides of that "divide" if they are to critically and constructively engage with the world. The first project of the University should be to ensure that the University provides students with diverse and complex intellectual literacy: conceptual, cultural, experimental, historical, linguistic, and scientific. From these bases, students would be able to move to their concentrations and also carry more general understandings out into the world.

Departmental majors could be built atop this general literacy rather than on specific pre-requisites and increasingly narrow training. Students would still get the concentration they need in order to continue to further and deepen their learning; but they would also be given the general competencies needed to contribute critically to the world. Just as importantly we could insist on the connection between those general competencies and the more specific research inflected teaching provided to students.

The necessary combination of research and teaching would then become clearer to the public. In order to make this happen, faculty members should be encouraged to move beyond their departmental silos, not in search of some new master discipline, but in order to bring into being discussions about the ways that different forms of reason bring different perspectives to shared issues and indeed create new questions and arguments. Indeed, it is the rich diversity of research forms and agendas at UC that could make this project so successful. Insofar as we are able to able to bring the interplay of these different research agendas into the curriculum the relationship between research and teaching will become much clearer. Graduate students could be trained both to pursue their specific research interests and to provide instruction on both the general and the disciplinary.

The vocation of the University would be reaffirmed as a place of teaching and research; of learning in a broader sense. It is the task of the faculty to ensure that the rethinking of the University happens on the grounds of that broadened sense of learning. Otherwise budgets will not follow aims; aims will be directed by budgets.

Saturday, April 10, 2010

Saturday, April 10, 2010
By Bob Samuels

I would like to suggest here what the UC’s faculty position on pension contributions should look like. First of all, we should only accept the new plan if they promise to put employees on the pension board, and they allow for a public hearing to study the handling of the investments. Here is my fear: we will pay in more money, they will take out an expensive bond, and then they will continue to invest the money in an ineffective manner.

Here are the historical issues:

1) the UC started underperforming comparable pensions (including CalPERS and CalSTIRS) after the management of investments were outsourced in 2000 (this outsourcing was pushed by a Regent, Gerald Parsky, who had a vested interest in the privatization of the investment management);
2) since the UC now has over 50 money managers, it can not effectively control or diversify its assets, and it has to pay huge fees, while these money managers may be betting against each other;
3) the Regents may be influencing the UC’s investments in order to support their own business interests (real estate, private equity, high finance, construction) – individual Regents could be doing this by influencing the choice of money managers;
4) Like CalPERS, what may be happening is that middle men are being paid to find external money managers that represent the interests of particular regents;
5) the UC increased its holdings in real estate and mortgage-backed securities right when the market was tanking; these decisions may have been influenced by the Regents who have strong holdings in real estate and financial securities;
6) the Regents and UCOP are hiding the ineffective management of the funds by claiming that everyone lost money during this period, and that the real problem is the contribution holiday (while the holiday is a problem, do we want to hand over more money so they can bet it on toxic assets and cater to the Regents’ business interests?;
7) In order to chase higher investment returns, the UC has increased its stakes in highly volatile areas (private equity, real estate, securities, hedge funds); these investment allocations have to be studied and monitored – (Harvard and Yale have brought in more of their investments in-house and are pulling out of private equity and other non-traditional investment vehicles);
8) the actuarial projections of the pension plans under-funding are based on many questionable assumptions, like the future rate of investment return (even with the mismanagement of the funds, the UC twenty-year average of 13% is way above the 7.5 rate the actuaries are using); Most public pensions are funded at 80%, and this is considered solvent, so why does the UC have to be at 100%?

I think we should support starting up contributions, but we should use our leverage to safeguard the investments. Also, while it seems that I am contradicting myself, by pointing to the low returns and the low rate of return used by the actuaries, I am arguing that we can maintain higher returns if we invest wisely.

I think we need to write letters to the chair of the Academic Council and the chair of the systemwide Senate's Faculty Welfare committee addressing these issues.

Tuesday, April 6, 2010

Tuesday, April 6, 2010
By Michael Meranze

As a follow-up to Chris' post on the meltdown of UCRP I wanted to give a brief report on some of the highlights of the UCRP Task Force Presentation at UCLA on April 6. Several Members of the Task Force were present and while I can't give a blow by blow account I can point out some of the plans that they are seriously considering. They went out of their way, in good task force fashion, to indicate that they had not finalized any recommendations and that in the end they only would be making proposals to UCOP. For some reason they seemed to think that people are suspicious of their efforts.

1) The Task Force acknowledged that the University has a legal obligation to honor the pension commitments as they have accrued up to this point. Exactly how they construe their obligations going forward is less clear to me. Stressing past obligations could simply be a way of indicating that they are going to be raising our contributions more than is presently planned or it could mean that they are considering changing the benefits ratio for future earnings. They are thinking of changing the eligibility requirements in terms of age and years of service but it was unclear whether this change was for new hires alone. Indeed, they made it clear that they are still discussing where to set any cut-off point for grandfathering of the old eligibility requirements.

2) They are thinking of "offering" new employers a defined contribution plan. The entry wedge here appears to be the Medical Centers. In the case of the Medical centers they claim that a defined contribution plan is a better option for employees. But they are also thinking of making it an option for new employees. They are considering a new tier for new employees in any case: higher age and service, higher contributions, lower payout--indeed for all of the rhetoric about how nothing has been decided I think it is extremely likely that they will propose a different system for new hires. For example they now promise a defined benefit regardless of social security. One thing that they stressed was a proposal to include social security in calculations of benefits and to lower the ratio at which benefits would be calculated from 100% to possibly 80%.

3) They are clearly going to seek changes in the retirement health plans--either through higher benefits, a redistributed ratio in the amount that UC vs. the Retiree pays. Apparently now UC pays something like 89%. They are talking about gradually lowering it to 70%. They are discussing possibilities for structuring the situation so that people chose not to retire until they are covered by medicare.

Again, the Medical Centers are an interesting case because, according to figures presented today, the retirement health benefits to medical center employees are hugely over market averages. They are considering bringing them more in line. Interestingly, although there was also data that suggested that salaries for Senior Managers in the Medical Centers were also above market, there was no discussion of lowering those in order to save money.

4) Shane White was there as the Senate Representative. He spoke quite forcefully against the proposed changes in benefits and indicated that the Senate would oppose them as well.

5) Peter Taylor seems opposed to the UCFW proposal on bonds. As far as I could tell at the heart of his objections apparently is his fear that the UCFW bonds would crowd out other bonds that the University might float. Interestingly, he suggested that should these bonds be offered UC might be forced to draw upon student Ed Fees in order to pay for them. When asked about the relationship between student fees and bond service (the "Meister Controversy) he again insisted that no Ed Fees had been used to cover construction although he did indicate that Reg Fees had been used that way. If I heard him correctly he seemed to want to make a distinction between fees having been "used" and "pledged." He did not deny that Ed Fees were pledged as collateral but wanted to insist that they had never been actually used to pay off debt. Again he suggested that practice might change if the UCFW plan was implemented.

6) They trotted out the LAT opinion piece (written by an aid to Arnold) and the Stanford study (sponsored by Arnold) to point out the difficult political climate. I pointed out that since they seemed to have given up on the state funding UCRP I wasn't sure that this was relevant and suggested they were piling on. In response to that someone from UCOP insisted that they were still in negotiations with the state to get them to resume contributions and that whereas that wasn't going to happen right away they hadn't given up hope.

7) They insisted that they had heard the input from faculty about how central the retirement benefits are to recruitment and retention. So further pressure may do some good there.

There were a couple of points that I think were left very vague and that I did not think to press in the meeting. But they may be worth pursuing as the Task Force visits other campuses.

A) Where does the money go if there is a shift into defined contribution plans? At the present time, all of the money for retirement is centralized. But if UCOP opts for a defined contribution option for new hires then wouldn't the contributions of those individuals need to be removed from the general fund? If so, wouldn't the overall actuarial gap be increased?

B) This seems especially pressing concerning the plan to allow the Medical Centers to shift to a defined contribution scenario. As I understand it, part of the large actuarial problem is that while the Regents have not been contributing to UCRP, neither the clinical enterprises nor outside granting agencies have either. So each dollar that the Regents don't spend means two other dollars not spent. I understand that if the Medical Centers shift to a defined contribution plan the overall liability will decrease somewhat but so will the money being placed into the system. There was no clarity concerning those numbers or considerations.
UC's state-paid employees took about an 8% pay cut this year.  On April 15, the total cut climbs to 10% with the restart of contributions to UCRP.  Income over the Social Security wage base ($106,800) will be withheld at 4%.  The base rate of 2% is expected to rise to 5% for employees (the current CalPERS rate) in step increases of 1% a year.  The employer share is also slated to rise: under the Regents' 2008 "Funding Policy," under a "Slow Ramp-Up" plan,  employer contributions rise 2% a year starting July 2011. 
UC salaries are already 10-15% below salaries at comparison universities, but UC's outside consultants have long claimed that UC's pension plan was so much better than the others that it brought "total compensation"at UC into a strong position.  This claim was continuously contested by the relevant Senate committees, but in any case that argument is over.  At a 5% contribution level, the "value of UCRP to active faculty is below the average value of pension plans at the Comparison 8 universities" ("TIFR Recommendation to assure Adequate Funding for UCRP, p 11).

Take a deep breath, and ponder the sheer speed of UC's deterioration as a workplace.

Then ask, why restart contributions now, in the same year in which pay was cut? The simple answer is that UCRP was shifting from being super-funded to being underfunded even before the financial crisis, and the restart was set in motion two years ago.  A good summary of current official estimates of the problem is in this Regents presentation, given by UC's actuary, the Segal Company, which shows the decline of the funding ratio (assets over liabilities) such that pension commitments could no longer be funded 100% by UCRP investment income.  (Most pensions fund about 75-80% of their benefits from investments, and depend on employee and employer contributions for the rest.)

Commentary on the subject is all over the place.  The most thorough public document is the Senate's, linked above.  This is absolutely required reading on the subject, and I'll come back to it.  Bob Samuels has suggested that a new actuarial rule is being used to overstate liabilities, create a crisis, and reduce retirement benefits.  On the other hand, one faculty participant on a listserve has suggested that Regental mismanagement has led to such a large and genuine underfundng crisis that the University might consider "letting the pension fund go bankrupt," forcing the Pension Benefit Guarantee Corporation" to pay off pension obligations.

A UC economist who has followed the discussions splits the difference.
I don't think there's any question that the green-eyeshades people in Oakland want to cut benefits anywhere they can. But the crisis is indeed real. The funding status of UCRP will continue decline because the figures reported are using actuarial and not market returns.  Only 1/5 of the meltdown is recognized each year, using actuarial smoothing.  (This isn't misleading, it's openly acknowledged, and an acceptable way to keep annual contributions from being overly volatile.)  PERS uses 15-year smoothing. So we can predict how the funded status will decline, as we "recognize" more and more of the losses, through 2013.
This economist confesses some bafflement at the variations in the amounts by which the pension is said to be underfunded, and then adds an important political comment: since the state is unlikely to restart its support for employer contributions, these will increasing depend on increased student fees.  (Fees are relatively fungible UC revenues that currently help pay for salaries, among many other things).    This puts student and faculty interests increasingly at odds. If new faculty hiring stalls, it's possible to imagine a rapidly aging faculty, already overrepresented in the Academic Senate, consenting to higher tuition out of pension self-interest.

In addition, UCLA's Faculty Association offers a thorough backgrounder on UCRP in the context of state public pensions.  It calls on the state to live up to its obligation to fund the employer contribution to the pension, which the state has so far refused to do.  UCLA's FA also suggests discussion of a "tier 2" plan for new employees.

My own review of the situation started with a Stanford policy brief about California state pension, written by some public policy grad students advocating a more complicated way of assessing liabilities.  If you look at Table 2, you will see that in their "adjusted' accounting of UCRP liabilities the funding ratio is an alarming 59.3% (meaning that only about 60% of liabilities are covered by assets).  But the stated liabilities, using the standard method of discounting liabilities in lockstep with (smoothed, estimated) investment returns, are nearly 99% funded as of July 1, 2008.

I am not qualified to comment on the value of the Stanford authors' probability-based "stress test" for pensions, but am doubtful of the foresight of such modeling-- triply so in the wake of the financial crisis, whose tandem epistemological crises have yet to be resolved.  So I  humbly note that the stock value crash that occurred later in 2008 will be smoothed over 5 years, that the funding ratio is based not on market value but on actuarial value as noted above, that this method brought the funded liability to 95% after the crash (slides 7-8),  and that the ongoing, non-drastic downward smoothing will be partially countered by the bounceback of equity markets in 2009-10.

So far, this looks like less than a major emergency.  A "gentle ramp-up" on contributions? Yes. Weighing better accounting methods, investment strategies, and accountability? Yes. Rethinking the status of UCRP and public pensions?  No.

But it gets worse.  The issue is the gap between the Segal Company's Recommended Contribution and UC's actual plan for restart, the Slow-Ramp Up.  The Recommended Contribution was 11.6% of covered compensation for 2009-10 (due by the end of 2010), which would come 2% from employees and 9.6% from the employer. Segal recommended nearly doubling this to 20.4% in 2010-11, the current year,  3% from employees and 17.4% from UC.  This Recommended Contribution is based on the scary action in Segal's Regents slides in Slide 12 and Slide 13. The really big pension funding gaps - $10 Billion in 2010, $20 Billion in 2014, and so on that we see there, comes from projecting the effects of continuing insufficient contributions from both the employer (via the state) and the employees, causing the Unfunded Accrued Actuarial Liability (UAAL) to grow each year.

Is the red line a scare tactic designed to induce employees, already financially destabilized, to take more money out of their shrunken pockets?  We have no way of checking the public math because there isn't any.  The red line does seem to be a worst-case scenario, based on projecting low contribution increases (the Slow Ramp-Up of 2%/1% annually) out into the future, and coupling these with unknown but probably pessimistic assumptions about investment returns (not still 7.5% / year?).  We need more explanation of the generation of these scenarios before we react to the bad one.

But now we come to the Senate's TIFR report, cited above (TIFR stands for Task Force on Investment and Retirement, and it is part of the systemwide Faculty Welfare  Committee (UCFW).  TIFR has looked at the math, has better access to UCOP data than any other systemwide Senate committee, and has membership that doesn't rotate and so keeps its accumulated expertise.  Their report is as scary as Segal.  The "Slow Ramp‐Up," they say, "will lead to a catastrophic underfunding of UCRP over the next 15 years" (6).  There are a number of factors-- do read this report of 13 double-spaced pages--that starts with a gap of 10% between recommended and actual contributions in 2009-10, and 14% in 2010-11. In this scenario, the gap compounds, until by 2022 the contributions rise to 50% of covered compensation, doing further major damage to UC's ability to spend money on actual education.

Underfunding looks inevitable: the state won't pay the costs of the employer start-up, UC seems not to have the money, most employees are broke, and in fact they got their contribution "holiday" in the first place to make up for flat or falling pay during the cuts of the early 1990s. Although the assumptions and scenarios need to be checked, and although I would like to know if they are assuming everyone retires at once as some suggest (and as dumb an assumption as that may seem), I have no grounds to doubt the TIFR-Segal projections.

If more laissez-faire will lock us into a death spiral, what would get us out of it?  We have the usual two funding sources of sufficient size - major student tuition increases, and restored state money.  TIFR recommends adding a third - the issuance of "Pension Obligation Bonds" as a way of providing the employer contribution (employees would still pay through their income).  The idea is that paying interest on the bonds is cheaper than making up the shortfall later on.

That is no doubt true, but I have two objections to this TIFR proposal.  The first is discomfort with older people borrowing to pay for their stuff and sticking the young with the bill.  We've been funding state services this way in the Arnold era and it isn't right.   The second is that raising money with bonds is like raising money with tuition hikes: both allow the state to say, "good, you've solved your own problem, no further need for you to come running to us."

The only solution I see is restoring public funding on the multiple educational grounds this blog has often described, with the added twist that refusing to honor pension payment obligations sets UC up for a step-function decline.  How low does Sacto want us to go?

This solution of extracting state support for its retirement obligations has to buck pervasive predictions, as in an op-ed by a Schwarzenegger aide in today's LA Times, of a coming pension nuclear winter.  These predictions could at some point persuade the state to two-tier and eventually eliminate its public pension system.  I can imagine the Gov. Meg Whitman special commission on the pension crisis, a Parsky promotion of an "employee independence from unaffordable pensions" scheme, an Edley endorsement, a ballot proposition like that of 2005, and a "Fast Ramp Up" phase out of future accruals and benefits.

So expert groups like TIFR need now to put as much energy into solving the UCRP problem as they have put into exposing it-- in a way that fits with the public character of the university.