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Friday, May 15, 2015

Friday, May 15, 2015

The May Budget Revision: UC Budget Goes from Bad to Worse

I'm sorry to rain on the parade, but even though the state continues to recover, UC does not.

In November 2014, Gov. Brown offered UC a 4 percent increase in state funding, or $119.5 million.  The UC Regents countered with their famous 5 percent tuition increase, which would have added another $131 million (not counting financial aid revenue from the state).  That might sound like a lot of new revenue, but it isn't. Were both pieces in place, UC would be getting about half of the16 percent annual increase it had estimated it needs for several years running to recover from the Schwarzenegger and the Brown cuts. See my November post on the Regents meeting for context and for UCOP's chart on the subject.

There are various ways to describe the problem: it   is a $1.5 billion structural deficit (2011 values) or it is the $1 billion in cuts since 2008 that CFO Brostrom uses in public statements. A third way is even more ominous: the last Independent Audit Report of UC's finances had UC losing $5.7 billion on operations in FY2013 and $4.5 billion in FY2014 (page 10).  These losses were partially offset by non operating gains (investment returns is the largest piece). Even so, the shortfall was $1.0 billion in 2014.

The Governor has again offered UC the same state increase and no more. He has added a compact-like agreement to do this for four years in a row.  At the appearance of a new headwind he can abandon this commitment as Gov. Schwarzenegger abandoned his, but more to the point is that this is a minimal increase that would likely have emerged from the normal budgeting process.  UC has agreed to freeze tuition for another 2 years, so that increment is lost. In 2017-18, UC can request a tuition increase, but one to be tied to an inflation rate that is likely to remain well under the 5 percent UC proposed. 

In other words, UCOP has agreed to several more years of austerity and shortfalls.  This will keep the deficit in place and, as far as I can tell, sustain annual operating losses.  

Students will be happy they will not be paying more. They will not be happy that they will still be getting less.  Educational quality became a clear student issue last fall. But the state's likely political calculation is that cost is still more important than quality, and that students will also take deal.

One possible compensation for bad operating budgets would be a structural fix.   Here we arrive at the pension announcement.  This Democratic administration has taken to describing UC's pension liability as both a gap to be filled and an affront to state budgeting.  It is not just a budgetary problem in this narrative but a moral failing on UC's part. UCOP wanted the state to start paying the employer's share of the pension as it had in the past, and as it does for Cal State. The state's refusal to do this was one reason why the restart of the contributions was delayed. 

The state continues to refuse annual contributions. What it has now offered instead is a one-time payment of $436 million staggered over three years. In exchange, UC is to tier its pension again by adding a Defined Contribution plan for new employees and capping the Defined Benefit pension at the state employee level of $117, 020. (See Dan Mitchell's rundown here.)

In budget negotiations, it is always a bad idea to make a permanent change in exchange for a one-time payment, and this one is no exception.  In addition, the amount received is very small: $145.33 million per year for three years, while UCRP, the pension fund, has a $73 billion net position for pension payments, which is up nearly $10 billion from the previous year, and paid out nearly $4 billion in benefits last year  (page 17).  Why would you restructure your pension, which your employees dearly love, in exchange for 3.6 percent of your annual pension expense, and for just three years?  

UCOP has already handed UC employees an 8 percent pay cut in the form of restarted contributions, and UC operating funds have been squeezed to do the same--with very good results for pension solvency.  So what is the real purpose here?  Perhaps the purpose is to convert UC's pension into a 403(b) over time, and that UCOP wants this as well. I don't know this, but I can't explain why UCOP would take this deal when the pension is actually on the mend.

I can see why the state would do it. It gets a chunk of UC operating expenses off its budget. State politicians can also divide up the UC employee body.  The Academic Senate already cooperated in one tiering of the current pension for ladder faculty; most unionized employees voted to keep younger employees with them in one tier while paying an additional percent of their income to help the fund.  Represented staff generally make less than the $117k pension limit, will thus be less affected by the cap, and have resented high executive salaries.  Thus the state may face little UC employee opposition overall.  

Ladder faculty, senior managers, and Management and Senior Professionals will be seriously affected. The cap would make faculty retention harder: in most disciplines, the cap will kick in at mid-career when the most visible faculty are most liable to be recruited away, and a capped pension will make it that much easier for competitors to beat UC's best offer.   (In some disciplines, assistant professors will start at or above the cap.) UC campuses have long been starved for internal funding for non-sponsored research, academic programming, and new teaching initiatives, but have been able to offer retirement security in the age of academic adjuncting and the "disposable employee."  As retirement benefits are cut and/or destabilized, faculty will lose the one clearly superior thing about working at UC.   

Jerry Brown has long been inserting himself into the middle of UC educational policy, most obviously with his campaign to convert some percentage of UC courses to online. This current deal sets the first actual quota for new students: one third of them must be transfer students from community colleges.  Listen to the clips of the governor and his budget director that Prof. Mitchell has posted.  They offer a good representation of executive branch aggressiveness, and also feature Gov. Brown saying that he wants UC's lower division to shrink.  

This idea is equally bad for students and for the University.  Resident undergraduates who actually want to go to a four-year university will be squeezed between non-resident applications who pay 3 times more and community college students who have seats set aside for them.  In addition, they will lose the lower division courses that form part of the integrated curriculum for the major they will eventually complete.  Putting the first half of college into some other institution's hands will make coherent sequencing and skills accumulation that much harder.  On their side, campuses have a budgetary ecosystem that a shrunken lower division will damage.  Lower division enrollments cross-subsidize graduate education, sponsored research, and student services, among other things, and provide graduates with teaching opportunities.  Shrinking lower division enrollments will shrink funds that support UC's status as a research university.
We'll have more to say about all this during the Regents meet next week and as the plan unfolds. But my main impression today is that this is another step in the state's half-unconscious plan called, "the UC reversion to the mean."  UC was for decades a spectacular, standout place.   It now seems slated to follow California's K-12 system down the national rankings--or would do were other states not busily pushing the rankings collectively down by slashing their university systems too.  

The higher community needs to say, if our senior managers will not, that all of these budget economies are false. Saving money as Sacramento would like simply reduces the quality and the quantity of the intellectual and human capital that UC can produce.  The economist Walter McMahon offers the most comprehensive quantification that includes the non-market and social benefits of higher ed. He shows they are together twice as large as the private, market benefits.  And yet the state, led by Jerry Brown, is trying to fund UC only for the latter, in which it is a three-year skills training service that starves both higher order capabilities and research. If this carries on, massive public benefits will be lost. 

In addition, the quantitatively larger portion of the benefits of higher education, these indirect and non market benefits, consist of deep, complex capabilities like powers of critical thinking and a capacity for democratic deliberation.  These are often generated by liberal arts and sciences disciplines that form the campus core. They depend almost entirely on state funds and tuition.  UC is now starving the core but sustaining the periphery, particularly the medical centers where so much of the administrative growth, pension liability, and high-end salaries have accrued.  One good feature of UC having lost two of its national laboratories to a private limited-liability corporation during the Bush years was that the federal government reimburses UC for pension costs at Lawrence Livermore and Los Alamos National Laboratories.  It may be time for a similar spin-off of the medical centers.  

I think that would be too bad, personally--medical research and practice are obviously crucial academic and public services.  Unfortunately, this latest poverty deal makes the internal competition for dwindling resources even worse, and the campus core is not protected.

Photo credit: Onbeyond, LLC, 2003.  Sample public campaign ad for UC, declined by UCOP


Anonymous said...

Is the proposed pension basis limit exactly $117,020 for all time, or is it the maximum taxable earnings under Social Security, which gets revised yearly?

That is a very important distinction.

Many UC employees don't trust the UCRP anymore and have socked away money in the 403(b) to cover possible cuts from UCRP. The origin of UCRP's problems are bad management at the top, of course... the 19-year holiday. Many of us are now paying 8% a year to fix management's mistake, but it is likely we will see only 30 or 40 cents on the dollar of the promised UCRP pensions, so, the 403(b) is essential.

Chris Newfield said...

the DOF docs peg the cap to the state "2012" reform law (UC starts around 28 here http://www.dof.ca.gov/documents/2015-16_May_Revision.pdf) This must mean PEPRA (in effect 2013), which from guidance here http://www.seethebenefits.com/showarticle.aspx?Show=5878 is tied to the Social Security cap. But I await more definitive opinion.

Chris Newfield said...

why do you say 30-40 cents on the dollar defined by UCRP's formula?

Anonymous said...

I believe UCRP ends up near 30-40 cents on the dollar if future catchup employer contributions never get made... huge employer catchup contributions, in the 10-20% range and maybe even above 20%, in excess of the normal cost were projected as necessary in the 2015-2025 time frame; projections date from the big scramble a few years ago that lead to the 8% employee contribution. It was very hard to believe UC would make those employer contributions.

Anonymous said...

Here is what UC said about the new tier:

"The Governor has agreed, subject to agreement with the Legislature, to provide $436 million in one-time funding over three years to pay down UC's unfunded pension liability, in recognition by the State of its obligation to help fund UC's retirement plan. In exchange, the University would adopt a new pension tier by July 1, 2016. The new tier, which would affect only new employees hired after the new tier is implemented would provide, at the employee's election, either: A defined benefit plan with a pensionable salary up to the PEPRA cap (currently $117,020), plus a supplemental defined contribution plan for certain employees, or A defined contribution plan. Implementation of the new pension tier, as with UC's prior pension reforms, would be subject to extensive consultation with Regents, faculty, staff, union leaders and other stakeholders, and also our collective bargaining obligations concerning represented employees."

I should note that Bob Samuels says that the Department of Finance does not agree with UC's characterization that this one time money is a "recognition by the State of its obligation to help fund UC's retirement plan." So that fight will likely continue. I also will note that UC said that nothing in the agreement with the state requires UC to set up an alternative defined contribution plan. While creating a defined contribution plan for salary above the PEPRA cap is one thing, and possibly a way to reduce the damage this cap would have on retaining faculty, creating a defined contribution plan that can be opted into instead of the defined benefit plan is something else. UC appears to be using this mandated new tier as an opportunity to once again attempt to create an alternative defined contribution plan. UC has proposed this plan in the past and it has been rejected by employee groups because 1) defined benefits plans are far better for long term employees than defined contribution plans and 2) employee groups fear that if UC allows this defined contribution option it will siphon employees out of the defined benefits plan in a way that could cause the defined benefits plan to eventually fail (what is called a death spiral in new joins).

As you saw in the above quote, UC realizes they must negotiate this new tier with employees, and the new tier will have to be approved by the UC Regents, so this is just the start of a long process. Also, the Governor's May revise may get heavily modified by the legislature before it becomes the state budget (although I don't expect the legislature to remove the need for a new PEPRA cap based tier in UCRS - legislators have been very vocal about their desire for this cap).

By the way, this $436 million in UCRS funding from the state over the next three years is only a small fraction (16.7%) of the amount of money the state currently owes UCRS ($2.6 billion).

I'll conclude by repeating, as UC said, these changes will not apply to current UC employees. The plan is that only employees hired July 1, 2016, or later would be in the tier being proposed.

Chris Newfield said...

on UCRP, I can't find my copy of the consultancy study from several years ago, but don't remember shortfalls anything like that. The employer contribution was even more of a lift than the employee side, so it makes sense to stay skeptical about whether UC can meet it until there's some better arrangement with the state than this 3-year act of charity on the state's part. at the press conference, Jerry Brown cast it as a response to UC"s fiscal irresponsibility, and as long as pensions are seen as a special privilege for unreformed big spenders that fight is going nowhere. Pensions are actually a more efficient way of providing retirement security than is giving money to for-profit financial institutions who take many slices off the top--it's really too bad Californians and Americans have been brainwashed out of understanding this, and retirement disaster awaits the boomers -- along with an eventual government bailout . . .It would be good to watch UCRP very carefully--thanks for bringing this up

Chris Newfield said...

I meant to add that I've had some exchanges with irritated readers who point out that the increase is more than 4% if you count the maintenance money and the pension backfill. This is true. 4 percent represents what might go into the operating budget--except it's now actually less than that by a couple of hundred million because bond interest is now included. A separate point they raised was that this is no longer an austerity budget. Where austerity means in the most basic sense severity and difficulty, that describes daily operations on the campuses, where in the face of ongoing deficits deans and departments struggle to cover TA budgets and fund discussion sections to say nothing of actual quality upgrades or new initiatives. State per capita personal income grew 6% on average in 2011-12 and then dropped to 2% in 2013, so 4% is ballpark average (http://www.dof.ca.gov/HTML/FS_DATA/LatestEconData/FS_Income.htm) However, personal income fell only once in this period (-4.6% in 2009) and has stayed well ahead of HE funding. I'll keep using the word--there is no moment in which educational goals will NOT be controlled by insufficient budgets in the foreseeable future. What I also notice in these emails is a profound cynicism about UCOP--even the audited data was considered phony by one--that leads even some UC faculty to side with the state's politicians in cracking down on UCOP opacity and excess spending because they will never do it themselves. I don't agree with this, though that is more wishful thinking than sound historical analysis on my part. But what really concerns me is the idea that shortfalls, fiscal browbeating, and continuous insufficient funds are the only way to make UC better than it is. It's the "spare the rod" theory writ large, and is pernicious in public policy. That's austerity theory in action.

Anonymous said...

Of course DB pensions are the most efficient post-retirement income solution... for two reasons: 1)lower fees than the DC industry, and 2)elimination of longevity risk.... on 2) in a DC plan you are in a risk pool of 1, so everyone must plan on surviving into their 90's, and that means a lot more money most be saved or that situation. In a big risk pool, those who die early pay (before about 85) subsidize those who live longer, and, there is an incentive to stay healthy.

Maybe look at slide 12 of http://regents.universityofcalifornia.edu/regmeet/nov09/f5present.pdf... now we are at 8% employee and 14% employer, so 22%. We have just clawed back to the normal cost + a little big.

But a huge amount is missing... should have been paying 43%, look at the rose color & yellow on that plot. Worse, since UC doesn't make those 21% missing contributions for its employees, all the Labs & Medical Centers don't make them either for DOE & other non-academics. But the pension fund is still liable for all the Lab & Medical Center pension payouts. Then note the dark triangles... policy assumed the employer contribution would continue to ramp up.

Go to slide 14 of the same presentation. We plateau at 60% assuming the policy. Unlikely to ramp, add the labs/Med Centers, we're very likely to end up in the 30-40% range.

Deep in documentation there was some discussion of this scenario, but I can't find it either. It was like pulling teeth.

Anonymous said...

Possible update... look at http://regents.universityofcalifornia.edu/regmeet/nov14/f4.pdf... says total contribution should be 28.79% (page 4). I think employee is 8, employer 14, so the missing portion is 6.79%. I think that is $632 million missing. The `one shot' is $145 million per year for 3. Tempting to say shortfall of $632-145=487 million, but the real shortfall is less, because the $145 million leverages some med center & DOE lab contributions. No more than X2 though, about a $300 million shortfall, and it compounds at 7.5%.

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