• Home
  • About Us
  • Guest Posts

Sunday, January 17, 2016

Sunday, January 17, 2016

Pensions, Politics, and the Failures of Leadership

The Task Force charged with making a silk purse from the sow's war of President Napolitano's pension agreement with Governor Brown issued its report on Friday.  To no one's surprise, the Task Force indicated that the task was impossible; given the limits the Task Force faced most faculty and many staff (especially in the health sciences) hired from July 1, 2016 will face dramatically reduced retirement benefits compared to current employees.  This situation results from two interrelated factors: the actual budget deal that President Napolitano accepted and the desire on the part of Vice-President Brostrom that there be savings produced by the new 2016 tier.  In exchange for a relatively small (about 5% of UCRP's unfunded liability) short-term State contribution to UCRP, UCOP has agreed to reduce the compensation for generations of employees to come.

In this post I am going to do several things:  first, describe the contexts within which the Task Force was presented with its impossible task; second, provide a broad indication of the Task Force Majority's recommendations; and third, describe the process to come with some suggestions and comments on the situation facing faculty and unrepresented staff (as is often the case represented staff may have more control over their situation since they are entitled to collectively bargain on these matters).

THE CONTEXT

You will recall that following UCOP's Fall 2014 proposal for a 5% tuition increase, UC and the Governor's office established the so-called "Committee of Two" to examine the cost structure at the University and secretly negotiated a budget agreement.  (For the Senate's Committee on Planning and Budget's critique of this process see here).  Despite the hullabaloo that accompanied those high level discussions it was clear from the start that the Governor was only interested in cost controls and that the likelihood that the University would gain in substantial ways was quite low.  In the end those expectations were met.  Although UC received a promise from Governor Brown that he would extend his planned base budget increases for an additional 2 years he succeeded both in locking UC in an ongoing under-funding and also in increasing the demands on the University.  In addition, the threat of tuition increases alienated the Legislature and, at least indirectly, led to UC having to agree to expand resident undergraduate enrollment without sufficient funding to pay for the increased costs.  We have commented on the weaknesses of that deal before (here, and here).  But as part of that deal President Napolitano accepted a permanent reduction in pension benefits for future employees in exchange for the Governor's promise of a temporary State contribution to UCRP.s unfunded liability of $436M over three years.

Under the terms of President Napolitano's agreement with the Governor, UC is committed to reducing the cap on the amount of income that can count in calculating an employee's pension benefits in UCRP.  UCRP as you know is a Defined Benefit Plan.  As a result an employee is promised an annual payment after retirement based on a calculation that takes into account an employee's three highest salary years, years of service, and age at retirement.  For employees hired before July 1, 2016,  earnings up to the Federal Cap (now about $265,000) could be counted.  For those hired on July 1, 2016 or later the University is proposing to shift to the PEPRA State Cap (now at $117,020 and tied to inflation). It is important to recognize that these numbers are limits NOT on retirement benefits (which are lower) but on the amount of earnings which can be used to calculate retirement benefits.  Starting with those hired on July 1, 2016 earnings above the PEPRA cap will simply not be included in the calculation.  The Task Force estimates that these new rules will affect roughly 25% of employees hired on or after July 1, 2016 (13-14).  These individuals tend to be concentrated in the Ladder Faculty, the Health Sciences, and Management (13) Because of the large number of represented nurses. about 40% of these individuals will have the ability to engage in bargaining over these terms.

The Task Force was charged with figuring out how to change the retirement system.

THE PROPOSAL

The basic parameters of the proposal can be sketched quickly (and you can find them at pages 5-7 of the Report).

The Task Force is proposing that new employees be given two options:

1) The first (Plan A) is hybrid plan.  In it an employee would participate in the Defined Benefit Plan offered by UCRP (with benefits calculated on income up to the PEPRA cap) with a Supplemental Defined Contribution Plan (with University contributions) on income between the PEPRA cap and the Federal Cap.  Employees who choose Plan A would continue to vest after 5 years (as is the case now) and would continue to contribute the same amount annually to their pension as do employees hired before July 1, 2016. Once in Plan A you would be committed to Plan A.  Plan A is proposed as the default choice.  It is important to note that the Defined Benefit portion of this proposal would operate under the conditions imposed on the 2013 Tier--who already had a later retirement age than earlier hires.

2) The Second (Plan B) is a Defined Contribution Plan with both the employee and the University contributing up to the Federal Cap.  Again, the amount that the employee would contribute would be the same as Plan A.  Employees who chose Plan B at hiring would be allowed to switch to Plan A after 5 years of employment (this would be a one-time opportunity).

A Defined Contribution Plan, as you know, promises a certain amount of annual contributions to a pension fund but no obligations as to payouts after retirement. The risk in the latter type of plan is borne by the individual (just as s/he accrues greater portability and the benefit of any investment brilliance).  A DC plan can be better for shorter term employees.  But the employee bears the risk of either poor investment performance or longevity risk.  It is not exactly clear why the Task Force chose to include a DC plan (it was not required by the Budget Act).

The actual details of the proposal are considerably more complex and depend on a variety of options concerning the actual amount of contributions (by the University) to the different plans, the expected annual growth of the value of the DC plans, the costs to the University of choosing between different contribution levels, the age of hires and the distribution of choices between plans, etc.  These questions mean that the actual effects of these two plans are still in flux as both the Task Force Report and Senate Leaders Dan Hare and Jim Chalfant make clear.  So university employees are being asked to respond to a concept without precise numbers on which to make that decision.

But despite the complexities it is clear that the retirement benefits for affected future employees will be dramatically reduced. (for a quick way to see this effect see 84)

MOVING FORWARD

The Academic Senate (and I assume staff associations) have until February 15th to formulate responses to the Task Force Report.  The Senate, in turn is asking for comments and responses by February 5th.  I want to underline these dates because they show quite clearly the closed-off nature of the process.  Despite the claims by both UCOP and the Task Force about consultation, faculty and staff at large have less than a month to respond to a proposal that will significantly change the compensation for future employees with an unknown effect on the University as whole.  Given this situation I would argue that the Senate and other faculty and staff organizations proceed on two tracks.

The first, involves a series of technical considerations but is politically the easiest to do.  This option would be to insist that wherever the Task Force provides alternatives in the amount of the University's contributions to retirement income that President Napolitano and the Regents choose the most generous alternative.  In addition, the proposed opportunity to switch from Plan B to Plan A should not be set at 5 years but later to allow for faculty to make the decision after their cases for tenure have been resolved.  The guide provided by Chair Hare and Vice-Chair Chalfant is the best place to start for evaluating these different questions.  But this avenue is the conventional one.

The second and more significant option is to reject the proposal.  I think that the Task Force did the best that they could under the circumstances.  And I recognize that trade-offs often need to be made. But the funding gained under this agreement is not worth the damages done to compensation nor the potential damage done to the University as whole.  The Senate should oppose this deal even if it means returning the initial payment of $96M.  There are a variety of reasons for this:

1) As I indicated above there is no question that acceptance of this deal will reduce retirement benefits for a significant portion of future employees.  Nor is there any reason to think that the University has any real program to make these losses up in other ways.  Indeed, as the Report indicates, the University does not have an accurate idea of total compensation and competitiveness (the last report having been done in 2009).  (64-65)

2) What does the University get in return in financial terms?  Not much.  As I indicated above, the three year state contribution addresses only a very small amount of the unfunded liability. And according to the calculations of the Task Force, establishment of the New Tier under present conditions will speed up the elimination of the unfunded liability minimally if at all.  In fact, under certain scenarios the elimination of the unfunded liability might be faster under the 2013 Tier (with borrowing) than under most of the 2016 options.  (57)  Nor does there seem to be much savings in yearly terms.  And these savings are placed far down the road as individuals hired under the 2016 come to replace the 2013 Tier in retirement.

3) The pension deal and the Task Force proposal mark a crossroads for President Napolitano and also for shared governance within the University.  It is conceivable that the President did not realize the extent to which the pension deal would reduce benefits.  But faced with the Task Force report it is clear that the reduction would be significant and that the financial benefits are limited.  If there is significant opposition to this proposal President Napolitano would have the option of concluding that the deal was a mistake.  If there is significant opposition President Napolitano would also have the option of demonstrating an openness to shared governance on policy rather than just on implementation of policy already decided by senior managers.  It is possible, of course, that UCOP has calculated that given overall market conditions they are willing to weaken recruitment and retention of top faculty and staff (that certainly is the implication of the Governor's position).  But at least we would be clearer on that.

CONCLUDING COMMENTS

1) If the University wants to consider revamping the retirement system it should, at the least, demand that the State acknowledge its own obligation to funding of UCRP and restart contributions on an ongoing basis.  Much is made of UC's "pension holiday" and it clearly went on too long.  But it is important to remember that there has been a State "pension holiday" from funding UCRP as well (as it funds other public employee retirement systems).  Renewed ongoing funding would enable UC to eliminate the loss in retirement income or total compensation on the one hand and to reinvest in core functions on the other.

I recognize that this is a politically challenging route.  Taking this route would not be without its dangers in terms of relationships with the governor and the legislature or in terms of motivating those who are opposed to all pensions (especially public ones) But the Governor is at best disingenuous on this issue.  If you look at his 2016 budget proposal, he includes UCRP as part of the debts and obligations under Prop 2 when he wants to indicate how much debt the State has.  (3)   But as a matter of policy he refuses to acknowledge that UCRP is a permanent state obligation.  Moreover, even the short-term funding is only a gubernatorial promise at this point.   The Task Force, to be honest, was less than forthright in this regard when they open their report with the statement that "As part of the 2015/2016 Budget agreement between the University, the Governor, and the Legislature, the State will provide a total of $436 million for the University of California Retirement Plan (UCRP) over the next three years." (4)  The Legislature has not engaged in any multi-year promise.

2) If nothing else, the Report of the Task Force is another indication that UCOP's tuition gambit and subsequent "Committee of Two" process was unsuccessful.  Although I commend President Napolitano for actually advocating for increased State funding (something her predecessor was particularly poor at doing) the Tuition strategy seems to have backfired.  The Legislature was alienated, the budget deal that resulted showed little if any improvement from what the Governor had indicated previously, UC has now agreed to take large numbers of additional students without adequate funding, and the pension deal was a mistake.  Moreover the secrecy of the process not only sidelined effective shared governance but, as with the proposal on the governance of the health sciences, precluded an effective mobilization of debate and ideas about the best ways for the University to move forward.  As with so much of the debate over higher education today, efficiency and speed is held in higher regard than thoughtfully considering the long-term implications of policy and practice or aiming to improve the quality in higher education (as opposed to simply lowering spending). Rushing to produce a bad idea just means you produce a bad idea more quickly.

For your convenience:

The Task Force Report can be found HERE.

The Guide to the Report produced by Chair Hare and Vice-Chair Chalfant can be found HERE.



19 comments:

Joseph Bristow said...

Thank you for this analysis, Michael.

Anonymous said...

Fighting for the pension benefits of those making between $117,020 and $265,000 is an attractive battle. Brown saw this and pressed the issue. He probably could have won for a lot less than $436,000,000.

In contrast, the tendency of the UC top brass and humanities professors to dump 1000's of new students into severely overloaded lower division calculus, chemistry, and physics classes, with no $ support of any kind for those new teaching duties, is a much bigger problem. I don't like it but humanities enrollments are down. The humanities shouldn't hold on to the historical resources and turn STEM education at UC into even more of a joke.

Not that the science & engineering departments are clean either... their faculties largely evade teaching the very same courses that are now bloated and underfunded. It is all a terrible mess.

Anonymous said...

Whoops meant `**isn't*** an attractive battle' above.

Chris Newfield said...

Anon: well heck. Defined Contribution pensions have enriched Wall Street like nothing else while creating retirement insecurity among the boomers who bought the false promises. In contrast, Defined Benefit pensions offer security as part of long-term total compensation to which the employee also contributes. DB pensions are also better in the context of philosophical ethics, since they don't tie retirement income to individual luck or to a skill--investing--unrelated to job performance. The new Task Force proposals damage OUR educational institution while helping other people's financial institutions. I don't know why we don't fight for DB, including DB up to $265,000, on both philosophical and practical grounds.

On the 2 separate matters of UCOP accepting cut-rate undergrad funding and STEM "versus" humanities, the solution is to do credible calculations of undergrad ed cost in different majors and then negotiate with the state until the true average cost is paid. The solution is not to take already-poor arts, humanities, and social science departments and make them even poorer. The solution is also not to asset to a long term anti-liberal arts propaganda campaign that has weakened the very departments on whose health STEM funding depends, via cross-subsidies. (If you aren't sure what I mean by cross-subsidies, tell me and I will send you some links. If you aren't sure what I mean by poor SASH departments (arts, humanities, social sciences), check out my department's 30:1 faculty:staff ratio, which makes research support nearly nonexistent - http://bap.ucsb.edu/institutional.research/planning.data.book/tables/2013.14/academic.unit.engl.pdf. You will also see that our student FTE is down 4.4% over 5 years, far less than the decline in majors, who are being scared off by the aforementioned propaganda.)

Your comment reflects the success of divide-and-conquer strategies of the kind expertly deployed by skillful politicians like Jerry Brown. But that doesn't mean academics need to fall for them. To the contrary, institutions that can muster solidarity will figure out the long-term solutions that increase the odds of survival.

Westman said...

I tried to send this before, and I lost my internet connection. Apologies if I repeat myself.

Chris, thanks so much for this analysis.

Similar proposals to privatize Social Security have foundered (so far) partly on this problem: diverting Social Security taxes to private 401(K) accounts would impoverish those who are currently beneficiaries, as taxes pass through to those receiving benefits now. There is no way to take Social Security taxes and put them in private accounts without taking money away from current beneficiaries.

Is UCRP like Social Security to the extent that employee contributions to UCRP are passed along to current retirees? And if so, how will the benefit stream be maintained when employees contribute less - - or not at all - -to UCRP but instead to private 403(b) accounts (the non-profit equivalent of the 401(K))?

Chris Newfield said...

There are about $55 billion in assets in UCRP, which cover retiree payouts (there are something like 2 active members per retiree). Active members and UC pay into the fund. As with all mutualized risk pools, we're all covering each other, so I don't think the question is correctly constructed. It's of course a question in all of our minds because of the past 40 years of politicized redefinitions of retirement as a private rather a social phenomenon, which has allowed the financial industry to chop up pension pools into individual retirement accounts and then charge each person large fees for participating in what used to be very cheap risk pooling (and still is with Social Security). I'm no pension expert, but I can see how the imposed preconditions of the discussion have skewed the outcome and gutted the DB side. (the URL for a summary of UCRP's state is http://utotherescue.blogspot.com/2016/01/pensions-politics-and-failures-of.html )

Michael Meranze said...

As the Hare and Chalfant guide (which i linked to in my post) makes clear UCRP is not like social security because it is prefunded (along with investment). The problem is the unfunded liability which this deal does not help reduce more quickly.

Chris Newfield said...

agreed. But the UCRP's assets are gigantic, and actuarial underfunding is also being deployed rhetorically to push through proposals that would normally be rejected, even though as you say they won't fix it. the unfunded liability isn't in my list of top 10 critical problems for UC. On the other hand, Anon's points about crappy instructional resources are in my top 3.

Michael Meranze said...

Agreed as well. And the acceptance of insufficient funding for new students will only make matters worse.

Michael Meranze said...
This comment has been removed by the author.
Bob Samuels said...

UCRP is now funded at about 84%, and could be increased through some internal borrowing. The problem is that is we go over 90%, the state has even less reason to contribute. Also, the DCP option was pushed by the medical centers, and it looks good to the bond rating agencies because it is pay as you go and not a long term funding obligation. Research shows that when plans switch from DBP to DCP, it ends up costing more and delivering reduced retirements. The task force simply failed to look at relevant research, and they caved to the administration.

Chris Newfield said...

what would prevent the Senate, CUCFA, and the unions from opposing the plan now that it has been made public, and pushing for modifications or rejection? @Bob Samuels

Anonymous said...

I doubt California voters, who have a median income of $61,320/year, are supportive of *any* DB pension at all on salaries above $117,020, or even of *any* DC pension contribution based on income above that level, particularly when some of the funding of that pension benefit (like the $436,000,000) comes from their taxes. Thinking otherwise really defines out-of-touch Ivory tower dwellers. Most of those same average California voters have no DB pension plan at all, which is atrocious, of course.

As for fomenting discord between STEM and others: many of the research faculty in STEM don't teach the large undergraduate classes. It is not STEM v. the Humanities. The research faculty in the STEM fields often avoid the large undergraduate classes entirely.

Those who teach the large undergrad STEM classes have already lost the propaganda campaign. They are screwed by everyone, and all parties are dumping more and more students on them. In practice, temporary lecturers at very low wages are expanding to take those classes, the teaching is bad, and nobody, and certainly not Chris Newfield, Michael Meranze, the Regents, the Senate, or the STEM research faculty give a damn... more money for all of them.

Michael Meranze said...

Anonymous--

It is certainly a relief to know that I don't have to think since you are going to tell me what I do and don't care about. But for the record I have pushed when I was in a position to do so for increased compensation for lecturers (and I don't think that lecturers are worse teachers btw). But as with your initial comments sneer about humanities professors we don't actually have the power to change compensation or funding in the sciences. All Chris and I can do is make arguments for increased funding for educational spending

Michael Meranze said...
This comment has been removed by the author.
Chris Newfield said...

UC and the US have a problem, Anon, and it is management by apodictic assertion: the public doesn't want us to have DB pensions, DC pensions will bring shared responsibility for retirement security (as though DB beneficiaries weren't being responsible (see task force website). No evidence is produced, no real problem is identified that needs to be solved, so we get a series of solutions that are themselves problems. Please try not to do the same thing on the blog!

Anonymous said...

Apodictic? Substantial evidence exists that the California voter supports reductions in DB pensions and replacement with DC. See http://www.ppic.org/main/blog_detail.asp?i=1872 .

There substantial evidence that there is strong public support for the DB pension portion of Social Security: https://www.nasi.org/learn/social-security/public-opinions-social-security . It is the Social Security system itself that defines the upper limit of $117,020. Also, the payment from Social Security rarely exceeds $30,000/year, and is notably progressive in that the higher paid (up to $117,020) subsidize the lower paid. Much more progressive than the UCRP.

Perhaps, Chris Newfield, you can now produce evidence that the public supports *any* (either DB or DC) post-employment replacement of compensation in the range $117,020 to $265,000. If you don't have such evidence, aren't you already making an apodictic assertion on this blog?

Only a 4.4% decrease in overall humanities enrollments? Gosh, the large STEM classes I'm aware of have had 200% to 300% enrollment increases, and have 100's of new students, many now out of state and foreign. And yes, sometimes the instructors of those courses, and the instructors of freshmen writing courses, are far, far better than the research faculty.

An implicit apodictic assumption in the entire UC enterprise is that the dumb public can't tell that the well-compensated tenured research faculty aren't doing the hard work of educating lower division students, and can't tell that the poorly compensated lecturers with no security are working extremely hard to subsidize the well-compensated tower of tenure-track faculty and administrators who exploit them.

The public can tell and subsequently rolls their eyes when tenure-track faculty and administrators complain about their compensation between $117,020 and $265,000 being replaced post-retirement.

Chris Newfield said...

Anon, thanks for the evidence. I didn't say the public shows majority support for DB at any level--I don't know of any evidence for that--but that supporters of DB who understand why it's better than DC for retirement security need to fight to change the public's various minds. Most polls present DB as a crisis of costs and deficits: the poll Reason cites gets a predictable recoil from DB by asking whether you want to pay for pensions or have your public services. http://reason.org/news/show/public-support-pension-reform If you asked whether all public employees should be forced to put their old age security at the mercy of Wall Street bankers' profits, you'd get a skew in the other direction. The point is to educate the public when the majority is wrong, as they are about DB. The PPIC poll finds that fewer Californians think the cost of public pensions is a problem than at any time since 2005, o this would be a good moment to start. Do we have to go back to 1926 and reinvent the arguments for social security and mutualized costs for health, education, and retirements? Maybe. Then we need to get started.

I don't know why you combine pensions and LD over enrollments, but your beef is with admin's resource allocations not with me. It sounds like you and I agree on the need to improve LD educational quality by demassifying it. There was an interesting piece on this in the Chronicle this week - http://chronicle.com/article/The-Faulty-Foundation-of/234905

If the public rolls our eyes at us we need to engage with them rather than take it as a final verdict. To do the latter guarantees defeat.

Anonymous said...

As I posted above, the public strongly supports the DB system known as `Old Age' (the OA in OASDI) social security benefits. That is the DB system that recognizes a cap of $117,020 for the payroll tax that supports OASDI.

Whether DB or DC, I don't think (and polling does seem to support) the public majority supports any income replacement for the portion of public servants salaries that exceeds $117,020 a year. Note that that number has been and will be indexed with inflation.

The public does want the UC system to provide a first rate education in the large STEM and writing classes of the lower division students. Right now UC does that with temporary lecturers who earn far less than the $117,020 cap. So you see perhaps why the public would be very hesitant to provide further payments out of the general fund like the $460,000,000 paid recently to gild the lillies of higher education.

Jerry Brown is a far better politician, in tune with his constituency, than are UC faculty.

Join the Conversation

Note: Firefox is occasionally incompatible with our comments section. We apologize for the inconvenience.