Doghouse Pension Politics

Another negative report about the University of California appeared last weekend, this time on the front page of Sunday's Los Angeles Times.  The headline summarized the storyline: "UC is handing out generous pensions, and students are paying the price with higher tuition."

The piece has some analytical problems, but that doesn't keep it from painting a powerfully dark picture of the UC system.  I should say up front that I appreciate the investigative efforts of the piece's author, Jack Dolan, and his Times colleagues to collect internal university data and to report coherently on an important issue.

UC employees have been treated to two major pension tierings in less than a decade (where new employees get reduced benefits).  They have had their contributions increase from 0 to 7-9 percent of pretax salary depending on their employee group, during a period of de facto salary freezes.  No UC employee group ever requested the "contribution holiday" in the first place: UCRP was greatly overfunded at the time, and then zero contributions became an administrative end-run around pay freezes and stagnation during the first big round of state budget cuts that started in 1991-92. For the ensuing 25 years, most UC salaries have lagged behind their peers: faculty have generally been at least 10 percent behind.  The overfunded UC Retirement Program (UCRP) balanced that out, so that "total compensation" stayed competitive.  Now total compensation has fallen behind as well (by 10 percent for ladder faculty in a 2014 Mercer Total Remuneration Study; also see Berkeley FA overview) and this is due to deteriorating benefits as well as the tiering of and the rising contributions to the retirement plan.  UC now contributes 14 percent of salary to UCRP, with 6 percent of that going to backfill the effects of the "holiday," which, stupid as its protraction was, tried to counterbalance substandard salaries (UCRP page 8). So UC employees have little to learn about UC pension problems from the Dolan article.   And yet they were likely disturbed by Dolan's equation of all UC employees with the tiny $300,000+ Club whose payouts have been critiqued by faculty before, and that the article wrongly implies represent a pervasive, fatal overgenerosity to the whole.

(1)

That said, I'm interested in the larger framing problem the Dolan piece represents. How can UC frame its operations and missions in a way that avoids this kind of repeated damage to its reputation?  Fixing root causes is of course the real solution.  But real fixes are themselves blocked by a framing narrative that makes it much harder to address root causes or even to see what they are.

The master frame is "UC is rich and dishonest and doesn't need or deserve more state money."  Dolan's piece adds, "UC acts rich with pensions when it's actually poor, and thus hurts its students."  These are both "private good" frames that rest on "public-choice" political economy, as I'll discuss below.

We are in Year Ten (or Twenty) of a university strategy crisis about changing these narratives.  How can UC increase the chances of an alternative front page headline like,

After years of austerity, UC struggles to meet needs of students without hurting staff" (or vice versa)?  

A frame composed of such headlines would allow UC to address deep problems (e.g. inadequate public funding, including no ongoing state pension funding) rather than go after the specific mistakes of their critics.

Let's take a look at how Dolan's argument works.  He argues that a "good chunk" of this year's 2.5 percent tuition increase (rising for resident undergraduates from $12,294 to $12,630) will go to filling in the pension shortfall rather than improving campus operations. UC has $57 million in new tuition money for operations, but could have had $83 million were it not sending $26 million to add a drop to the pension deficit bucket.  The piece rolls several pension issues into a giant D.U.M.E spliff, as my Mardi Gras office candle would put it.

1. "The average UC pension for people who retired after 30 years is $88,000."
2. "More than 5400 UC retirees received pensions over $100,000."
3. "The number of UC retirees collecting six-figure pensions has increased 60% since 2012."
4. "Nearly three dozen [former employees] received pensions in excess of $300,000 last year, four times as many as in 2012."
5. Former UC President Mark Yudof got a sweetheart pension deal that put him in the top ten, though he "worked at the university for only seven years--including one year on paid sabbatical and another in which he taught one class per semester."
6. The pension fund can't really afford this because it has a $15 billion shortfall--which has been getting worse.
7. The pension problem "is distinctly self-inflicted. In 1990, administrators  . .  . stopped making contributions for 20 years, even as their investments foundered."

The result is "a jaw-dropping bill for the next generation--which has now arrived." Students are paying the price.

That's just the first section of the piece.  The next section details how Mark Yudof got his pension up from the $45,000 per year the formula would have granted him--first to $230,000 per year for 5 years (via a custom formula he negotiated with senior UC officials), then to $357,000 per year when the year of sabbatical and year of teaching counted part of the president formula).  Then there's discussion of the medical professors who make up the bulk of the top-10 list.  Dolan interviewed two of them, Lawrence Bassett and Nostratola Vaziri (41.4 and 36.7 years of service), who both said they stayed for the work not the pension.  That's probably true, but leads to

     8. UC's justification for Defined Benefit pensions--they retain top talent--is false.

The rest of the piece is a mixture of people claiming that paying higher salaries on Defined Contribution plans would be cheaper, and a recount of how UCOP stonewalled The Times and another organization that thought the pension data was public. The piece notes that Regent Richard Blum did not respond to requests to explain the contract he negotiated with Yudof, and ends with this paragraph:

Napolitano’s staff also initially refused when The Times requested the pension information in February. It took until June for them to provide usable data — which showed the dramatic rise in six-figure pension payments and revealed for the first time the full amount of Yudof’s pension.

That brings us to 

    9. UC officials are not transparent and, lip service aside, don't think they are accountable to the public.

And throw in the conclusion (in pension author Lawrence McQuillan's words): 

    10. "this year's higher tuition is just the beginning of bailouts by students and their parents" of UC and other public universities. 

This chain of statements is very damaging.   (1) is not a bad but a good: $88,000 after 30 years is a reasonable pension for an institution comprised of the most highly qualified kinds of people in society, and whose professors are usually 30 when they get their doctorate and can start their career--or 35-40 given the shortage of tenure-track jobs and the stopgap of postdocs.  But then (1) gets buried by (2) through (10).  

We could analyze (2) through (10) and show that each of them is not entirely true and/or is decontextualized, and that there are counterexamples. We could say reforms have taken place, as UC CFO Nathan Brostrom does.  These kinds of rebuttals are satisfying and helpful but leave the current framework in place.  An example of failure in the recent series of UC-negative reports was UCOP's point-by-point rebuttal to the audit that we discussed several times in May (starting here).  It weirdly resulted in UCOP's formal capitulation, with no clarification for the public of the principles at stake.

(2)

What would work better is critique embedded in an explicit alternative framework.  For universities this should be a public good framework.  I theorize this in The Great Mistake, but I'll just do a summary narrative here.  The private good framework makes Defined Benefit pensions anomalous, and statements like "we're 83 percent funded!" won't change that.  In addition, a pervasive public-choice theory casts DB pensions as typical expressions of public-employee self-interest that are won at the expense of the customer (students). In contrast, DB pensions (to stick with our case here) are normal and logical in a public good framework. Here's a sample narrative, in the voice of the University administration:

Public universities create and sustain public goods in a variety of ways.  One public good is a fair salary that reflects the past effort and educational attainment of the employee and the value their ongoing labor.  Market rates are one guideline for but not the final determinant of salary.  The same is true for retirement.  Retirement security is a public good, and historical experience shows that Defined Benefit pensions are the best way of providing that.  We also know that pool investing is more efficient than individual investing.  Although UC is always being told to replace DB with Defined Contribution (DC) pensions, the main benefit would be to push the cost of retirement off state and institutional books and onto the budget of the individual employee.  There are no truly convincing ethical defenses of this "risk shift" to individuals.  In addition, the decades-long replacement of DB by DC plans (e.g. the 401(k)) has created a retirement crisis in the country. This is the real problem with pensions: not enough people have them.  We are not willing to shift from good to bad retirement design simply because the 401(k) satisfies a policy bias towards market solutions--even when their performance is worse.

In the public good context, we reject the LA Times article's assumption that students and university staff have opposing interests. We detect a standard public-choice framework, which posits that public employees are there to maximize their own welfare rather than to perform a satisfying and valuable service for a decently supportive salary, which is what we know empirically to be the case.  Public-choice assumptions misstate the problem: the problem is not that university staff have excessive pensions at the expense of the customer-student because bureaucracies defeat market discipline; the problem is that the system of public-good activities--learning, researching, disseminating knowledge--has been underfunded and continuously stressed.   We will not cut part of our employees' total compensation on the basis of an incorrect paradigm.

Since the University and society work together in a common public enterprise, we need to disclose what the funding does and explain how the institution works.  We have not been doing this well. This is largely because we don't trust the political system to grasp the history and rationale of policies unique to universities (like supplemental summer salaries for sponsored research) before they starting kicking those policies around as political footballs. We are always afraid of retaliation and have a duty to protect the university from it.  And yet we realize that we have increased public distrust by how we handle negative findings like those of the UCOP audit.  We know the price of selective disclosure is far too high, and we will end the practice of not disclosing budgetary information until we are sued or threatened with lawsuits, as was the case with the pension story. Non-disclosure blocks practical reforms by cutting us off from shared public-good goals.  Secrecy protects bad practices and thus prevents us from protecting a good overall policy.  So while pensions above $100,000 are justified (2), and their increase (3) can be traced to demographics, the spiked Yudof pension (5), was not.  We can tell you why we thought the Yudof deal was a good idea at the time, but we won't be doing such things again.  

The same goes for the 20 year pension "holiday."  This was sustained in an attempt to compensate UC faculty and staff for substandard salaries. They were below market value then, and they remain at least 10 percent below peer levels today.  We should have ended this practice much sooner, and both employees and employer are paying high costs out of pocket to make up for this mistake.  The state saved quite a bit of money from the pension holiday too.  When we place the Dolan article in a public good frame, we can see that the real issue is for all parties to contribute to keeping the retirement system solvent.  The University and its employees are doing their part: only the state rejects an ongoing commitment. A public good framework makes a state contribution natural. 

More generally, we won't engage in practices we can't defend in our overall philosophical framework, in which any practice must be able to withstand full disclosure.  At the same time, all practices that survive this test will be fully defended by us.   

Finally, our core public good is the creation and dissemination of advanced knowledge. In this context, we must insist that coverage follows full academic standards.  Here Jack Dolan's article falls short.  Dolan puts out large numbers without context. For example, 5400 pensions above $100,000 is  less than 10 percent of the over 60,000 former employees now receiving pensions (UCRP page 4). The average professional/support staff pension is $33,000; the average senior professional pension is under $60,000; even faculty, who mostly don't have 30 years of UC service, receive on average under $83,000. Mark Yudof and the other big pensions do not represent the system.  The article's cherry-picking of examples is a classic error, though it feeds the private-good paradigm that underwrites Dolan's analysis.  We will apply the same standards to critiques of us that we apply to our own research and administration.

That's a first draft on a public good frame for the retirement issue, and it could no doubt be improved. But the main point stands.  Reframing would give the public a new way of thinking about a scandal-plagued system. It could get them focused on UC's real problems and interested in actually fixing them.  And it has a better chance of breaking the doghouse cycle that the defenses we rely on now.