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Friday, August 27, 2010

Friday, August 27, 2010

Why Did Mark Yudof Discuss the Pension Report Ahead of its Release?

UPDATE: The Report of the Post Employment Benefits Task Force has now been posted.
So has the 10-page "Dissenting Statement" (without appendicies).

Mark Yudof has released a statement about the Task Force report on the UC pension system that has itself not yet been make public.   The Yudof  message contains perfectly OK principles regarding pension attractiveness and stability, and also some information about cost issues.  I read through it wondering why President Yudof was jumping the gun.  A paragraph towards the end prompted a theory.

As background, the Task Force  focused not only on when to start recontributions and by how much, but on a range of permanent, fundamental pension changes. These included the wholesale conversion of the UC Retirement Program to a defined contribution plan for new employees -- an imitation of the decades-old trend in corporate America that is one major reason why half of all baby boomers are "at risk" of insufficient retirement income.  The original concerns were more narrow, and for some of the history of the Task Force on Post-Employment Benefits, see UCRP expert and incoming Senate Vice-Chair Bob Anderson's Q&A on the Senate recommendationsmy reservations about the Senate call for a rapid ramp-up, Michael's report on a Task Force visit to UCLA, Bob Samuels' call for a better position than that of the Senate's, a report about a UCSB discussion of the pension,  our section on pensions,  various UCLA Faculty Association coverage, and Charles Schwartz's 27- part series of detailed financial analyses.

Like the UC Commission on the Future, the pension and benefits task force had working groups with major faculty representation and expertise, and then a decision-making body, a Steering Committee, with little faculty representation, in this case, two members.  Since the June 29th occasion of the Anderson interview linked above, the Steering Committee has selected two options. Mark Yudof describes the approved options as "shifting the minimum retirement age from 50 to 55, and raising the age of eligibility for the maximum pension benefit from 60 to 65." He continues:
The two alternatives advanced by the Task Force also introduce a new form of pension calculation, one that integrates a career employee’s Social Security benefit with the UCRP benefit to replace the employee’s working income in retirement.

Recommended options also would allow current employees with lower salaries to make a lower level of contribution and receive a lower pension benefit, if they so desire. The Task Force has proposed that current UC employees be given a one-time opportunity to enroll in that lower-cost plan. 
These are major reductions of benefits for new employees. Some are defensible, like raising retirement ages.  Others are misdescribed as benefits (lower contributions for a lower pension from a lower salary base), or integrating Social Security income with the UCRP benefit, which of course means subtracting Social Security income from the UC benefit.

I kept reading, on through incomplete and therefore misleading financial factoids that would be in a better world limited to press releases:
  • "UC currently contributes 4 percent of annual pay to the UCRP, while employees contribute about 2 percent. Yet the current cost of the pension is roughly 17.6 percent of annual pay."
Without minimizing the funding problem (e.g. Anderson), Mark Yudof could also note that other major revenue stream -- UCRP  iinvestment income --on which the fund has rested for nearly twenty years, and which for most pensions is still currently estimated to be around 7.5% annually as a return on assets.  So the gap is not 11.6%, as implied. [

And then:
  • "One thing is certain: UC must make changes to its retiree health and pension programs. If we do nothing, in four years the University will be spending more on retirement programs each year than we do on classroom instruction."
While UCRP costs are incurred on the total UC payroll, only  1/3 of UC payroll is state funded, and significantly less than 1/3 of payroll goes directly to faculty and staff time spent on instruction. The only purpose of this otherwise arbitrary comparison is to set up UCOP's traditional, inaccurate trade-off between the interests of faculty and the interests of students, which can then be used to weaken the faculty.

The main news here is that "faculty and staff" members of the task force working groups issued a Dissenting Statement - dissenting from the two options endorsed by the Steering Committee.  Also not yet released, "this third option more closely mirrors the current UCRP benefits, although it moves the age for maximum pension benefit to 65, as do the two other plans. It does not, however, integrate UCRP benefit payments with an individual’s Social Security benefits."

The text that follows then proffers more alarming factoids:
The option will cost UC and its employees approximately 3.2 percent more than the Task Force’s least expensive alternative. To put that figure in perspective, each percent adds more than $80 million in costs for employees and the University, or roughly $256 million in permanent, annual UC expenses that must be paid by the University and its employees together, if the more expensive plan were adopted. This is in addition to the roughly $1.6 billion that we must pay annually to restore UCRP to health.
UC's overall budget is about $20 billion, and Mark Yudof should have provided this figure to allow readers to decide whether $80 or $256 million more is a lot of money, given the "third option"'s attempt to minimize "tiering" younger from older employees.

My theory, then, is that the statement is an odd kind of preemptive strike -- an attempt to weaken the pension solution preferred by the faculty and staff members of the working groups before anyone has been able to read the report. Mark Yudof is right to say that the debate  is just getting started -- but in the context of a projection of authority that rarely leads to the best decisions.


dr_k said...

The bad news is that two of the options are clearly uncompetitive (by the usual UCOP measures) for any employee group covered, although the Task Force was explicitly charged with considering competitive total compensation for UC employees. The good news is that he has agreed to consider a third option upon the urging of dissenting voices.

One should note that those voices are not merely from "interested faculty" but from people who have devoted many months of intense analysis and argument to these issues, including several UC economists as well as the incoming Academic Senate vice chair who holds an endowed professorship in risk management. Their expertise cannot be dismissed.

Charles Schwartz said...

Thanks, Chris, for those alarms.

If anyone wants to see another measure of Yudof's credibility with numbers related to the pension fund, read my recent paper posted at http://socrates.berkeley.edu/~schwrtz/WHPF27.html

Charlie Schwartz

Bob Samuels said...

Michael, thanks for your helpful comments on Yudof’s pension letter, which I also see as a pre-emptive spin to dismiss the third alternative and to scare people into accepting a two-tier pension system with diminishing benefits. The proposal for a two-tier pension is in direct opposition to the position held by most of the UC unions, and we have been told by people from the Office of the President that this change would do nothing to help the short-term or the medium-range problems facing the pension plan.

In fact, while some of the unions have endorsed the need to increase employee and employer contributions to keep the pension well funded, they have also rejected the need to adjust the age requirements and payout calculations. In fact, UC-AFT and AFSCME have been in conversation with senate faculty members in order to push for a united front against a two-tier system.

As I have previously written, this pension fight will not be just about retirement, but it will also bleed into all aspects of the university, and Yudof himself indicates this problem in the following passage: “It is also important to understand that funding our UCRP obligations competes directly with paying for other University operations – a problem that is compounded by the fact that the State has not contributed its share to the pension program in nearly 20 years.” The problem with this statement is that if neglects to add that the university has also had a contribution holiday and so have the various grant-giving agencies and services connected to the university.

What we must keep in mind is that because the university stopped contributing to the pension plan 20 years ago, it also stopped asking research grants and medical services to make matching contributions. According to its current accounting structure, for each dollar the university puts into the pension plan, it receives two other dollars from other sources. Yudof misrepresents this role of outside funding when he discusses a third possible plan that has been endorsed by the senate committee but not supported by the task force: “This third option more closely mirrors the current UCRP benefits, although it moves the age for maximum pension benefit to 65, as do the two other plans. It does not, however, integrate UCRP benefit payments with an individual’s Social Security benefits. The option will cost UC and its employees approximately 3.2 percent more than the Task Force’s least expensive alternative. To put that figure in perspective, each percent adds more than $80 million in costs for employees and the University, or roughly $256 million in permanent, annual UC expenses that must be paid by the University and its employees together, if the more expensive plan were adopted.” What Yudof neglects to add is that two thirds of the employer contributions would come from grants and services; moreover, UC is asking the state to pay for the other third of the employer’s contribution.

Like the current attack on social security, the call to downsize the UC pension is coupled with dire predictions of future underfunding. While UC-AFT recognizes that we need to increase the employer and employee contributions, we do not want to be scared into making false choices. It is also important to stress that the pension plan has recently gained back close to $10 billion of investments, after it lost $16 billion during 2008-09. This huge investment swing dwarfs the amount of money that will be brought in through employee and employer contributions, and so it is very important that UC employees gain some oversight over how the university invests its pension dollars.

Anonymous said...

The assumption that over the next decade, which is likely to under 4% growth, the pension fund is going to make 7.5% is sheerest poppycock. We are likely going into a Japanese style recession with 1-2% growth the norm. If the S&P falls to 600-700 as many believe it will, returns will be catastrophic.

We need an immediate cut of 10% to those currently receiving pensions, as those retiring recently spent most of their careers not paying into the pension system. What a disgrace collecting for something to which they did not contribute.

Further the state will never pay its "share" of the pensions. We need to stop whipping that horse and move on.

It is amazing that the UC community simply does not want to face the new reality.

But then these are people who contributed more to Obama's campaign than did Goldman Sachs. Consider who has gotten more for their purchasing power.

Wake up.

Anonymous said...

Wake up?

I came to work at UC for the pension and took a 20% paycut to do it. I get the feeling it is you that wants something for free.
(my labor)

As for investment returns, you could be right. How about if it does poorly we pay the price and if it does well we get the additional funds? Does that agree with your ideology?

Anonymous said...

Pension = vested rights. And no, you're not going to see UC win against that axiom in court. But they will surely try, since it's lawyers and bankers running the UC, instead of academics. Blech!

Meanwhile, the faculty have been thinking through the budget crunch, and have put out thoughtful and thorough reports, the latest of which Yudof just unceremoniously buried: http://www.scribd.com/doc/36922095/Powell-Non-Endorse-Choices

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