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Tuesday, July 16, 2013

Tuesday, July 16, 2013

Worsening Problems with UC Pay

The UC Regents' busy week includes hiring a new president and also voting on more routine matters, including one that has become routine fairly recently.  That is a proposal to increase employer and employee contributions to the pension again next year.    Each of these increases helps make the pension fund (UCRP) more solvent. Each also amounts to annual cuts to staff and faculty take-home pay.

In 1990, the Regents stopped pension contributions from both the University and from its faculty and staff, when the pension was overfunded, and did not restart them until April 2010, at least ten years after the pension began its decline towards the underfunded state it's in today.  The outcome for staff and faculty was summarized in an April 2013 letter from the University Committee on Faculty Welfare (UCFW) to Senate Chair Bob Powell (scroll down past the cover letter):
Between April 2010, the time that employee contributions were restarted, and July 2013, the value of take-home pay will have declined by a total of 10% due to inflation (6.5%) plus the restart of employee contributions (an additional 6.5%), off-set by only one 3% salary increase, in October 2011.
The employee contribution increased 1.5% in the year just started (bringing it to 6.5% of gross pay.  The proposal this Wednesday is to increase the employee contribution another 1.5% in 2014-15. In that year, each employee will send a total of 8% of their gross pay to the pension fund.

The Senate has had three general positions on this. The first is that contributions need to be ramped up quickly to fix UCRP's underfunding. To that end, Academic Council voted unanimously to support the proposed 2014-15 rates of 14% from the University and 8% from the employees (cover letter). 

The second position has been that the ratio of employee:employer contributions should never be more than 1:2.  That principle has now been temporarily set aside by the endorsement of the ratio of 8:14.

Finally, by a vote of 14-3-1, Council ratified UCFW's proposal that Senate approval be contingent on

the increase in employee contributions to 8% [being] accompanied by an across the board pay raise for faculty (and non represented staff) of at least 3%. A 3% increase would merely compensate for the two most recent 1.5% increases in employee contribution rates effective on July 1, 2013 and July 1, 2014; any increase greater than 3% would constitute a small step toward restoring competitive salaries
Unfortunately, such a pay increase has not been budgeted by the state, which foresees a 5% general fund increase (still well below 2007-08 levels) and no tuition increase (page 4).

I hate to depress my colleagues, but we may well be looking at another 1.5% cut in take-home pay next year, bringing the UC cuts to 8% since 2010, or say 12% when we count inflation and subtract the one-time 3% salary increase .

UC's 2013 Accountability report claims that faculty salaries are 85-89% of their comparators (page 70). The net pay gap  may be closer to negative 25%. 

UC commissions compensation studies, and in the 2000s they generally concluded that while UC faculty and staff salaries lagged, total compensation was as good or better, because pension and health benefits were so good. That was then. As employees pay more to support the pension, the pension becomes a smaller benefit. 

At a UCLA event last fall, former Senate chair and benefits guru Bob Anderson reported that the pension became "slightly uncompetitive" with comparison universities when employee contributions hit 5%.  At the 2013-14 rate of 6.5%, they are "definitely uncompetitive." So the solution to the uncompetitive salaries--the pension--has now become part of the problem.  (The same thing has happened to retiree health benefits, as UC contribution to current employee health costs was also cut from 89% to 70% of total cost over time.)

The state of UC's salary scales is even worse than that of actual salaries.  The reason is that 2/3rd of general campus faculty are off-scale.  The only way to keep a competitive individual salary is to be off scale, and if you didn't get hired with a large off-scale increment then in general you need to go on the job market, get an offer with a higher salary from a university that is good enough for UC to want to match, and get a salary match in return. 

This situation creates a "loyalty penalty" in which faculty who serve the institution more than they serve their own careers are in effect punished for service with lower salaries.  In addition, when faculty play the market, administrators need a bigger war chest to retain them.  They grow their reserves by keeping allocated lines unfilled and by failing to put any new salary money into fixing the scales.  One of the reasons fixing the scales overall has not been a priority is because many executive vice chancellors have opposed it, on the plausible grounds that the fix would come out of their campus funds and reduce their funds for faculty retention and related needs.

Prof. Anderson pointed out that when the University stopped contributing to the pension, it was engaging in hidden deficit spending. Employees were incurring $1.5 billion in annual service credit, a third of that tied to state funding. So at the 1:2 employee:employer ratio, UC artificially suppressed its state funding need by at least $333 million a year. 

The same can be said about salaries.  The university needs enthusiastically self-overworking loyalists to function at a high level.  The avoidance of a two-speed faculty has over decades increased both equity and efficiency, and in particular helped shrink gender-based pay gaps. The new practice of having negative to zero overall net pay increases establishes a two- or three-class structure within the faculty, with attendant operational and equity problems.  And it perversely allows the University to lowball its real state funding need in a way that insures correct state funding will never be there.

The salary scales need to be fixed, loyalist pay brought back into line with comparison schools, and faculty in this way encouraged to put more rather than less time developing the university overall.  The only way to fix scales (and the pension) is to get state funding back to normal levels.  But no one is making the case clearly enough that UC, without renewed investment, is still on the verge of being permanently downgraded as a university.

Salaries and scales are one of those issues where conventional wisdom is wrong, and where you need deep experience to understand why.  Pay gaps will be along the new president's major challenges, and I hope the issue will be presented correctly to her.


Anonymous said...

Although employee contributions to the UC Pension funds ceased to go into the Defined Benefits system starting in 1990, employees *did not* recover that money in increased take-home pay.

That is because the employee contribution was redirected into the `Defined Contribution' or DC plan.

Translation: there never was a pension holiday for *employees*, only for UC as employer.

The employee contribution kept going into to post-employment compensation, just through a different plan.

The UC employer contribution entirely disappeared between 1990 and 2012 and now the employees are covering for that holiday through the increased employee contribution.

Anonymous said...

Whoops, 2010 mistyped above, mistakenly typed 2012.

Anonymous said...

How do you spell "faculty union"?

Anonymous said...

Anonymous 3:48 is wrong. For most of the period of contribution holiday (1990-2010), there was no mandatory contribution to the Defined Contribution plan. Mandatory contributions started about halfway through that period and were, if memory serves, only 2% of gross pay (minimum). Most importantly, all money paid into the DC Plan remained the individual possession of the employee--essentially a form of forced retirement savings and investment.

The contribution holiday was a huge miscalculation, and one that younger faculty are now paying for while Boomer retirees laugh all the way to the bank.

What the OP wrote about the loyalty tax is right on. UC rewards selfishness, not service, and it can no longer afford the former or count on the latter.

Anonymous said...

Anonymous 12:00am's claim that DC contributions started `about halfway through that period' (1990-2010) is in conflict with page 154 of this history of the UCRP:


My own paperwork from the early 1990's confirms that I contributed to the DC plan when Anonymous 12:00am says no contributions were being made.

This was not a normal DC plan, like a 401(k), 403(b), or 457(b), where the contributions are optional. These contributions are mandatory.

There are a lot of rules that penalize any withdrawal of money from the mandatory DC plan prior to age 59 1/2. I would not characterize funds in such a plan as `in individual possession'.

In any case, UC employees never got a take-home pay boost from the so-called `pension holiday'.

The typical UC employee contribution to the UC defined benefit pension plan was 2% (or less) for the entire history of contributions prior to 1990. There is a very good reason for this: defined benefit plans have an `insurance' aspect. If you die young, you lose can lose awful lot of your contributions to the defined benefit plan... the bigger the employee contribution, the bigger that loss becomes. (Conversely, folks who live to age 100 get more than the contribute).

It once was considered a bit unethical to force employees to gamble on their own livelihood... hence the much larger contribution from the employer, who is not gambling... from the employer's perspective, everyone gets lifetime benefits.

Anonymous said...

"It once was considered a bit unethical to force employees to gamble on their own livelihood... hence the much larger contribution from the employer, who is not gambling... from the employer's perspective, everyone gets lifetime benefits." (Anonymous 1:19pm)

I guess "unethical" is in the eye of the beholder. There are different risks in defined-contribution plans, and there is a survivor benefit in UCRP. The broader point is certainly accurate---individuals who live long in retirement earn more in lifetime pensions than those who do not---but the characterization that the University is unethically forcing employees to gamble is a stretch.

Anonymous said...

Well of course ethics is in the eye of the beholder... many (most?) folks in the financial industry in the US find it entirely ethical to say a pig is in the poke, when it is really a cat.

When one of my relatives, a long term UC employee passed away in 1995, I actually received the survivor benefit. There certainly was no transparent accounting of how much of the benefit came from their UCRP contributions, and how much came from UC's. But I'm sure the vast majority came from UC, in those days.

In my years on the Senate I regularly asked for a simple table comparing contributions categorized by source (with investment returns) with payout, for the various fix-ups to UCRP. It is worth remembering that the need for the fix-ups and greatly increased employee contributions is:

**UC ceased UCRP contributions between 1990 and 2010, incurring a huge debt to the pension fund.**

What I expected to see was... some employees who die young after contributing 8% or 10% for 20 or 30 years might well see a net *loss*. The funds to cover the long-lived must come from somewhere.

Never got any of those tables. The Administration pats the Senate on the head and stonewalls.

Now another definition of ethics: wresting control of the UC pension fund from a dedicated and modest professional who had a sterling record (Patricia Small), and then dealing huge pension consulting contracts to your buddies and business colleagues while the pension fund tanks is entirely ethical in the US financial industry.

Hey, you can always socialize the losses to the UC rank and file with higher employee contributions! Great business model, no wonder Regents like Parsky are wealthy while us dedicated little people find a cat in the poke.

It was rich when a large portion of the staff in UC's investment office petitioned for pensions that exceeded the IRS limits... after overseeing the debacle of 20 years of debt accumulation by the UC pension fund, and then the plunging of the fund into $billions of actual debt.

They get the roast pork, us silly teachers and researches get a few cat bits to fry.

ps... once again, UC employees *NEVER GOT A PENSION HOLIDAY*. Their 2% contribution was redirected into a different retirement fund, not into their take home pay, **FOR THE ENTIRE 1990-2010 PERIOD**. Now, for financial folks, it is just find to still say `UC and employees got a pension holiday*. But remember their view of the ethics of pigs and pokes.

Simonekf said...

Also, I really wish people would stop WRONGLY calling it a 2013 UCRP Tier. It's not. Any faculty member hired on July 1, 2012. Yes, 2012, or later is in the new pension tier, the 2013 pension tier. I have seen article after article that says, "for employees hired after July 1, 2013". It's a lie. You are only eligible for UCRP after working at the UC for a year.

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