Don't Worry, Be Happy

By Joe Kiskis  (UC Davis)

This note makes a few comments on the final UC budget for 2015-2016 and then focuses on points related to the UC Pension Plan (UCRP). To some extent, it updates previous comments here by including changes since then and information that was not available then.

The 2015-16 UC Budget and UCRP

To get good information on the budget, one must read both AB 93 and SB 97. The process this year was a little convoluted. On June 15, the legislature passed AB 93, the Budget Act of 2015. This was the Legislature's version of the budget and was passed on that day so as to meet the constitutional deadline. It was done before the Legislature and Governor had come to agreement. Their agreement was announced the next day. To account for that and other small items in the following days, SB 97 was passed on June 19. It makes many significant amendments to AB 93, including a number relevant to UC. Both AB 93 and SB 97 were signed by the Governor. However the Governor exercised his line item veto authority in a few minor ways that are not relevant to UC. To get complete information, there are, as usual, trailer bills to read. One of those, SB 81, has a few parts relevant to UC---most significantly concerning the Middle Class Scholarship Program.

The main features of the UC budget concerning tuition and the base budget came out as expected and as have been widely reported. However, it's worth noting that the final language on these points is less proscriptive than in the original version and that what is expected to happen in the out years is just that---an expectation that is not mandated in this budget. Briefly, per the Regents decision of May 2015, tuition for California resident students is to remain constant for two more years. Following that, modest increases comparable to the rate of inflation are possible. On the other hand, for non-resident students, tuition will likely increase by 8% in each of the next two years. System-wide Student Services fees (as opposed to tuition) are allowed to go up 5% ($48).  The increase in the 2015-16 UC base budget is the same as the Governor originally proposed, i.e. 4% or $119.5M. The expectation is that 4% increases will continue through 2018-2019.

There was an expectation that the Legislature would augment the Governor's budget with funding for enrollment growth and that the Governor would not line-item veto it. This did not turn out as well as was hoped. The amount is only $25M, and it is contingent on UC adding 5,000 resident undergrads by 2016-17. This is a short timeline, and the amount is far below that needed to educate 5,000 students for one year. On a per student basis, it is also substantially below the average State contribution to the cost of education.

Earlier versions of the budget had limits on nonresident enrollment. Those did not make it into the final budget.

In the trailer bill, the eligibility requirements for the Middle Class Scholarships have been raised and the funding for the program has been decreased.

UC Retirement Plan (UCRP)

As it turned out, there is a large discrepancy between the language related to UCRP in the publicized agreement from the Committee of Two (or equivalently in the Governor's May Revise statement) and that which actually appeared in the final budget product.

The original claim was that there would be a one-time payment of $436M spread over three years ($96M in the first year) to pay off a small fraction of the UCRP unfunded liability. In return the University agreed to make a permanent change to UCRP by adding another tier that would apply to new employees. In this new tier, UCRP eligible salaries were to be capped at the inflation indexed PEPRA/Social Security limit ($117k for the current year) rather than at the IRS limit of $265k currently used by UCRP. Employees in the new tier would have the option of either a defined benefit plan with the new cap in combination with a supplemental defined contribution part or a defined contribution plan with no defined benefit portion. The second option of a straight defined contribution (DC) plan is most troublesome. Fortunately, no language describing such options was incorporated into the budget bills signed by the Governor.

The Governor's May Revise letter to the Legislature suggested budget bill language. This suggested language said only that UC would get a one year addition of $96M in exchange for making UCRP consistent with the PEPRA cap. It said nothing about how that should be done. It made no mention of $436M, no mention of a DC supplement, and certainly no mention of a DC only option. This recommendation was followed, and the language that the Governor suggested is essentially that of the budget bills. However, to drive home the point that there is no larger deal, the amended version of the budget adds:

"This appropriation does not constitute an obligation on behalf of the state to appropriate any additional funds in subsequent years for any costs of the University of California Retirement Plan." (SB 97, p. 96)

Thus neither the Governor nor the Legislature are pressuring the University to introduce a straight DC option. The DC option is something introduced (most likely by UCOP) during discussions in the Committee of Two but done without appropriate consultation within the University. Nevertheless, the Office of the President intends to pursue the possibility of a DC only option. In the discussions that will take place in the coming months, it is worth keeping in mind that a DC option appears to be primarily a priority of UCOP and not of the Legislature or the Governor. Note also that the relative merits of defined contribution verses defined benefit plans were thoroughly, carefully, and widely discussed in the University about six years ago. The conclusion was that the excellence of the University was best served by continuing with UCRP as a defined benefit plan. Thus in 2010, when the President recommended and the Regents endorsed pension reforms, UCRP was preserved as a defined benefit plan.