UC’s Pension Fiasco

By Lawrence J. McQuillan

Monday, January 05, 2015

The University of California’s Board of Regents recently voted to increase student tuition up to 25 percent over the next five years. UC president Janet Napolitano said the tuition hike was necessary “to maintain the University of California in terms of academic excellence.” But the real reason for the tuition increase is that the UC system needs funds to bail out the mismanaged pension system that covers retired employees of its ten campuses.

Let this be a lesson to the rest of the country: Public officials rarely take responsibility for the messes they make. Rather, they deny culpability and send the bills to the public they’re supposed to serve.

The University of California Retirement Plan (UCRP), like most other public-employee pension plans, is a defined-benefit system, which obligates UCRP to provide eligible pensioners with a set-dollar-amount benefit each month. The UC Board of Regents governs the UCRP, which has assets worth $53 billion and pension liabilities of at least $61 billion.

UC admits that it should have at least $8 billion more in the bank today to pay for the pensions it has promised to retirees. Other independent estimates put the unfunded liability as high as $16 billion. Either way, UC is scrambling to fill a massive hole and hitting up students for the money.

According to numbers supplied by UCRP’s actuarial consulting firm, Segal, UC needs to inject $1 billion more each year into the pension system for it to be fully funded in 20 years or so. The tuition increase will produce at least $100 million a year in new money, all of which will be swallowed up by the pension fund.

This is all the result of the regents’ irresponsible oversight. In 1990, UCRP had 137 percent of the assets it needed to meet its obligations, so regents suspended employer and employee contributions to the pension fund. State legislators also stopped allocating money to UCRP. This “pension contribution holiday” lasted 20 years. To top it off, during this period, university officials boosted pension benefits a half-dozen times. By 2012, more than 2,100 UC retirees were each collecting six-figure pensions for life.

The contribution holiday and benefit increases devastated the pension fund, with funding levels plummeting from 137 percent to only 75 percent. A September 2010 UC report admitted the catastrophic mismanagement: “Had contributions been made to UCRP during each of the prior 20 years at the normal cost level, UCRP would be approximately 120 percent funded today.”

Five years later, UC officials are denying their mismanagement. Gary Schlimgen, an executive director with the retirement system, said recently: “The contribution holiday is neither here nor there. . . . We feel we’ve been responsible stewards of the system. Pension plans cost a lot of money to keep going. They just cost money.” In reality, what costs more money is not making sufficient contributions and losing decades of compounded earnings.

As the American Academy of Actuaries noted in a 2014 report, one hallmark of a well-run pension fund is that contributions “should actually be contributed to the plan by the sponsor on a consistent basis.” UC officials have eschewed this commonsense approach and now seek a bailout from students, who played no role in the pension fund’s mismanagement. This is unjust and will do nothing to prevent similar disasters in the future.

The best way to mitigate the California university system’s pension woes is not by levying a patently unfair pension-bailout surtax on students, but by reforming the system itself, as other states have done. Faced with similar fiscal problems, public officials in Alaska and Michigan reformed their pension systems, switching government employees from defined-benefit plans to 401(k)-type defined-contribution plans. These plans are more affordable, always fully funded, and limit the public’s long-term obligations. If UCRP were to do the same, students could not be used as piggy banks to pay for future unfunded liabilities.

The University of California already has declared its “right to change UCRP benefit provisions prospectively for both current and future employees.” The regents should exercise that right, switch to financially sustainable 401(k) plans, and get their hands out of UC students’ pockets.

And the rest of America should applaud and learn from California’s mistakes.