When the University of California Board of Regents on Wednesday debates a plan to raise tuition by up to 5 percent annually over each of the next five years, they will focus on how the revenue could benefit the university’s academic mission: expanded course offerings, more support services, 5,000 more slots for California students.
But UC officials say the system also needs the money to help rescue its pension fund – neglected for two decades and facing $7.2 billion in unfunded liabilities – and to cover the growing cost of retiree health benefits.
“They’re going to have to ramp up contributions considerably over the next few years in order to maintain the financial health of the system,” said Adam Tatum, a retirement systems specialist at California Common Sense, a nonpartisan policy research organization. “What is certain is that the UC needs more money to pay off these unfunded liabilities – if not now, then in the future. That’s inevitable.”
This year, UC will pay about $1.3 billion to the pension fund, about 5 percent of its overall operating budget. UC officials want the state’s general fund to pick up nearly a third of the payment, which would cover the university’s portion of pension contributions for faculty and other employees who are paid from state funds.
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“Frankly, if the state were to pay that, we would not be proposing a tuition increase,” said Nathan Brostrom, UC’s chief financial officer. “That is money that could go to other resources.”
UC notes that the state covers the costs of employer pension contributions to CalPERS for other state agencies, including California State University. “This is money we’re paying out of our own resources that the state is providing to every other state agency,” Brostrom said. “It’s just a matter of equity. Why do they not take any action to help us with it?”
Gov. Jerry Brown’s administration maintains that UC, with a good deal of governing autonomy and its own retirement system, should cover the costs. H.D. Palmer, spokesman for the Department of Finance, said the state’s taxpayers aren’t obligated to help UC cover its liabilities. He said the state has increased UC’s general fund allocation so the university could determine its own fiscal priorities.
“They have an independent system,” Palmer said. “We don’t have any input on the structure of the system. We don’t have any input on the level of benefits.”
How much responsibility the university bears for its pension problems is a matter of dispute.
California taxpayers – through the state budget’s general fund – routinely contributed to UC’s pension plan before 1990. But with the economy sagging and state government in the nascent stages of a revenue crisis, the payments stopped. An actuarial review found that the plan was healthy, funded at 137 percent of its projected needs, and concluded that “anticipated earnings … could sustain the fund for the next several years with no further state contribution,” according to a report from the Legislative Analyst’s Office.
The 1990-91 state budget approved by lawmakers and then-Gov. George Deukmejian did not include the usual allocation to cover UC’s portion of pension contributions. UC regents also decided to stop making payments on behalf of the university and subsequently relieved employees from having to make contributions as well.
That strategy worked for a while. The system’s assets eventually grew to more than 150 percent of estimated obligations. But in 2010, following years of growing payouts and two stock market crashes that depleted the system to 75 percent funding, UC resumed making contributions and began taking additional steps to address its pension debts.
In all, the contribution holiday – for the university, its employees and the state – lasted for two decades. Critics say that was a major miscalculation.
Dan Pellissier, president of the advocacy group California Pension Reform, said it may have made sense for UC to temporarily reduce contributions to such an overfunded system, but the university “waited until they were in the hole to start putting money back in,” instead of responding earlier to the downward trend.
“The math is really simple: The reason they don’t have enough money in the funds is because they didn’t put enough money in the funds,” he said. “It took them so long to finally come to grips with what they faced, and now it’s a much more expensive solution.”
David Crane, a former political adviser to Gov. Arnold Schwarzenegger who briefly served on the Board of Regents, said, “They shot students in the foot.”
Employees are counting on the retirement benefits that were promised, but students are facing rising costs because the university made insufficient contributions in the past, he said.
“If the proper level of contributions had been made in the past,” he added, “an increase in tuition today could go toward improvements in the classroom.”
Tatum estimated that without the contribution holiday, the pension system would be 120 percent funded.
Brostrom, the chief financial officer, acknowledged that UC probably should have kept some minimum level of payments to the pension fund or resumed them sooner. University officials argue that the halt in contributions was initiated by the state, but still contend it would not have had such a severe impact on the retirement system without the two market crashes.
“The contribution holiday is neither here nor there,” said Gary Schlimgen, executive director of UC’s retirement programs. When the university saw the system’s assets dropping, he said, it approached the state around 2007 about restarting contributions, and ultimately had to move forward without help from the state’s general fund.
“We feel we’ve been responsible stewards of the system,” Schlimgen said. “Pension plans cost a lot of money to keep going. They just cost money.”
Brostrom said solidifying the pension fund has been a “huge focus” for the university in the last several years. Beginning in April 2010, UC ramped up contributions, which now stand at 14 percent of payroll for the university and 8 percent of payroll for employees.
It also created a new pension tier for employees hired after July 1, 2013, increasing the early retirement age from 50 to 55 and the maximum age from 60 to 65, which Brostrom said is expected to reduce annual costs by 20 percent in the long run.
And UC has borrowed $2.7 billion from itself, moving the money from an investment pool to the retirement fund, where Brostrom said it will yield a much higher return.
“With the things the university did, we have stabilized and put ourselves on a path to full funding,” Brostrom said, perhaps within 20 or 25 years.
UC also has a $14 billion unfunded liability in retiree health benefits, but unlike pensions, the benefit is not guaranteed. UC pays the annual costs of health services as the bills come due and does not set aside money for future obligations. University officials are not as concerned about the retiree health obligation, because they could act to limit benefits or negotiate employee contributions with the unions.
Still, the costs are expected to grow substantially in the coming years. Retirees and beneficiaries will cost the program an estimated $263 million this year. If nothing changes, the UC system’s annual retiree medical costs will more than double over the next decade to $671 million in 2024-25.
Call The Bee’s Alexei Koseff, (916) 321-5236. Follow him on Twitter @akoseff.