Capitol Alert

Budget deal brings major changes to University of California pension system

Gov. Jerry Brown waits to answers questions during a news conference where he announced a budget agreement on June 16.
Gov. Jerry Brown waits to answers questions during a news conference where he announced a budget agreement on June 16. rbyer@sacbee.com

The highly public funding battle between the University of California and Gov. Jerry Brown that began last fall centered primarily on tuition levels and enrollment slots for students. But a budget deal reached this spring holds the biggest changes for future university employees.

As part of an arrangement that includes four years of funding increases, a two-year tuition freeze and additional money for UC’s sizable pension debt, the university is undertaking a significant overhaul of its retirement system. Though details remain to be worked out, it will introduce a pension tier with a dramatically lower compensation cap, and could shift new hires from a guaranteed benefit to a 401(k)-style defined contribution plan.

The changes would apply to employees of the university’s 10 campuses, five medical centers and dozens of peripheral enterprises hired after July 1, 2016. They seek to address UC’s rising retirement costs, which were cited last fall as a major reason for the proposed tuition increase.

Any savings won’t be realized for decades, however. Until then, stabilizing the fund, and curbing how much it eats into the university’s multibillion-dollar annual operations, will largely depend on whether UC, and the state, remain committed to paying down the current debts.

“Tackling the problem from both ends, it definitely does help the health of the system,” said Adam Tatum, who studies retirement systems for California Common Sense, a policy research organization. “In order for the UC to plan going forward, they need to know to what extent they can depend on the state.”

Careful management is necessary for the UC retirement system. For two decades, no contributions were made to the fund by the state, the university or employees. It took further hits during two economic downturns and now faces $7.8 billion in unfunded liabilities.

$7.8 billionThe amount of unfunded liabilities in the UC pension system

Steps have already been taken to deal with the debt: UC resumed contributions in 2010, which now stand at 14 percent of payroll for the university and 8 percent of payroll for employees, and created a new pension tier in 2013, raising the retirement age by five years. The university estimates that the pension system will be fully funded in about 25 years.

Nevertheless, UC inserted the issue of retirement costs into the budget battle last fall, asking the state to begin contributing to the pension fund again, which it has not done since 1990.

Out of the subsequent “committee of two” discussions between Brown and UC President Janet Napolitano, a broader overhaul emerged instead, reflecting widespread changes to California’s public retirement systems that Brown pushed for in 2012.

Under the deal, UC will adopt a state limit on the amount of employees’ salaries that are used to calculate their guaranteed pension. The limit, which would be adjusted for inflation, now stands at $117,000. The current cap for UC workers, based on a federal ceiling, is $265,000.

“It is in line and consistent with the pension reform and the requirements that we have placed on other parts of state government,” said H.D. Palmer, spokesman for Brown’s Department of Finance.

Because many employees, including professors, administrators, doctors and nurses, make more than the limit, UC is considering alternatives. New hires might be able to opt for an investment-based supplement for their additional compensation or choose a 401(k)-style plan not subject to the state cap.

The latter would be a first for the university. During the last round of pension changes, a task force recommended that UC stick with the guaranteed benefits, which provided a competitive advantage over its peers.

“This is where the pension world is moving, and for public institutions, it makes a lot of sense,” Napolitano told The Sacramento Bee editorial board in May. “It’s much more portable, so for many people that will be an attraction. There are lots of gives and takes in all of this.”

AFSCME Local 3299, which represents custodians, cooks, bus drivers and other UC workers, has long pushed for a more modest pension cap. Spokesman Todd Stenhouse criticized the potential alternatives for higher-paid employees, which he said would undermine intended savings that could be used elsewhere at the university.

“If you’re simply going to just take the money out of your right pocket and put it into the same place, does it really solve the problem?” he said.

In exchange for lowering the pension limit, the state will provide UC with a one-time infusion of money set aside for debt reduction, totaling about $430 million over three years. UC is making a permanent change in order to receive a temporary subsidy, but Napolitano said paying down the unfunded liabilities more quickly is to the long-term benefit of the university.

The University of California estimates that its pension system will be fully funded in about 25 years.

She also expects that future governors will continue depositing state funds into UC’s retirement system. “That’s not part of the deal, but there’s a precedent that’s being set now,” she said.

Palmer, however, characterized the payment as a “commitment of limited scope,” a difference that could set the stage for future budget battles.

Employee groups have already raised concerns about the deal, arguing that it will hurt recruitment, retention and the stability of their retirements.

Many cite UC’s pension as one of the biggest selling points for potential hires, and a way to keep workers tied to the university throughout their careers as opportunities arise elsewhere. They criticized the proposed defined-contribution plan for shifting the investment risk from UC to individual employees.

Mary Gilly, chair of the Academic Senate, which represents UC faculty in university governance, called the pension a “golden handcuff.”

“It benefits the institution in ways that not everybody realizes,” Gilly said. “We can’t rely (solely) on UC’s great reputation as being a stellar research institution.”

Maureen Dugan, a nurse at UC San Francisco who sits on the board of directors of the California Nurses Association, expressed frustration that UC had not instead considered reducing executive compensation or the number of administrators, other criticisms that were leveled at the university during the budget battle.

“This is really going to impact the people who are working the hardest in the UC system,” Dugan said.

UC is set to determine the details of the new pension tier and send it to the governing board for approval before July next year; negotiations with unionized workers will follow as their contracts come up for renewal.

“Pension reform needs to happen. It’s the responsible thing to do,” Napolitano said. “This too will be a very generous pension system, but it will be stable and funded.”

Alexei Koseff: 916-321-5236, @akoseff

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