Capitol Alert

UC pension overhaul shifts away from guaranteed benefits

The University of California is set to adopt a new pension tier for its underfunded retirement system that it calculates will save nearly $1.5 billion over the next 15 years.

President Janet Napolitano will ask UC’s governing board to approve the proposal – which will dramatically lower the compensation cap for guaranteed benefits and result in some new employees signing up for 401(k)-style defined-contribution plans – at its meeting later this month.

“The goal of the change is to sustain the university’s excellence, but also to ensure our long-term stability,” Napolitano told The Sacramento Bee’s editorial board on Wednesday.

The pension overhaul is the result of a budget deal Napolitano reached with Gov. Jerry Brown last year that also included four years of funding increases, a two-year tuition freeze and an additional $436 million for UC’s unfunded pension liability, which after a two-decade contribution holiday and two economic downturns is now about $11 billion.

It will offer two options to employees at the university’s 10 campuses, five medical centers and dozens of peripheral enterprises hired after July 1 of this year: One will provide a guaranteed pension for the first $117,000 of their salary, a state limit that adjusts for inflation, plus a defined-contribution supplement for any pay above that up to a federal ceiling of $265,000. The other is a pure defined-contribution plan up to $265,000, which they can begin vesting sooner.

UC estimates an average annual savings of $99 million for 15 years, 57 percent of which will be used to pay down the unfunded liability.

Highly-paid employee groups, such as faculty and nurses, have been raising concerns about possible changes since the budget deal was announced. They cite UC’s guaranteed retirement benefits as one of the biggest selling points for potential hires and a “golden handcuff” that keeps workers tied to the university throughout their careers as opportunities arise elsewhere. They have also criticized UC for shifting the investment risk onto individual employees.

Napolitano said her pension proposal would put UC more in line with its peer institutions. While she argued that some employees may prefer the portability of a defined-contribution plan, she added that part of the savings would be used to address recruitment and retention issues.

“We’re able to reduce risk and balance responsibility for retirement between the university and employees,” Napolitano said. “Our employees won’t have to worry about the benefit being there at the end.”

Alexei Koseff: 916-321-5236, @akoseff

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