Contentious plan for sagging UC pension fund
Nanette Asimov, Chronicle Staff Writer

Friday, September 10, 2010

A tidal wave of unfunded retirement obligations that could top $40 billion in four years is washing over the University of California, forcing employees to pay far more for those benefits and threatening students with the possibility of more tuition hikes and years of austerity.

Now a UC task force has released a set of recommendations, to be evaluated throughout the fall, intended to help the university gain control over its vast retirement problem over the next 30 years.

At the same time, employees who cut the grass, serve the food and perform other essential but low-paying jobs throughout the university system say the new proposals will ensure only that UC’s rich get richer, and its poor get poorer. They point out that the proposals would let thousands of highly paid employees keep their current retirement benefits while slashing their own.

They also point to a particular recommendation that would improve the pension benefits of the 250 top-paid employees, using a federal waiver that UC recently won after a 10-year beef with the Internal Revenue Service.

“While claiming that cost-cutting is needed, UC unbelievably increases retirement benefits for highly compensated executives, while cutting low-wage retirement benefits in half,” said Julian Posadas, vice president of the American Federation of State, County and Municipal Employees, which represents 21,000 UC workers who typically earn around $40,000 a year.
More or less

For the most part, the task force recommendations would save money in two ways. Highly paid employees would have to pay more for the benefits they have now. Lower-wage workers would see reduced benefits, but the university says Social Security can make up most of the difference.

For example, UC employees who retire at age 65 after 30 years currently get a pension worth about 75 percent of their salary. Under the new proposals, that would continue only for employees earning above $120,000 or so. Those earning $60,000 or less would get 45 to 60 percent of what they earned.

That may sound unfair, say UC officials on the retirement task force, but those figures don’t tell the full story. With Social Security, low-wage workers who stay 30 years and retire at 65 can expect an income near their salary, they said.

“Social Security is a legitimate and predictable form of income, so it seems not unreasonable to count that,” said UC Provost Lawrence Pitts, chairman of the task force, created in 2009.

Pitts also said that in exchange for retaining benefits, highly paid employees would eventually contribute more to the pension fund – up to 7.7 percent of their paycheck – than low-wage workers. This would happen after 2013, if the regents approve the recommendations. Most employees pay 2 percent of their salary toward retirement.

The UC regents are expected to approve an interim increase for all employees at their meeting in San Francisco next week. It would raise the employee contribution to 3.5 percent beginning in July 2011, and to 5 percent in July 2012.
Regents to consider

But the regents won’t consider the full range of recommendations from the task force until November, after UC President Mark Yudof distills them into a single plan.

The recommendations for reforming UC’s pension and retiree health system come from 30 UC professors, chancellors, executives and staff members. Seven dissented, saying the impact on compensation would be severe enough to prevent UC from attracting top-tier faculty.

The crisis at UC generally mirrors problems in counties, states and public agencies across the country, where the cost of retiree health insurance and pensions is projected to be far higher than the funds available to pay them.

“The magnitude of the problem is enormous,” said Pitts, noting that unless the state kicks in millions of dollars to help sew up the university system’s problem, UC may have to raise tuition again after increasing it 32 percent this year.

“It certainly seems possible,” Pitts said.

It wasn’t always that way. In the early 1990s, the retirement fund was so well-funded that UC stopped paying into it altogether.

They’re kicking themselves now.

“The total cessation of contributions, which seemed desirable at the time for a variety of reasons, has created a serious problem today,” says the task force report.
Known problem

UC knew of the problem by 2005, but it waited until 2010 to start contributing again. In April, UC began contributing 4 percent of payroll to its retirement fund.

At its meeting next week, the regents will vote on whether to bump up the contribution to 7 percent next July, and 10 percent in 2012.

Meanwhile, pension-rights advocates say it is unfair to lower-wage workers to count Social Security as part of their pension, a practice found more often in private industry.

“It would certainly be a sad trend if that’s what’s happening in California,” said John Hotz, deputy director of the Pension Rights Center in Washington, D.C.

He said part of the problem is that full Social Security benefits don’t kick in until age 65, and employees working at physically taxing jobs – on their feet or lifting heavy items – typically retire years earlier.

“Cutting benefits to those who are the least able to supplement them seems almost patently cruel and shortsighted,” he said.
Sweet deal

Meanwhile, union members and faculty alike object to what they consider a sweet retirement deal being proposed for the highest paid UC employees.

It would let about 250 UC employees take their pension as a percentage of $360,000 instead of the federal limit of $245,000.

UC won a waiver of the federal salary cap from the IRS more than a year ago – about 10 years after the regents first asked for it, said Pitts, whose task force is recommending the expanded pension benefits.

But that move would be “unseemly” at a time when benefits are being cut for everyone else, say task force members in the dissenting statement. “The effect on faculty and staff morale and on the university’s public relations would be highly detrimental.”

Approval may be a long shot anyway, Pitts said, at least for now. “It will probably wind up in the courts.”

E-mail Nanette Asimov at nasimov@sfchronicle.com.

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