LAO Report on Higher Ed Contains Significant Pension Recommendations

The state’s Legislative Analyst has released a lengthyreport on funding higher education which covers UC, CSU, and the communitycolleges (as well as CalGrants).  Thereport is essentially a response to the governor’s January budget proposal withregard to higher ed.

Generally, the report tends to disagree with the governor’sapproach which the Legislative Analyst views as giving too much autonomy to UCand the other segments with regard to enrollment and other matters.  On the other hand, it documents the trendtowards reduced state funding and thus seems to continue the pay-less/say-moreapproach which is odd on its face.

The Legislative Analyst does raise questions about thetrigger cuts proposed by the governor in case his tax initiative does not passin November.

There is a lengthy section on pension matters, especiallyfor UC which has not received explicit state funding for its pension for overtwo decades and which has had to divert other funding to deal with resumedpension contributions.  The report seemsto favor some state funding for the UC pension and – significantly - does notcondition it on UC being covered by the statewide plan proposed by thegovernor.  That is a step in the rightdirection if followed by the legislature in the final budget.  The report favors somewhat less of a pensioncontribution than UC has requested.  However,establishing the principle of some state responsibility would be an advance.

Excerpts from the pension portion are below:

Retirement Costs

The Governor proposes major changes to the way in which some retirementcosts are funded for higher education. For CSU, the Governor proposes to nolonger make base adjustments to reflect changing retirement costs. For UC, theGovernor proposes (1) a $90 million base augmentation that could be used forpension costs or other purposes, and (2) no out–year adjustments for retirementcosts. The budget proposes no changes to the way retirement is funded for CCC.

Background

CSU Pension Benefits. CSU employees are members of theCalifornia Public Employees Retirement System (CalPERS)—the same retirementsystem to which most state employees belong. Funding for this system comes fromboth employer contributions and employee contributions. Each year, as is thecase with other state departments, CSU's employer contributions to CalPERS arecharged against its main General Fund appropriation. The employer contributionis based on a percent of employee salaries and wages that is determined byCalPERS and specified in the annual budget act. The Governor's budget annuallyadjusts CSU's main appropriation to reflect any estimated changes in theemployer contribution. For example, the Governor's budget reduces CSU's mainappropriation by $38 million due to a lower employer rate and lower payrollcosts in the current year. The CSU is expected to contribute $404 million toCalPERS in 2012–13.
UC Pension Benefits. Employees of UC (and Hastings) aremembers of the University of California Retirement Plan (UCRP). This retirementplan is separate from CalPERS and under the control of UC. Prior to 1990, thestate adjusted UC's General Fund appropriation to reflect increases anddecreases in the employer's share of retirement contributions for state–fundedUC employees. Starting in 1990, however, UC halted both employer and employeecontributions to UCRP because the pension plan had become"superfunded." Specifically, the plan at that time was enjoyingexceptionally strong investment returns, resulting in assets that exceededliabilities by more than 50 percent. This "funding holiday" lastednearly 20 years until the plan's assets had declined considerably andcontributions once again became necessary. In April 2010, both UC and itsemployees resumed contributions to the plan. The state, however, has notprovided UC with any additional funding specifically for that purpose.

Governor Proposes New Approach To Funding Retirement Costs

The Governor proposes two major changes related to funding for universityretirement plans:

• A $90 million base budget augmentation for UC that, according to the administration, "can be used to address costs related to retirement program contributions." The administration emphasizes that this funding is not being provided specifically to fund costs for UCRP. Rather, UC could use it for any purpose related to its state–related programs—including, but not limited to, UCRP.
• A new policy that the segments' budgets no longer be adjusted for changes in retirement costs in the future. Instead, state–related retirement costs would be funded entirely from the segments' unrestricted base appropriations.

Unclear Which Retirement Costs Are Affected. The Governor'sproposed language refers simply to "retirement costs." At the timethis analysis was prepared, the administration had not provided sufficientclarity on whether this would include costs for retiree health and dentalbenefits. For example, funding for CSU's retiree health care costs arecurrently bundled together with funding for other CalPERS retiree health carecosts. Since the administration has not yet indicated how it would split outfunding for CSU, we are unsure whether the proposal applies to these costs. Theadministration also was unable to provide information regarding base fundingfor retiree health costs for UC. For these reasons, our budget analysis onlyfocuses on funding for pension costs for UC and CSU.

UC Proposal Has More Merit,But Raises Several Questions

The request for pension–related funding for UC is more difficult andcomplicated than that for CSU. This is because (1) the state currently is notproviding any pension–related funding to UC, and (2) UC has full control overits pension system. To address the Governor's proposal, the Legislature shouldconsider the following questions:

• What is the main justification for the state to provide funding for UC's retirement costs? In other words, why is funding for these costs a state responsibility?
• Given that UC controls its own pension plan, are UC's pension benefits reasonable? How do they compare to the pension benefits the state provides state employees?
• How much funding should the state provide UC in 2012–13? More specifically, what methodology or calculations support the request for $90 million?
• Finally, should the state lock in the pension amount provided UC at the 2012–13 contribution level or provide UC with budget adjustments for pension costs in future years? …

Pension Costs Should Be Funded as Part of Workload Budget. Thestate currently provides funding for pension–related costs for all other stateagencies as part of a normal, workload budget. In other words, the stateprovides funding to state agencies for the salaries and benefits (includingpension benefits) related to their budgeted positions. Given that the stateprovides UC with funding for the salaries and benefits of some of itsemployees, it would make sense from a standard, workload budgeting perspectiveto also provide funding related to pension costs. As noted earlier, the statedid provide such pension–related funding to UC for many years prior to thepension holiday that began in 1990. (As we discuss in the nearby text box, thestate has repeatedly deferred a final budget increase for pension costs sincethat time.) Given that the university has had to restart its contributions toits pension plan in recent years, we find justification in its request that thestate also resume providing pension–related funding.
UC Pension Benefits Similar to State Employee Pension Benefits. Althoughthe state does not control UC's pension system, actions taken to date by theRegents have largely mirrored recent changes to state employee pensionbenefits. For example, the Regents have taken action to reduce pension costs inthe long term by increasing the minimum retirement age for new employees. Inaddition, …the Regents have approved increases to employee contribution ratesthat are beginning to bring them in line with state employee contributionrates, which are now generally 8 percent. (Some of UC's proposed employeecontribution increases are still subject to collective bargaining.) Additionalcontribution increases beyond July 2013 will also likely be necessary to reducethe plan's significant unfunded liability that has accrued due to thedecades–long pension funding holiday and recent market downturns.

UC's Estimate of State's Share of 2012–13 PensionCosts Is Overstated. The $90 million that UC requested from theadministration is only a fraction of the $255.6 million that UC estimates to bethe state's share for 2012–13. The UC states it requested the lower amount inrecognition of the state's severe fiscal shortfall. The university furtherindicates that it will likely seek the full amount of what it estimates to bethe state's share (which it calculates could rise to roughly $450 million) infuture years...

We find two issues that the Legislature should carefully consider withrespect to how the university has estimated the state's share of UC retirementcosts.

• First, we find that the request for $90 million in 2012–13 is overstated. …UC's estimate of the state's share of its 2012–13 retirement cost increase totals about $78 million. The UC appears to be requesting a greater amount because it believes that the state should provide contributions to account not only for incremental retirement costs in 2012–13, but also for part of the cost increases in the two prior years. We take a different view. The UC has managed—by both redirecting internal resources as well as increasing student tuition—to fund all of its employer contributions in both 2010–11 and 2011–12. If the Legislature were to provide funding related to prior years, the funding would in effect free up existing UC base funding for other purposes. In our view, given the state's fiscal shortfall, such an augmentation would be unwise.
• Second, the university's calculation of the state's share of retirement contributions includes employer costs related to tuition–funded salaries. From a workload budgeting standpoint, the state portion of retirement costs should only be related to state–funded payroll costs. Given, however, that the Governor's budget assumes no increases for tuition in 2012–13, the Legislature may wish to consider providing the funding for pension costs related to tuition–funded salaries in 2012–13. In future years, higher pension costs—just like any other UC cost—presumably would be covered by the General Fund and tuition fees in proportion to their current funding levels.

Timing Not Right to Lock In Base Funding for Pensions. Aswith the CSU proposal, now would be a poor time to choose to lock in a basefunding level for UC pensions, given that the Governor is separately proposingto modify public employee pensions to reduce costs in the long run. Inaddition, as noted earlier, UC intends to increase its employer contributionsover the next few years, although it has not yet reached agreement with all ofits union–represented employees on the employee contribution rate. In our view,the Legislature should carefully evaluate future requests from UC for pensionfunding on a year–by–year basis in the context of the university's currentpension benefit and contribution structure. In the long term, however, it couldmake sense to expect UC to fund its pension costs out of its base budget, giventhat the university's retirement system is separate from the state's. Thiscould only work once a reasonable funding level has been identified andcontribution amounts have stabilized.

Recommendations

…Recommend Restarting Budget Adjustments for UC. Asdiscussed above, we find that there is sufficient justification on a workloadbudget basis to provide UC with an augmentation that the university could useto address its pension costs. We recommend, however, that the Legislature onlyprovide funding for the incremental change in 2012–13 in UC's pension costs forstate– and tuition–funded employees—which we estimate to be $78 million. Thiswould mean reducing the Governor's request for $90 million in General Fundsupport by $12 million. In addition, we recommend that the Legislature adoptintent language in the budget specifying that in the future funding for UCretirement costs (1) shall be determined annually by the Legislature, (2) shallbe contingent on such factors as the comparability of UC's pension benefits andcontributions to those of state employees, and (3) shall not necessarilyinclude funding for tuition–supported employee pension costs or pension costsincurred prior to 2012–13.

The full report is at http://lao.ca.gov/analysis/2012/highered/higher-ed-020812.pdf

A video presentation of the report highlights is availablebelow:

More History Lessons (from Faculty Association Chair Dwight Read)

As Chair of the Faculty Association at UCLA, I would like to emphasize againthe point that was made in the Saturday, Jan. 21, 2012 Blog on this site,“Plenty of Nothing.”
 
The Governor wrote in his proposed budget: "The University of California(UC) will receive an increase of $90 million from the General Fund for baseoperating costs, which can be used to address costs related to retirementprogram contributions."
 
The main purpose of the public employee retirement law (PERL), passed in 1931,was to separate pension funding from all other kinds of funding. Early on, thestate recognized that pension funding is long-term funding and must followclear guidelines and sound actuarial principles to ensure that the state hasthe resources to keep its pension promises. Those principles require that theplan estimate many factors: the cost of service for the current year, the rateof return earned on investments, mortality rates, projected salary and benefitincreases, etc. Based on these estimates and the plan design, the state can setthe employee and employer contributions necessary to meet the fundingrequirements.
 
Each year public retirement plan sponsors need to ask the state to make aspecific contribution to their retirement plan based on the actuarialprinciples agreed upon. This contribution is not lumped together with any otherfunding. Each year the State evaluates those requests and makes a separateallocation to the retirement plan, which can be used for nothing else.Retirement is and should be separate.
 
The same was always true for UC. In the past, before 1990 when contributions toUCRP were suspended or, one could say, dropped to "zero," the UCRegents like all other public pension plans in the state requested retirementfunding from the state. And the state allocated UCRP funding annually as partof the budget category, "Fixed Costs and Economic Factors," asubcategory of "Unallocated Adjustments." The accounting categorieswere different for UCRP than they were for CSU or other public pension plans inCalifornia, but the principle was exactly the same: retirement funding isseparate, not to be comingled with any other use of the funds.  Althoughthe Regents can spend General Fund allocations as they wish, given theirautonomy in the state, they never wavered in the past from using statecontributions for UCRP for anything other than the employer contribution unlessgiven specific permission by the Legislature to do otherwise. They honored thefounding principle of public retirement funding.
 
Contrary to this principle, the Governor now wants to fund UCRP by way of anincremental increase to the General Fund. Although the Regents regarded theGovernor’s gesture positively -- “This represents a major step forward in termsof securing the State’s participation in employer contributions for UC employeesupport which is automatically provided for employees of California’s other twohigher education segments.”  -- it neither recognizes the obligation ofthe state to support retirement of the public employees at the University ofCalifornia, nor does it provide actual funding for retirement based onactuarial principles. What the Governor awards can just as easily be removed bya legislative reduction in UC funding. How will budget decisions such as theminus $100 million trigger in the current budget affect long-term pensionpromises?

That is exactly why the forefathers and mothers of public pension funding inCalifornia knew that funding retirement is a serious business and must followseparate financial principles from all other kinds of funding in order to keepthe state and the employee pension plans on a sound financial basis.
 
I urge clarity and transparency in talk about public pension funding. Anaugmentation to UC’s budget from the state General Fund is welcome, but it isnot the same as state support allocated specifically for UCRP. And I urge theLegislature to do the right thing: fund $90 million to UCRP directly as part ofthe long tradition of supporting public employee retirement in California andin accordance with PERL principles of retirement funding.

 
Dwight Read,
Chair, UCLA Faculty Association  

We Missed the Boat on Pensions With the Governor: Time to Talk to the Legislature

We missed the boat when it came to getting the governor to exempt UC from his statewide pension plan.  His plan, which now goes to the legislature, includes UC explicitly (p. 13), involves a hybrid plan (defined benefit plus defined contribution) for new hires, and has a 75% cap on retirement benefits.

A summary of the plan: The changes would kick in Jan. 1, 2013. Labor agreements that contradict the governor's plan would prevail until the pacts expire.

The statutory language includes these proposals:
• Ends additional retirement service credit purchases, or "airtime."
• Forfeits all or part of pensions for elected officials or civil servants convicted of a felony associated with their offices or jobs.
• Ends retroactive pension enhancements.
• Ends "pension holidays" for employers and employees.
• Mandates that all employees pay "at least one-half" the normal costs for defined benefit plans or the defined portion of a hybrid plan. Employers may not pick up the employee share.
• Limits the hours and wages for retirees who return to government work.
• Calculates benefits based on a 36-month average of an employees' wages.
• Narrows the definition of wages that can be included for pension calculation purposes.
• Establishes a hybrid pension system for new hires. It would replace 75 percent of an employee's income after 30 years of service and a "normal" retirement age of 57 for public safety employees or, for all other workers, 35 years of service at age 67.
• Sets 5 years and 52 years old as the minimum length of service and age that safety classes can qualify for retirement, 57 years old for all other groups.
• Eliminates seats on the CalPERS Board of Administration now occupied by a member of State Personnel Board and an insurance industry representative
• Gives CalPERS board membership to the Department of Finance director.
• Adds an independent health insurance expert and a representative from a contracting agency to the CalPERS board, both appointed by the governor.
• Adds three public representatives to CalPERS' board, two appointed by the governor and one jointly appointed by the Assembly speaker and the Senate Rules Committee.
• Sets 25 years of service as the threshold to receive 100 percent of the state's retiree health benefit. Applies to new hires only.

Full article at http://blogs.sacbee.com/the_state_worker/2012/02/jerry-brown-delivers-pension-reform-language-to-legislators.html

Some of the plan would be in a constitutional amendment which requires a 2/3 vote of the legislature if it is to be put on by the legislature.  (It could be done by initiative but the governor is already putting a tax measure on the ballot by initiative and might have trouble getting the money for an additional pension initiative.)

In any event, as noted in a recent blog post, UCOP and the Regents need to be talking to the legislature.

The governor's proposal is at:
http://gov.ca.gov/docs/Pension_Language_part_1.pdf

UPDATE: Union reaction http://www.sacbee.com/2012/02/03/4235853/unions-howl-at-details-of-jerry.html

Not Worth a Mention?

Gov. Brown delivered his “State of the State” speechyesterday.  Click below for thespeech.  Lots of topics arediscussed.  Higher ed, however, is notone of them.  An earlier post noted thatUC is like a flea on the back of an elephant when it comes to state budgetingand such.  That message was reinforcedyesterday.  But perhaps our absence willmake the governor’s heart grow fonder. Valentine’s Day is coming up after all.  Thegovernor did mention his public pension plan in the speech – which would sweepUC into a larger state change.  Withregard to that plan, however, we would rather be absent.

Part 1 of the Speech:

Part 2:

Update: With regard to pensions (mentioned in part 2 of the speech), presidential politics are beginning to creep into the issue http://www.californiaprogressreport.com/site/vulture-capitalists-dominate-california-pension-reform-funders-links-bain-revealed

Someone let the cat out of the bag on the state budget

Normally, the governor's budget proposal (reminder - it is a proposal, not an enacted budget) would be made public January 10.  Someone in the governor's entourage apparently goofed and posted it on the web today.  So there was a hasty unveiling without the usual leaking of bits and pieces for days before January 10.

As it happens, yours truly is about to go to Chicago for three days so only a rough perusal of the budget was possible.  But here are some highlights.  First, take a look at the chart on the left.  The dark part of the bars are what folks mean by deficits in normal English parlance.  That is not necessarily the language spoken in Sacramento.  But what the dark bars tell you is that without changing anything with regard to revenue or spending, there would be about $5 billion deficit (outflow > inflow) in the next budget year that would gradually decline with (assumed) economic growth.  However, each year of deficit adds to the debt in the general fund, which is not supposed to be in debt.
==================================

The numerical table of "problem definition" tells us that the budget is roughly in balance for the current year that started last July 1.  But there is a debt overhang inherited from the past which the governor would like to pay off.  Paying off such past debt means - again using common English parlance - running a surplus.  The faster you want to pay off the debt, the more of a surplus you need.  The governor would like all of it gone by the end of the next fiscal year which starts July 1, 2012.  But note that there is always the issue of how fast you should go in paying off past debt.  The Legislative Analyst has pointed out this issue in prior years.

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The governor's solution is in part temporary tax increases he will propose in a ballot initiative that will appear in November 2012.  Signatures will have to be obtained since it is clear he will not get a 2/3 vote in the legislature to put such a proposal on the ballot.  Some of that revenue - assuming the initiative passes - would show up in the current year.  So the rough balance above becomes a surplus for the current year.  And there is a larger surplus for the coming year.

But what if voters do not pass the tax increases?  Then there will be a trigger - as there was in the current year.  And guess what?  UC would be cut $200 million relative to the proposal for next year.

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Note that there is a footnote on the trigger table which effectively says the governor expects a UC tuition increase.  The proposed UC budget - assuming the initiative passes - raises the UC budget by almost $300 million.  (You can find the UC budget on page 149 of the budget summary - see link below.)  So the $200 trigger cut, if it happens, still leaves an added $100 million, net.

Again, a reminder that a proposal is not an enactment.  The legislature will hold hearings.  There will be a "May revise" of the budget unless there is speedy enactment of a budget.  And there could be much drama before a budget enactment occurs.

If you would like to see the governor's official budget proposal, go to:
http://www.ebudget.ca.gov/pdf/BudgetSummary/FullBudgetSummary.pdf

Update: There is a statement from UCOP on the budget at http://www.universityofcalifornia.edu/news/article/26905.  It pegs the increase to UC at $90 million.  Given my trip to Chicago, I can't reconcile that figure with the $300 million cited above.  But here is the statement:

OAKLAND — Patrick Lenz, UC vice president for budget and capital resources, made the following statement today (Thursday, Jan. 5) regarding Gov. Jerry Brown's proposed state budget for 2012-13:  


We're gratified that Gov. Brown is proposing an additional $90 million in funding for the University of California — an ongoing increase that the governor said can be used to address costs of employee retirement. We applaud the governor's willingness to grant UC leadership maximum flexibility in navigating these fiscal times, and also his recognition that, after a 20-year hiatus, the state has a responsibility to resume paying for a portion of retirement costs.

The administration's focus on protecting higher education from further budget reductions is a welcome relief, and the governor's stated desire for a long-term state investment is encouraging. It appears the governor is moving in the right direction after cuts totaling $750 million this year alone.

His proposal is only the first step toward a state budget for 2012-13. We will continue to make the case that public higher education is not a cost but the best investment an innovative state like California can make.

We will continue to seek out and implement administrative efficiencies that already are saving hundreds of millions of dollars a year — savings that go straight to our core mission. We also are working hard to identify alternative revenue sources that could help us preserve quality and access.

Finally, we intend to press forward with the governor and legislature to develop a long-term plan that would give the university much-needed financial stability, help the families of students and benefit Californians in every part of the state.

State Budget Ruling Expected Today on Redevelopment Agencies

From the San Jose Mercury-News: The California Supreme Court will issue a long-awaited ruling Thursdayon the legality of the state's move to grab $1.7 billion in redevelopment moneyto help close California's budget shortfall -- a move that rocked cities aroundthe Bay Area and across the state.

The ruling, expectedat 10 a.m., should give critical guidance on two state laws: one that dissolvesredevelopment agencies and redirects their property tax revenues to the state,and a second that allows agencies to stay afloat if they agree to relinquish alarge portion of their funding, which will be used to pay for schools…

What is this issue all about?  In November 2010, voters passed Prop 22 whichwas intended to prevent the state from grabbing pieces of local budgetrevenue.  Among the supporters of Prop 22were local redevelopment agencies.  Theseagencies – set up by local governments – are intended to do what their namesuggests, i.e., promote redevelopment of “blighted” areas.  They are in part funded through (property)tax increment financing.  As the propertyvalues of the redeveloped areas rise (because of the renewal), the added taxrevenue goes to the agency.  Other localgovernments – such as school districts – don’t get it.

Because state and local budgets are intertwined, thediversion of property tax indirectly pulls money from the state which hasobligations to the schools under Prop 98 of 1988.  Governor Brown, in putting forth his currentyear budget (2011-12), proposed to get around Prop 22 by abolishingredevelopment agencies entirely.  If theydid not exist, you could not take money away from them, so the reasoning seemedto go.  It is not clear that the stateSupreme Court will see it that way.  Inany event, as the budget progressed through the legislature – and the localagencies screamed – a compromise was reached whereby the agencies couldcontinue to exist, but only if they paid tribute to the state.  They have mostly done so under protest.

All of this matters to UC because if the state’s attempt totake money from redevelopment agencies is ruled to be a violation of Prop 22,another $1.7 billion will have disappeared from the current year budget.  If that happens, the governor will likelypropose to make it up in next year’s budget. That budget will be announced in early January, although the governorhas been leaking bits and pieces of it in recent days (as is the tradition).

Full story from the Mercury-News is at http://www.mercurynews.com/california-budget/ci_19632057

The court proceeding should go off on schedule - but you never know:

Another Hint of Discussions with the State Behind Closed Doors on Multiyear Tuition Increase Deal

The text below in italics is from UC President Yudof’s Facebook page. As noted in a prior post on this blog, there are hints of a multiyear-tuition-increase/steady-budget-support-from-the-state being discussed behind closed doors with Brown administration officials. See the bold print below.

We are extremely disappointed that UC is faced with yet another significant State budget reduction: the $100 million “trigger cut” just announced. This additional cut will exacerbate the fiscal challenges the University faces in the current year and place additional stress on the quality of education provided to UC students. While the $650 million cut to UC enacted by the State last June resulted in additional tuition hikes for our students, let me assure you there are no 2011-12 mid-year tuition increases planned.

Over the past several years, cuts to higher education by the Governor and the Legislature have had a severe impact on students, their families, faculty and staff. The University has consistently objected to additional mid-year cuts, and while we certainly understand the ongoing fiscal challenges the State faces, we are requesting that this latest reduction be considered a one-time cut to UC’s budget and not made a permanent reduction. We will ask to have this funding restored to UC at the beginning of the next fiscal year (July 1, 2012).

In the current economic environment, marked by a huge State deficit and a limited revenue stream, we recognize that the Governor is in the eye of a “perfect storm.”

As we draw closer to the 2012-13 State budget release in January, however, we are asking the Governor to refrain from any additional cuts to higher education. Faculty and staff have sacrificed, and our students in particular have given more than their fair share.

Moreover, as we move forward, we will continue to work closely with State officials to develop a long-term revenue plan that will give the University much-needed financial stability.

This has been a challenging year for the University of California. I understand the concerns that many in the UC community have voiced over the recent incidents surrounding student protests on some of our campuses. I assure you that a thorough review of these incidents is in progress. I am making every effort possible to protect our long-held traditions of free speech and peaceful protests. During these difficult times, I ask you not to lose sight of our common goals—to make public higher education a priority and to keep a UC education accessible and affordable for Californians.

Thank you for your continued support for the University of California and best wishes for a happy holiday season.

Sincerely yours,

Mark G. Yudof

President

University of California

From http://www.facebook.com/note.php?note_id=10150425120888379

One problem with this strategy is that a handshake deal between the UC president and the governor on a "compact" reached behind closed doors did not work out well under Schwarzenegger. The governor cannot appropriate funds; only the legislature can. To make such a deal work, there needs to be wider participation including the legislature, the Legislative Analyst, major interest groups, etc.

It would be nice to know what is going on behind the door:

Our earlier post on this subject is at http://uclafacultyassociation.blogspot.com/2011/12/buried-lede-uc-reviving-multiyear.html

Early Budget Leak

It's standard practice for bits and pieces concerning the governor's upcoming (January) budget proposal to start leaking out in December.

Today, on "Which Way LA?" - the evening program of KCRW - H.D. Palmer, a spokesperson for Governor Brown, indicated that there would be a budget presented which assumed the governor's proposed tax initiative would pass. That initiative won't be on the ballot until November (on the assumption that the governor can get the money to get the needed signatures), well into the 2012-13 fiscal year. If voters reject the initiative, there will be another budget trigger that would automatically scale back spending.

What's in a name?

A prior post on this blog noted that Governor Brown had submitted an initiative for temporary taxes entitled "The Schools and Local Public Safety Act." (That may not be the title that appears on the ballot which is set by the attorney general.) It was also noted that perusing the text of the act suggested it was aimed at K-14 funding, i.e., higher ed was in it only at the community college level. However, to get the initiative on the ballot - and then run a campaign to get it passed - Brown will need a lot of money.

The Sacramento Bee today reports he has created a campaign fundraising committee called "Californians to Protect Schools, Universities and Public Safety." It's a bit of a stretch to call community colleges "universities," no?

The initiative is at http://ag.ca.gov/cms_attachments/initiatives/pdfs/i1035_11-0090.pdf

The Bee article is at http://blogs.sacbee.com/capitolalertlatest/2011/12/jerry-brown-opens-tax-campaign-committee-starts-fundraising.html

And the question is:

Rosy Scenario on State Budget Likely to Be Ending Soon

The Sacramento Bee points out today that the process of re-examining the rosy scenario budget forecast on revenues will soon be coming to an end.

As readers of this blog know, the governor was unable to get GOP support for putting tax extensions on the ballot. But under new procedures approved by voters, only a simple majority was needed to pass a budget even though 2/3 was needed for the taxes. So extra revenue was assumed and the budget was passed. However, a trigger mechanism was included to cut expenditures if revenue assumptions were not met. Since then, it has seemed likely that the trigger would be pulled and we are now approaching the time set for that to happen.

The Bee article is at http://www.sacbee.com/2011/12/12/4116082/californias-financial-forecast.html

For UC, the trigger means another $100 million in cuts. However, we can of course be hopeful it won't happen:

On the other hand, it may not smell like roses, at least not at UC-Berkeley:
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/12/11/BA7V1MB8RJ.DTL

Details on Governor's Pension Plan?

CalPERS has released (or someone has leaked) a draft set of comments about the governor's 12-point pension plan. Much of what is questioned is not relevant to UC which has its own problems with the plan. (See prior posts on the legislative hearings on the plan and other aspects of it.) However, the CalPERS draft makes it clear that there is much more to be resolved than just okaying the governor's proposed 12 points.

The fact that the proposal has different implications for the various plans that CalPERS administers - something clear from the document - opens the door to the idea that there should be separate policies for different plans. That, in turn, opens the door to UC having already adopted changes suited for its plan and opting out of some statewide solution.

The draft comments are at http://www.calpers.ca.gov/eip-docs/preliminary-analysis.pdf

Also worth noting is a legal test that may come out of an attempt by San Jose to change the benefit formula for current employees going forward:

http://www.publicceo.com/2011/12/pension-reform-does-san-jose-know-the-way/

What's the right headline?

The California Field Poll produced the table above. But what is the right headline? The news release from Field says

PLURALITY OF VOTERS SEES PUBLIC PENSIONS AS TOO GENEROUS. MOST REACT POSITIVELY TO BROWN’S REFORM PROPOSALS, WANT PENSION CHANGES TO APPLY TO BOTH CURRENT AND NEW PUBLIC EMPLOYEES

But the headline could have been that despite all of the bad PR public pensions have had, 49% of voters think public pensions are about right or not generous enough. The news media will follow the Field headline. Keep the alternative in mind if some proposition on pensions gets on the ballot.

The poll is at http://www.field.com/fieldpollonline/subscribers/Rls2401.pdf

The Governor's Open (Electronic) Letter on His Tax Initiative

Governor Jerry Brown has sent out a mass email regarding plans - that have been reported in the news media - to file a tax initiative. The same message was posted on his official website.

The key word is "initiative" since - as last year's budget process indicated - he would be unlikely to get a two-thirds vote in the legislature to put the proposition on the ballot. He is planning to go the signature route, which means he has - or expects to have - the $1-$2 million needed to pay signature gathering firms.

The initiative would go on the November 2012 ballot. That ballot is likely to be crowded with other propositions. There was a recent report in the media that Brown persuaded some key unions not to support other tax initiatives. Folk wisdom has it that when there are lots of propositions, including competing propositions, voters tend to reject everything. The text is below in italics

Brown's letter indicates the revenue obtained would go for "education and public safety." Whether "education" includes higher education or UC remains to be seen. A quick look at the initiative's language suggests that the educational funding is for K-14 only. (A link to the initiative is at the bottom of this blog entry.) Conceivably, there could be some leakage to higher ed in the state's complicated fiscal system - perhaps just by taking some of the pressure off alternative funding for K-14.

Open Letter to the People of California

When I became Governor again -- 28 years after my last term ended in 1983 -- California was facing a $26.6 billion budget deficit. It was the result of years of failing to match spending with tax revenues as budget gimmicks instead of honest budgeting became the norm.

In January, I proposed a budget that combined deep cuts with a temporary extension of some existing taxes. It was a balanced approach that would have finally closed our budget gap.

I asked the legislature to enact this plan and to allow you, the people of California, to vote on it. I believed that you had the right to weigh in on this important choice: should we decently fund our schools or lower our taxes? I don’t know how you would have voted, but we will never know. The Republicans refused to provide the four votes needed to put this measure on the ballot.

Forced to act alone, Democrats went ahead and enacted massive cuts and the first honest on-time budget in a decade. But without the tax extensions, it was simply not possible to eliminate the state’s structural deficit.

The good news is that our financial condition is much better than a year ago. We cut the ongoing budget deficit by more than half, reduced the state’s workforce by about 5500 positions and cut unnecessary expenses like cell phones and state cars. We actually cut state expenses by over $10 billion. Spending is now at levels not seen since the seventies. Our state’s credit rating has moved from “negative” to “stable,” laying the foundation for job creation and a stronger economic recovery.

Unfortunately, the deep cuts we made came at a huge cost. Schools have been hurt and state funding for our universities has been reduced by 25%. Support for the elderly and the disabled has fallen to where it was in 1983. Our courts suffered debilitating reductions.

The stark truth is that without new tax revenues, we will have no other choice but to make deeper and more damaging cuts to schools, universities, public safety and our courts.

That is why I am filing today an initiative with the Attorney General’s office that would generate nearly $7 billion in dedicated funding to protect education and public safety. I am going directly to the voters because I don’t want to get bogged down in partisan gridlock as happened this year. The stakes are too high.

My proposal is straightforward and fair. It proposes a temporary tax increase on the wealthy, a modest and temporary increase in the sales tax, and guarantees that the new revenues be spent only on education. Here are the details:

• Millionaires and high-income earners will pay up to 2% higher income taxes for five years. No family making less than $500,000 a year will see their income taxes rise. In fact, fewer than 2% of California taxpayers will be affected by this increase.
• There will be a temporary ½ cent increase in the sales tax. Even with this temporary increase, sales taxes will still be lower than what they were less than six months ago.
• This initiative dedicates funding only to education and public safety--not on other programs that we simply cannot afford.

This initiative will not solve all of our fiscal problems. But it will stop further cuts to education and public safety.

I ask you to join with me to get our state back on track.

Jerry Brown

The letter can be found on the governor's website at http://www.gov.ca.gov/news.php?id=17329

The text of the initiative is at http://ag.ca.gov/cms_attachments/initiatives/pdfs/i1035_11-0090.pdf

And then there is the initiative process:

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More pension hearings?

We posted audios from the legislature's public pension hearings on December 1. Apparently, according to the State Worker blog of the Sacramento Bee, there will be more hearings to come.

Although the special pension committee was supposed to have concluded its work by January, …"This cannot be a two-hearing answer," said Democratic Sen. Gloria Negrete-McLeod, co-chair of the panel. A spokeswoman for Democratic Assemblyman Warren Furutani, also a co-chair, said the committee will probably end up holding at least four hearings in all "in order to get through all of the information." …

Whatever the motives of the committee, if there are more hearings, it gives UC more time to make the case that it has already dealt with its pension problem and has unique features that won't fit with the one-size-fits-all model that the governor is proposing for all state and local pension plans.

Full article at http://blogs.sacbee.com/the_state_worker/2011/12/california-conference-committee-on-public-employee-pensions-jerry-brown.html

How can one argue against the idea of More?

Audio of Legislative Hearing on Public Pensions

Audio of Dec. 1, 2011 hearing by the legislative Conference Committee on Public Employee Pensions on Gov. Jerry Brown's proposals for state and local public pensions in California.

Click on link above. If you don't want to listen to the full four and a half hours, scroll towards the bottom to hear the governor's testimony and UC's testimony.

Testimony by representatives of the Dept. of Finance, the Legislative Analyst's Office, Gov. Jerry Brown in person, CalPERS, CalSTRS, State Assn. of County Retirement Systems, University of California pension system, Employer groups (League of California Cities, California State Assn. of Counties, California Special Districts), Employee union groups (CTA, California School Employees Assn., Professional Engineers & Scientists, AFSCME, Peace Officers Research Assn.), Public Comments. See earlier post for agenda of this hearing. Gov. Brown was not on the original agenda.

Dept. of Finance: The governor’s 50-50 sharing of contributions idea refers to the normal cost, not the unfunded liability. The 75% notion is not a cap but a kind of goal. There was vague reference to a dollar cap. But much was unclear. It was said that the Dept. of Finance would be hiring a consultant to work out details. There would be a minimum early retirement age but it is not clear what that will be. There was an allusion to a 6-month period to get an actual hybrid plan in shape. There was some discussion of legal issues surrounding “impairment of contracts” but again there was fuzziness. It came up in the context of what the governor wanted to put on the ballot in the way of constitutional changes. The only clear cut response was that it would be necessary for voters to approve changes in the CalPERS board.

Legislative Analyst’s Office (Jason Sisney): Noted there are thousands of pension plans and occupations so putting together a plan will be complicated. There was reference to the total compensation idea (if you cut pensions, other forms of compensation may need to rise so the savings may be offset). The details are not yet in the governor’s plan. Legal doubts raised about changes for current employees, even changes in contributions. Recommended not fiddling with current workers. Thus, changes would be for new hires so there would be little short term savings. Specifically cautioned about high paid workers and need to be competitive, particularly university professors who are recruited in a national market.

Gov. Brown: Philosophized about debt, Greek financial crisis, Europe. At one point, referring to a statement by CalPERS that freezing its plan would cut off incoming contributions from new hires, said that seemed like a Ponzi scheme. That is, if a plan depended on new people coming in, it sounded like a Ponzi scheme. This remark could be a media sound bite. Told the Democrats that there will be taxes on the ballot they would like voters to pass but unless there is a pension reform also on the ballot, the taxes won’t pass. So there needs to be compromise, balance, etc.

Note: The Ponzi scheme quote has already hit the news:

http://blogs.kqed.org/capitalnotes/2011/12/01/browns-pension-musings-from-ponzi-to-castor-oil/

CalPERS: Prefers pure defined benefit to hybrid of defined benefit and defined contribution. The latter is more expensive to administer and will earn less. Said the proposed ban on contribution holidays when plans become overfunded could violate tax rules and lead to loss of tax-exempt status. Tried to respond to governor’s Ponzi comment without using the word Ponzi. Said what was meant was that if a pension plan such as CalPERS is frozen (closed), it no longer gets cash from new hires and it needs cash for paying benefits. Need for cash flow would cause it to invest in assets that throw off a lot of cash and therefore have lower rates of return. The answer was not great since if the plan were really 100% funded, you could in theory freeze it and pay off the obligations. CalPERS problem (and the reason for the governor’s proposal) is largely a matter of unfunded liabilities.

CalSTRS: CalSTRS is recognized as the most problematic state plan. Spokesperson noted that the governor’s plan doesn’t deal with CalSTRS’ unfunded liability. Complained about fuzziness in governor’s plan as to who pays for the defined contribution component. But polite language that the governor’s plan was a good “starting point.”

County Systems: Noted that there were many plans. They are already negotiating two-tier arrangements and other features such as increased contributions similar to the governor’s plan. Doubts raised about hybrid proposal. Total compensation point made (if you cut pensions, you have to raise something else).

University of California: (Nathan Brostrom and Gary Schlimgen) Some history of the UC system. Discussed the two-decade contribution holiday. The other sources of funding are paying but not the state. Regents have been ramping up contributions but must pay for state share out of operating budget funds. Defined benefit model helps retain mid-career faculty but encourages retirement so that there is faculty renewal at older ages. Discussion of Regents’ pension changes of 2010 after PEB report. Many features of the governor’s plan have already been adopted by UC such as two tier. We already have 3-year HAPC to prevent spiking. UC doesn’t offer “airtime” purchases of past service unlike CalPERS. Regents are not plan members so no conflict of interest in serving as plan trustees. UC doesn’t make retroactive improvements. UC is less generous than the state on retiree health care. UC has problems with 50-50 contribution proposal for current employees. Hybrid model is problematic. 75% replacement target is too low for retention/recruitment. Some UC unions have already agreed to two tier. The constraints in the governor’s plan would make collective bargaining more difficult. UC plan has the right balance. (Note: brief break in audio stream towards end.) In Q&A period, pointed to current projection of full funding by 2039. Notes that contributions of current employees are rising as part of that projection.

Local Employer groups: There was again reference to the idea that the tax status of plans could be at risk if an overfunded plan could not have a contribution holiday.

State and Local Employee groups: No unexpected points.

Public comment: Included some external groups pushing pension reforms.

Part 1 of Gov. Brown's testimony

Part 2 of Gov. Brown's Testimony


Part 1: UC Testimony

Part 2: UC Testimony

Faculty Association Sends Report on UC Pension to Legislative Committee

The UCLA Faculty Association has submitted a report to the members of the legislative committee studying the governor's proposals for public pensions. (See an earlier blog post.) The cover letter to the committee members is reproduced below. Below that is a link to the report which details the history of the UC pension system.

=====

To: Members of the Conference Committee on Public Employee Pensions AB 340/SB 827

From: Faculty Association at UCLA

Date: Dec. 1, 2011

Subject: Examining the Governor’s Twelve Point Pension Reform Plan

Dear Representative Furitani,

On behalf of the Faculty Association at UCLA, an independent association of Academic Senate Faculty on this campus established in 1973, we would like to draw your attention to a chapter entitled “Public Pension Funding: The Unique Case of the University of California.” This chapter will appear in California Policy Options 2012. Background material for the chapter appears in several parts on the UCLA Faculty Association website at www.uclafaculty.org .

The attached document provides important information about the creation, history, funding, and current condition of the University of California Retirement Plan, UCRP.

The document makes 4 points related to pension reform:

1 UCRP is a unique state retirement plan that covers both state and non-state supported employees; roughly two thirds of the contributions to the UC plan come from non-state sources. However, contributions from non-state sources cannot be obtained unless the state share is paid.

2 The UC Regents have already made changes to UCRP in the form of a lower-tier plan for new hires that, when they take effect, will result in significant cost savings in the future.

3 The State should resume contributions to cover UC's state-supported employees. If it does not, the Regents will be forced to continue to make the payments out of funds otherwise intended for core academic programs. The Regents must make the payments to obtain the corresponding two-thirds of contributions from non-state sources.

4 Since the Regents have only two sources of funding - state appropriations and tuition - for plan contributions, continued lack of state support puts upward pressure on tuition.

The chapter documents the historical development of the UC plan in the early 1960s, noting that the Regents developed the plan in consultation with the legislature and with the understanding that state contributions would cover state-supported employees, as they had in prior pension programs at UC. The legislature provided such contributions from the plan's inception until 1990, when it became overfunded. When the overfunding ceased, however, state contributions did not resume.

The Faculty Association believes that the Regents' modifications to the UC pension system adequately address the funding problems. The Regents' modifications were developed with due consideration of the personnel and recruitment needs of the University, including its faculty. We do not believe UC's pension should be included in the proposed changes in state and local plans, whether proposed by the governor or by others. The UC plan already includes features of the governor's proposal such as ways to prevent "spiking" of pensions.

We ask that the legislature consider the history of the UC pension system and that it not sweep UC into a statewide program that does not meet the needs of the University.

Sincerely,

Dwight Read, Chair, Faculty Association at UCLA, and

Susan Gallick, Executive Director, Faculty Association at UCLA

The report - which will appear as a forthcoming chapter in California Policy Options 2012 - can be read at:

Open publication - Free publishing - More pension

Update: Brown on Pepper

Jerry Brown says he's 'seriously concerned' about protest response (excerpt)

Capital Alert blog of Sacramento Bee 11-28-11

..."I am seriously concerned that the rules governing the use of force, in particular the use of pepper spray, are not well understood in the context of civil disobedience and various forms of public protest," Brown wrote to Paul Cappitelli, director of the state Commission on Peace Officer Standards and Training. "The recent 'occupation' protests in cities throughout California and on campuses of the University of California underscore the urgency of articulating guidelines that are crystal clear and comport with constitutional requirements."

Brown, who returned to California over the weekend after a vacation out of state, had been silent about the pepper spraying of protesters by police at UC Davis and a clash between protesters and police at UC Berkeley…

Full story at: http://blogs.sacbee.com/capitolalertlatest/2011/11/jerry-brown-says-hes-seriously-concerned-about-protest-response.html

Regent Crane Leaves an Unhelpful Message

Departing Regent David Crane, a last-minute appointment to the Board of Regents by Governor Schwarzenegger, would have had his last Regents meeting in November, since he could not get legislative confirmation. But the Regents’ meeting was canceled due to a fear of Occupy-type demonstrations. However, Crane has left behind a missive of sorts – a press release on state budget and pension matters in which he a) endorses the pension proposals by Governor Brown and b) wants to take those proposals further.

No reference to the changes already adopted by the Regents for UC is made in the release. No call for exempting UC on the basis of those changes from the one-size-fits-all remedy proposed by the governor. Crane heads an organization called “Govern for California” which put out the release reproduced below.

Thanks, Dave!

Govern for California President David Crane Issues Statement on LAO Report

SAN FRANCISCO - David Crane, President of Govern for California, today issued the following statement on the California Legislative Analyst's report that the state is facing nearly a $13 billion shortfall for fiscal year 2012-13.

"Today the Legislative Analyst's Office reported that state revenues will fall far short of budgeted revenues, virtually assuring that billions in "trigger" cuts enacted as part of the state budget last June will be implemented. If so, those reductions would mark the third cuts this year to higher education and human services and now even impact K-12 education spending.

"State budget cuts have already decimated higher education and human services as well as other state services such as San Francisco's Superior Court system, which in response to the June budget laid off a quarter of its staff, lengthened wait times for trials and boosted costs even for impoverished litigants.

"It doesn't have to be this way. In a special session, Governor Brown and state legislators could immediately adopt the following legislation:

• Renew the temporary tax increase adopted in February 2009;

• Enact the mandatory single sales factor corporate tax reform proposed by Governor Brown earlier this year but dedicate revenues from that change to the general fund; and

• Enact the pension reform proposed by Governor Brown but modified to include proposals recently outlined by some pension reform groups to save more money in the short term.

"Together, those provisions would produce desperately needed revenue while ensuring that new revenues go to public services rather than to pension costs. As recently demonstrated by Illinois, which saw billions of new revenues from a tax increase last year go to pension cost increases this year instead of to services, there's little benefit for citizens if taxes are raised without reforming pensions.

"Perhaps there's a better way. But the key point is that the Governor and legislature have the power to make these changes, right now. No initiative ties their hands and none of these actions requires a vote of the people. In other words, our leaders have the power to successfully govern California, right now. All that's required is the courage to act."

From http://www.governforcalifornia.org/what-were-saying/

An article about this statement is at: http://blogs.sacbee.com/the_state_worker/2011/11/california-pension-reform-david-crane-arnold-schwarzenegger-tax-increase-single-sales-factor-legislative-analyst-office.html

As the song says:

Update: We may get a swan song from Crane :) after all. The Regents have rescheduled for Nov. 28 by teleconference. One of the locations will be at UCLA in the James West Alumni Center. Below is the schedule:

Monday, November 28

8:30 am Committee on Compensation (closed session)

8:40 am Committee on Health Services (Regents only session)

8:50 am Committee on Finance (Regents only session)

8:55 am Board (Regents only session)

9:00 am Committee of the Whole (public comment)

10:30 am Committee on Finance (open session)

12:00 pm Committee on Grounds and Buildings (open session)

12:15 pm Committee on Compensation (open session)

12:30 pm Board (open session)