Audio of the Nov. 7 Regents Committee on Compliance & Audit

The UC Regents Committee on Compliance and Audit met on November 7, 2011 in advance of the full Regents meeting that was originally scheduled for the following week. The full Regents meeting was postponed due to concern about possible violent demonstrations. This blog has been making available audios of the Regents meetings. A link to the audio can be found at the bottom of this blog entry.

During the public comment section of the Committee meeting, the first speaker made a satirical speech for privatizing UC on behalf of the 1%, as opposed to the 99%, as per the Occupy movement. There was discussion at the Committee of funding of retirement benefits. The agenda is below:

COMMITTEE ON COMPLIANCE AND AUDIT

Committee membership: Regents Crane, Makarechian, Mireles, Pelliccioni, Ruiz, and Zettel (Chair); Ex officio members Brown, Gould, and Lansing; Advisory member Anderson; Staff Advisor Herbert

Date: November 7, 2011

Time: 2:30 p.m.

Locations: 1111 Franklin Street, Room 11326, Oakland ; West Coast Room, Covel Commons, Los Angeles Campus; 3104 Mosher Alumni House, Santa Barbara Campus

Agenda – Open Session (there was a closed session before this audio begins)

Public Comment Period

Action Approval of the Minutes of the Meeting of September 13, 2011

A5 Discussion Annual Report of External Auditors for the Year Ended June 30, 2011

UC Annual Financial Report,

UC Retirement Plan, including the PERS-VERIP,

UC Retirement Savings Program (Defined Contribution, 403b and 457b Plans),

UC Health and Welfare Program, including the retiree health benefit trust

Annual Financial Reports for each of the five UC Medical Centers.

A6 Discussion Chief Financial Officer Division AIM Report: Actionable Information for Managers

A7 Discussion Annual Report on Internal Audit Activities, 2010-11

A8 Discussion Report on Ethics and Compliance Activities

The full agenda with attachments is at http://www.universityofcalifornia.edu/regents/regmeet/nov11/audit.pdf

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

Testimony in Sacramento Coming Up on UC Pension

Two UC officials will be testifying tomorrow about the UC pension at a legislative hearing on the governor's public pension proposals.

We don't know what the UC reps will be saying. Hopefully, it will be a polite version of "no thanks; we have our own plan."

If more info becomes available, we will post it. Meanwhile, the hearing agenda can be found below.

Pension Agenda

Regents Expected to Approve Rise in Employee Pension Contributions Today

The Regents at their postponed meeting today (11-28-11) are expected to raise the employee contribution to the pension plan to 6.5% as of 2013-14. See the chart below:

The full item is at http://www.universityofcalifornia.edu/regents/regmeet/nov11/f5.pdf

This will not be the last increase for either the employee or the employer contribution. No help from the state in sight. Au contraire:

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)

LAOmission

Our previous post deals with the Legislative Analyst's Office (LAO) report on the state budget. Quote from page 41 of the report:

"...because the state is not required under current law to contribute additional funds to UC to address its unfunded pension and retiree health liabilities, the forecast assumes no General Fund resources to assist UC for these purposes."

UC Budget Proposal for 2012-13 Readied for Regents

President Yudof's UC budget proposal for 2012-13, scheduled for discussion at the Regents on Nov. 17, is now posted. The key links are

http://www.universityofcalifornia.edu/regents/regmeet/nov11/f12.pdf

and

http://www.universityofcalifornia.edu/regents/regmeet/nov11/f11attach.pdf

The proposal includes a request for increased “core” funding by 8%. Notably included is a contribution to the UC pension – which the state has not been doing since contributions resumed. There appears to be an arbitrary request for one fourth of the employer contribution ($87.6 million). See the last page of the second link. Why just one fourth is requested is not clear. Since this seems to be public pension year, given the governor’s pension proposals, getting a contribution from the legislature to the pension may be a long shot. There may well be a response that the entire state and local pension issue needs to be studied before something “new” is done for UC. Of course, paying in to the pension is not new; it was routinely done before the contribution holiday.

A press release on the budget proposal is at http://www.universityofcalifornia.edu/news/article/26629

See also this piece in which Yudof promises no midyear tuition increase if the state budget trigger is pulled:

http://blogs.sacbee.com/capitolalertlatest/2011/11/uc-no-tuition-increase-even-if-mid-year-budget-trigger-pulled.html

That's nice - but not exactly optimum bargaining strategy. (See prior posts if you don't know what the trigger is and how it affects UC.)

LAO Report on UC and Other Public Pensions

The Legislative Analyst has just released a report on the governor’s proposal for public pensions. The report states that the “Governor’s Proposal Is a Bold, Excellent Starting Point” and then goes into a detailed analysis. Most of the report is not about UC, although it does note that changing the UC plan might well involve amending the constitution. But it does have a section on UC reproduced below:

What About UC?

UCRP Also Has a Major Funding Problem. From 1990 to 2010, UC and its employees enjoyed a remarkable two–decade pension funding holiday due principally to (1) substantial overfunding of UCRP during the 1980s by the state and the university and (2) very strong investment returns for UCRP during the 1980s and 1990s. The state also benefited from the funding holiday, since it had contributed to UCRP regularly in prior decades and used the elimination of contributions as a budget solution during the fiscal crisis of the early 1990s. Given that UCRP continued to enroll new employees and provide additional service credit to existing employees, it would have been impossible for such a funding holiday to continue forever. The investment market downturn of 2008 caused the already dwindling surplus in UCRP to fade away, and now the system has an unfunded liability.

Unlike other systems, however, UC and its employees are struggling to find a way to cover normal costs, as well as unfunded liabilities, given that neither of them had contributed to the system for two decades. The university and its employees have already moved to change certain benefit commitments for current and future employees, and they continue to engage in hard talks on how to increase contributions to cover the costs of both past and future benefit commitments. The university, however, believes that it may have to raise tuition more or cut student services or other employee costs in order to fund its entire share of pension costs in the future. As a result, UC seeks several hundred million dollars of additional annual state funding beginning within a few years so that it can cover normal costs and retire unfunded liabilities over the next several decades. The state has no apparent legal commitment to provide such additional funding, and the state does not directly set benefit levels for UC employees. To date, the Legislature has chosen not to provide additional funding to UC for this purpose, despite the university’s requests.

UC May Well Need Additional State Funding for Retirement Costs. The magnitude of UC’s unfunded liability costs not covered from other funding sources (such as enterprise units and the federal government) is so large—hundreds of millions of dollars per year—that the university will face very difficult decisions in the coming years about how to cut costs or raise tuition further if the Legislature does not provide additional funding related to UCRP. Extending the Governor’s proposed pension changes for other public employees to UC employees as well may reduce UC’s future personnel costs and help the university address the UCRP funding problem over the long term. In the short run, however, costs to address existing benefit commitments will remain very difficult to address within existing resources of the university.

We urge the Legislature to consider the long–term funding strategy for UCRP during these legislative discussions on overall pension policy. Specifically, the Legislature could resubmit a request to UC that it provide a comprehensive, detailed proposal for a long–term funding strategy. (That same request was included in the 2010–11 Budget Bill, but was vetoed by Governor Schwarzenegger.) It will be very difficult for the state to consider a long–term UCRP funding policy without such a detailed proposal being submitted and without firm agreement on the plan from all UC employee groups.

The full report is at http://lao.ca.gov/reports/2011/stadm/pension_proposal/pension_proposal_110811.pdf

A video summary is at:

Statement by Academic Senate Task Force on Investments & Retirement on Governor's Pension Plan

October 31, 2011

ROBERT ANDERSON, CHAIR, ACADEMIC COUNCIL

RE: Governor Brown’s Twelve Point Pension Reform Plan

Dear Bob

Following circulation of the Governor’s Twelve Point Pension Reform Plan, the Senate Task Force on Investments and Retirement (TFIR) discussed the proposed reforms, and prepared the attached document: “TFIR’s Comments in Response to the Governor's Pension Reform Plan”; TFIR would like to post this document on the TFIR section of the Senate’s web site, and hopes that you will place a link to the document on the main page.

The goals of the TFIR statement are 1) to let Senate faculty know that the Academic Senate is engaged in discussions with the administration concerning the proposed reforms, 2) to document that much of what the Governor proposes is already incorporated into UC policy; 3) to indicate that there are some issues about which to be seriously concerned; and 4) to emphasize that TFIR looks forward to engagement with UC and State leadership to ensure that neither the university nor the faculty’s welfare are harmed.

The University needs to place a high priority on maintaining the Regents’ historic independence in the management of the UC retirement system. That independence and management has contributed to UC’s unprecedented growth and success. It has also provided substantial savings in retirement funding for the State over the last two decades, and has already produced and enacted a plan for moving forward without creating the sort of doomsday scenarios that plague public employee pension plans.

We look forward to assisting the Academic Senate and advising the administration in ensuring the success of UCRP.

Sincerely,

Shane White, UCFW TFIR Vice Chair

Copy: UCFW, TFIR, Robert May, Chair, HCTF, Jim Chalfant, Chair, UCPB, Martha Winnacker, Executive Director, Academic Senate

TFIR’s Comments in Response to the Governor's Pension Reform Plan

On Thursday, October 27, 2011, Governor Brown announced his Twelve Point Pension Reform Plan: (http://gov.ca.gov/docs/Twelve_Point_Pension_Reform_10.27.11.pdf). The Academic Senate's Task Force on Investment and Retirement (TFIR) has reviewed the Governor's plan and offers the following observations and concerns.

The retirement plan of the University of California has for decades already included several aspects of the Governor's twelve-point pension reform plan. The university has for many years:

• calculated retirement benefits using a three-year average of compensation, to avoid pension spiking (point 4);

• calculated retirement benefits based on regular recurring pay, again to avoid spiking (point 5);

• limited post-retirement employment to approximately 860 hours (less than the 960 proposed by Governor Brown in his point 6);

• generally avoided retroactive pension increases (point 8); and

• generally prohibited employee purchase of service credits (except in very special circumstances that serve the best interests of the University) (point 10).

We are pleased that the Governor advocates these long-standing features of the UC retirement system as part of his efforts to reform the State's retirement systems.

The University of California has also long recognized that pension reform is necessary to address future costs of the UC retirement plan. Several years ago, the University of California began a process resulting in a pension reform plan adopted by The Regents in December of 2010. Actions taken are similar to several other points included in the Governor's twelve-point plan. The Regents increased retirement ages for new employees, with some modest numerical differences from the Governor’s proposal (point 3), increased the employee contribution to the retirement system, but by less than proposed by the Governor (point 1), and reduced the employer’s contribution to retiree health costs (point 12). The University also is considering pre-funding the retiree health benefit, using both employee and employer contributions, along with having recently made substantial increases in contributions to UCRP.

The time and effort invested in the development of the University's pension reform plan has generated substantial experience about the issues and options for pension reform. These internal university discussions have identified several areas in which the Governor's pension reform plan would not serve the best interests of the university. For example, a "hybrid" retirement system combining a defined contribution plan with a defined contribution plan (point 2) was rejected because it was not the most effective plan to help recruit and retain an outstanding faculty. In particular, the University’s analysis showed that a hybrid plan would not aid in retention of faculty and staff during their most productive years, unlike the defined-benefit plan that remains the cornerstone of UC’s retirement benefits. Similarly, the linkage of the university's retirement plan with Social Security was found to be too complicated to implement and also not effective in recruiting and retaining the diverse work force needed by the university. Finally, competitive total remuneration is essential to retaining the excellence of the university, and for evaluating new proposals concerning retirement benefits; increases in employee contributions to the retirement system or decreases in benefits would generate a corresponding need to increase salaries to offset benefits reductions, thus negating any potential financial savings. UC’s experience demonstrated that the unique characteristics and workforce-related needs of the university must drive reform, and that policies chosen primarily for their role in reducing costs can have adverse consequences that are more operationally detrimental, or costly, than the costs they were designed to avoid.

It has been suggested that the pension reform plan is intended to include the University. Hence, it is critical that the University engage in substantial conversations with the Governor and the legislature to ensure that UC’s excellence is not inadvertently compromised by the Governor’s pension reform efforts, and to share with the Governor the considerable expertise gained during UC’s recent reform. The members of TFIR look forward to engaging with UC leadership and the Governor to ensure that we serve the best interests of both the State and University.

TFIR recognizes that the provisions of benefit plans should be adjusted as circumstances change. Equally important, however, is that those adjustments do not bring further erosion in the competitiveness of total remuneration for UC faculty and staff. TFIR will continue to monitor any adjustments proposed by the Governor, the Legislature, or the University, and analyze their consequences for total remuneration and their role in preserving the University’s excellence.

Changes cannot be solely designed to reduce costs; proposals must be accompanied by analysis and consideration of their collateral deleterious impacts.

The link is at http://www.universityofcalifornia.edu/senate/committees/tfir/TFIR2RAre12ptplanOct2011a.pdf

Crane Likely to Pick Up on Pension Issue at Next Regents Meeting

Regent David Crane - a last-minute appointee to the Regents by Gov. Schwarzenegger - has been a public pension hawk and has made remarks about collective bargaining that ensured he would not be confirmed. Assuming he attends the November Regents meeting (Crane's last given the non-confirmation), he is likely to say something about the pension issue. The Regents' agenda for November is not yet posted. But even if the pension item is not a formal agenda topic, Crane can bring it up.

That is not a Bad Thing. The Regents should be informed about the impact of the governor's pension proposal on UC - which is a Bad Thing for UC as presented. The governor's pension proposal and its impact on UC should be on the agenda - however it gets there.

You can read a recent op ed by Crane on public pensions at http://www.washingtonpost.com/opinions/how-about-a-race-to-reform-state-pensions/2011/10/26/gIQAJmYNNM_story.html

So we may miss Regent Crane after all:

Was that Jerry or Casey at the Bat (on pensions)?

Now that it is clear the governor wants UC to be part of his public sector pension proposal, you might be curious about what the Legislative Analyst thinks:

LAO calls pension plan excellent start

Duane W. Gang, Riverside Press-Enterprise 10/27/11

California’s nonpartisan legislative analyst praised Gov. Jerry Brown’s pension plan Thursday and said it deserves consideration by the Legislature. “I thought it knocked the ball out of the park,” Mac Taylor, who heads the Legislative Analyst’s Office, said during a lecture series at his alma mater, UC Riverside. “I think it is an excellent start.” …

Full article at http://www.pe.com/local-news/politics/duane-gang-headlines/20111027-inland-lao-calls-pension-plan-excellent-start.ece

Trying to knock it out of the park didn’t work out so well for Casey:

Stand By

As prior posts on this blog have noted, Gov. Brown has a public pension plan proposal – but no one quite knows what it is and whether, more specifically, it will cover UC (and possibly override the Regents’ pension revision of December 2010).

Excerpt from Capitol Alert late yesterday:

Gov. Jerry Brown will give lawmakers his plan for pension changes on Thursday, the governor said in a letter to legislators this afternoon, though it remains unclear what Brown will propose.

"Given the paramount importance of pensions to both taxpayers and public employees, it is absolutely critical that we carefully examine our current assumptions and practices," Brown said in a letter to Sen. Gloria Negrete McLeod, D-Chino, and Assemblyman Warren Furutani, D-Gardena. "We have to do our best to make sure that we have a system that is fair and truly sustainable over the long time horizon that our pension and health systems require." The Democratic governor has said for weeks that he would propose pension changes this fall. He recently said some of them will require a constitutional amendment and a vote of the people.

Full article at: http://blogs.sacbee.com/capitolalertlatest/2011/10/california-jerry-brown-to-propose-public-pension-changes-thursday.html

So we’ll just have to wait until tomorrow:

Rising Employee Pension Contributions

A note from the Daily Bruin of 10/20/11:

Faculty and staff could be paying more toward retirement within two years in a proposal to be discussed by the UC Board of Regents in November.

Under the proposal, employee contributions to the University of California Retirement Plan would rise to 6.5 percent of covered salary starting July 1, 2013. The UC, meanwhile, would pay 12 percent.

Right now, faculty and staff contribute 3.5 percent and the UC pays 7 percent.

This is the second time in about a year that the regents will vote to raise employee and UC contributions. Last September, increases were set to begin in July 2011 and July 2012...

The proposed increase to 6.5 percent would cover the yearly cost of the retirement plan for the first time in years, said Steve Montiel, a spokesperson with the UC Office of the President. Every year, the plan’s costs total about 17 percent of annual pay...

Full article at:

http://www.dailybruin.com/index.php/blog/off_the_press/2011/10/board_of_regents_to_discuss_another_increase_in_employee_contribution_to_uc_retirement_plan

Worrying about it? Don't:

Note: This may be in keeping with the state's new In-God-We-Trust-All-Others-Pay-Cash policy. See http://www.sacbee.com/2011/10/21/3992291/gov-brown-rejects-proclamation.html

Follow Up: GASB proposals could stir things up for UCRP via CalSTRS

Yesterday, we noted proposed changes in public pension accounting rules by GASB, the Governmental Accounting Standards Board. An observation from Academic Council Chair Robert Anderson, added to that blog note, indicated that the GASB proposal would not have a direct impact on UCRP. However, the problem facing UCRP is partly political.

As prior blog posts have noted, the governor is planning some kind of pension proposals – apparently requiring a ballot proposition. Such a proposition, depending on how it is worded, could sweep UCRP into a statewide change, even though the Regents enacted their own pension modifications in December 2010.

There is a report today in the Sacramento Bee that the big CalSTRS fund covering schools, whose unfunded liability is already large under current accounting rules, would experience a big jump in its recorded liability:

…The California State Teachers' Retirement System already faces a funding gap of $56 billion – the difference between the money it expects to have on hand over the next 30 years and what it will need to pay out in benefits during the same period. The (GASB) proposal would triple the gap – on paper – to around $150 billion, said Ed Derman, deputy chief executive officer at CalSTRS…

Full article at: http://www.sacbee.com/2011/10/18/3986621/outlook-goes-from-bad-to-worse.html

Anything that raises the pension issue in the larger state pensions – CalSTRS and CalPERS – could lead indirectly to UCRP changes that go beyond what the Regents enacted. While CalPERS apparently would not be much affected by the GASB proposal, $150 billion at CalSTRS will surely stir things up.

Buried Lede on Retiree Health?

From Wiktionary

“bury the lede”

(idiomatic, US, journalism) To begin a story with details of secondary importance to the reader while postponing more essential points or facts.

http://en.wiktionary.org/wiki/bury_the_lede

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An article in today’s calpensions.com indicates that both CalPERS and CalSTRS have asked GASB – the Governental Accounting Standards Board – for a delay in its proposed new rules on public pension accounting. The rule would allow public pensions such as UCRP to continue with their projections of earnings on their assets (7.5% for UCRP) but would require a much lower discount rate for unfunded liabilities. The net effect of the proposed change would boost the accounting value of unfunded liability.

Buried at the end of the report is an indication that GASB is moving towards doing the same for retiree health care. Note that at UC, as in most public systems, there essentially is no trust fund with assets for retiree health – the system is pay-as-you-go. Hence, everything is unfunded liability. The impact on reported unfunded liability for retiree health would be much bigger than for pensions.

There is also a final sentence that indicates GASB is looking at “financial projections.” It is not clear to what that phrase refers, but it sure sounds like GASB is looking at whether assumed future earnings rates on assets, e.g., 7.5% for UCRP (and higher at CalPERS and CalSTRS), are too high.

Here are the last few sentences of the article:

Other speakers at the hearing said the new accounting rules should require government employers to report their retiree health debt. The state, for example, owes an estimated $60 billion over the next 30 years for retiree health care. Like most government employers, the state has not set aside money to invest and help pay for retiree health care promised current state workers. The state is paying about $1.5 billion for retiree health care this year, a rapidly growing cost.

“I think I can offer you some hope,” …the GASB chairman, told a speaker. “Dealing with OPEB (other post-employment benefits), primarily retiree health benefits, is something that’s on our agenda. We will be looking at that going forward.”

(He) told another speaker that GASB has “another project that is looking at financial projections.”

Full article at http://calpensions.com/2011/10/17/calpers-calstrs-delay-new-accounting-rules/

UPDATE: Academic Council chair Robert Anderson adds the following note re UCRP via email (in italics below):

The actual GASB proposal for pensions is to project the liabilities year by year; then project the assets forward, including future contributions according to your actuarial plan (which you must be actually following, not just planning to do at some indefinite point in the future) and your assumed rate of return on assets and see if you ever run out of money. If you do, all liabilities beyond that point are discounted back at a lower rate, most likely a corporate bond or a taxable municipal bond rate. If not, all liabilities are discounted back at the assumed rate of return. We have an actuarial plan that restores us to full funding in 30 years, and we are currently following it, so the new GASB rule on pensions should make no difference to us.

It would make sense for (GASB) to apply that to retiree health. But note we are already discounting retiree health at (if I recall correctly) 6%, precisely because we are not prefunding it. Thus, I think there would be little change in our retiree health liability. I presume CalPERS and CalSTRS are also currently required to use the lower rate also. Thus, I am not sure it would make much difference.

In short, the impact on retiree health accounting would depend on whether GASB insisted on a rate below 6%.

Pension Train Is Leaving the Station

The Legislature has formed a joint committee to hold meetings around the state on public pensions. As noted in a prior blog post, the governor seems to be formulating his own proposal which he says will involve constitutional changes and need a vote of the electorate. On the joint committee:

Legislative leaders have named six lawmakers to a joint committee that will hold hearings on changes to public employee pension systems. Assembly Speaker John A. Pérez has appointed Michael Allen, D-Santa Rosa, Warren Furutani, D-Gardena and Jim Silva, R-Huntington Beach. Senate President Pro Tem Darrell Steinberg has appointed Gloria Negrete McLeod, D-Chino, Joe Simitian, D-Palo Alto and Mimi Walters, R-Laguna Niguel. Negrete McLeod and Furutani will co-chair the committee.

Full article at: http://blogs.sacbee.com/the_state_worker/2011/10/three-state-senators-named-to-pension-conference-committee.html

Will there be input in either of these forums from UCOP? As noted many times on this blog, a statewide "solution" might sweep in UC and override the changes the Regents have already made in the UC retirement system. The pension train is leaving the station.

Gov. Brown Says Pension Proposal Will Involve Constitutional Changes & a Vote of the People

At the Milken Institute State of the State conference today (attended by yours truly), Governor Brown was asked by Michael Milken about public pensions in California. (Cell phone photo of conference event at right.)

Brown indicated he was working on a proposal on pensions – but did not give a precise date when it would be unveiled. He did say that it would involve a constitutional amendment that would have to be approved by a vote of the people.

It was unclear what the coverage of the pension proposal would be. All state and local pensions in California? Just state-level pensions? Would it include UCRP? If so, would it override what the Regents did to modify the university's pension system in December 2010?

What appears to be the case is that this proposal is still a work in progress. That means that UCOP and the Regents have a chance to weigh in on the proposal before it is completed.

Below is an audio of what Brown said. (Video with just a still picture.)

Update: State Treasurer Bill Lockyer comments at http://blogs.sacbee.com/the_state_worker/2011/10/bill-lockyer-says-pensions-must-be-fiscally-politically-sound.html He notes with regard to the legal obligation to pay earned benefits: "I'm also mindful that judges, too, have been promised their pensions."

Piggy-Back

Can UC piggy-back on CalSTRS? We are “education,” too. And we have pension funding issues. If you don't ask, you surely don't get. See below:

CalSTRS reported ready to seek more state funding

Sacramento Bee, 10/11/11, Dale Kasler

For more than two years, CalSTRS has been talking about asking state lawmakers for more money to plug its funding gap. Now the teachers' pension fund believes the Legislature is ready to listen. Pension fund Chief Executive Jack Ehnes said last week he wants Gov. Jerry Brown to include additional CalSTRS funding in a long-awaited pension reform proposal he's expected to release in the coming weeks. "We think we're at the right moment where it's time to move on the funding strategy politically," Ehnes said at a CalSTRS board meeting in Huntington Beach, according to Bloomberg news…

Full article at http://www.sacbee.com/2011/10/11/3973771/calstrs-reported-ready-to-seek.html