The Gay Marriage Decisions: What Do They Mean for UC?

As the preliminary reports and analysis of the U.S. Supreme Court's rulings on gay marriage appear, you may be wondering what effect it might have on U.C., particularly with regard to benefits.  Or maybe you are not wondering since you know that U.C. has provided dependent benefits for domestic partners.  There is actually an effect through the federal tax system.  The now-defunct Defense of Marriage Act (DOMA) meant that the IRS did not recognize gay marriages, even in states where such marriages were permitted.  Thus a spouse/dependent in such a relationship, even if eligible for, say, coverage under his or her spouse's health insurance (at UC or elsewhere) had to pay taxes on the value of that coverage.  With DOMA gone, presumably such benefits to dependent same sex spouses will now receive the same tax-favored treatment that was afforded under federal law to opposite sex spouses.

The Supreme Court avoided ruling on California's Prop 8 ban on gay marriage.  However, a lower court had voided the Prop 8 ban - which was the route by which the case reached the Supreme Court - so presumably gay marriage will now resume in California.  (There may be some local variation initially but it will be possible for gay couples to marry in the state and thus receive federal tax-favored treatment for benefits.)  It is unlikely, however, that domestic partnerships will be recognized as marriages by IRS, particularly since formal marriage will now be an option for gay couples.  Thus, gay couples under UC benefit plans that are currently in domestic partnerships and that choose not to get married won't receive federal tax-favored treatment.  At least, so says yours truly - a non-lawyer and non-tax expert.  (So be warned.)

UPDATE: The governor has told the counties to resume or begin issuing marriage licenses to gay couples. Story at http://blogs.sacbee.com/capitolalertlatest/2013/06/jerry-brown-tells-california-counties-to-issue-gay-marriage-licenses.html

Shying Away from Retiring

Inside Higher Ed today carries an article about surveys of faculty who say they don't plan to retire at the "normal" age or maybe ever.  The work-til-you-drop response is attributed to such motivations as wanting to be intellectually active but also importantly to concerns about having sufficient funds and health insurance to retire.  When UC was considering changing its retirement plan - it created a two-tier program - it retained the defined benefit approach rather than switch to a defined contribution approach.  Many faculty in the U.S. are under TIAA-CREF or some similar defined contribution program which means that they face the danger of outliving their savings.  Retiree health care is also not necessarily provided.

UC retained its basic defined benefit model in part to encourage faculty renewal.  Many years ago, before federal law changed, universities - including UC - had mandatory retirement ages.  Once that policy was made illegal, only the defined benefit system provides an incentive to retire.  Under defined benefit, the retiree can't outlive his or her savings.  And long service employees essentially end up working for nothing if they continue so the system incentivizes "on time" retirement.  Decisions in the future on retirement benefits need to be take account of the behavioral effects of the system.

The Inside Higher Ed article is at http://www.insidehighered.com/news/2013/06/17/data-suggest-baby-boomer-faculty-are-putting-retirement

Pension Promises and the UC Budget

One of the issues facing UC is pension liabilities.  As we have noted in prior posts, although it may seem paradoxical, liability for the pension is a young person's issue.  Old folks tend to worry about whether they will get their promised UC pension when the issue is raised.  However, the actual issue is that because they and everyone else will get what is promised, the UC budget going forward has to meet the promise in future years.  Dollars that will go to the pension won't go to something else.

Although you may read about this or that jurisdiction that is attempting to undo past pension promises, the law doesn't allow it.  For example, in Calpensions.com today (at the moment, the piece seems to be misdated 5-13-13 but it was circulated today), we read:

One of the first local ballot measures aimed at cutting public pension costs, a cap on Pacific Grove payments to CalPERS approved by voters three years ago, was ruled unconstitutional by a Monterey County superior court judge last week. Judge Thomas Wills ruled Friday that Measure R violated the contract clause of the state constitution, reaffirming the view that pensions promised on the date of hire are a “vested right” that can’t be cut without providing a new benefit of equal value...

Full story at http://calpensions.com/2013/05/20/pension-measure-wave-crests-court-slog-remains/

It is clear, therefore, that public jurisdictions (including UC) can't walk away from past obligations.  It is also clear that lesser promises can be made to new hires.  There is a fuzzy area about reducing the benefit formula going forward for incumbent employees.  UC has not gone down the fuzzy route.  The Regents did create a lower-tier pension plan for new hires in 2010 (which has yet to go into effect).

There are two key aspects to the pension issue for UC:

1) The legislature is only gradually acknowledging that the state has a liability for the UC pension.  CSU is under CalPERS which the legislature does acknowledge.  So UC has been arguing that we should get at least what the state gives CalPERS for CSU. 

2) Administrators, particularly at the campus level, tend to take a short-run perspective.  As the employer contribution is scheduled to ramp up, they resist putting in the money since they won't be in charge when the consequences of underfunding occur.  The UC pension assumes a 7.5% return on investment.  So the liability for dollars not put in today grows at 7.5%. Borrowing at 7.5% in the current low-interest climate makes no sense - unless you think you won't be around in the long run to pay off the loan.  See our earlier post on this issue at http://uclafacultyassociation.blogspot.com/2013/05/ignorance-may-be-bliss-but-ignoring.html.

The Regents understand Point #1.  It is not clear they fully understand Point #2.

From the viewpoint of current younger faculty, therefore, particularly those who expect to make a career at UC, the pension issue is primarily a matter of the potential squeeze on the UC budget.  When the lower-tier goes into effect, younger faculty hired thereafter face the budget squeeze plus the reduced value of pension benefits.  Total compensation is the sum of salary plus value of benefits.  So in theory the lesser pension could be offset by more cash pay.  But the budget squeeze works against that solution. 

We have made these points before but it is useful, from time to time, to make them again.

New LAO Report on (More) State Revenues

The Legislative Analyst's Office has released a commentary on the governor's May Revise budget proposal.  It's headline feature is that LAO expects higher revenues than the governor projects.  That extra money is not pure gravy since it interacts with the Prop 98 formulas for K-14.  Nonetheless, the report will become part of the legislative process and negotiations which will go on between the governor and legislature.  The governor wants to be cautious and his way of doing it is to tilt toward less optimistic revenue projections.  LAO has a lot of cautionary notes in its report - things that could happen which would cut into revenues - but does not choose, as the governor did, to convey that message via its best guess on revenue projections.

One thing that may help UC in its attempt to pry more pension fund contributions out of the legislature is some combination of the governor saying there is a "wall of debt" that needs to be paid off (including pensions) and the legislature getting a message that there is more money around.  In effect, other things held constant, the more that the legislature puts into the UC pension, the more there is effectively in other resources for UC.

You can find the LAO report at:
http://lao.ca.gov/reports/2013/bud/may-revise/overview-may-revise-051713.pdf

The contrast between the revenue and transfers forecasts for the governor and LAO can be seen below (in $billions):

Fiscal Year | Governor    LAO
------------------------------
2012-13     |   $98.2    $98.9
2013-14     |   $97.2   $100.0
2014-15     |  $104.5   $107.0
2015-16     |  $110.2   $112.3
2016-17     |  $116.1   $118.9
------------------------------
Source: Page 12 of the LAO report.

Ignorance May Be Bliss - But Ignoring Won't Be

This post is going to be a bit complicated.  But note that you can think of ignorance in two ways.  One is just not knowing.  The other is a state of ignoring.  So here is what the powers-that-be at UC, systemwide and campus level, should know, and what they may be ignoring.  First, by now, everyone knows UC has an unfunded pension liability.  It grows over time unless adequate contributions are put into the pension fund.  Second, UC maintains a liquid cash reserve on hand to deal with ongoing needs for payments.  It maintains the reserve both for systemwide needs and for campus level needs.

The financial experts at UC think that there may be an excess of such liquid funds on hand which at current very low interest rates earnings very little.  So one idea is to put the assumed excess into a somewhat longer-term riskier fund.  Of course, risk comes as a price.  Those whose funds are held in these reserves would ostensibly get a higher return.  But the assets could vary in value.  The greater the risk, the less you can treat the reserves as a demand deposit with the principal returnable to the owner on demand guaranteed.  There would have to be some limit on access to prevent a run on the bank if there were a decline in asset value.  In other words, if you want the return that comes with risk, you get less of a guarantee.  Nonetheless, there seem to be some who think, or maybe are being told, that the extra return comes with no loss of liquidity.

There is a subcommittee of the systemwide Faculty Welfare committee known as TFIR (Task Force on Investment and Retirement).  (Full disclosure: Yours truly is a member although he was not involved in the particular report to which a link will be provided below.)  TFIR thinks a) the risk-liquidity matter is not being well presented to those who will make a decision, and - in any case - b) a better use of "excess" funds is to put them into the pension fund to offset the unfunded liability.  Shortchanging the pension fund means that eventually there will have to be higher contributions than would otherwise occur.  And the percent of payroll expected to be going to the pension fund under current circumstances is already quite high.

As this blog has pointed out umpteen times, the pension issue is not an old folks issue.  The old folks will be paid.  It is a young folks issue because the need to fund the pension will squeeze university budgets.  Neglecting contributions now will make the future - when today's young folks are in mid-career - painful.  Meanwhile, older administrators will have passed the problem on to their successors.  Maybe this issue is not so complicated after all.  Let's just avoid ignoring the facts that a risky return has costs - no free lunch - and that not contributing to the pension now will cause difficulty for the university in the future.

A recent TFIR report on this matter is at:
http://senate.universityofcalifornia.edu/committees/ucfw/TFIRLiquidityStatement050613.pdf

Indirect Flattery for UCRP from CalPERS

According to a Bloomberg report, CalPERS' chief actuary is recommending that his fund follow the practice that is currently in place (assuming the Regents continue it) for the UC pension fund.  At present, CalPERS follows a fifteen year smoothing period, extremely long, and doesn't get to 100% funding in thirty years.  UC has five years smoothing and a plan for 100% over 30 years.

...Alan Milligan, (CalPERS')... chief actuary, recommends that the biggest U.S. pension stop spreading out losses and gains over 15 years and instead set rates based on how much is needed to reach 100 percent funding within 30 years... Under Milligan’s proposal, the fund would shrink its 15-year rolling period for asset smoothing to five years and amortize gains and losses over a fixed 30-year period rather than the current rolling 30-year period. A fixed period means that all obligations will be fully funded by a specific date...

Full article at http://www.bloomberg.com/news/2013-04-16/california-pension-may-ask-for-50-boost-to-close-gap.html

UPDATE: Report indicates that the recommendations are likely to be adopted:
http://blogs.sacbee.com/the_state_worker/2013/04/calpers-board-votes-for-accounting-changes-to-hike-pension-costs.htm
A more detailed account is at http://calpensions.com/2013/04/17/calpers-panel-approves-rate-hike-on-split-vote/

Chained-CPI

Chained Houdini

You have probably heard or read about the "chained-CPI" (CPI = Consumer Price Index) proposal for Social Security contained in President Obama's latest budget plan.  Chained-CPI is supposed to take account of the "substitution effect," i.e., the tendency of consumers to shift their purchasing habits away from goods that rise relative to others in price.  The official CPI which is now used for indexing Social Security and other federal programs - and is also used for the partial inflation adjustment in the UC pension - is often described as pricing a fixed basket of goods.  In actuality, the CPI has become more complicated than that description suggests.  However, the operative point is that chained-CPI empirically tends to rise somewhat more slowly than official CPI and thus, if Social Security were indexed to the former, payments would rise more slowly and there will be budgetary savings.

Current University of Calilfornia workers are under a combination of the UC pension and Social Security.  Some older workers and retirees may have opted out of the joint system when it was offered to UC employees and may just get the UC pension under a slightly different formula than those who opted in. (Or they may get some Social Security based on other eligibility.) 

Since the chained-CPI proposal is part of ongoing budget negotiations, whether it is adopted remains to be seen.  An interesting question is whether indexing of public pensions in California (including the UC pension) could be switched to chained-CPI.  My guess - that's all it is - is that as long as the federal Bureau of Labor Statistics continues regular official CPI, public pensions could not be changed for existing workers under the state systems. If at some point, however, chained-CPI became the official CPI, indexing would be based on the chained version.  (CPI methodology has changed from time to time over the years and programs indexed to the CPI follow whatever the official index is.)

In any event, radio comedian Harry Shearer had a comment today about chained-CPI:

Update: http://www.employmentpolicy.org/topic/17/blog/mitchell%E2%80%99s-musings-4-22-13-does-cpi-have-unchained-malady [Click on link to pdf.]

You can't take it to the bank exactly, but...

The state auditor prepares a kind of balance sheet for the state as a whole and for individual components of the state such as UC. For the year ending last June 30, the accounts show that UC had assets of $58.0 billion (including buildings - construction costs minus depreciation) and liabilities of $34.6 billion for a net asset total of $23.4 billion. (pages 58-60)

There is an ongoing issue of the degree to which the state is responsible for the UC pension.  The report indicates that $6.4 billion of the liabilities of UC are "net other postemployment benefits obligations" which probably comes from the pension. UC is described in the following language: 

From page 70: The University of California was founded in 1868 as a public, state-supported, land grant institution. It was written into the State Constitution of 1879 as a public trust to be administered by a governing board, the Regents of the University of California (Regents). The University of California is a component unit of the State because the State appoints a voting majority of the Regents and because expenditures for the support of various university programs and capital outlay are appropriated by the annual Budget Act. The University of California offers defined benefit pension plans and defined contribution pension plans to its employees through the University of California Retirement System (UCRS), a fiduciary responsibility of the Regents. The financial information of the UCRS is not included in the financial statements of this report due to its fiduciary nature.* Copies of the University of California’s financial statements may be obtained from the University of California, Financial Accounting, 1111 Franklin Street, 10th Floor, Oakland, California 94607-5200. 

*Editorial note: This statement appears to mean that the details of UCRS are not included as opposed to the net liability. On the same page, similar language is included for CalPERS and CalSTRS.

UC is listed as one of several "component units" which on page 69 are described as follows: 

Component units are organizations that are legally separate from the State but for which the State is financially accountable or organizations whose relationship with the State is such that exclusion would cause the State’s financial statements to be misleading or incomplete. The decision to include a component unit in the State’s reporting entity is based on several criteria, including legal standing, fiscal dependency, and financial accountability. 

If it ever came to a court determination of state liability for the UC pension, such language would come into play.  We'll leave it to legal types take this matter further.  

The audit report is at: www.bsa.ca.gov/pdfs/reports/2012-001.pdf 

 

For the Record

Back in mid-December, the Legislative Analyst’s Office (LAO) produced a report saying all was well with UC faculty compensation, despite concerns about pay lags.  No one seems to have paid much attention to the LAO report so far, which is a Good Thing, since the report was poorly done. It is unclear what suddenly motivated the LAO to issue the report just when UC was entering intersession and the ability to respond was limited. In any event, the University Committee on Faculty Welfare (UCFW) prepared a response which was recently posted on the Academic Senate website.  For the record – because you never know when someone might haul the LAO report out - here are some excerpts from UCFW’s rebuttal to LAO report: [Links to the full UCFW report and the LAO report are below.]

The UC Systemwide Committee on Faculty Welfare (UCFW) carefully studied the recent report on faculty salaries, recruitment, and retention released by the Legislative Analyst's Office (LAO). The LAO's major conclusions are the following: 1) total UC compensation is competitive with top universities; 2) few faculty members leave, and reasons other than salary are responsible for most faculty leaving; 3) the small number of tenured associate professors who leave shortly after receiving tenure is not a concern; and 4) UC continues to hire its top-choice candidates. UCFW questions the accuracy of these conclusions...

(P)rior to 2000, UC salaries closely matched the Comparison Eight average but started to lag behind the Comparison Eight universities shortly after 2000... The lag continues to grow. UC salaries now lag the Comparison Eight by more than 11%...

The LAO makes (an) error by relying upon UC's most recent, but outdated, analysis of total remuneration from 2009. At that time, although faculty salaries lagged the Comparison Eight by about 10%, the value of UC's retirement benefit partially compensated for the salary lag. This was entirely because employees were not required to make contributions to their retirement plan and not because the retirement benefits themselves were overly generous.  The LAO overlooked the predictions in this study, as well as and the update to examine the competitiveness of the "New Tier" retirement plan, that the UC retirement plan would become uncompetitive when faculty made a 5% contribution to retirement, as they are doing in 2012-13... If employee contribution rates rise even higher (6.5% for current employees in July, 2013 and higher thereafter), then UC benefits will not compensate for below-market UC faculty salaries whatsoever...

The LAO concluded that "most faculty do not leave UC or reject UC job offers due to compensation" on the basis of some exit surveys performed in the mid-2000's and summarized in ... the LAO report. The LAO noted that several reasons were given. "Salary" was cited by 33% of those who rejected UC offers and by 37% of those who left UC.  UCFW notes, first, that "salary" was the most prevalent reason for both categories. Secondly, an increase in salary could certainly mitigate concerns about "housing problems" (cited by 22% of those who rejected UC offers and by 13% of faculty who left) and "cost of living [besides housing]" (cited by 11% of those who rejected UC offers and by 7% of those who left). Taking into account not only the issue of "salary" but also the separately enumerated issues that an increase in salary could mitigate, then salary-related issues could account for up to 66% of the reasons for rejecting UC offers and up to 57% of the reasons that faculty leave UC. This is quite the opposite conclusion of the LAO...

UCFW is uncertain what point the LAO attempts to make with the data on the fate of Assistant Professors hired in 2000-01. These data have no reference point, either from when UC was in a more favorable economic environment than in 2000-01, or from other universities when the UC data were collected. In contrast to the LAO, UCFW believes that a 10% rate of departure of young professors after receiving tenure is of great concern. UC heavily invests in assistant professors, especially in science and engineering, by providing them with start-up packages worth several hundred thousand dollars each...

UCFW members, based on their experiences on search committees in their home departments, question whether the data provided to LAO by the UC administration concerning the top choices in faculty searches is truly representative of the current competitive job market.  ...(T)he data are almost 10 years old and do not reflect the current economic conditions in which UC competes for new assistant professors...

The full UCFW report is at: http://senate.universityofcalifornia.edu/committees/ucfw/UCFWreLAOFacultyRecruitmentandRetentionMarch2103.pdf 

The December LAO report is at: http://www.lao.ca.gov/laoapp/PubDetails.aspx?id=2675

And - for the record - we'll try to maintain a sunny attitude and be optimistic that the LAO will do better next time:

Listen to UC-Regents Committee on Investments 2-26-2013

The Regents Committee on Investments met earlier today, in part by phone conference call.  Note our earlier post today which contains links to the agenda.

A link to the audio of this meeting is below.  It is unclear whether the Regents plan to post the audio or video of this meeting.  Unlike the January meeting, I did not find audio or video archived on the web after this meeting.  So I have provided a link to a recording of the meeting below.

Some highlights.  There was a dispute, not always in entirely friendly terms, between one Regent ("Gary" or sometimes "Gerry Rogers {sp?}") on a phone line, and the others about comparison of the returns of other major university endowment returns with UC returns over both short term and longer terms.  [The odd thing is that there is no Gary or Gerry {Jerry?} listed on the committee or, for that matter, on the list of Regents found on the Regents' website.]  "Gary/Gerry" kept pressing for discussion which was resisted by others on the grounds that a) the comparison wasn't appropriate because UC has changed its strategy and b) the data from Cambridge Associates were not available.  Gary/Gerry got the info - he said - from the other universities.  You can hear the exchange from roughly minute 7:30 to minute 23:30. 

Another component of the discussion involved a reduction recommended in the fixed income portfolio of U.S. government securities including TIPs (inflation-indexed Treasuries).  The rationale provided was a concern that the Federal Reserve will at some point stop holding down interest rates and yields on such securities will rise (so that there will be a capital loss on holdings of these securities.)  The general discussion of this matter is at approximately 1:12 - 1:32.

Finally, there is a short anecdote about how the state stiffed UC at one point last year when the state ran into a cash flow problem.  Apparently, UC makes its payroll and the state quickly puts the funds in the bank involved.  There is a brief point where the bank is advancing the funds.  At some point, the state didn't make the payment and UC in effect had an overdrawn account by hundreds of millions of dollars.  The bank now insists on getting the money first before the payroll goes out.  This episode is described at 1:32-1.35.

Generally, the UC treasurer is requesting more "flexibility" in portfolio management than in the past, with the flexibility being passed along to the various fund managers with which the treasurer contracts.  I would characterize this change as a willingness to take a more active/aggressive approach relative to a more passive strategy.  The treasurer would likely have a somewhat different characterization and talk about being able to be more "opportunistic" in fund management.

Towards the end of the meeting, there was a review of campus foundation financial results.  The regents seemed somewhat unclear as to what responsibility they had for these foundations which make their own investment decisions.

You can hear the meeting at the link below:


UPDATE: The mysterious Gary/Gerry is T. Gary Rogers.  There will be a post about him 2-27-13.

And here's something you probably didn't know...

The Regents are meeting today.  Not all of them.  However, the Committee on Investments is meeting at 1:30 pm.

On its agenda is possible changed guidance for investment of the UC pension plan portfolio.  My impression is that there has not been much Academic Senate involvement in the process of coming up with recommendations, although we have some well-known financial experts on the faculty.  You can find the Committee's agenda and background documents at:

http://regents.universityofcalifornia.edu/regmeet/feb13/invest.pdf

and particularly

http://regents.universityofcalifornia.edu/regmeet/feb13/i2.pdf

http://regents.universityofcalifornia.edu/regmeet/feb13/i2attach2.pdf

http://regents.universityofcalifornia.edu/regmeet/feb13/i2attach1.pdf

Yours truly particularly liked the last link just above which says the new investment policy is slated to go into effect on April Fools Day.

In any case, we do have some advance audio from the meeting:


Also meeting today is a special (closed) committee on the search for a new UC president:

http://regents.universityofcalifornia.edu/regmeet/feb13/special.pdf

Grading the LAO Report on Higher Ed

We summarized the Legislative Analyst's report on higher ed funding in a post yesterday and provided a link to the document.  One thing that faculty do is evaluate and give grades.  In this case, the grade for the report would have to be an "incomplete."

Pensions: The LAO continues its assertion that the state has no legal liability for the UC pension.  It wants the legislature to say so.  The legislature can say the Moon is made of green cheese if it wants.  But the Moon will be what it is.  The question of state liability is a legal matter and no legal analysis is provided.  It is a legal matter that extends beyond the state into the federal constitution.  If the LAO wants to be serious about this issue, it could start with the history of the UC pension written by the UCLA Faculty Association's Executive Director, Susan Gallick, and then get some outside legal advice from constitutional experts.  As the governor and the legislature continue to discover about the state prisons, it is the courts that ultimately decide issues of constitutionality, regardless of state pronouncements.

What is odd is that after its assertion of no liability, the LAO goes on to say that someone is going to have to fund the pension and says the legislature should do so.  It suggests that the UC pension should be compared to the recent state pension enactment for other public pensions and then the legislature should pay in some sense what the others get.  UC's pension was omitted from the pension bill because the legislature and governor were persuaded that the pension changes enacted by the Regents in 2010 approximated what was later proposed for other public pensions.  What the cost implications are will vary from plan to plan, even with the same provisions.

Costs.  In loose terms, UC and CSU get comparable amounts from the state.  But UC has fewer students so the dollars/student ratio is going to be higher - which is what you expect in a research university.  There is little analysis in the report of what California gains by having a research university.  There is no analysis of what other states such as Michigan and Virginia have done once they concluded that they couldn't afford, or didn't want to afford, a research university. 

Pay for Performance.  As personnel directors can tell you, this is a slogan - maybe even a concept - but specifics are needed as to how you do it.  Is this year's budget going to be based on a formula?  Transfers - dropouts + course loads + completion in Y years = X?  What?  Personnel directors can also tell you that you can get perverse results.  Quantity over quality is a prime example, but only one.

Capital Costs.  There is concern in the report about the handling of capital costs but the concern seems to be confined to state-paid capital costs.  At UC, as we have noted repeatedly on this blog, the Regents - members of a part-time unpaid board - are routinely asked to approve large and expensive capital projects which are said to be paid for from future revenues.  But the Regents have no independent capability to review such projects or to follow up on whether the promised revenues actually materialized.  If the revenues prove inadequate, like the pension, somehow the deficiency will be paid; the campuses don't default.  The issue of Regental oversight and governance needed to be discussed regarding all capital projects, not just state-paid.

==
The rule at UCLA is that if you get an incomplete, you have one quarter to finish the work or the grade goes from incomplete to F.  There is an out from that rule in this case, however.  LAO can join us in what we have recommended in prior posts.  It is clear that we have arrived at a point in California where a new Master Plan needs to be developed to deal with the issues above and others.  To get there, we need to set up a review of the three segments - a process in other words rather than off-the-cuff "solutions" from the governor, the LAO, or anyone else.  The annual budget cycle doesn't work when a fundamental review is needed.  It was done before under Pat Brown and it can be done again.
==
Of course, we'll have to wait.  A process takes awhile to complete.  But in the meantime, we have just the selection to go with an incomplete report:

LAO Critique of Governor's Higher Ed Budget Proposals

The Legislative Analysts’ Office (LAO) has a new report out critiquing the governor’s higher ed budget proposals.  It comments on his online higher ed proposals but relative to all the attention paid to that topic at the most recent Regents meeting, it appears that the LAO doesn’t see them as the solution to budget problems for higher ed)  Much of the report involves recommendations that the legislature base future funding increments on meeting performance targets.  Because most of the report deals with all three segments of higher ed, the target discussion largely is focused on concerns involving CSU and community colleges such as time to degree, etc.  On retirement funding, LAO repeats its assertion that the state isn’t responsible for the UC pension, but then seems to acknowledge that if the state doesn’t pay, the cost will come out of tuition or some university programs.  It seems to suggest funding UC’s pension at the same rate as other state public pensions.  Excerpts and a link to the full report are below:

...Governor’s Overall Approach Unlikely to Improve System

Justification for More Funding and Less Legislative Involvement Unclear. Although we believe the Governor’s budget plan has drawn attention to some notable problems, we have serious concerns with several of his specific budget proposals. Most notably, by providing the segments with large unallocated increases only vaguely connected to undefined performance expectations, the Governor cedes substantial state responsibilities to the segments and takes key higher education decisions out of the Legislature’s control. We recommend the Legislature reject the Governor’s proposals relating to unallocated base increases, combining the universities’ capital and support budgets, allowing the universities to restructure their debt, and eliminating enrollment targets. Instead, we recommend the Legislature allocate any new funding first to meet the state’s highest existing priorities, including debt service, employee pension costs, and paying down community college deferrals. If more funding is provided than needed to meet these existing funding obligations, we recommend the Legislature link the additional funding with explicit enrollment and performance expectations.

Extended Tuition Freeze Likely Would Have Negative Long-and Near-Term Consequences. We also have serious concerns with the Governor’s extended tuition freeze proposal, as it very likely would result in steep tuition increases during the next economic downturn and reduced accountability in the near term. Moreover, tuition levels and students’ share of cost currently are low. After accounting for state and institutional financial aid, the average share of cost paid by California students is about 30 percent at UC and CSU and 6 percent at CCC.

Some Good Ideas but Associated Proposals Need Reworking

Some Problems Likely Addressed by Redistributing Rather Than Increasing Funding. In some cases, we think the Governor’s basic ideas are worthwhile but likely could be implemented within existing resources. For example, increasing the availability of required courses while reducing the amount of excess course-taking could be done within existing resources. Likewise, the segments could leverage an existing repository of online courses developed by faculty and enable students to more easily access those courses largely, if not entirely, within existing resources.

Higher Education Funding Models Up for Redesign. We also think revisiting the ways the state allocates funding to the segments is worthwhile, but we again have concerns with the Governor’s specific proposals. The Governor’s approach for the universities appears to fund neither student access nor success whereas his approach for the community colleges focuses only on one poor measure of student success. We envision a better funding model that balances the state’s dual goals of access and success. Under a redesigned system, instead of basing funding entirely on enrollment or on vague performance expectations, the Legislature would establish clear expectations in areas such as program completions, degrees earned, research activity, and cost reductions…

==

(LAO is) concerned with the absence of a proposal relating to UC retirement costs…

==

Weak Rationale for Proposed Changes to Capital Outlay Budget Process. The administration

indicates the motivation for combining the universities’ capital and support budgets is to provide the universities with more flexibility, given limited state funding. The administration, however, has not identified specific problems associated with the current process used to budget the segments’ capital projects, nor identified any specific benefits the state might obtain from the proposal. As a result, both the problems the proposal is intended to address and the benefits that the proposal offers are difficult to ascertain.

==

Recommend Rejecting (Debt) Restructuring Proposal. Given that restructuring debt would cost more money in the long term and constrain future budget choices, we recommend the Legislature reject the Governor’s debt restructuring proposal for the universities. If the Legislature is concerned that the universities would lose the short-term savings associated with the debt restructuring, it could consider other strategies for the universities to increase revenue or reduce costs.

==

(Pension) Payment Obligation. The state is not legally obligated to provide funding for the university’s retirement costs. Nevertheless, current retirement costs are largely unavoidable obligations for the university. Not addressing them means the university would incur significantly greater costs in the future...

Recommend Designating $67 Million for UC Retirement. For these reasons, we recommend the

Legislature specify $67 million of UC’s proposed 2013-14 base budget increase for pension costs...

In addition, consistent with the approach taken by the state in 2012-13, we recommend the Legislature include language in the budget reiterating that the state is not obligated to provide any additional funding for this purpose moving forward. Such language is intended to reinforce that the state is not liable for these costs.

Future Considerations for Universities’ Retirement Costs. The Legislature recently enacted pension-related legislation that could significantly reduce long-term retirement costs for nearly all public employers. In the future, the Legislature may want to consider the universities’ retirement costs in light of this legislation. This consideration would be useful since UC was specifically exempt from the legislation... In the future, the Legislature could consider providing the universities with funding for retirement costs comparable with costs incurred by other public employers...

==

Online Education Can Promote Access, Efficiency, and Student Learning. Online education has been found to have numerous benefits, including making coursework more accessible to students who otherwise might not be able to enroll due to restrictive personal or professional obligations and allowing campuses to serve more students without a commensurate need for additional physical infrastructure...

Need for New Funding to Create More Courses Is Questionable. We do not see a justification, however, for earmarking $10 million each for UC and CSU and up to $16.9 million at CCC for the development of additional online courses...

Full report at http://lao.ca.gov/analysis/2013/highered/higher-education-021213.pdf

How Ironclad is the Pension Guarantee?

Famous clash of Civil War ironclads

There is a risk in even blogging about this topic that someone will start worrying that his/her pension check next month won't arrive.  So the usual caveats are in order.  1) There is enough money in the UC pension today so that if no one contributed (and in fact contributions are being made and ramping up), 2) and investment returns were zero over the long term (very unlikely), the fund would not run out of money for many, many years.  And even at that point, there could be pay-as-you-go funding.  In addition, the Regents' 2010 plan for a lower tier affects pensions only for new hires.

Nonetheless, the issue of cutting existing pension obligations keeps being raised, particularly by those who don't like public pensions.  Most recently, there has a been a legal battle over the bankruptcy filing of the City of San Bernardino regarding its pension obligations to CalPERS.  When it filed for bankruptcy, that city stopped making its payments to CalPERS (which doesn't mean that CalPERS stopped paying pensions to those who earned them in that city).  The city said it was short of cash.  CalPERS threatened to sue, threats that it made (successfully) to other bankrupt cities.  Initially, all of this was reported by the media as a loosening of the public pension guarantee.  But that is not accurate, as a recent article in calpensions.com points out.  The federal bankruptcy judge asked CalPERS not to sue - but did not forbid it.  So far CalPERS has not sued.  But the bankruptcy judge has also said that unlike other creditors, CalPERS is not among those who would have to negotiate for a reduction in what they are ultimately paid on their debts.  It appears that CalPERS will have to be made whole.  The outcome of the San Bernardino filing for bankruptcy is not clear.  (There are even some questions about whether the city met the full requirements for such a filing.)  But so far, the idea of an ironclad pension obligation seems to have been reinforced rather than eroded.

Again, this situation is very unlike that of UC.  UC is not filing for bankruptcy.  You will get your pension.  The concern for UC is that past underfunding is now encroaching on the current and future budget of the system.  As we have repeatedly emphasized, the pension is a young folks issue, not an old folks issue, because of the budget impact.

The calpensons.com article is at:
http://calpensions.com/2012/12/24/san-bernardino-may-have-to-pay-full-pension-tab/

Social Security Estimator Available

Faculty who are getting up there in years may find it useful to estimate what they will receive in Social Security from the website above at http://www.ssa.gov/estimator/.  Note that some old timers opted out of Social Security when the Regents joined the federal system and that the website will not be applicable for them. You can receive Social Security starting at age 62.  If you wait, your benefits will increase.  (But - and we hate to remind you of this existential fact - the fewer months you will have to receive those benefits.)

And a little music while you work on your estimates: