Even with an assumed rate of return of 7.5 percent on the UC Retirement Plan’s investments …

Even with the April 15 restart of contributions as planned (the first contributions in nearly 20 years) and a “gradual” ramping up to 17 percent total from employer and employee …

Even with all that, UC officials are projecting a slide in the plan’s funded status to 61 percent by 2013, down from 95 percent as of July 1, 2009. The 95 percent figure is from the newest actuarial report, which was presented to the UC Board of Regents this week.

The report also shows a 19.2 percent decline in the rate of return on the market value of the plan’s assets in 2008-09. Add in the assumed rate of return of 7.5 percent — and the retirement plan is really looking at a decline of 26.7 percent.

‘Something needs to be done’

“So something does need to be done above and beyond what we are currently talking about,” Randy Scott of the UC Office of the President told an audience of nearly 200 people at UC Davis on Nov. 9.

“What we are currently talking about” is a minimum 4 percent contribution from the university to start with; and 2 percent from most employees, going up “gradually” in annual increments, to 3 percent, then 4 percent and, finally, 5 percent (subject to collective bargaining for represented employees). The 5 percent figure is what state employees put into CalPERS.

Scott spoke at UC Davis as part of a systemwide tour on behalf of the UC President’s Task Force on Post-Employment Benefits, which is exploring all angles to ensure the long-term sustainability of not only the pension plan but retiree health care benefits.

In earlier forums, Scott said, retirees posed a primary question: “ ‘Is this somehow going to take away my pension?’ And the answer to that is, absolutely not.”

Asked if benefits could be changed for new employees, Scott answered: “Yes.” The task force is expected to look into what those changes might be.

For now, the restart of contributions is the only pension change we are sure of — for active employees only, not retirees, Scott emphasized.

The systemwide Academic Senate, for one, is urging accelerated contributions.

Assurances for retirees

Task force representatives conducted two forums on the Davis campus and one in Sacramento. The Davis forums filled the AGR Room at the Buehler Alumni and Visitors Center, for a total audience approaching 400. An estimated 150 people attended the Sacramento session.

Scott began the first forum on the Davis campus with assurances:

“The task force will not be dealing with or trying to reduce the earned, vested pension benefits of active employees,” said Scott, director of Talent Management and Staff Development at the Office of the President.

The same is true for retirees: “Those of you who are retired, you’ve earned your benefit; it cannot be touched in any way by the university.”

As for retiree health care benefits, Scott said UC is reducing the amount of money that the university contributes to retirees’ premiums, from an average of 92 percent in 2009 to 89 percent in 2010.

Still, he said, UC will be paying about $25 million more for retiree health coverage 2010, for a total cost of $250 million. The cost is expected to climb to $373 million in 2013 and $610 million in 2018.

UC’s average contribution for retirees “will be more closely aligned with what active employees pay,” Scott said. For active employees, UC will pay, on average, 88 percent of health care premiums in 2010.

Scott gave two reasons for reducing the university’s contribution to retirees’ health care: budget constraints and financial reporting obligations.

The latter refers to the federal government’s recent mandate on public employers: Their financial statements must include the projected cost of health insurance for the life of all retirees — those who are already retired and those who will retire in the future.

Unfunded liabilities

As of July 1, UC estimates this health insurance liability at $14.5 billion, which is unfunded at this time.

The pension fund is also dealing with unfunded liability, now that the funded status has dipped below 100 percent for the first time. The July 1 report lists an actuarial value of assets of $42.8 billion and accrued actuarial liability of $45.2 billion, for a deficit of $2.4 billion.

In a PowerPoint presentation at the task force forum, UC officials showed their projections for unfunded liabilities by the year 2013: $18.9 billion for retiree health care and $18.1 billion on the pension side, for a total deficit of $37 billion.

“Together, this is the picture that moved the regents in February to say we’ve got to begin to get a handle on this,” said Scott, explaining the genesis of the Task Force on Post-Employment Benefits.

No impact for first 15 months

For most employees, there will be no impact on take-home pay for 15 months, from April 15 to June 30 (the end of the 2009-10 fiscal year) and during all of 2010-11. The 2 percent contribution rate during this period is the same amount that employees already are required to contribute to individual defined contribution plans (DCP).

Starting April 15, all those 2 percent contributions will be redirected to the UC Retirement Plan, which is managed by the university; employees get to keep whatever they have already accumulated in their DCPs, which employees can manage themselves.

The university’s share also would go up annually, from 4 percent to 6 percent to 8 percent to 10 percent to 12 percent. For the employer’s share, the university has been trying unsuccessfully to get the state to pay — just as it does for CalPERS members.

UC first wanted to restart contributions on July 1, 2007 — but failed to get money from the state.

UC next tried for a restart on July 1, 2009, and asked the state for $96 million to cover the employer’s share. The governor agreed to $20 million, but, in the end, UC got nothing. For 2010-11, the university will ask again for $96 million, and hopes UC’s allies will join a lobbying effort to secure the money.

In the meantime, UC will cover its retirement contributions from elsewhere in the already-strapped university budget.

The task force plans more campus forums during the first half of 2010, and is scheduled to deliver a report and recommendations next summer.

“This isn’t about next year’s budget fix; it is about the long-term sustainability of these post-retirement benefits,” Scott said.

Randy Scott’s forum presentation as a webcast, plus the
PowerPoint presentation

The UC Retirement Plan by the numbers

UC Davis representatives on the task force

More about the retirement plan’s future

UC for California advocacy