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Chalfant and Henry PEB Op-Ed

Chalfant and Henry PEB Op-Ed

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Published by Chris Newfield

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Published by: Chris Newfield on Oct 19, 2010
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10/19/2010

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1
SavingUCandItsPensionPlan
JamesA.ChalfantandHelenL.Henry*TheUniversityofCaliforniafacestwocrisesofunprecedentedmagnitude.Atatimeofsustained,painfulcutstotheoperatingbudget,UCmustalsodealwithlargeunfundedliabilitiesforitspensionandretireehealthbenefits.Theseunfundedliabilitiesarenotduetomismanagementofinvestments,buttoa20-yearsuspensioninmakingcontributionstothepensionplan,UCRP,andtoa“pay-as-you-go”approachtoprovidingretiree-healthbenefits,inlieuofpre-funding.Thepension“holiday”financedsubstantialgrowthbeyondtheUniversity’smeans,andsavedthestateofCaliforniabillionsofdollarsincontributionsforstate-fundedemployees.Unfortunately,amidconcernsthatthestatewillnotprovidefundingtoaddressthiscrisis,theadministrationnowproposes,intheReportoftheTaskForceonPost-EmploymentBenefits,topayitsbillswithcutsinbenefitsthatrisktheUniversity’sexcellence.Thisisanaturalreaction,butitismisguided,andwillcausefarmoreharmthangood.Wepointedthisoutinour“DissentingStatement”:theunfundedliabilitiesaretheresultoffinancingdecisions,notoverlygenerousbenefits.Hence,cuttingbenefitsdoesnotrepresentevenpartofthesolution.TheReportofthePresidentialTaskForceonPost-EmploymentBenefitsisamissedopportunity.Insteadofbuildingastrongcaseforthecriticalneedforstatefundingforcompetitivesalariesandbenefits,topreserveUC’sexcellence,thereportcallsforaseriouslyuncompetitivepensionplan,inadditiontosubstantialcutsinretiree-healthbenefits.Thesenioradministratorsadvocatingthisplanarewell-intentioned,andareunderstandablyfocusedonUC’sfinancialproblems.However,cuttingbenefitstouncompetitivelevelsisthewrongmove.Itrepresentswishfulthinkingthatsomehowthismovewillleadtobudgetarysavingsandhavenoimpactonthequalityoftheworkforce.Unfortunately,wishingdoesnotmakeitpossible;nouniversityhaseverbecomeorremainedgreatbypayingitsfacultyandstaffuncompetitively.Thebudgetarysavingscitedbytheadministrationhaveanotherinterpretation:theyrepresentcompensationwewouldnotbepayingtofacultyandstaff.AnyonereadingthesecommentsisfamiliarwiththeUniversity’sargumentthatcompetitivesalariesareneededfortopadministrators,toattractthebesttalent,butthisargumentshouldnotbeforgottenwhenitcomestothefacultyandstaffwhocarryoutUC’smission.Californiacannotgeneratequalityjobsandabetterstandardoflivingforallwithouthiringthebestfacultyandstafftosustainanexcellentpublicsystemofresearchuniversities.OnlyUCcandeliverresearchandinnovationatthescaleandqualityneeded.Privateuniversitiescannotpossiblyfillthevoid,buttheywillbealltoohappytopoachUC’sfacultyifUCbecomesevenmoreuncompetitiveincompensatingitsfaculty.Thesameholdsforstaff,whowillfindoutsideoffersmoreandmoretempting,asUC’scompetitivenessfallsfurtherbehind.
 
2DuringourserviceontheTaskForce,ourfocuswasononekeyquestion:howwillourrecommendationsaffectUC’sexcellencetwentyorthirtyyearsinthefuture?WedonotacceptthatwemustfurthercutthecompensationoffacultyandstaffinordertoallowUCtocontinuetogrowbeyonditsmeans.Alarge,mediocreUniversitysystemisnotinanyone’sinterest,butthatiswheretheadministration’sproposalswilltakeus.Publicsectorpensionshavecomeunderaremarkableamountofcriticisminthecurrentpoliticalseason.Itisnotsurprisingthattheywouldbescrutinized,giventhesizeableunfundedliabilitiesmanyplansface.Wearesurprised,however,thatpensionsareanalyzedinisolationfromsalariesandotherjobcharacteristics.Arepublicsectoremployeesover-compensated,withsalariesandbenefitsfarabovemarketlevels?Perhapstheyare,butmostcriticismsdonotevenaddressthisquestion,letalonedocumentthatthepensionsaremoregenerousthannecessarytoattractthebesthires.Instead,onecomponentofcompensation,retirementbenefits,seemstobeconsideredinisolationfromallothers.Buttheunfundedliabilitiesinthoseplansaretheresultoffinancingdecisions,notthe“richness”ofthebenefits.Similarly,UCRP’sunfundedliabilityisduetoafinancingdecisiontoputnomoneyinfortwodecades,notbecausethebenefitsareoverlygenerous,soitshouldnotsurpriseanyonethatcuttingbenefitsdoesnotaddresstheproblem.Thecurrentpensionplan,withevena5%employeecontribution,isuncompetitivewithcomparisonuniversities,inpartbecauseUC’ssalariesalsolagthecompetition’s.Theadministrationwillsaythatcuttingbenefitsis“partofthesolution,”butthisismerelyastatementaboutaccounting.Cuttingspendingonelectricity,travel,andadministrativelayersalsofreesupdiscretionaryfundingtopayofftheliabilities,buteverycuthasconsequencesthatneedtobeaddressed.Adefined-benefitplan,suchasUCRP,playsseveralroles.Inadditiontoprovidingapension,itcreatesa“goldenhandcuff”thatmakesitmorecostlytoleaveforanotherjob,incontrasttotheportableretirementbenefitprovidedbyadefined-contributionplan.Thisgoldenhandcuffisveryvaluabletotheinstitution.Ourdefinedbenefitplanalsomakesitmorelikelythatfacultyandstaffwillretireatatargetedage,wherethemaximumagefactorisattained.InthecaseofUC,theresultofthesetwoeffectsistoencouragetalentedpeopletospendtheircareerwiththeUniversity,avoidingthecostsinqualityandmoneyofrapidturnover,andtoprovideforrenewalofthistalentasyoungeremployeesarehiredtoreplacefacultyandstaffwhoretireatoraroundthetargetage.Becauseofthesedesirablecharacteristicsofadefinedbenefitplan,reducingthepensionbenefitdoesnotsimplytranslateintocuttingcosts.Therewillbesubstantialeffectsontheworkforce,andUCwillfinditselfpayinghighersalaries,justtoretainfacultyandstaff,andjusttoremainascompetitiveasitisnow.Thebenefitscutswon’tcreatethefundsthatareneedtopaytrulycompetitivesalaries.Therealityofthesituationisthat,withthecurrentmixofsalariesandbenefits,UCalreadyisuncompetitive.Thissituationcaneasilyworsenifcarefulattentionisnotpaidtothetotalcompensationweareoffering.Eachofthethreeproposedpension

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