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BERKELEY· DAVIS. IRVINE. LOS ANGELES. MERCED. RIVERSIDE. SAN DIEGO. SAN FRANCISCO
SANTA BARBARA • SANTA CRUZ
1111 Franklin Street
Oakland, California 94607-5200 Phone: (510) 987-9074
Fax:(510) 987-9086 http://www.ucop.edu
December 10, 2010
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
As you may recall, the post-employment benefit recommendations originally sent to you for a vote on Monday included a recommendation regarding benefits for UC employees whose compensation levels exceed IRS limitations on the amount of pension they may receive. That recommendation has now been put over for further discussion in January. Several UC executives who are affected by this proposal asked me if they could prepare a letter to The Regents outlining their opposition to the recommendation. Their letter is attached.
As you may recall, the University's legal position is that the resolution of February 1999 was never implemented and the cap on the contribution level was not eliminated. When the item returns to the Board in January, you will have the opportunity to discuss arguments contained in the letter as well as arguments supporting other points of view.
With best wishes, I am,
Jark &. Yudof President
TO THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
Dear Members of the Board of Regents:
We, the undersigned, respectfully but URGENTLY write to tell you of our position relating to Pension Restoration Benefits, originally scheduled as part of item J 1 of your December 13 agenda but now moved to your January agenda. We write for two reasons:
1. With respect to current employees and affected retirees: Appendix E, to restore pension benefits earned under UC's standard pension formula but denied due to Internal Revenue Code limits, was considered in detail during two Regents' meetings in 1999. It was unanimously approved by the full Board in February 1999 (minutes) and has remained standing Regents' policy to this day. Many senior-level employees joined the University or remained with the University based on this publicly declared policy, which was viewed as a condition of employment.
Retroactively denying a benefit approved through policy action by the Regents, on which many UC faculty and staff made career decisions, would be unprecedented for the Regents and the University. This is what was proposed in the original J1 item, now moved from your December to the January meeting.
2. For future employees hired after July 1,2013: Many ofUC's competitor universities, and almost all competitor medical centers, offer retirement benefits above the IRC limits (well documented in the 1999 Regents' action). The proposal to eliminate pension restoration benefits will place the University, professional schools and medical centers at a critical disadvantage in recruitment. Some competitor organizations use a combination of defined benefit and defined contribution plans, or annuities, but these tools were not included in the original J1 item.
We understand the current political sensitivities relating to pension benefits. But the Regents have historically stood strong for doing what is right; in this instance that means honoring commitments made to employees by a previous Board, and taking steps to ensure that new pension benefits will still keep UC competitive with the best universities in the country.
After some of us worked for months through appropriate administrative channels to try to resolve the status of Appendix E, we were surprised to see the J1 proposal included in the Regents' meeting packet without prior notice and absent any input or context from the
more than 200 senior faculty and executives affected by this matter. We hope that the additional month provides that opportunity for that dialogue.
President Yudof encouraged us to share our views in a letter to you. We write not only as University leaders who counted on Appendix E in our own retirement planning, but also as executives who will be recruiting the next generation of University senior management.
On the following pages is a comprehensive summary of Appendix E, including the legal/policy imperative for its implementation, and an explanation of the need for a new pension restoration plan going forward. You deserve a full hearing of these issues before taking any action.
We are eager to work with you in any productive way. In the end, however, we urgently ask that you direct the University administration to 1) implement Appendix E for current employees as promised by the 1999 Board of Regents and required by University policy, and 2) develop a responsible but market-based plan for future senior level employees that will keep the University of California the leading institution of higher education and clinical care in the world.
[SIGNED BY EMAIL]
Satish Ananthaswamy, CFA Sr. Portfolio Manager Office of the CIO
Terry Belmont, CEO, UCI Medical Center
Marie Berggren, Chief Investment Officer
David Brenner, MD Vice Chancellor for Health Sciences and Dean, UCSD School of Medicine
William J. Coaker Jr. Senior Managing Director of Equity Investments University of California, Office of the Treasurer
Lynda Choi Managing Director, Absolute Return Office of the Treasurer of the Regents
Steven C. Currall, PhD, Dean, UC Davis, Graduate School of Management
Christopher Edley, Dean, Boalt School of Law, UCB
Roger Farmer, Chair, Department of Economics, UCLA
David T. Feinberg, MD, MBA, Chief Executive Officer, UCLA Hospital System, Associate Vice Chancellor
Linda Fried Sr. Portfolio Manager
Gloria B. Gil Managing Director of Real Assets Office of the Treasurer
Franklin D. Gilliam, Jr. Dean, School of Public Affairs, UCLA
Sam Hawgood, MD Vice Chancellor and Dean, UCSF School of Medicine
Tom Jackiewicz, CEO and Associate Vice Chancellor for UCSD Health System
Ken Jones, Chief Operating Officer, UCSF Medical Center
Mark Laret, CEO UCSF Medical Center
Gerald S. Levey, MD, UCLA Dean Emeritus
Larry Lotenero, Chief Information Officer, UCSF Medical Center
Richard Lyons, Dean, Haas School of Business, UCB
Gary Mathews, Vice Chancellor Resource Management& Planning, UCSD
Thomas McAfee, MD, Dean for Clinical Affairs, UCSD
Virginia McFerran, Chief Information Officer, UCLA Health System
William McGowan, CFO, UC Davis Health System
Judy Olian, Dean and John E. Anderson Chair UCLA Anderson School of Management
Jesse L. Phillips Senior Managing Director, Investment Risk Management Office of the Treasurer of the Regents
John Plotts, Senior Vice Chancellor, UCSF
Claire Pomeroy, MD, MBA, CEO UC Davis Health System; Vice Chancellor/Dean, UCD School of Medicine
Tim Recker, CFA Managing Director - Private Equity Office of the Treasurer of the Regents
Ann Madden Rice, CEO UCD Medical Center
Amir Dan Rubin, Chief Operating Officer, UCLA Hospital System
J. Thomas Rosenthal, MD, Chief Medical Officer, UCLA Hospital System, Associate Vice Chancellor
Paul Staton, Chief Financial Office, UCLA Hospital System
Jack Stobo, MD Senior Vice President Health Services and Affairs
Robert Sullivan, Dean, Rady School of Management, UCSD
Randolph E. Wedding Senior Managing Director, Fixed Income Office of the Treasurer
Position Paper on Pension Benefits for Faculty and Staff Earning Above mCLimits
The Regents acted in 1999 to restore UCRP benefits earned by employees under UC's standard pension formula but "denied due to IRC limits." The new policy was contingent upon IRS approval, which, after an unexpectedly long delay, was received in 2007. The Regents' policy was intended to become Appendix E ofUCRP, with an effective date of January 1,2000. It has yet to be implemented, despite public declarations and repeated promises to employees.
In the 1999 action, implementation details were delegated to the President, with the concurrence of the Chairman of the Board and the Chairman of the Finance Committee, to ensure compliance with IRS requirements. In 1999, these three officials were in complete support of Appendix E and shepherded the matter through the full Board.
Item J1 wrongly asserts that implementation "concurrence" meant that three new individuals holding these same positions 11 years later could overturn the unanimous intent of the full Board and choose whether or not to implement the approved policy. Item J1 confoundedly suggests that the current Board of Regents can retroactively deny benefits promised to employees by a prior Board 11 years ago. There is no language whatsoever in the 1999 Regents' item to support this interpretation. Instead, the item repeatedly states that benefits "will be restored," and "this will be done by amending UCRP," and "benefit restoration plans will replace UCRP benefits that are not currently paid because of the IRC limits."
According to the University's own policies, Appendix E must be implemented (documentation follows). Further, employees made career decisions in good faith based on the expectation that the Regents' policy would be implemented - consistent with all other Regents' policies. The University has enjoyed the benefits of recruiting and retaining senior leaders with the explicit promise that once IRS approval was received, the policy would be implemented.
Prospectively, for employees hired after July 1,2013, the Post-Employment Benefits task force recommended a cap on the pension benefit augmented with alternative forms of retirement compensation. We believe that defining an appropriate future benefit will be critical to our ability to recruit senior management in the University, including the professional schools and medical centers. Capping the pension formula at the IRC limit, with nothing to mitigate for benefits earned but lost, will be inadequate to accomplish this goal. Our competitors have recognized this by approving restoration benefits, which was the driving force behind Appendix E.
The Imperative to Implement Appendix E For Current Employees and Affected Retirees
A. The Policy Imperative for Implementation
Regents Standing Order 120.3 states: "All provisions of the University of California Retirement System ..• shall be set forth in Regents' policy. "
The Board of Regents on February 18, 1999 unanimously adopted a new UCRS policy to be effective January 1,2000. The Appendix E policy was designed to ensure that all employees, regardless of salary level, would receive retirement benefits based on a standard, uniform formula of years of service, age at retirement, and highest average Plan compensation. The policy was deemed fair and equitable to all employees. It was designed to encourage and reward long service to the University and responded to market-based compensation.
The only condition for implementation of the new policy was IRS approval, which was granted in 2007.
The policy did not say that implementation was subject to further determination of the desirability of the policy by the President and the Chairs of the Board and Finance. The Administration's position to the contrary suggests that the President similarly could have refused to implement the UCRP policy approved by the Board in May 2002 extending survivorship benefits to domestic partners had he disagreed with the policy or had the issue become politically undesirable.
Regents Policy 1100 states: "It is the responsibility of the Board to set policy and the responsibility of the University administration to implement and carry out policy •••. "
And tt ••• the President of the University shall administer each Plan under UCRS as the appointed Plan Administrator." (111411999 Regents mtg. Finance, p.l0)
The explanation of why Appendix E implementation was delegated to the President and chairs of the board and finance can be found in the minutes of the January 14, 1999 Regents' meeting, when restoration ofIRC-limited benefits was first discussed.
At that meeting, the month prior to the Regents' ultimate policy vote, the President's responsibility as UCRS Plan Administrator was expanded "to make technical changes to these Plans ... to accommodate changes in the Internal Revenue Code (IRC) and United States Treasury Regulations to preserve the qualified status of the Plans under the IRC." This action was taken to avoid delays that resulted when bringing technical changes back to the full Board. These technical amendments, it was noted, "do not reflect any policy changes" to decisions approved by the full Board. (1/14/99 Regents mtg. Finance, pg.l 0)
As this expansion of authority was being discussed, Regent Howard Leach "pointed out that the President, in addition to being the administrator of the Plan, is also a Plan beneficiary. He believed that it would be unfair to ask the President, acting alone, to determine if a change to the plan is a technical one [and not a policy change], and suggested that the recommendation be amended to include the provision that any technical changes that are made are subject to the concurrence of the Chairman of the Board."
The next month, on February 18, 1999, the Board approved as a matter of policy Appendix E, restoring benefits "earned but denied by IRC regulations." Per the concerns expressed earlier by Regent Leach, implementation of Appendix E was delegated to the President, with the concurrence of the Chairman of the Board and the Chair of Finance, so that as the University worked out compliance details with the IRS, the full Board did not need to act again and the potential for a conflict of interest on the part of the President as Plan Administrator and Plan beneficiary could be avoided.
In summary: The President, as Plan Administrator, was directed to carry out the Regents' policy directive and implement Appendix E, and he was given authority to make technical adjustments to preserve the qualified status of the plan - NOT policy adjustments. The reason two other Regents were required to concur was to ensure that the President, as a Plan beneficiary, made ONLY technical adjustments and not policy adjustments. Choosing to override the full Board and not implement Appendix E is clearly a policy decision, not a technical adjustment.
Regents Bylaws 16.11 "Reconsideration, Repeal, or Rescission" states: t~ny member may move for the reconsideration of an action taken by the Board. Such motion must be made and voted upon at the same meeting at which said action is taken. "
This Bylaw suggests that Appendix E became binding at the conclusion of the February 1999 Regents' meeting. Any changes to UCRS require new action by the full Board, which is being requested in JI. However, all University and legal precedent suggests that new policies apply going forward from a new date, not retroactively. For the past 11 years, the 1999 Appendix E decision to restore benefits "earned but denied due to IRC limits" has been the standing policy of the Regents of the University of California - and the policy on which many senior employees made life and career choices. The 1999 action was not a "proposal" as described in JI; it was approved Regental policy.
UC Standards of Ethical Conduct, adopted by the Regents May 2005, #5 "Compliance with Applicable University Policies, Procedures and Other Forms of Guidance, " states:
... it is not acceptable to ignore or disobey policies if one is not in agreement with them, or to avoid compliance by deliberately seeking loopholes. "
The failure to implement the Regents' 1999 policy on pension restoration benefits appears to violate this UC Standard of Ethical Conduct. The Appendix E policy decision repeatedly states that benefits "will be restored," contingent upon IRS approval. While some may not agree with the Regents' 1999 policy decision, "it is not acceptable to ignore or disobey policies if one is not in agreement with them."
Further, avoiding implementation of the policy on the grounds that the President does not have the concurrence of the Chairmen of the Board and Finance - especially given the clearly documented rationale in the Regents' minutes for requiring that concurrence -- appears to be an effort to "avoid compliance by deliberately seeking loopholes."
B. The Ethical Imperative to Implement Appendix E
The Regents' action on Appendix E has been widely reported throughout the University and beyond since 1999.
• Since 1999, the Regents' policy and progress with the IRS approval process were regularly discussed among affected employees and OP staff. This included discussions with Regents, Presidents Atkinson and Dynes, and several senior executives in OP managing the approval process with the IRS.
• California Postsecondary Education Commission reports in 1999/2000 and 2000/2001 noted that the IRC limits were hindering recruitment and retention of executives at both UC and CSU. CPEC reported that the UC Board of Regents addressed the problem by approving restoration plans: "Should the plans be approved by the Internal Revenue Service, the program would apply to some University faculty, staff, and retirees, and benefits would be provided as of January 1, 2000." Notably, this contemporaneous public document, which was circulated statewide, did not say that implementation was contingent upon the further review and ultimate concurrence of the President and the Chairs of the Board and Committee on Finance.
• Since the 2007 IRS approval of Appendix E, UC has been accruing to pay full restoration of benefits earned. The July 1,2008 UCRP valuation report to the Regents notes a "Change in Plan Provisions: The estimated increase to UCRP's actuarial accrued liability (AAL) of$50.6 million and the increase in the normal cost of approximately $5.5 million that would result from Appendix E are included in the current valuation results." Contrary to suggesting that earned benefits will not be restored, the report to the Regents notes that UCRP plan provisions have changed to include Appendix E, and UCRP accruals appropriately have been adjusted.
• In costing implementation of 415(m) restoration plans, campus officials were told to assume "Appendix E implementation (costing based on no cap to Covered Compensation)" The University a/California 415(m) Restoration Plan 2009 Trainings/Overview, UC Human Resources, pages 14 and 15.
Senior-level faCUlty and staff made career decisions based on the Appendix E policy decision by the Regents, knowing that IRS approval was highly likely and that the President's responsibility was to implement the approved policy.
Many senior-level employees turned down or did not consider positions at competing institutions over the past decade solely because of the Appendix E benefit, and other senior-level employees joined the University based on this representation. These employees trusted the University and Regents to fulfill their commitments. This benefit was viewed as a condition of employment.
To date, Appendix E remains on the public record as the most recent Regents' policy decision relating to IRC limits. This is confirmed on page 155 of the 2010 PEB Task Force Report, which lists a timeline of major policy changes to UCRS; there it notes in year 2000, "Restoration Benefits approved by The Regents." Regents', PEB and official University statements continue to support the principle that Appendix E be implemented, e.g.:
• "Accrued UCRP benefits for past service cannot be reduced."
PEB pg. 29
• "Current employees' pension benefits will not change." Town Hall Forum 9/24110
• "Employees need 78-94% income-replacement [UCRP plus Social Security] to maintain the same standard of living in retirement as while working," and UCRP is designed to provide that after a full career devoted to the University. PEB pg. 18 [For a 35-year UC employee earning well above the IRC limits, this goal is impossible to achieve without the restoration provided in Appendix E.]
Failing to implement UCRP Appendix E is viewed in the same way President Yudof might view his successor PresidentIPlan Administrator choosing not to implement UCRP Appendix 0, which provides President Yudofs supplemental retirement annuity payments. The rationale for Appendix E was documented in Regents' items in the same way the rationale for President Yudofs annuity was documented, and both were approved in Regents' actions. Presumably, President Yudof expects Appendix ° to be implemented -- in the same way that more than 200 individuals covered by Appendix E expect it to be implemented.
The University of California has benefitted from the 1999 Regents' policy action by promising its implementation, retaining employees who might otherwise have left, and recruiting employees who otherwise would not have come.
"UC's defined-benefit plan should encourage and reward long service to the University." PEB pg. 1
The University has used the prospect of Appendix E benefits to retain senior-level employees who, had they known Appendix E might not be implemented, would have left UC for other employment offering superior deferred compensation.
Failure to implement the policy would violate the trust that those employees placed in the words and actions of the Board of Regents and in two former presidents of the University of California, who were absolutely committed to seeing the implementation of Appendix E.
Requiring affected employees to seek legal remedy to secure Appendix E benefits promised in the 1999 Regents' action will be demoralizing to those senior employees who have devoted themselves to the University, and it will be costly and detrimental to the Regents, the President and the University.
The 11 Regents' item seems to suggest that it will better politically for the University to be directed by a court to implement Appendix E than to implement Appendix E as a matter of policy and conscience. However, forcing resolution in the courts will put 200 of the University's most senior, most visible current and former executives and faculty leaders in public contention with the President and the Board.
Legal proceedings would likely involve the following actions:
• Depositions of former Presidents Atkinson and Dynes on the rationale for Appendix E, their actions to see Appendix E implemented, and their promises to affected employees.
• Depositions of former Regents Parsky, Leach, Davies, Khachigian and others involved in the 1999 Regents' action regarding their rationale for the action and their expectations of implementation by the PresidentIPlan Administrator.
• Depositions of former General Counsel on the role of the Board to set policy, and the role of the PresidentIPlan Administrator to carry out policy.
• Depositions of current Regents on their decision to grant substantial supplemental retirement benefits to President Yudof (Appendix 0) as an exception to policy while not requiring the President to implement retirement benefits that were prescribed within policy by a previous Board (in Appendix E).
• Depositions of the current President and General Counsel on why failure to implement Appendix E is not a violation of the University's Standards of Ethical Conduct #5.
For all of these reasons, we believe it is the University's legal, moral and ethical obligation to implement Appendix E for current employees and affected retirees. Failure to do so will likely result in a costly and unsuccessful legal confrontation, while undermining the University's reputation as a trusted and good-faith employer and demoralizing senior leaders who have devoted their careers to ensuring its continued excellence.
Pension Benefits for Future Faculty and Staff Earning Above IRe Limits
A. Retirement Benefits are Critical to UC's Ability to Compete for Talent
Increasingly, competitive retirement benefits are a key consideration in the recruitment of senior faculty and management to positions at UC and our competitor institutions.
Almost all ofUC's competing universities, as well as many other employers offering defined benefit plans, have instituted pension restoration programs to mitigate the loss of earned benefits. Some are modeled after UC's Appendix E; others use a combination defined benefit and defined contribution plan. Other institutions, including competitor private hospitals, offer defined contribution plans to the IRC limits plus additional deferred compensation or annuities.
B. The IRC Limits Are Insufficient to Recruit and Retain Senior-Level Faculty and Management
A future Chancellor retiring at age 60 after 30 years of University service with a RAPC of$500,000/yr would have earned a pension of75% of his or her final salary under UC's standard, uniform pension formula. This is consistent with the University's stated objective that the defined-benefit plan should encourage and reward long service to UC.
But capping his or her RAPC compensation at the IRC limit of $245,000 would produce a pension of37% of final working salary, despite 30 years of service. A future vice chancellor earning less than half of what this Chancellor earned ($245,000/yr) would receive the identical pension benefit, but it would represent 75% of his or her working salary.
With fewer years of service for both officials - 5, 10, whatever number -- this Chancellor would receive the same post-retirement income from UC as the vice chancellor who earned half the salary. This would require the Chancellor to set aside a high percentage of salary to self-fund retirement, thus negating the distinction in compensation between the two positions of markedly different responsibility.
Capping the retirement formula at the IRC limit is inadequate to attract and retain the best leadership for UC. It is also inadequate in the medical centers to compete with retirement benefits offered by private university medical centers as well as larger not-for-profit hospital systems.
C.lfa Cap on Covered Compensation/or UCRP Is Implemented, It Must be Supplemented with Appropriate Additional Retirement Tools
CSU and UC have both used supplemental annuities tied to longevity for senior-level recruitments. Other universities and hospitals have used combinations ofDBIDC plans to achieve competitive retirement benefits.
The Regents should direct the University's compensation consultants to provide an analysis of competitors' offerings to ensure that UC's benefits remain competitive.
D. The Comprehensive Retirement Program/or Employees Hired After July 1,2013 Should be Standardized to Avoid Having to Bring Individual Items to the Regents.
This will streamline the recruitment process and avoid complex individual arrangements requiring Regental approval, which invariably create internal inequities across the University.
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