Pension Benefits
The University of California Retirement Plan (“UCRP” or “the Plan”) is a governmental defined benefit plan that provides pension benefits for more than 61,700 retirees and survivors and has more than 118,000 active employee members as of July 1, 2013. UCRP promotes recruitment of talented individuals and provides incentives for long careers with UC. Because UCRP provides guaranteed benefits, career faculty and staff gain income security over the span of their retirement years. UCRP disbursed $2.5 billion in retirement benefits during 2012-13. Prior to November 1990, contributions to UCRP were required from all employer fund sources and from employees (members). In the early 1990s, the Regents suspended University and member contributions to UCRP after actuaries determined that UCRP was adequately funded to provide benefits for many years into the future. The University estimates that in the nearly 20 years during which employer contributions were not required, the State saved over $2 billion in contributions for those UCRP members whose salaries were State-funded.
Compensation, Employee and Retirement Benefits, and Non-Salary Cost Increases
Display XIX-4: UCRP Historical and Projected Funded Status (Dollars in Billions)1
The surplus in the UC Retirement Plan has diminished over time and is estimated to have fallen to a level of 79% on an actuarial value of assets (AVA) basis by July 2013.
1Excludes retirees of Lawrence Berkeley National
Laboratory
The total cessation of contributions, which was desirable at the time for a variety of reasons, has created a serious problem today. For almost 20 years, faculty and staff continued to earn additional benefits as they accumulated UCRP service credit, yet no funds were collected from the various fund sources that were supporting member salaries and invested in UCRP to offset the annual increase in liabilities. Plan liabilities currently increase by $1.5 billion (17.7% of covered payroll) annually as active members earn an additional year of UCRP service credit. Due to both increasing liability and recent turmoil in financial markets, the actuarial-funded status of UCRP fell from 156% in July 2000 to 79% in July 2013. The accrued liability exceeds the actuarial value of assets by
$11.7 billion. The extent to which this unfunded liability grows depends on future investment returns, as well as employer and member contributions to UCRP and changes in plan provisions.
It has been clear since at least 2005 that resumption of contributions was necessary to cover the cost of additional service credit accrued each year. Unfortunately, in 2007, the State was unwilling to restart contributions to UCRP due to the Plan’s overfunded status at that time. The lack of State funding to support retirement contributions delayed the restart of contributions from other fund sources as well. The 2009-10 Governor’s Budget acknowledged the need to provide $96 million for its share of employer contributions (covering employees funded from State funds and student
fees), representing a rate of 4% to begin on July 1, 2009, rather than the proposed 9.5% employer rate. However, the Governor’s budget proposal reduced this amount to $20 million, and ultimately no funding for this purpose was included in the final budget act.
The University restarted employer and member
contributions in April 2010, with an employer contribution of 4% and contributions from most members of 2% for the period from April 2010 through the 2010-11 fiscal year. The State’s share was funded by redirecting resources from existing programs and student tuition increases.
In September 2010, the Regents approved increases to both employer and member contributions for 2011-12 and 2012-13. Employer contributions rose from 4% in 2010-11 to 7% for 2011-12 and to 10% for 2012-13. Member contributions rose from approximately 2% in 2010-11 to 3.5% for 2011-12 and rose to 5% for 2012-13. Because the combined contribution rate of 15% in 2012-13 remained below the normal cost of annually accrued benefits (i.e., Normal Cost) as a percentage of salary (17.44%), these contribution rates slowed, but did not eliminate, the growth in unfunded liability. At their November 2011 meeting, the Regents approved increases in employer and existing member contribution rates to 12% and 6.5%, respectively, effective July 1, 2013. New employees began paying 7% as of July 1, 2013, as described below. At their July 2013 meeting, the Regents approved increases in employer and existing member contribution rates to 14% and 8% respectively, effective July 1, 2014.
In December 2010 and March 2011, the Regents gave the President authority to transfer funds from the UC Short Term Investment Pool (STIP) to UCRP to stop further increases in the unfunded liability. Approximately
$1.1 billion was transferred to UCRP in April 2011. Another $936 million was transferred to UCRP in July 2011, which was garnered from external borrowing through the issuance of a variable rate general corporate bond. Campus and medical center payroll funds will be assessed a fee to cover the principal and interest on the STIP note and bond debt. These cash transfers to UCRP were authorized to prevent future employer contributions to UCRP from rising to unsustainable levels. 0% 50% 100% 150% 200% $0 $25 $50 $75 2000 2013
Compensation, Employee and Retirement Benefits, and Non-Salary Cost Increases
In December 2010, the Regents took further action to make changes to post-employment benefits, including retirement plan benefits that will reduce long-term costs. Most significantly, the Regents approved the establishment of a new tier of pension benefits applicable to employees hired or (in certain situations) rehired on or after July 1, 2013, which would increase the early retirement age from 50 to 55 and the maximum age factor from age 60 to 65. In 2013-14, UCRP members hired on or after July 1, 2013 will be paying 7% of covered compensation. UC is continuing to explore further changes to retirement plan benefits to ensure that benefits are market-competitive and cost- effective.
In September 2012, the Governor signed legislation to reform the California Public Employees Retirement System (CalPERS) for State employees hired after January 1, 2013. The new legislation limits the maximum
compensation used for benefit calculations, requires State employees to pay 50% of their pension costs, and increases the early retirement age from 50 to 52 and the age at which the maximum age factor applies from 63 to 67. The pension reform also included measures (similar to measures the University already has) to prevent abusive practices such as “spiking,” when employees are given big raises in their final year of employment as a way to inflate their pensions.
General Accounting Standards Board (GASB) rules require UC to report accrued unfunded pension liabilities on its financial statements. For 2012-13, UC recorded an unfunded pension liability accrual of $1.9 billion.
In 2013-14, the University is contributing $320 million from core fund sources and $1.1 billion from other sources to UCRP. As employer contribution rates rise over the next several years, UC contributions are expected to rise to $393.1 million from core funds ($1.3 billion from all funds) in 2014-15. The State’s share, based on State- and student tuition and fee-funded employees, is projected to rise to approximately $296 million in 2014-15.
In 2012-13, the State provided an augmentation to the University’s budget of $89.1 million intended as actual support of the State’s share of the contribution to UCRP. This was welcome acknowledgement of the State’s
responsibility for its share of these costs. However, this amount is far short of the $281 million needed to fully fund the State’s 2013-14 share of UCRP. The budget plan for 2014-15 includes $73 million for the increase in these costs for core-funded programs in 2014-15. Of this, $64.1 million is the State’s share of UCRP employer contributions and the remaining $8.9 million is related to programs funded from UC General Funds.
Display XIX-5: Actual and Projected Employer and
Employee UCRP Contribution Rates1
Employer Member
UCRP Bond DebtSTIP Note/ 2 UCRP
2010-11 Actual 4.00% 0.00% 2.00%
2011-12 Actual 7.00% 0.07% 3.50%
2012-13 Actual 10.00% 0.63% 5.00%
2013-14 Actual 12.00% 0.65% 6.50%3
2014-15 Approved 14.00% 1.00% 8.00%
1Measured as a percentage of base pay. Member
contribution amounts are pretax and less $19 per month. Member contributions are subject to collective bargaining agreements. Contributions began in April 2010 at the 2010-11 rates.
2Payroll assessment to cover the principal and interest on
the STIP note and bond debt used to stop further increases in the unfunded liability for UCRP.
3Member contributions for employees hired on or after July
1, 2013 will be 7% with no $19 per month offset. Display XIX-6: Actual and Projected Employer
Contributions to UCRP by Fund Source (Dollars in Millions)
Employer contributions to UCRP restarted in April 2010. Contribution rates will be 14% of employee compensation by 2014-15, at a cost of about $393.1 million to core-funded programs and $1.3 billion in total.
$0 $500 $1,000 $1,500
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15