The University of California has long had a defined-benefit
pension plan for its employees. This type of plan provides a
monthly income for retirees based on age at retirement, years of
university service and earnings history. The regents act as
trustees for this plan and maintain a fund of about $40 billion to
handle its liabilities.
Unlike other state and local pension plans in California, the
regents’ plan is fully funded. In fact, they have done so
well in their fund investments that neither employer nor employee
contributions have been required for the last decade and a half.
The plan has earned enough in interest and dividends to meet its
obligations.
A ballot initiative has been submitted to the California
attorney general. If approved by voters, it would require all
California state and local pension plans to place new employees
under defined-contribution plans. Such plans are essentially
tax-favored savings accounts. They shift the risk of adequate
retirement income to employees and away from the employer.
The motivation behind this initiative, an amendment to the
California Constitution, is to limit the liability of state and
local government entities. Some governments, such as that of San
Diego, have proved to be poor pension administrators and have
gotten themselves into financial difficulties because of their
pension obligations.
Now the UC is being penalized for the sins of San Diego and
other governments, despite very responsible pension management by
the regents. There are several reasons why the UC should not be
included in the proposed initiative.
If passed, the initiative would require contributions to the new
plan starting in 2007, but the UC’s budget is already tight.
Where would the money come from?
Also, universities need faculty renewal. Defined-benefit
pensions provide incentives for senior faculty to retire, even
though tenure makes it difficult to force retirement.
Defined-contribution plans, in contrast, provide no incentives to
retire.
In addition, the UC already has a defined-contribution plan as a
supplement to its basic pension that is funded by employee
contributions. It also makes voluntary, employee-paid retirement
savings options available to its faculty and staff.
The UC has historically enjoyed constitutional autonomy. The
proposed constitutional amendment would override that
tradition.
It is quite possible, however, that the UC may want to revamp
its pension programs in the future. Indeed, a review of the pension
system was underway before the initiative was filed. But the
initiative would force an immediate shift without allowing the UC
to weigh the pros and cons of any pension changes.
UC administrators need to make the case for exempting the
university from the proposed initiative before its final wording is
locked in place, and there is very little time for that to
occur.
Mitchell is an Anderson professor of management and public
policy.