The Bay Citizen: University System Perk Becomes Pension Liability

At various points since 1992, the university has diverted about $875 million from its regular retirement fund to finance supplemental retirement benefits, in part to make up for salary cuts or meager increases tied to state budgets. But now the university system is carrying a roughly $1.3 billion obligation to more than 100,700 faculty, staff and administrators who were promised generous returns on those initial sums that the university salted away for them.

The initial goal of expanding these benefits under the so-called Capital Accumulation Payment plan was to attract and retain talented employees. But university officials acknowledged that there was no clear evidence that that aim had been achieved.

And while the supplemental plan represents a small fraction of the university’s overall pension obligations, it is compounding the system’s financial problems, which include an overall pension deficit of $14 billion tied to investment losses and a 20-year hiatus on contributions from the university system and employees that ended in April.

If the university hadn’t offered the perk, said Steve Montiel, a spokesman for the University of California, “we would be in a little bit better financial position.” The plan was overfunded at the time, Mr. Montiel said, “so it was like, ‘Yeah, this is not going to matter that much. Let’s assign some of it to this other plan.’ ”

That was a mistake, said Jason Sisney, director of state finance at the nonpartisan State Legislative Analyst’s Office.

“The idea that retirement benefits would have been expanded in this manner for a pension system in this particular position seems quite questionable in retrospect,” Mr. Sisney said. “Clearly, a pension system that has employees accruing new benefits each year without any accompanying contributions is unsustainable.”

Neither of the state’s largest pension plans, the California State Teachers’ Retirement System and the California Public Employees’ Retirement System, provide supplemental retirement benefits financed with employer contributions and investment returns alone. But the Board of Regents of the University of California approved the enhanced benefits on seven occasions from 1992 to 1994 and 2002 to 2003. The university set aside the equivalent of 2.5 to 5.3 percent of each employee’s salary from a given year in a separate account with a guaranteed return of 7.5 or 8.5 percent, which varied depending on when the allocation was offered.

Joe Nation, a public policy professor at Stanford and a former state assemblyman who has overseen studies on California’s largest pensions, sees the university’s expanded pension benefits as anachronistic at best.

“It puts them in a really bad spot because they have these obligations that are iron clad firm obligations to employees,” Mr. Nation said. “It also means that tuition increases and other cuts will continue.”