Davis Faculty Association

Archive for 2005

Letter to Regents Re: Non-Resident Tuition

The Regents of the University of California

The Davis Faculty Association represents voluntary dues-paying members who serve on the faculty of the University of California Davis. Our membership is gravely concerned about the issue of non-resident tuition for foreign graduate students. As the Board of Regents is well aware, foreign students are currently required to pay significant tuition charges, in excess of the fees that are paid by resident graduate students, without the ability to gain residency.

The Davis campus instituted a policy wherein research grants that employ students as a graduate student researcher must pay the full non-resident tuition. This has created a situation where the cost to grants employing non-resident students has become excessive, to the point where it may be more attractive to employ a postdoctoral researcher, thus reducing both the research and employment opportunities for graduate students. Language departments which seek to employ native-speaking graduate students as instructors in basic language skills are also seriously impacted.

The training of foreign students, many of whom remain in the United States and in California in particular, and who form the basis of the next-generation of faculty for the University and entrepreneurs in start-ups and high tech businesses and industries, is essential. These students contribute to the vitality of our graduate programs, and they make significant contributions to the health of the California economy.

The DFA supports the efforts of the University to ameliorate this problem by freezing graduate non-resident fees for 2005-06 and eliminating fees for three years once students qualify for candidacy to the Ph.D. as a good first step. These proposals offer some relief to faculty researchers and academic departments but are still inadequate in solving this system-wide problem; non-resident graduate students (and their University sponsors) are still burdened with the prospect of enormous fees, and as a result, many simply do not come to California. We are not competing adequately with other institutions that recruit the top talent from overseas.

The membership of the Davis Faculty Association trusts that the Board will keep these issues in mind as it discusses the future of graduate education at the University.

Ian Kennedy, Chair
Davis Faculty Association

FA Representatives Meet with UCOP Representatives

by Charles P. Nash, VP-External Relations and Eric Hays, Director-External Relations

On October 26, 2005 we had our now-customary annual meeting with Assistant Vice President for Academic Advancement, Ellen Switkes, and Vice President for Budget, Larry Hershman. Among other things, these late autumn meetings give us a preview of the budget proposal that the administration will be presenting to the regents at their November meeting, to be held this year on November 16-17 in Berkeley. We also discussed several personnel policies of interest to CUCFA members: Faculty salaries, merits and benefits; annuitant heath benefits; student fees, especially non-resident graduate student fees; and private funding for executive compensation.

UC Budget and Faculty Benefits:
Last year at this time, with some apprehension, the University proposed a budget that was in line with the “compact” that UC and CSU had recently reached with Governor Schwarzenegger. That agreement was generally honored in the 2005-06 budget, which suggests that this year it probably will be as well.

By covering enrollment increases and including minimal pay increases (merits, COLAs, etc.) in the range of 3% to 4% per year, the proposed budget partially stems the budgetary erosion that UC has long suffered. In the last 20 years the state’s per-student subsidy for UC students has fallen 40% in constant dollars. The Academic Council unanimously chose to continue having COLAs begin in October rather than in July so as to have the largest possible increase in the salary base; however, merits will be awarded in July (this due in part to CUCFA’s participation in the lawsuit initiated when because of budget cuts merits were deferred in the early 1990’s).

The compact-based budget does nothing to reduce the growing student : faculty ratio (now 19.5) or to address the erosion of faculty salaries relative to our comparison-eight institutions. The UC faculty salary lag is expected to grow to about 15% this year. Recently, UC has emphasized the unusual strength of its benefits package in an attempt to compensate for non-competitive salaries. Both of our contacts stated that these advantages are now likely to be short-lived. UC plans to cap health benefit cost increases at 5% per year. Also, both the university and its employees will have to begin making regular contributions to the retirement system (UCRS), probably starting in 2007-08. The administration says that such contributions will be phased in over a period of years. Our own view in this regard is that the employee contribution rate will ultimately approximate CalPERS’s 5% of salary.

Annuitant Health:
Although it is probably not widely known among active faculty members and employees, annuitant health insurance is not a UCRS benefit. Rather, it appears as a line item in the UC budget that in recent years has not been well-enough funded by the legislature to cover the actual costs thereof. Annuitant health care has suddenly become an issue because new retirement system reporting requirements will spotlight the estimated $10 billion unfunded liability that this benefit represents. The UC Regents have appointed a committee to explore options to address this issue and will be discussing the committee’s findings at a spring meeting. As we see it, in a very unlikely worst case scenario this benefit could be eliminated entirely for faculty and other University employees who are not covered by collective bargaining agreements.

UC Tying Faculty Salary Parity to Student Fee Increases:
UC wants to restore competitive faculty salaries before the benefits differential disappears. It plans to do that in part by increasing undergraduate student fees. This funding source will also be used to decrease the student : faculty ratio, thereby presumably enhancing the quality of undergraduate education across the system. The administration believes that currently UC’s undergraduate fees are enough lower than those of our legitimate comparison institutions to justify about four years’ worth of accelerated increases before parity is reached.

Professional Student Fees:
The Governor, who opposes increasing undergraduate fees, has supported raising graduate student fees, especially at the law and business schools, which now receive very little state money and have fees comparable to those of to private schools. Several campuses are proposing fee increases that will continue this trend, and fees are already up to $27,000 per year, $40,000 for non resident students. Our UCOP contacts were concerned that the fee situation at professional schools might become a slippery slope for fees in other programs.

Non-resident Graduate Student Tuition:
As faculty members are well aware, rapidly rising graduate student fees have created huge problems in the recruitment and funding of academic graduate students — largely, though not exclusively, in the sciences and engineering. Non resident graduate fees pose a particular problem for international students, who cannot become California residents. The administration plans to address the last point by freezing non-resident graduate fees at the current level and totally eliminating non-resident fees for up to three years after a student has been advanced to candidacy for the Ph.D degree. (The current non-resident post-candidacy fee reduction is 75%.) The three-year limit is intended to encourage students to finish their degrees promptly.

Private Funding for Executive Compensation:
as was reported widely in newspapers across the state, at their September, 2005 meeting, the UC regents committee on finance floated an idea to seek private funds to augment the salaries of 42 senior leadership positions with current annual salaries equal to or greater than $350,000. We were told that this idea was being pushed by certain Regents rather than by the University Administration. According to the September Regents agenda the proposal was to be voted upon at the November meeting. It originally was on that agenda, but as of this writing it had been withdrawn.

It is noteworthy that the looming changes in benefits programs that are described in the above paragraphs first came to CUCFA’s attention deep down in the same September Regents’ finance committee document that raised the issue of executive compensation. Since these items are clearly matters of concern to the Faculty Associations, CUCFA leaders will be meeting with Judy Boyette, Associate Vice President – Human Resources & Benefits, at the end of November.

Disability Insurance Issues

Dear DFA Members:

The DFA Board is sending the following information to you as a means of helping you determine whether or not to sign up for the disability insurance being offered during the Nov. Open Enrollment period. You, of course, will need to make that decision based on your own personal situation. Some faculty feel that if they are approaching retirement, it would not make sense to get Disability Insurance: if one were to become disabled,taking retirement might provide more than the Disability Insurance. See the link below for additional information and the following message sent to us at our request from Barbara Horowitz:

You are correct in that there is a draft of a new policy regarding medical separation which provides for the separation of an academic appointee who cannot return to work (or perform the essential duties of their position) after a period of medical leave (I don’t believe the length of time is stipulated). However, there is also a draft of a revised APM 710 (leaves) which puts a cap on paid medical leave for academics that do not accrue sick leave (this includes faculty). The cap would be 1 year for academics with at least 10 years of service and 6 months for academics with less than 10 years of service (see the quote below). Both of these drafts went to the campuses (including the various Senates) for informal review in March, 2005. They have not yet been released. Anticipating the release of these 2 policies, OP negotiated an opportunity for current academics to enroll in supplemental disability insurance without a medical exam during November’s open enrollment period. They can also change their waiting period during this time as well. OP is recommending a waiting period of 180 days. As you probably know, staff and some academics do accrue sick leave at the rate of 2 days/month. Faculty do not — but if they did accrue at the same level as staff and other academics, it would take 22 years to accrue 1 year of paid sick leave.

DRAFT Revised APM 710-22
“a. Academic appointees with less than 10 years of service may be granted a maximum of six months of consecutive or intermittent paid sick leave in a ten year period for personal illness or injury.
“b. A maximum of six months of paid sick leave with the possibility of up to six additional months of paid sick leave, subject to approval by the Chancellor, may be granted to academic appointees who have 10 years or more of University service in an eligible academic title at the time of personal illness or injury. The maximum amount of paid sick leave for those with 10 years or more of service is one year of consecutive or intermittent paid sick leave in a ten-year period.”

I hope the above helps.


For more information about the Disability Insurance, click on this link.

Tuition for non-resident graduate students

by Ian Kennedy

Non-resident graduate students are currently required by the University of California to pay significant tuition charges, in excess of the fees that are paid by resident graduate students. US citizens and permanent residents can become residents of the state of California following one year of residency. However, foreign nationals cannot follow this route to Californian residency. The non-resident fees are reduced by 75 percent following advancement of the student to candidacy for the Ph.D., usually following successful completion of their qualifying exam. Students then have three years to complete their degree, but if this time limit is exceeded the non-resident tuition once again increases to the full amount.

In order to support non-resident students, the Davis campus instituted a policy wherein research grants that employ students as a graduate student researcher must pay the full non-resident tuition. This has created a situation where the cost to grants employing non-resident students has become excessive, to the point where it may be more attractive to employ a postdoctoral researcher, as has been noticed in Washington. House Republicans are investigating the use of federal funds through grants to pay non-resident tuition, a practice that leads, in the estimation of the Chair of the House Committee on Energy and Commerce, to foreign students receiving more in total compensation than many post-doctoral scholars. The University of California Davis rates a special mention because the Committee used our Graduate Studies web site as a source of information.

Non-resident fees also wreak havoc with language departments that recruit native-speakers as graduate students and TAs. These departments have to use most of their block grants on huge out-of-state fees for students who cannot claim residency. The education of graduate students, both US citizens and foreign nationals, is an important mission of the University of California. The demise of the graduate program due to the imposition on non-resident fees on grants is a serious issue for the faculty

The imposition on non-resident fees arose during budget negotiations between the State Legislature and the University. It is apparent that the Legislature does not understand the important role of foreign graduate students, or graduate education in general, in the University’s mission. Nor does it appreciate the economic contribution of graduates who remain, or the political benefit of those introduced to our culture.

The Academic Senate of the University is not at liberty to lobby the Legislature in this regard. However the Davis Faculty Association, in conjunction with the Council of the University of California Faculty Associations, is free to undertake political lobbying activities. The DFA believes this is an important issue for many faculty members, and one which must be taken up with the legislators. It is not productive to complain within the University – we need to indicate to the Legislature the importance of training foreign students, many of whom remain in the United States and in California in particular, and who form the basis of the next-generation of faculty for the University and entrepreneurs in start-ups and high tech businesses and industries. This issue is a high priority for the Association. The DFA will work with CUCFA to educate legislators about the importance of graduate education and the role of non-resident students. To contact the DFA, email myrna@ucdfa.org.

DFA Opposes Regents Salary Proposal for Administrators and Possible Changes to Faculty Benefit Package

by Ian Kennedy

The DFA is closely monitoring discussion by the UC Board of Regents in regard to private sources of compensation for senior University administrators. At press-time, it was not clear whether the adverse public reaction to this proposal had persuaded the Board to drop the proposal. We are also tracking discussion of faculty benefits. A brief summary is provided below; the full document can be found on the web.

Private Funding to Augment Salaries
The Finance Committee of the Board of Regents recommended a change in compensation for senior administrators, from the President of the University of California down to the Deans of professional schools. They proposed that private funding be raised to increase the compensation paid to these senior administrators because the total compensation package received by this select group lags the market. They believe that this discrepancy impedes the recruitment and retention of highly qualified and talented administrators.

This issue may have ramifications for the faculty and the University as a whole. First, the concept of raising private funding to pay the compensation of University employees is troubling to many of the faculty. Second, it is not clear that general private donations to the University will be safe during times when the gifts are not sufficient to maintain the elevated salaries. The administration may be tempted in times of budgetary difficulty to dip into the general donations to support compensation packages, reducing available funding for other academic activities such as student support, research initiatives, classroom and laboratory construction, inter alia.

Retirement Benefits Threatened
Within the same document the Finance Committee made note of the cost of benefits paid to the faculty and retirees, having employed a private consulting firm to study the issue. Although salaries lagged behind measures of the current market, total compensation was found to be similar to the market due to the generous benefits paid by the University. This report noted that the University of California is one of the few remaining employees that provide generous retirement and health benefits to its employees and retirees and suggests that this practice may end: “Within the next couple of years, following intensive review, it is expected that there will be reductions in these benefits…. Additionally, it is anticipated that the value of both the Health and Welfare benefits and the Retirement and Retiree Medical benefits will be reduced significantly over the next few years….

This is an issue which is of substantial concern to both present employees and retirees. In particular, reduction in the benefits for health coverage for retirees is likely to have a significant impact on the more senior faculty and possibly on retirees. This is a very important issue that DFA is keenly interested in. We are expressing our concerns about both of these proposals to the University and the Regents; we will monitor developments closely. As more information comes to light, the membership of the association will be informed.

CUCFA’s 2005 Legislative Activities

by Charles P. Nash and Eric Hays

The Davis Faculty Association is a member of the Council of University of California Faculty Associations (CUCFA). CUCFA advocates on behalf of senate faculty in the UC system. Its member organizations – including the DFA – set CUCFA’s agenda. The Council coordinates government relations activities and exercises its right to meet and consult with the UC Office of the President on matters affecting the systemwide terms and conditions of faculty employment. As an independent entity with its own financial resources and its own lobbyist, CUCFA has the power to lobby on behalf of faculty in ways that are impossible for the Academic Senate.

The 2005 legislative session was a busy one for CUCFA. This article will discuss the key bills on which CUCFA was active. It also identifies the issues that will most likely deserve attention in the months to come.

AB 992: Law Enforcement Surveillance (T. Spitzer, R-Orange)
In January of 2004 the University administration asked the 2003-2004 Academic Council to review and comment upon a request from the UC Police Officers Association for UC to sponsor legislation that would have given the UC and CSU campus police forces the same authority to overhear and record communications that virtually every other law enforcement agency in the State already had under existing law. At that time the Academic Council believed that the proposed legislation did not impinge on academic affairs, and consequently decided not to take a position on it.

The legislation in question was introduced in February, 2005, whereupon some members of the 2004-2005 Academic Council had second thoughts about the broad authority that the UC police would have if the legislation were enacted. The current Academic Council began to consider the matter at its March meeting, and at its April meeting voted to oppose AB 992, reversing the position taken in 2004.

The turnaround on AB 992 was expressed in a letter from Academic Council Chair George Blumenthal to Senior Vice President Joseph Mullinex dated May 19, 2005. In it, Professor Blumenthal wrote that because the Academic Council had not instructed him to communicate its opposition to the bill anywhere other than to Mullinex, he had “no plans to pursue this matter outside the University.” He noted, however, that the letter in question was “a public document” so that other faculty members who “may choose to oppose this bill as individuals” could “use this letter as evidence of Council’s views.”

On the same day that the Academic Council’s letter was written, AB 992 passed out of the Assembly by a vote of 65 ayes to 3 noes and went to the Senate for their consideration. In spite of the daunting Assembly vote, some faculty members continued to oppose the bill – now with the Academic Council letter as ammunition – and contacted CUCFA seeking our support. Very shortly thereafter the CUCFA Board voted its own unanimous opposition to the bill.

CUCFA’s lobbyists from the firm of Orrick, Herrington and Sutcliffe contacted Assemblymember Spitzer’s staff, conveying our specific objections to the bill that had passed out of the Assembly. In particular, virtually all of the other law enforcement agencies that already had the proposed surveillance authority are answerable to elected officials, which campus administrations are not.

In the Senate the bill was assigned to the Public Safety Committee. We sent a formal letter of opposition to the Chair and members of that committee, as did other organizations, including the ACLU and the California Faculty Association (the CSU faculty union). Individual UC faculty members also lobbied the Senate committee staff, making good use of the Academic Council letter. As a result of all these efforts the version of AB 992 that had passed the Assembly so handily was voted down in the Senate Committee on June 14, 2005 by a vote of 2 ayes to 3 noes, 2 members not voting.

The Senate Committee granted the author’s request for reconsideration, and on June 22 he introduced a heavily amended version of the bill that would have limited UC and CSU police officers’ authority to the overhearing or recording of communications only in criminal investigations related to sexual assaults or other sexual offenses. Through our lobbyists, CUCFA then withdrew its opposition to the bill.

The amended bill was considered by the Public Safety Committee on June 29 and again failed to get a majority “aye” vote. This time the vote was 3 ayes, 2 noes, 2 members not voting. By the rules of the Legislature, a bill that fails to get the necessary votes to pass it out of committee “may not be considered further during the session.” The current session is now over, but a new one will convene in January and it remains to be seen whether or not AB 992 is truly dead.

SB 724: California State University Doctoral Degrees (J. Scott, D-Altadena)
As originally introduced in February of 2005, this bill would have authorized the California State University to award free-standing professional/clinical doctoral degrees, which were defined as post-master’s degrees that would qualify their holders to enter professional practices other than university faculty research and teaching.

This is not the first time that CSU has tried to extend its authority to include the award of independent doctoral degrees. The ostensible motivation for this latest attempt was the looming need in the state for a professional doctoral degree in audiology. The national accrediting body for audiology has decreed that two years from now a master’s degree will no longer be accepted for certification/licensing in that field

The UC administration vigorously opposed SB 724 as being contrary to the provisions of the venerable Master Plan for Higher Education. They argued that the projected demand for professional degrees in audiology, education, and other fields was exaggerated, and what needs there really were could be met by the proper implementation of planned or existing UC/CSU joint doctoral programs. UC also questioned the plausibility of the proposed funding strategy whereby CSU proposed to pay for the new programs at no additional cost to the state by combining the existing formulaic capitation funding with a fee that would be higher than the standard CSU fee but lower than UC’s graduate program fees.

CUCFA also formally opposed this bill in letters to the Senate Education Committee (chaired by Jack Scott, the bill’s author) and the Senate Appropriations Committee. Contrary to the administration’s rigid position, ours acknowledged the possibility that at some point there could be needs “that might be met most effectively by using the expertise and resources of CSU acting on its own.” To us, however, the legislation then at issue had inadequate mechanisms and criteria for addressing this question on a case-by-case basis. We also doubted that quality programs, particularly in fields with significant library or equipment requirements, could be created or sustained at the bargain-basement costs that the bill projected.

Over the opposition of UC, a bill authorizing the CSU to award doctoral degrees “in selected professional fields” passed out of both Senate committees with no dissenting votes and on May 31 passed on the Senate floor by a vote of 34 to 3. During the next month, UC and CSU reached a compromise whereby CSU would be authorized to offer only an independent Doctor of Education degree. The bill as amended in that manner was passed by the Assembly Higher Education Committee in mid-July by a vote of 5 to 2, the Assembly Appropriations Committee without dissent on August 25, and on August 30 the Assembly as a whole by a vote of 73 to 3. Because the new version of SB 724 was totally different from the one that was originally passed by the Senate, the bill was returned to that body for its concurrence.

The final version of SB 724 requires the CSU to fund the program with resources derived from enrollment growth budgeted at the marginal cost of instruction, and without changing the ratio of graduate to undergraduate enrollment in the system. Students can be charged fees no greater than those charged for students in the UC or joint UC/CSU Ed.D programs, and CSU will be required to pay startup costs from existing academic support budgets without diminishing either the quality of the support for or the enrollment in its undergraduate programs. It was signed by the Governor.

ACA5: Public Retirement Systems (Richman, R- Northridge)
ACA5 is a proposal to eliminate all defined benefit retirement programs for new public employees in California, replacing them with defined contribution plans. As part of Governor Schwarzenegger’s “year of reform” – legislation backed by voter initiatives – ACA5 received considerable press attention. Many people may think the issue died when Schwarzenegger withdrew his support of the underlying voter initiative when it became clear the wording of the initiative might result in the elimination of death benefits for the families of police and firefighters. However, ACA5 is not dead. It has been placed on the calendar for legislative consideration next year and is a high priority item among Republican legislators.

SB5: Student Bill of Rights (Morrow, R-Carlsbad)
This bill, along with similar ones throughout the country, was formally opposed by the AAUP. SB5 is a political intrusion into the intellectual life of the University. It poses a threat to the independence of faculty members to determine course content. It failed in the Senate Education Committee at the end of April by a vote of 4 ayes, 6 noes, with one member not voting. However, it is probably NOT dead. By a vote of 11 to none the Committee granted the author’s request for reconsideration, so in some form or other it will more than likely be revived in 2006.

Proposition 75: Public Employee Union Dues – Required Employee Consent for Political Contributions.
If passed in the November special election, Proposition 75 would apply to the Santa Cruz Faculty Association and all of the public employee labor unions in the state, including those in the UC system. The DFA is not a union but we do benefit from the fact that UCSC is. Any of these organizations would be required to get the written permission of each of its members if it wanted to contribute any of his/her dues money to political causes. There is no companion proposition on the ballot that would require employers or corporations to get a piece of paper signed by each employee or each shareholder before spending money on political campaigning. Accordingly, we urge you to vote NO on Proposition 75 on November 8th.

DFA Board Slate

The Nominating committee has selected the following slate of candidates to fill DFA Board positions as listed below with the following code (C – continuing; E – elect, RE – re-elect for one-year term):

Chair  Ian Kennedy (Engineering) RE
Vice Chair  Terrance Murphy (DBS) E

Board Members:
1. Daniel Link (Radiology) C
2. Robert Rucker (Nutrition) E
3. Lyn Lofland (Sociology) E
4. Richard Scalettar (Physics) E
5. Peter Richerson (Env. Sci) RE
6. Peter Rodman ( Anthropology) RE
7.Norma Landau (History) E
8. Lynette Hart (VM: Pop. Health) RE
9.Kathryn Radke (Animal Science) RE
10.Joe Kiskis (Physics) E
11.Floyd Feeney (Law) RE
Charlie Nash (ex-officio)due to CUCFA position

All nominees have agreed to serve. Their two-year terms of office will begin Sept. 2005. Further nominations may be made upon petition of 5% of the membership (15 members) in good standing as of April 1, 2005. Such petitions must be delivered on or before June 13 2005 to the Executive Director at 41 Camrosa Place, Sacramento, CA 95835. If no nominations are submitted, the slate shall be accepted as elected.

DFA Bulletin Re: Pension Plan Issues

Here is a link to an interesting piece that explains why some people feel that public pension plans based on defined contributions usually end up being more expensive for taxpayers than defined benefit plans as well as harder on retirees:

Commentary of the Day – March 3, 2005: The Myths and Realities of Public Employee Pension Plans. Irreverent Commentary on the State of Education in America Today. By Dr. Mark H. Shapiro.

The URL for the full article is: http://irascibleprofessor.com/comments-03-03-05.htm

Please note also that there is another link within the article in paragraph 7, under the words “For example.”

The Board of the Davis Faculty Association believes that this issue is of sufficient importance that we are sending this information to all UC Davis faculty and posting the link on our web site.

The Davis Faculty Association is an independent organization of UC Davis faculty concerned about salaries, working conditions, and the general health of the Campus. You can learn more about the DFA, including how to join, at the website www.ucdfa.org.

DFA Email Bulletins are meant to alert all UC Davis faculty to issues of general interest. This bulletin does not necessarily reflect the opinion of the Board or the DFA membership. Your opinions and comments are invited by replying to this message. You can opt not to receive DFA Email Bulletins by replying and asking that your name be removed from the email list.

Public Employee Pension Plans Under Fire

by Charles Nash and Eric Hays

For reasons that appear to be infinitely more political than fiscal, Governor Schwarzenegger and the Howard Jarvis Taxpayers Association have joined forces with the expressed intent of changing the structure of all public employee pension plans, including UCRS, from defined benefit plans to defined contribution plans for all employees hired on or after July 1, 2007.  They propose to do that by means of a Constitutional Amendment that they threaten to put to a vote of the people either via an act of the legislature or by collecting signatures in the parking lots of shopping malls.

In the legislative arena Assemblymember Keith Richman (R, Northridge) has introduced two measures ACA X1 and ACA 5 that have yet to go anywhere, and as a practical matter were effectively dead on arrival in their current form. That is because it takes a 2/3 majority vote in both houses for the legislature to put a Legislative Constitutional Amendment on the ballot, and the current legislature has a huge Democrat majority in both houses. What Richman has done, however, is insert benefits funding near the front end of a long list of budgetary matters that the legislature must now consider.

Legislative Committees have just started holding informational hearings on the structural features of the two types of retirement plans and the fiscal health of some specific public-employee plans in California. On February 15 the CEO of CalPERS, the CEO of CalSTRS, the Chair of the Legislative Committee of the State Association of County Retirement Systems, and Judy Boyette (UC’s Associate Vice President, Human Resources) discussed public pension plans at a hearing on the “Budget Implications of the Privatization of Public Pensions: Defined Benefit vs. Defined Contribution” held by Subcommittee #4 of the Senate Budget and Fiscal Review Committee.

On the surface, the debate would seem to be over the economics of defined benefit plans vs.defined contribution plans, so at this point it is worth describing their salient features.  In brief, a defined benefit plan pools contributions from employees and employers and upon retirement pays a guaranteed monthly annuity to the employee or the employee’s dependent spouse for life. (UCRS is such a plan.)  A defined benefit plan is administered entirely by the employer. Because the annuity amount is guaranteed, the plan must be fiscally sound (by actuarial standards) at all times. Typically, California public employees make contractually-fixed contributions to the system and if there is “underfunding” after that, the employer bears full responsibility for maintaining the soundness of the plan.

A defined contribution plan creates individual retirement accounts to which both the employer and employee contribute.  The employee invests these funds in one or more externally-managed investment vehicles, which are often contracted for by the employer. At retirement the account balance is paid to the employee (in most plans as a lump sum, but it can also be paid as an annuity over the life of just the retiree). With this type of plan there can be no such thing as “underfunding.”  The financial risks and rewards are born entirely by the employee. A more detailed comparison of the two types of plans is given in the table below.

Proponents of the Amendment assert that changing all the public retirement systems to defined contribution plans would save the taxpayers money, and to date the general public seems to believe that fable    In an Op-Ed piece in the Sacramento Bee Assemblymember Richman asserted that “…public employee pensions are devastating government budgets throughout California, threatening priorities such as education, transportation, public safety and health care.” He noted that a “Public Policy Research Institute of California poll showed seven in ten California voters believe public pensions are a problem for state and local government.” His punch line was “Fortunately, a fiscally responsible solution is available—defined contribution plans—that would help eliminate deficits, lower costs and improve budget predictability.”

What he knows, but did not say in that piece, is that it will take at least ten, and probably more like twenty years for taxpayers to realize any savings whatever.  Public employees earn vested rights to benefits for the performance of their services.  Under the contract clauses of both the US and California Constitutions these rights cannot be impaired.  Pension system staff and the Legislative Counsel hold that the benefits of existing plan members, including the right to accrue benefits from future service and compensation, cannot be reduced for current members without an offsetting benefit.

As a practical matter, therefore, anyone currently employed by a public agency, or anyone hired on or before June 30, 2007, will be entitled to collect benefits equal to or better than those currently offered by the defined benefit plan in which they are enrolled as of the date of hire. An Assistant Professor, Step I, whose employment begins on July 1, 2006, must be able to retire some 35 years later with a benefits package (adjusted for inflation etc.) identical to the one provided to a departing high-step Full Professor who retires effective that same date.

If the Jarvis/Schwarzenegger forces are successful, it is virtually a given that public employers will be required to administer two different retirement plans for almost four decades.  To contradict an old saw: two (retirement plans) CANNOT live (be administered) as cheaply as one.

It is abundantly clear that the Governor is determined to get rid of defined benefit plans.  He summarily revoked the appointments of four of the five individuals (two Republicans and two Democrats) he had named to the board of the State Teachers’ Retirement System because they were part of a 10-2 majority that voted to oppose ACA 5.  (The law allows a Board appointee to serve for one year without Senate confirmation.  These individuals were in that grace period.). On February 16 the CalPERS Board also opposed changing to a defined contribution plan by a vote of 9-3.  The Sacramento Bee’s report on this outcome quoted a spokesman for the Governor as saying “the vote signals that PERS prefers to be a spectator instead of a participant (in discussions).  While we wish that isn’t the case, the debate on reforming the state public employee pension system will move forward.”

As the legislative hearings progress, the debate will surely be highly partisan.  In the Senate Subcommittee hearing mentioned above a Republican Senator attacked CalPERS for what he judged to be highly inappropriate meddling in corporate affairs. (Both CalPers and CalSTRS have blocks of stock that are large enough to give them a significant voice in annual stockholder meetings.)  After the CalPERS Board meeting on February 16 the newly-elected Board President, Rob Feckner, said that the $183 billion fund’s corporate governance agenda, including trying to rein in executive pay and health care costs would not change.  “One thing should be abundantly clear to the corporate wrongdoers: We will not retreat from our fiduciary duty to protect our shareowner interests.”

Comparison of Traditional Defined Benefit with Traditional Defined Contribution Plans

Source: “An Evolving Pension System: Trends in Defined Benefit and Defined Contribution Plans” by David Rajnes, Employee Benefit Research Institute, September, 2001.
Items in italics are fundamental features of DB and DC plans that cannot be modified without changing the plan to another type.

Strategic Business Considerations

Defined Benefit

Defined Contribution

Employees Attracted and/or Most Benefited Longer-tenure and/or older employees. Shorter-tenure and/or younger employees.
Job Tenure Patterns Encouraged Longer-tenure because employees receive greatest benefit accruals at end of long-time service. May lock people into jobs they would otherwise leave. Although employees receive benefits based on salary, not tenure, may encourage employees to change jobs in order to receive access to lump-sum distribution from retirement accounts.
Influence on Retirement Patterns Can be designed to encourage early retirement; may financially penalize workers for working additional years beyond the normal retirement age. May pressure workers who would not otherwise retire to do so. Cannot be designed to encourage early retirement but instead rewards employees for working additional years.
Cost/Funding Flexibility Concerns
Cost variability/risk Employer assumes investment and possibly preretirement inflation risk and therefore annual plan costs are less predictable. While costs might be higher than anticipated, pension costs in a booming stock market may be zero because of investment returns on past contributions. Employer assumes none of the investment risk on retirement fund assets. As a result, annual costs are more predictable although the employer cannot take advantage of high stock market or other investment returns on retirement plans’ assets.
Annual funding flexibility However, there tends to be more flexibility as to when employer may meet these costs contributions in defined benefit plans. However, money purchase and some types of profit-sharing plans have less flexibility in when those costs are to be paid. In addition, defined contribution accounts can be designed to entail no employer contributions at all, unlike defined benefit plans.
Termination benefits Termination benefits are usually small for employees with less job tenure. Termination benefits equal account balances, when vested, based on both salary and years of plan participation. Tend to be larger than those for defined benefit plans, cet. par.
Plan termination Can be very costly if plan is underfunded. Not applicable, because defined contribution plans are by definition never underfunded
Administrative costs Managing a large pool of funds is less expensive than managing individual accounts, but there may be more overall expenses because of the provision of annuities (which can be relatively complex to administer) and the need for professional actuarial and investment advice to ensure compliance with regulations. While actuarial services are not required to the extent necessary for defined benefit plans, the provision of participant investment education and the cost of administering many individual funds for loans, hardship, and/or retirement benefits may make defined contribution plans more expensive. Generally, however, defined contribution plans are less expensive to administer, especially for smaller employers.
Administrative Complexity More. Less.
Integration with Social Security Benefits Employers fulfill a specific retirement income objective (e.g., to replace 60 percent of preretirement income with Social Security and pension benefits), and therefore Social Security integration is accomplished more efficiently under defined benefit plans. Integration can be accomplished, but the process focuses on the disparity in contributions and does not attempt to target a specific replacement ratio.
Providing Substantial Benefits Over a Short Time Period Employees can be grandfathered into a new defined benefit system so as to provide special benefits that are not possible under a defined contribution approach (e.g., the quick accumulation of benefits to participants who have not participated in the system for a substantial period of time). Unless grandfathered into a defined benefit plan, shorter tenure workers leave service with more substantial benefits under a defined contribution arrangement.
Collective Bargaining Unions prefer defined benefit plans. Less favored as primary plans by union leaders.
Flexible Benefit Retirement Plan Provision Defined benefit plans cannot be part of a flexible benefit package. Some types of defined contribution plans (401(k), profit sharing, and stock bonus) may be included in a flexible benefit package.
Company Identity/Linking Benefits with Company Performance Investment of pension assets in company stock is prohibited beyond 10 percent of assets. Employer contributions may be in the form of employer stock so as to tie company performance to retirement funds. In addition, profit-sharing defined contribution plans tie employee productivity to retirement security.
Paternalistic View
Responsibility given to participants. Generally do not require employee contributions except in state and local government plans. Employer says, “Don’t worry about your retirement plan. We’ll take care of your retirement plan.” Employees usually help fund their own retirement accounts. Employer says, “We’ll help you help yourself.” Participant-directed accounts encourage financial literacy and awareness of savings.
Investment risk given to participants. Employer absorbs investment risk in exchange for investment control. Employees absorb investment risk in exchange for potential investment rewards.
Inflation risk given to participants. COLAs may be provided and are often done so for public plans. Employer may share responsibility for inflation after retirement if ad hoc COLAs are used in private plans. Employer assumes preretirement risk if defined benefit formula is based on final averages. No room in plan design for COLA adjustments. Employees assume risk for inflation both prior to and after retirement.
Access to funds. No preretirement access to accounts is usually provided. Preretirement access to accounts is often provided.
Benefit provided at retirement Benefits are usually paid in the form of life annuities. Benefits are usually paid in the form of lump-sum distributions, which the employees may spend as they please.
Automatic enrollment. Enrollment is automatic. Enrollment is usually not automatic.
Investment Horizons and Expected Impact on Investment Income A defined benefit plan allows the burden of retirement security (including the attendant investment risk) to be spread over a long period of time. In theory, defined benefit plans may be expected to hold a larger percentage of more risky (and higher yielding) investments since their relevant investment horizon spans several decades if the plan is assumed to be an ongoing operation. A defined contribution plan usually requires employees to invest for their retirement on an individual basis. This may cause them to increase their asset allocation in less risky (and lower yielding) investments to mitigate the impact of market downturns near retirement age.
Tax Advantages In defined benefit plans, only employer contributions are given tax-favored status. In defined contribution plans, both employer and employee contributions may be given tax-favored status.
Best Use of Employer Retirement Funds In defined benefit plans, all benefits accrue to retired workers and/or spouses. In a defined contribution plan, account balances may be inherited by heirs other than spouse upon beneficiary’s death.
Approach to Informational Parity Dedicated governance: investment expertise means that those buying and selling pension investment services have informational parity. Employers sometimes offer participant education to increase informational parity between investors and investment services.

Advocacy Survey about UC’s Future

Here are some interesting results  from a survey taken recently by the UC Alumni Advocacy group called Friends of the University of California. The survey was distributed to active alumni advocates for UC interests. More information about this group is available on the web at http://www.ucforcalifornia.org/ucfriends/home.html


What issues pose the most critical opportunities for the University of California in the coming years?

Advocates were asked to check up to three of six choices. UC should:

88% Continue to provide access to a high-quality education at a reasonably affordable price for all eligible students.

52% Continue to drive California’s international economic engine and create new jobs by developing cutting-edge technologies and training a highly skilled workforce.

48% Use UC’s size and scientific breadth to mount “big science” initiatives to conduct multi-disciplinary research with broad applications, such as what’s being done by UC as part of the new California stem cell research initiative.

40% Lead a new initiative to dramatically increase the training of math and science K-12 teachers in California.

36% Launch new efforts to better reflect the diversity of California’s growing population and serve the needs of all communities throughout the state.

32% Continue to provide quality patient care at its hospitals, train California’s doctors and nurses, and develop new treatments to fight life-threatening diseases.

Selected comments:

“UC needs to be both visionary and traditional. We must continue to be the best public university in the world. We must attract the best faculty and the most dedicated staff. Only then can we continue to offer an unparalleled educational experience. From that position of strength, we can be an asset to the state and the world. We can foster math and science education to sustain our strength. We can take advantage of our status as a multicultural state to show the world how to be a diverse, respectful, and productive community in these days where international borders are increasingly artificial.”

“Fund the University of California in a manner that is not so dependent on the variabilities of the political process and insures the excellence of all campuses and the global preeminence of several campuses.”

“I think that increasing the diversity of the university really has to be addressed. Over the last 10 years, the student population has become less diverse due to the rising of standards and the inability of students in areas plagued by poor K-12 education to be prepared to meet those standards. UC’s need to focus some attention and efforts on creating programs as well as initiative that will prepare students to meet the rigors and demand of the UC application process. All students benefit from a diverse student body, and the world benefits from having individuals entering the work force who come from a variety of perspectives as well as point of views.”

“The University needs to continue to create both a workforce and the engines of new work to make the state economy strong enough to support all of its citizens and again be a national if not an international leader worthy of respect. In all of that, the University needs to never diminish its role in creating a thoughtful and compassionate citizenry that the critical thinking skills and ethical understanding to use wisely what it creates.”

“I think that providing quality patient care and training California’s doctors and nurses and developing new treatments is extremely important.”

“UC should pursue research efforts that help the world with environmental efforts and issues such as global warming, pollution, quality of drinking water, deforestation, etc. and other “natural” threats to humanity (e.g., meteor striking Earth, tsunamis, and supervolcanoes). These are not fantastic fabrications of a Bradburyian mind, but pressing realities. Especially because of California’s prominence and physical location next to the Pacific Rim countries, the UC is in a very good position to be a leader in these and other similar areas.”

“I just retired after 39 years teaching American history. I realize that math and science must be top priorities but I feel that it just as important to improve the teaching of history. All of the UCs have eminent historians who should get their feet wet and work with all of the schools, primary through secondary.”

“As a scientist I feel the most important goal for the next two years is to retain the contracts at the national laboratories.”

“UC should conduct leading-edge research in all disciplines not just the sciences – economics, the social sciences, the arts, etc. With the resources of the UC system, the world and its challenges is our laboratory.”

“I worry about the stress on science. Why train only math and science teachers? What about English, history, etc.? I am afraid “big science” will crush the liberal arts.”

“Maintain the quality of the libraries and other research resources.”

“I consider our advocacy efforts to be a high priority. We must continue to inform legislators of the benefits UC provides to California’s economy in order to solicit more financial support from the State.”

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