The funding status of the UC Retirement Plan deteriorated significantly in the last fiscal year, according to a report presented at the UC Board of Regents meeting Thursday.
The funding ratio — a measure of the program’s financial health — fell from 81 percent to 77 percent between July 2011 and June 2012.
Anemic investment returns have only exacerbated the problem. Across all UC retirement plans, the return on investments was only 0.8 percent last year, compared to 20.5 percent the year before.
Troubles with the UC Retirement Plan follow the decision to suspend employee pension contributions from 1990 to 2010 because the fund appeared to have a surplus.
The plan now faces a roughly $11 billion unfunded liability as employee contributions have yet to catch up to the cost of benefits, creating an ever-widening funding gap.
Due to the plan’s massive size, its woes have begun to weigh heavily on the university’s financial health at large.
“Changes in the pensions and retirement are really the tail that wags the bulldog of the university,” said Nathan Brostrom, UC executive vice president for business operations.
But proposals to increase employee or employer contributions in order to improve the plan’s health have seen huge pushback from unions and campuses alike.
In October, UC Berkeley Chief Financial Officer Erin Gore said increasing employer contribution rates would place an even greater fiscal burden on the campus in an already difficult time.
At Thursday’s meeting, the regents also discussed potential changes to the methodology for analyzing the financial health of their plan.
To determine how much of a pension plan is funded, actuaries estimate how much the plan will pay out in benefits in the future and then discount that number based on various factors.
The choice of discount rate can have a huge impact on the apparent size of the unfunded liability — the amount the university will owe that the plan has not accounted for.
The art of selecting a discount rate mirrors Goldilocks’ dilemma: If actuaries choose too high of a discount rate, they may mask the unfunded liability; and if they choose too low of a discount rate, their analysis may produce a deceptively large unfunded liability.
The trick is choosing just the right rate.
The university’s choice of a discount rate has come under fire from all sides with some parties, like a group of UC San Francisco nurses calling for a higher discount rate, and others, like former secretary of treasury George Shultz and former chairma of the Federal Reserve Paul Volcker, calling for a much lower one.
During the public comment session of the meeting at UC San Francisco, Erin Carrera, a nurse at UC San Francisco, made reference to an independently prepared actuarial report that used a higher discount rate, reducing the apparent unfunded liability by $1 billion. Under this plan, there would be far less need to increase contribution rates.
But Brostrom said he remained comfortable with the university’s choice of discount rate because it remained in line with a long-term rate of return on investments.
Still, UC President Mark Yudof appeared open to having the administration consider all proposals.
“I want you to read this material, think about it (and) respond,” he told UC Chief Financial Officer Peter Taylor. “Treat that extremely seriously.”
Curan Mehra is the lead higher education reporter. Contact him at [email protected]