UC Faces a Budget Hole of Not $500 Million But $700 Million

The University of California faces a more than $200 million deeper reduction than the $500 million proposed in Gov. Jerry Brown’s budget – in part because the state refuses to make a contribution to the 10-campus system’s retirement system.

UC says the state, as it has in the past, should pay a percentage of the employer payments the university makes to its retirement system based on the $3 billion general fund contribution the state makes to the system’s $6 billion instructional budget. Brown would reduce the $3 billion to $2.5 billion.

Since UC’s employer contributions resumed in April 2010 after a 20-year hiatus, the state has maintained that because the university’s retirement system is separate from the California Public Employees Retirement System, no contribution is required.

“The governor’s budget treats the UC pension issue in a manner consistent with prior budgets – it proposes no state contribution to its independent retirement system,” said H.D. Palmer, a spokesman for Brown’s Department of Finance.

Sparring between the state and the university has intensified as the state’s fiscal condition has worsened.

Although the budget for the fiscal year ending June 30, 2010 proposed giving UC $20 million to cover the state’s share of the employer payment for the final three months of the fiscal year, lawmakers removed the money from the final version of the spending plan.

The administration also inserted language in the budget to prevent the state from having to make any further payments into UC’s retirement system.

“This represented a real dilemma,” said Patrick Lenz, UC’s vice president for budget. “We were restarting everybody’s else’s contributions and yet the state didn’t.”

In the record-late budget approved in October, UC succeeded in repealing the prohibition and renewed its efforts to get the state to pay a percentage of the employer contributions.

Last year, the contribution level was 4 percent of revenue, representing a $96 million payment from the state.

This year, the contribution level is 7 percent, $171 million to the state.

For the 20 years, UC’s return on investments was sufficient to not require any contributors from either employees or employers, the state saved $2.5 billion, Lenz said.

Historically, the state has contributed to UC’s retirement system, which was created in 1961.

Then Gov. Ronald Reagan’s 1969 budget shows a contribution of $14.1 million to the fund from two years earlier.

Twice in the 1980s, the state has missed payments because of fiscal problems but agreed to repay what was owed over time.

The state’s contribution is calculated and included in the budget request sent to Sacramento by UC’s Board of Regents.

Lenz says that $171 million is part of some $350 million in mandatory costs that include a $23 million increase in employee health benefit costs, $5.5 million higher energy costs, $28 million in “academic merit increases” and $87 million in “potential employee salary increases.”

Those increases would go to employees who haven’t had a raise in three years and are now required to contribute 2 percent of their salary to the pension fund, climbing to 3.5 percent next year, Lenz said.

The combined $850 million hole is partly filled by $115 million – the net amount left from the fees hikes approved last year by the university. Total revenue from the 8 percent increase approved in November is $183 but one-third is devoted to financial aid.

There is no such dispute with the 23-campus California University System. Its retirement system is part of PERS and the Brown administration has proposed a $75.2 million increase in employer payment in the budget.

However, CSU is quick to point out the $500 million reduction proposed by the Democratic governor is an 18 percent cut that leaves its funding at the same level as 12 years ago, while attendance has increased by 70,000 students.

The Legislative Analyst, while not objecting to the state making a contribution, is concerned about safeguards.

“These retirement costs are in part — I emphasis in part — costs of UC fulfilling its public mission and generally the state has supported UC’s core mission with general fund revenue,” said Steve Boilard, director of Higher Education for the analyst’s office.

“There’s nothing inherently distinct about this particular cost with one exception:  UC makes its own decisions about these retirement benefits, which determines what the out-year costs will be.

“Our concern is we wouldn’t want the state to be obligated for whatever amount, even a percentage, UC decides it independently wants to provide for retirement benefits.”

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