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After two decades of getting by only on investment earnings, an apparent record for public pension funds, the University of California pension system faces what a task force calls a “frightening challenge.”

A retirement system that got no money from employers and employees during a contribution “holiday” that began in 1990 now needs about $1.6 billion this year, 20 percent of the payroll, to be properly funded.

It’s on track to get about $480 million in employer-employee contributions. The annual amount needed for proper funding could be more than $2 billion two years from now.

But the 10-campus UC system, with a $20 billion operating budget, is in a tight financial squeeze.

New money that UC puts into retirement has to come from borrowing, other programs or student fees. Hard times have already resulted in 2,600 layoffs and the elimination of another 1,400 positions and scores of programs.

Raising employee contributions is a pay cut, hitting low-income workers and others who have not had pay raises, while eroding generous retirement benefits that help UC attract top talent.

UC wants the state to resume contributions, a matter of equity since CSU and community college retirement programs get state money. But the state has a $19 billion deficit and lawmakers are in the third month of a budget deadlock.

Every $1 not received from the state, officials say, costs UC an additional $2 from other sources.

The state provides a third of the UC budget, the rest coming from medical centers, federal sources, grants and other operations. Without a state retirement contribution, UC cannot levy similar contributions on other budget sources.

After several years of pleading for state funds, UC restarted some pension contributions this year without aid from Sacramento. Alarmed by surging retirement program debt, UC officials say action is needed now.

“One thing is certain: UC must make changes to its retiree health and pension programs,” UC President Mark Yudof said in a letter last month with a report from a Post-Employment Benefits Task Force he appointed in March 2009.

“If we do nothing, in four years the university will be spending more on retirement programs each year than we do on classroom instruction,” he said. “And within five years, our unfunded liabilities will have ballooned to more than $40 billion. That scenario would be disastrous for UC.”

Contributions to the UC pension system, which has an investment portfolio currently valued at about $34 billion, resumed in April under action taken by the Regents last year.

Money that employees had been required to put into tax-deferred individual investment accounts, 2 percent of pay, was redirected to the pension system. UC contributed 4 percent of pay.

Last week, the Regents voted to increase the employee contribution to 5 percent of pay and the employer contribution to 10 percent by July 2012. The employee increase must be approved in bargaining with labor unions.

In November the Regents are scheduled to consider proposals to reduce pensions for new hires beginning in July 2013. Many retirees would be required to pay more for health coverage.

It may not be smooth sailing.

Protesters targeted Yudof with a demonstration and street theater outside the Regents meeting last week. Several dozen came inside and, after members of the audience spoke, disrupted the meeting.

“R F Yudof! R F Yudof!” they chanted, rising in unison from their chairs.

The Regents filed out. Campus police declared an unlawful assembly and cleared the room of protesters, who left peaceably. The Regents returned, resuming their meeting after a 10-minute delay.

A strong endorsement of Yudof from Regent Norman Pattiz drew a round of applause from the 26-member body.

“I think I speak for certainly a majority, if not all, of the Regents that we are really fortunate to have the president we have sitting at this table,” said Pattiz, “that the unfounded, inappropriate and wrong approach to personalizing this and attacking an individual is just not the right way to go.”

Protesters chant insult at UC president

UC police order protesters to leave

Protesters exit peaceably

Retirement benefits are an important competitive edge as UC seeks top talent. The task force said elite private universities – Harvard, Stanford and Yale – only offer 401(k)-style individual investment plans, common in the private sector.

A survey of UC employees done for the task force earlier this year found that 82 percent of respondents said the retirement program is an important reason they stay at UC. Results were similar among faculty and staff, campuses and medical facilities.

The UC pension formula is 2.5 percent of the highest 36-month pay for each year served at age 60. In comparison, the formula for the California State Teachers Retirement System serving kindergarten through community college is 2 percent at 60.

Unlike CalSTRS members, UC employees receive Social Security in addition to their pensions. The task force proposals to cut new-hire pensions would replace 80 percent or more of most salaries, when combined with Social Security.

Currently, long-term UC employees with salaries of less than $80,000 can receive a total retirement income from their pension and Social Security that exceeds 100 percent of their salary.

The task force proposals for new hires also would move the minimum age for retirement from 50 to 55 and the maximum benefit age from 60 to 65. For retiree health care, eligibility would be tightened and UC’s share of insurance costs reduced.

Roughly 40 percent of UC retirement program members would remain under the current retiree health care rules – “grandfathered” if they have at least five years of service and their age plus years of service equals 50 or more.

What the Regents will do later this year is unclear. The task force, unable to agree on a single plan, offered two options. Yudof has agreed to look at a third option the task force thinks is too costly.

Other proposals may come from employee groups. The Academic Senate has suggested that UC issue a $4.5 billion pension bond, which among other things might provide the state share needed to raise contributions from other budget sources.

The task force’s finance work team, looking at a number of options for putting more money into the pension system, gave some examples of what using the money for other purposes could buy.

A contribution of 1 percent of payroll is about $80 million, the equivalent of more than 630 new faculty (at $126,582 a year for salary and benefits), or a 5.65 percent increase in student fees not including related financial aid.

“The task force analyses began with an unfunded liability and UCRP (retirement program) benefit structure requiring total contributions at 37 percent of covered compensation by 2014-15,” said the report.

“Assuming a 5 percent employee contribution, this would have required a 32 percent university contribution. The task force finance recommendations reduce the university contribution to a maximum of 23 percent over time.

“While that number poses a frightening challenge to the university operating budget, it represents the collective best efforts of the task force, given the legal necessity of covering the unfunded liability and the need to provide competitive retirement benefits, essential to UC’s operating mission.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at