University of California Pension Costs Force Tuition Increase
Time and time again, California proves itself to be a what-not-to-do handbook for states looking to responsibly balance their budgets. This reputation was clearly on display by the University of California Board of Regents’ decision to increase the cost of tuition by 25 percent over the next five years.
The increased tuition won’t be going to make improvements for students but rather will almost certainly go directly into funding for UC’s underfunded and mismanaged pension system.
The University of California Retirement Plan (UCRP) is facing a major shortfall. In making sure that it is funded adequately enough to pay current retirees while investing retirement money for current employees to be paid out once they retire, UCRP comes up $8 billion shy.
Like the broader California Public Employees Retirement System (CALPERS) and California State Teachers Retirement System (CALSTRS), which handle the retirement funds of most state employees and K-12 teachers respectively, the root cause of funding issues for UCRP is due to an outdated form of pensions that is common among the vast majority of states governments and municipalities.
These pension systems operate on a defined-benefit model, meaning that retired state employees are paid out a specific amount per year in perpetuity, regardless of actual market returns.
The overwhelming majority of private sector employers now utilize a defined-contribution, 401(k) style pension system. In the defined contribution model, employees and employers each contribute into the employees personal retirement account. In the defined-contribution models, employees own the account, which means that in addition to it being more mobile, employees can sue their employer if it is not adequately funding their retirement account.
Since employees in a defined-benefit plan have no such option, these plans continuously face funding problems and give politicians incentives not to properly fund the pension systems.
Lawmakers often are in a position to over promise pension benefits for short term political gains and are frequently no longer in office when these chronic underfunding problems surface. In Keeping the Promise: State Solutions for Government Pension Reform, former Utah State Senator Dan Liljenquist discusses these perverse incentives and how underfunding pension systems, over promising benefits and assuming higher than reasonable rates of return on investments lead to the insolvency of many defined-benefit public pension plans. In fact, according to the non-partisan government watchdog group State Budget Solutions, state unfunded pension liabilities now total $4.7 trillion.
The University of California tuition increases also come at a time when the public is just learning that the majority of tax revenue from a major tax increase that Californians passed through ballot initiative in November of 2012 is going to backfill deeply underfunded state pension systems rather than going towards more education spending, as was promised by proponents of the measure in 2012.
Until states, municipalities and university boards transition from the broken defined-benefit pension systems to more stable defined-contribution 401(k) style pension plans, we can expect to see increasingly higher tax rates and now apparently higher tuition costs too.