A state assembly subcommittee voted Tuesday to withhold $176 million from the University of California unless the UC eliminates one of its proposed retirement benefit plans.
With the $176 million, the UC planned to pay of some of its pension debt, which is currently more than $7 billion. Last May, the state agreed to provide the funding if the UC limited the income eligible for pension contributions and restructured its retirement benefit plans.
The UC approved two retirement benefits options at its March regents meeting: a hybrid defined benefit plan, which includes a supplemental defined contribution plan, and a pure defined contribution plan.
Assembly member Kevin McCarty, the chair of the subcommittee, said he proposed the hold on funding because he thinks the UC wanted to avoid the limit on pensionable income, which was set in the 2015 Bipartisan Budget Act.
In a defined benefit pension plan, an employer or sponsor promises a specified monthly amount based on earning history, service and age. In a defined contribution plan, the employer, employee or both regularly make contributions to the retirement fund.
In the UC version of a defined contribution plan, the UC would contribute an amount equal to 14 percent of employees’ income to the retirement fund. The contribution would be limited to the IRS’s cap of $265,000.
In the UC version of a hybrid plan, the UC would contribute 14 percent of employees’ income up to $117,020, the cap set by the California Public Employees’ Pension Reform Act. The UC would also contribute an amount equal to 10 percent of income up to the IRS limit of $265,000.
In both plans, employees contribute 7 percent of their earnings to their retirement funds, but the defined contribution plan has a higher income cap for UC contributions.
The American Federation for State, County and Municipal Employees Local 3299, the union representing UC service workers, hired an actuary who reported the defined contribution plan would save the UC about $9 million, according a press release from the union. However, the actuary estimated the UC would save about $34 million a year if it eliminated the defined contribution plan.
Dianne Klein, a UC spokesperson, said the UC opposes the subcommittee’s vote. She added the UC disagrees with the calculation method the actuary used.
Klein added the UC thinks the benefits of offering a defined contribution plan choice will outweigh the cost because it will cause a one-year delay in the UC paying down the pension plan’s unfunded liability.
AFSCME Local 3299 spokesperson Todd Stenhouse said he thinks the defined contribution choice may motivate higher paid employees to opt out of the hybrid pension plan since they can receive benefits earlier. He added he thinks participants in the hybrid plan will contribute more of their salary but receive fewer benefits because fewer people are contributing to the retirement fund.
Klein said she thinks the defined contribution plan will appeal to employees who only stay for a few years because they can start receiving benefits after paying into the plan for a year.
“These employees may find (this choice) more attractive because a traditional pension plan has a five-year vesting requirement,” Klein said. “Without a (defined contribution) option, these employees would not have a retirement plan at all if they leave UC before vesting.”
Vesting is the amount of time an employee must be employed before he or she can start receiving retirement benefits.
Klein said the defined contribution plan is optional. She added an employee will be enrolled in the hybrid defined benefits pension plan if he or she does not make a choice when hired.
According to Klein, a conference committee will discuss and vote on the bill before the legislature votes on the budget by June 15.