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					TASK FORCE FINAL REPORT July 2010




                                APPENDICES




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TASK FORCE FINAL REPORT July 2010
                                           Appendices
General
   A. Charge to the Post-Employment Benefits Task Force……...………………………………….113
    B. Glossary of Terms…...…………………………………………………………………………….116
     C. Dissenting Statement on PEB Recommendations…………...………………………………...120
        Two members of the Steering Committee recommended that a dissenting statement be
        circulated that was developed by a subset of task force members outlining their views of
        the four New Tier pension designs considered by the Steering Committee, two of which
        were forwarded to the President. This statement can be found on the UCRPFuture website.

      D. Regents’ Action Item, November 2005 on Total Remuneration……..………………………121
      E . Post-Employment Benefits Survey Invitation and Questionnaires…..……………………..122
      F . Impact of Retirement Program Changes on Workforce Behavior,
          University of California,
          June 6, 2007 – Mercer Human Resources Consulting…………..……………..…………...142

      G. UC Emeriti Bibliographic Survey 2007-2009, CUCEA………..………………..…………….143

      H. Update to 2009 Total Remuneration Study for New Tier Options…..………………………144
              Plan Design A (Ia)
              Plan Design B (Ib)
              Plan Design C (Ic)


       I. Proposed Draft Attachment to September Regents’ Item – PEB Communications.....….145


Pension
     J. Sustaining State Retirement Benefits: Recent State Legislation Affecting
          Public Retirement Plans, 2005-2009, National Conference of State Legislatures……….146

      K. Background Articles…….……………………………………………..………………………….147
              Trends in Retirement Benefits, Hewitt Associates

              National Assoc of State Retirement Administrators Article; PERISCOPE article Public
               plan DB DC choices; Redefining Traditional Plans by Keith Brainard

              Different Pension Designs: Defined Benefit and Defined Contribution (Segal)
              Overview of three discussion papers on Defined Benefit and Defined Contribution
               Pension Plans
      L . UCRP Background……………………………………………………………………………….148
              University of California Retirement Plan, an Historical Perspective
              University of California Retirement Plan Contributions 1976 – 1993
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                History of $19 Offset to UCRP Member Contributions
                Demographics
                History of UCRP Investment Returns
                Funding Policy History
                Restart of UCRP Contributions
                UCRP Funded Ratio HIstory
                CalPERS, CalSTRS and Comparator 8 Plans
                Comparison of Current and New Plan Provisions for
                 Various California Public Sector Entities

                Proposed Pension Reform Highlights from Current Governor and Select 2010
                 California Gubernatorial Candidates

                Summary of Recent Plan Design Changes for Various State Plans
                The Regents’ Actuary, Segal – UCRP, Pension Plan Funding
                 and Investment Performance
                    o Covered Population
                    o Segments
                    o Active Members
                    o Career Employee Workforce Profile – 2009
                    o UCRP July 1, 2009 Actuarial Valuation Report – Segal (includes plan
                       description

     M. Work Team Materials……………………………………………………………………………175
                 June 1, 2010 – New Tier Modeling (Segal)


Retiree Health
       N. Background Articles……………………………………………………………………………176
                At a Crossroads: The Financing and Future of Health Benefits for State and Local
                 Government Employees, Center for State and Local Government Excellence

                Health Care in Retirement: Methods for Coverage and Funding, National Business
                 Group on Health

      O. Retiree Health Background…………………………………………………………………….177
                Demographics
                Program Summary
                Projected “Pay-as-You-Go” Costs 2009-2014
                Projected Balance Sheet Obligation 2009-2014
                Retiree Health Programs for other California Public Employers and
                 Comparator 8 Institutions




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      P . Deloitte LLP – Health Care Consultants to the University of California…………………..183
            Background
            Program Design
                 o Framework
                 o Scenarios
                 o Transition
                 o Behavioral Changes
                 o Protected Groups
                 o Prefunding
      Q. Work Team Materials…………..……………………………………………………………….193
            May 6, 2010 – Analysis of Final Proposed Plan Design, Deloitte LLP
Finance
     R. The Regents’ Actuary – Segal…………..………………………………………………………194
            Pension Plan Funding
            UCRP Funding Policy
            Glossary of Funding Policy Terms
            Role of Investment Performance in UCRP
     S . Risk Valuation Analyses………….……………………………………………………………..210
            Risk Valuation Analysis Discussion – Finance Office
            Faculty Comments on “Risk Valuation Analysis Discussion
     T . Work Team Materials…………………………………………………………………………….236
            December 9, 2009 – Perspectives on Pension and Retiree Health Obligation Bonds




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                                            Internet Links
General
     PEB Fall and Spring Forum presentations –
     http://universityofcalifornia.edu/sites/ucrpfuture/benefits-forum-presentations/

     Funding Pensions & Retiree Health Care for Public Employees, a Report of the Public
     Employee Post-Employment Benefits Commission -
     http://www.pebc.ca.gov/images/files/final/080107_PEBCReport2007.pdf

     2009 Update of Total Remuneration Study for Campus and UCOP and Medical Centers,
     October 2009 –
     http://www.universityofcalifornia.edu/news/compensation/total_rem_report_nov2009.pdf

     Academic Senate: 2006-07 Total Remuneration and the 2007-08 Budget: An Academic
     Council Analysis and Recommendation http://www.universityofcalifornia.edu/senate/reports

     PEB Survey Results – http://universityofcalifornia.edu/sites/ucrpfuture/2010-benefits-survey/

     Statistical Summary and Data on UC Students, Faculty and Staff –
     http://www.ucop.edu/ucophome/uwnews/stat/

     The Future of UCRP website: http://www.universityofcalifornia.edu/sites/ucrpfuture/

     University of California 2008 Workforce Profile –
     http://www.ucop.edu/atyourservice/forms_pubs/misc/workforce_profile_2008.pdf

     UC for California website (advocacy) – http://www.ucforcalifornia.org/uc4ca/home/advocacy


Pension
     The Trillion Dollar Gap: Underfunded State Retirement Systems and the Roads to Reform,
     Pew Center for Research – http://www.pewcenteronthestates.org/report_detail.aspx?id=56695

     Academic Senate Reports – http://www.universityofcalifornia.edu/senate/reports
           2008-09: Evaluating UCRP Investment Returns, Endorsement of the Restart of
             Contributions t515
           UCRP, Market Turmoil and the Lump Sum Cashout

               2007-08: UCRP Funding Policy

     Regents’ Action Item, September 2008: A Proposed New Funding Policy for the University of
     California Retirement Plan – http://www.universityofcalifornia.edu/regents/regmeet/sept08.html

     Academic Senate Endorsement, UCRP Funding Policy –
     http://www.universityofcalifornia.edu/senate/reports/mtb2Yudof_UCRP Funding
     Policy_Final_070208.pdf

     Annual Actuarial Valuation for UCRP - 2009:
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TASK FORCE FINAL REPORT July 2010
     http://www.universityofcalifornia.edu/regents/regmeet/nov09/f5.pdf

     Annual Actuarial Valuation for UCRP – 2008:
     http://www.universityofcalifornia.edu/regents/regmeet/nov08/f10.pdf

     University of California Retirement Plan Experience Study –
     http://www.universityofcalifornia.edu/regents/regmeet/may07/c14.pdf

     Aon Consulting’s 2008 Replacement Ratio Study– http://www.aon.com/about-aon/intellectual-
     capital/attachments/human-capital-consulting/RRStudy070308.pdf

     Sustaining State Retirement Benefits: Recent State Legislation Affecting Public Retirement
     Plans, 2005-2009, National Conference of State Legislatures

     Pensions and Retirement Plan Enactments in 2010 State Legislatures as of July 19, 2010
     (PDF): summarizes selected state pensions and retirement legislation enacted from January
     2010 through the date of publication, National Conference of State Legislatures


Retiree Health
     The Henry J. Kaiser Family Foundation Summary of National Health Care Reform and
     Implementation Timeline – http://www.kff.org/healthreform/8060.cfm


     Regents’ Action Item, May 2007 Establishing Retiree Health Trust –
     http://www.universityofcalifornia.edu/regents/regmeet/may07/f5.pdf

     Retiree Health Benefit Valuation – 2009:
     http://www.universityofcalifornia.edu/regents/regmeet/nov09/f6.pdf

     Retiree Health Benefit Valuation – 2008:
     http://www.universityofcalifornia.edu/regents/regmeet/mar08/f4.pdf

     Academic Senate Reports – http://www.universityofcalifornia.edu/senate/reports
     2006-07: Plans to Establish a Trust to Comply with New Governmental Accounting Standards
     Board (GASB) Standards Relating to Annuitant Health Benefit Obligations, Academic Council
     Endorsement


Finance
     Academic Senate Reports – http://www.universityofcalifornia.edu/senate/reports
     2009-10: UCFW Statement on Assuring Adequate Funding for UCRP




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General Appendices




                                APPENDIX A
          Charge to the Post-Employment Benefits Task Force




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                                         Task Force Charge
The Task Force is directed to consider the impact of issues such as, but not limited to, market
competitiveness, talent management, work force development, work force behavior, affordability, and
sustainability.

The Task Force benefits policy and design recommendations will include an analysis based on
multiple criteria including cost, long-term funding options, cash flow, as well as an assessment of the
impact on the long term financial integrity of the University.

The Task Force will seek to complete its work within a timeframe sufficient to adequately analyze a
range of pension and retiree health options, while seeking to prudently resolve the issues contained
in its charge.

The Task Force recommendations should seek to enhance the capability of the Regents to meet their
educational obligations to attract and retain outstanding faculty and staff, as well as fiduciary
obligations for all current and future University of California Retirement System plans.

                                                 Mission
The University of California is committed to providing competitive pay and benefits programs to
attract and retain excellent faculty and staff to accomplish its mission for the people of California,
while ensuring sustainable post-employment benefits for current and future retirees.

                                          Operating Principles
The Task Force will seek outcomes which reinforce the Regents stated commitment to attain market
competitive total remuneration for all employee groups.

   The Task Force will seek to be comprehensive in its assessment of the implications of
     postretirement benefit changes on recruitment, retention, and retirement behavior and impacts
     on the capability of the University to carry out its mission of education, research and service for
     the people of California.
   The Task Force will engage in a robust consultation and communication process with faculty,
     staff, retirees and other key stakeholders to assure that the diverse views and opinions of the
     UC community on this topic are solicited and considered. The University will observe all legal,
     regulatory, and Higher Education Employer- Employee Relations Act (HEERA) requirements in
     undertaking this process.

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TASK FORCE FINAL REPORT July 2010
                                          Guiding Principles
  Should be adaptable, for the recruitment and retention of quality faculty and staff in the context
    of total remuneration, based on the variety of academic, business and labor markets in which
    UC competes.
  Should ensure that Post-Employment benefits are sufficient to provide career employees with
    financial security and adequate access to affordable and quality health care.
  Should promote the talent management objectives of the University by encouraging retirement,
    after a full career, at a mutually advantageous time for both UC and for faculty/staff.
  Should include cost effective governance mechanisms that allow for oversight and monitoring of
    retirement benefits investment and administrative performance.
  Should consider a long term strategy for seeking the ways and means for identifying and paying
    for the costs and incurred liabilities of promised benefits, within the working career of those
    faculty and staff who will receive benefits.
  Should be designed and implemented so as to allow for sufficient time for retirees, as well as
    current faculty and staff, to plan for the effects of benefit changes.
  Should identify the ways, means, advantages, and disadvantages of UC and employees for pre-
    funding a portion of the current and future retiree health benefits liability.
  Should be competitive with the typical market comparator organization for employee pension
    contributions by workforce segment, while considering the impact on lower wage employees.
  Should consist of elements that include employer sponsored benefits and personal
    accountability with costs that are shared by both UC and by faculty / staff.
  Should seek to protect current UC faculty and staff from benefit changes that impact the pension
    formula or benefits eligibility.
  Should ensure an equitable distribution of employer benefits costs among the various sources of
    funding for employee salaries.”




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                                APPENDIX B
                                    Glossary




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                                        Glossary of Terms
Accrued benefits: benefits earned to date by plan members under the plan’s provisions.

Actuarial Value: a mathematical calculation of a pension plan’s status using assets, liabilities,
contributions and actuarial assumptions about future investment earnings, retirements, terminations
and mortality. It includes the present value of benefits payable to present members, and the present
value of future employer and member contributions, factoring in mortality among active and retired
members and the rates of disability, retirement, withdrawal from service, salary and interest. It is the
value of cash, investments, and other property belonging to a pension plan, as used by the actuary
for the purpose of an actuarial valuation. The actuarial value of assets may represent an average
value over time, and normally differs from the market value (what the plan’s investments could be
traded for at a particular in time, given market prices for its assets).

Actuarial Value of Assets: Actuarial Value of Assets: a calculated value of assets that spreads
investment losses and gains over a five-year period (for UCRP).

Age factor: In the UCRP retirement benefit formula, the percent of pay for each year of credited
service.

Amortize: to spread a debt in equal installments over a fixed period. Similar to a mortgage, a
pension amortization period has fixed annual amounts with differing levels of principal and interest.

Annual Required Contribution (ARC): A measure of needed plan funding used by GASB
(Governmental Accounting Standards Board). The ARC has two parts: the Normal Cost and the
Amortization, which is the annual amount needed to eliminate the unfunded liability over the plan’s
amortization period, which is currently 15 years under the Regents’ targeted funding level.

Annuity: payment of an income in regular installments. For UCRP, a retirement annuity is paid each
month.

Assumed earnings rate: the rate of investment return (including inflation) that a pension plan is
expected to earn over the long term; used in projecting the future value of a plan’s assets.

CalPERS or PERS: the California Public Employees’ Retirement System.

COLA or Cost-of-Living Adjustment: an increase in pension benefits for inflation.

Covered Compensation: For UCRP, covered compensation is base pay from the University for a
regular appointment at the full-time rate. This includes pay for sabbaticals or other paid leave, as well
as stipends. It does not include such things as overtime, summer session pay, uniform allowances or
amounts over the established base pay rates or pay above the limits established in the Internal
Revenue Code (IRC), except to the extent that the implementation of UCRP Appendix E raises or
eliminates those limits.

Covered Payroll: eligible earnings (or covered compensation) for UCRP.



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A Defined Benefit plan (DB) guarantees a benefit based on a formula, usually based on some
combination of age, years of service, and pre-retirement earnings. The amount of retirement income
is not affected by market fluctuations. The employer bears the investment risk and benefits are
funded by combined employer/member contributions and investment earnings.

A Defined Contribution plan (DC): contributions are put into funds whose investments are directed
by the member and are subject to market fluctuations. Participants bear the investment risk. Defined
contribution plan benefits generally are more portable than other types of retirement plans.

Funded ratio/funded status: A percentage based on plan assets divided by plan liabilities. It
indicates relative financial stability.

GASB (Governmental Accounting Standards Board: Organization that formulates accounting
standards for governmental units. It is under the auspices of the Financial Accounting Foundation and
replaced the National Council on Government Accounting.

HAPC or Highest Average Plan Compensation is the salary, or covered earnings, averaged over
36 consecutive months. It is used to calculate UCRP pension benefits.

Health Science faculty have academic appointments in a health science school which include such
departments as Medicine, Nursing, Dentistry, Pharmacy.

Market Value is the price at which a plan’s assets could be traded at a particular point in time.

Normal Cost is the cost of an additional year of service credit for all active UCRP members.

Pay Bands: The University uses “pay bands,” or four different levels of salary, to determine the
amount of the University contribution to health coverage for active members. The highest University
contribution is made for those in the lowest pay band; those in the top pay band receive the lowest
University contribution. Retirees’ University contribution is based on pay band 2, closest to what
would be payable without pay bands.

PERS or CalPERS: the California Public Employees’ Retirement System.

PERS Plus 5: Retired members of the University of California Voluntary Early Retirement Incentive
Program (the PERS Plus 5 Plan or Plan) were members of PERS while employed at UC who elected
concurrent early retirement under PERS and the PERS Plus 5 Plan effective October 1, 1991, who
now receive lifetime supplemental retirement income and survivor benefits from the Plan. The
supplemental retirement income is wholly funded by a trust that was financed by contributions from
employing departments.

Policy contribution: In this Report, UCRP Normal Cost plus an amount towards the unfunded
liability.

Reciprocity: Agreements between pension plans to coordinate benefit calculations.

Safety members: UCRP members appointed to eligible police or firefighter positions. These
members are eligible to retire earlier and the age factors for their years of service are more generous
than those of other UCRP members.
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“Smoothing:” UCRP “smooths” or spreads investment gains/losses over five years to avoid short-
term effects of market swings on planning based on thirty-year projections.

Social Security Covered Compensation: For each year, the average Social Security wage base for
the 35 years ending in that year. The amount is adjusted annually for inflation.

Social Security Supplement: Members with Social Security who retire before age 65 receive a
temporary supplement from UCRP, paid through the month of their 65th birthday (or through
the month of death, if earlier). This supplement temporarily restores the $133 reduction
applied to a memberʼs Highest Average Plan Compensation (HAPC) to account for the
Universityʼs contributions to Social Security. The supplement is calculated as follows: Benefit
percentage x $133 = monthly temporary supplement (not to exceed $133).

Total Remuneration: The market measure of the value of cash compensation, health, welfare and
retirement benefits to faculty and staff.

Vest or vesting: a right to an asset, such as pension benefits earned to date, that cannot be taken
away by any third party.




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                         Appendix C – Dissenting Statement
                               on PEB Recommendations

Two members of the Steering Committee recommended that a dissenting statement be circulated
which was developed by a subset of task force members outlining their views of the four New Tier
pension designs considered by the Steering Committee, two of which were forwarded to the
President. This statement can be found on the The Future of UCRP website:
http://www.universityofcalifornia.edu/news/ucrpfuture/emp_task.html




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                                            APPENDIX D
                        Regents’ Action Item, November 2005 on
                                          Total Remuneration

         http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/08/peb_ax_d_regents-action-item-2005.pdf




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                                          APPENDIX E

   Post-Employment Benefits Survey Invitation and Questionnaires

     PEB Survey Results – http://www.universityofcalifornia.edu/news/ucrpfuture/survey.html




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TASK FORCE FINAL REPORT July 2010

                                                      UC PEB ACTIVES SURVEY

[[Email invitation to sample population]]

University of California
2010 Post Employment Benefits Survey
Dear University of California Employee:

I am pleased to invite you to complete a voluntary and confidential survey regarding the University’s post employment benefit
programs. By completing the survey, your thoughts and impressions will help The Post Employment Benefits Task Force in
understanding employee preferences well as identify areas where additional education and communications efforts are needed. The
survey should take approximately 20 minutes to complete.

                                      Please click here to take the 2010 Post Employment Benefits Survey

The survey was developed by the independent consulting firm Towers Watson, in partnership with the University of California, Office of
the President Human Resources. To ensure confidentiality, all survey responses will be directly transmitted to Towers Watson.
Individual responses will be aggregated and summarized by Towers Watson in a written report for the University. For more information
about this survey, please go to: http://atyourservice.ucop.edu/pebi/
The survey will be available for completion beginning February 5th at 8am and will close March 1st at 5pm.

If you have technical difficulties in completing the survey, please contact Koki Mori at 703.258.7436 or send an email to
twsurvey@towerswatson.com. If you have questions about the survey content, please submit them via the Future of
UC Retirement Benefits website at: http://www.universityofcalifornia.edu/news/ucrpfuture/feedback.html

While survey participation is voluntary, I hope that you will be interested in helping to make this effort a success by taking the time to
complete the survey and having your voice heard. On behalf of the University, I thank you in advance for participating in this important
effort.



Sincerely,
Lawrence H. Pitts
Interim Provost and Executive Vice President, Academic Affairs and Chair of the Post Employment Benefits Task Force

Additional information on the PEB task force can be found at:
http:// www.universityofcalifornia.edu/news/ucrpfuture/

Note - If the above link does not work, copy and paste the following URL into your web browser:
[custom link]]


This email was sent to: [[recipient email address]]




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TASK FORCE FINAL REPORT July 2010


WELCOME AND INSTRUCTION PAGE

University of California
2010 Post Employment Benefits Survey


Welcome to the University of California's 2010 Post Employment Benefits Survey.

The survey was developed by the independent consulting firm Towers Watson, in partnership with the University of
California, Office of the President Human Resources. The survey should take approximately 20 minutes to
complete. Please be assured that your individual responses to the survey will be kept strictly confidential. Individual
responses will go directly to Towers Watson and kept in strict confidence. Aggregated results will be summarized in a
written report to the University at the completion of the survey process.

If you experience technical difficulties in completing the survey, please contact Koki Mori at 703.258.7436 or send an
email to twsurvey@towerswatson.com.

Instructions: Please answer the following questions to the best of your knowledge. After completing the questions on
each page, please click "Next" to proceed to the next page. If you wish to save this survey and return to complete it at a
later time, simply click "Save" found on the bottom of each page. The URL can then be bookmarked for later use.




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ABOUT YOUR RETIREMENT PLANS
The UC Retirement Plan (UCRP) provides pension and post-retirement survivor benefits, as well as personal and family
income protection in the event of pre-retirement disability or death. UCRP membership is automatic and mandatory for
eligible employees and begins the first day of an eligible appointment. UCRP is a defined benefit plan, which means that
benefits are determined not by contributions to the Plan, but by formulas based on a member's age at retirement, covered
compensation, and years of service credit.

The University also has three retirement savings plans - the Defined Contribution Plan (DC Plan), the Tax-Deferred 403(b)
Plan and the 457(b) Deferred Compensation Plan. In these plans your benefits are determined by the amount of your
contributions during your employment and your investment return over time.

Q1      Thinking about all of the University’s retirement plans for which you are eligible, please indicate the extent to which
you agree with the following statements.

              1    Strongly disagree
              2    Somewhat disagree
              3    Neither agree nor disagree
              4    Somewhat agree
              5    Strongly agree
              6    Don’t know

     a)   I would recommend the University’s retirement program to family and friends.
     b)   I am knowledgeable about the amount of retirement income I will receive.
     c)   Overall, I’m satisfied with the University’s retirement program.
     d)   The University’s retirement program was an important reason I decided to work for the University.
     e)   The University’s retirement program is an important reason I will stay with the University.
     f)   The University’s retirement program is the primary way I save for retirement.
     g)   The University’s retirement program should be the same for all career employees.
     h)   I would be comfortable with the University offering different retirement programs to different employee groups.
     i)   I would rather receive higher pay today for a lower retirement benefit.
     j)   Contributing money to (funding) the UCRP should be a high priority of the University.
     k)   I would be willing to pay 5% to 7% of my pay each month to ensure I have a lifetime monthly pension benefit.
     l)   I would voluntarily contribute 5% to 7% of my pay each month to the UC voluntary savings plan [403(b)/457(b)] if the University
          matched a portion of my contributions.


Q2      Have you voluntarily contributed a portion of your pay to a University voluntary savings plan [403(b)/457(b)] in the
past 3 years?

              1    Yes
              2    No
              3    I don’t know

Q3        When you retire, how would you prefer to receive your benefits from your defined benefit pension plan (UCRP)?

              1    As monthly income that lasts for the rest of my life (and/or for my eligible survivor)
              2    As a lump sum
              3    Have not decided




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TASK FORCE FINAL REPORT July 2010


ABOUT YOUR RETIREE MEDICAL PLAN

The University currently contributes to medical and dental coverage and allows retirees to participate in the same
programs as eligible staff, e.g., vision, legal and accidental death and dismemberment (AD&D) insurance. Unlike your
UCRP benefits, you cannot become vested in your health and welfare benefits. Eligibility for continuation of medical and
dental coverage requires a minimum of 10 years of service credit in most cases.

Q4        Please indicate the extent to which you agree with the following statements.

              1    Strongly disagree
              2    Somewhat disagree
              3    Neither agree nor disagree
              4    Somewhat agree
              5    Strongly agree
              6    Don’t know


     a)   Overall, I’m satisfied with the University’s current retiree medical program.
     b)   The University’s retiree medical program was an important reason I decided to work for the University.
     c)   The University’s retiree medical program is an important reason I will stay with the University.
     d)   I would rather receive higher pay today for lower retiree medical benefits.
     e)   I would be willing to pay a higher amount each month to ensure I have access to retiree health care benefits, if I retire before
          I’m eligible for Medicare.
     f)   I would be willing to pay a higher amount each month in order to keep lower, predictable health care costs when I retire.
     g)   I will likely work long enough in order to keep my health care benefits until I’m eligible for Medicare.


RETIREMENT PLANNING


Q5       Rank your top 3 most important expected sources of retirement security for you (or for you and your spouse/partner
if applicable)? Please use a “1” to indicate the most important, a “2” to indicate the 2nd most important, and a “3” to indicate
the 3rd most important source.


              1    Social Security                                                                     |_|
              2    University California Retirement Plan (defined benefit plan)                         |_|
              3    The University’s 403(b)/457(b) plan (voluntary pre-tax contributions)               |_|
              4    The University’s defined contribution plan (mandatory pre-tax contributions)        |_|
              5    The University’s retiree medical plan                                               |_|
              6    My spouse/partner’s retirement benefits                                             |_|
              7    Personal savings (e.g., IRA funds, brokerage accounts, variable annuities)          |_|
              8    Home equity or rental income (i.e., primary home and investment properties)         |_|
              9    Inheritance                                                                         |_|
              10   Income from work after I leave the University                                       |_|
              11   Pension, retirement income from another employer                                    |_|
              12   Other ____________________________________                                          |_|

Q6        At what age do you expect to retire from the University?

              1    50 to 54
              2    55 to 59
              3    60 to 61
              4    62 to 64
              5    65
              6    66 to 69
              7    70+
              8    Don’t expect to retire from the University
              9    Don’t know



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Q7       How many years of service do you expect to earn before retiring from the University? Please select the answer
closest to your expectations.

            1   5 years
            2   10 years
            3   15 years
            4   20 years or more
            5   Don’t expect to retire from the University (Skip to Q12.1L)
            6   Don’t know

Q8.1R   Has the age at which you plan to retire from the University changed over the last 2 years?

            1   I expect to retire much later
            2   I expect to retire a little later
            3   My expected retirement age has not changed
            4   I expect to retire a little earlier
            5   I expect to retire much earlier
            6   Don’t know


[If select options 1 or 2 in Q8.1R]
Q8.2R Approximately, how much later do you expect to work at the University? TW

            1   Less than a 1 year
            2   1 year to less than 2 years
            3   2 years to less than 3 years
            4   3 years to less than 5 years
            5   5 years or more
            6   Don’t know

[Respondents to Q8.1 or Q8.2R Skip to Q9]
____________________________________________

Q8.1L   If not planning to retire from the University, has the age at which you plan to leave changed over the last 2 years?

            1   I expect to leave much later
            2   I expect to leave a little later
            3   My expected departure age has not changed
            4   I expect to leave a little earlier
            5   I expect to leave much earlier
            6   Don’t know


[If select options 1 or 2 in Q8.1L]
Q8.2L Approximately, how much longer do you expect to work for the University?

            1   Less than a 1 year
            2   1 year to less than 2 years
            3   2 years to less than 3 years
            4   3 years to less than 5 years
            5   5 years or more
            6   Don’t know




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TASK FORCE FINAL REPORT July 2010
Q9      Please note that the following questions are not asking about the University’s defined benefit plan or other retirement
savings plans. Rather, these questions are asking broadly about the features that you would more like to see in an ideal
retirement program.

Please indicate your degree of preference towards each of the following benefit design features by selecting the option
closest to the one you prefer.

    (P L EASE MARK ONE BOX IN EACH ROW . )
                                                       No Preference/
                 A                 Prefer A             Don’t Know                  Prefer B              B
    a.   Getting higher cash                                                               Getting lower cash
         compensation today and a       □1    □2      □3      □4      □5       □6     □7   compensation today and a
         lower benefit when I retire                                                       higher benefit when I retire


    b.   Getting a guaranteed benefit                                                      Getting no guaranteed benefit
         amount, but no opportunity                                                        amount, but with an opportunity
                                        □1    □2      □3      □4      □5       □6     □7
         for higher returns and no                                                         for higher returns or a chance of
         chance of lower returns                                                           lower returns

                                                                                           Having a benefit that you cannot
    c. Being able to take your
                                                                                           take with you to another
        retirement savings with you
                                        □1    □2      □3      □4      □5       □6     □7   employer, but that will be larger
        when you leave the
                                                                                           in the end if you remain with the
        University
                                                                                           University for many years

                                                                                           Having your benefits distributed
    d. Having your benefits paid out
                                                                                           as guaranteed monthly
        as one lump sum payment         □1    □2      □3      □4      □5       □6     □7
                                                                                           payments over your retirement
        when you retire
                                                                                           years for life

    e. Having your employer make                                                           Having the freedom to make
      the investment decisions with                                                        your own investment decisions
      no opportunity for higher         □1    □2      □3      □4      □5       □6     □7   with an opportunity for higher
      returns and no chance of                                                             returns or the chance for lower
      lower returns                                                                        returns



ATTRACTION/RETENTION

Q10 Choosing from the list below, what are the top three reasons you joined the University?
[Programmer Instructions: Randomize Options]

                   Base pay
                   Post employment benefits (e.g., pension, retiree medical)
                   Career development opportunities
                   Work/life balance
                   Nature of work
                   Promotion opportunity
                   Length of commute
                   To pursue my particular scholarly research interests
                   To work with highly visible colleagues in my field
                   University’s reputation
                   Job security
                   Health care benefits


Q11 Choosing from the list below, what are the top three reasons you stay with the University?
[Programmer Instructions: Randomize Options]

                   Base pay
                   Post employment benefits (e.g., pension, retiree medical)
                   Career development opportunities
                   Work/life balance
                   Nature of work
                   Promotion opportunity

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TASK FORCE FINAL REPORT July 2010
                 Length of commute
                 To pursue my particular scholarly research interests
                 To work with highly visible colleagues in my field
                 University’s reputation
                 Job security
                 Health care benefits
                 Relationship with supervisor/manager


Q12 Choosing from the list below, what are the top three reasons you might consider leaving the University?   [Programmer
Instructions: Randomize Options]

                 Base pay
                 Post employment benefits (e.g., pension, retiree medical)
                 Career development opportunities
                 Work/life balance
                 Nature of work
                 Promotion opportunity
                 Length of commute
                 To pursue my particular scholarly research interests
                 To work with highly visible colleagues in my field
                 University’s reputation
                 Job security
                 Health care benefits
                 Relationship with supervisor/manager
                 Stress levels


DEMOGRAPHICS

D1      Which of the following categories best describes your current position?

            1    Senate faculty
            2    Policy Covered – Professional Support Staff ( PSS)
            3    Managers and Senior Professional (MSP/SMG)
            4    Position with Lawrence Berkeley National Lab (LBNL)
            5    Other Teaching/Research/Academic Titles
            6    Don't know


[For those selecting D1 option 1]
D1a      Which of the following best describes your position with the senate faculty?

            1.   Faculty Ladder Rank Assistant Professor
            2.   Faculty Ladder Rank Associate Professor
            3.   Faculty Ladder Rank Professor
            4.   Lecturer with SOE/PSOE
            5.   Acting Professor or Acting Associate Professor
            6.   Professor in Residence
            7.   Professor of Clinical X Series

[For those selecting D1 options 2, 3 or 4]
D1b      Are you a faculty member participating in a Health Science Compensation Plan?
              1. Yes
              2. No
              3. Not applicable

D1c     Which of the following best describes your current position with the LBNL?
           1. Scientist/engineer
           2. Manager
           3. Other




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D2      Please identify your primary work location.
            1. Campus
            2. Office of the President
            3. Health Science Center (Faculty and Academic Appointees)
            4. Medical Center / Health System (Staff Employees)
            5. Lawrence Berkeley National Lab
            6. Other

D3      Please indicate how long you have worked at the University.

        1.   Less than one year
        2.   One year, but less than 5 years
        3.   Five years, but less than 10 years
        4.   Ten years, but less than 20 years
        5.   20 years, but less than 30 years
        6.   30 years or more

D4 In what year were you born? Please enter as a four-digit number, e.g., 1963.

        [RANGE: 1890-1999]

        |__|__|__|__|


D5 Which best describes your 2009 income before taxes and deductions earned from the University? Please include your pre-
furlough income and do not include your total household income.

             1   $46,000 or less
             2   $46,001 to 92,000
             3   $92,001 to $137,000
             4   $137,001 or more
             5   Decline to answer




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TASK FORCE FINAL REPORT July 2010

                                             UC PEB SHORT SURVEY
UC Website: htttp://www.universityofcalifornia.edu/news/ucrpfuture/emp_survey2010.html

****************************

For Employees

Dear University of California Employee:

I am pleased to invite you to complete a voluntary and confidential survey regarding the University's post employment benefit programs
(pension and retiree health). By completing the survey, your thoughts and impressions will help the Post Employment Benefits Task
Force in understanding employee preferences as well as identify areas where additional education and communications efforts are
needed.

The survey will be available for completion beginning February 5th and will close March 1 at 5 p.m. To take the survey, please go to
https://inq.ehr.com/cgi-bin/qwebcorporate.dll?idx=4QV69S

The survey has been developed by the independent consulting firm Towers Watson, in partnership with the University of California,
Office of the President Human Resources. The survey is short and should take about 10 minutes to complete. Please be assured that
your individual responses to the survey will be kept strictly confidential. All responses will be collected and held in confidence by Towers
Watson and summarized in a written report for the University. The report will be posted on the Future of UC Retirement Benefits
website in the Spring 2010.

If you have technical difficulties in completing the survey, please contact Koki Mori at 703.258.7436 or send an email to
twsurvey@towerswatson.com. If you have questions about the survey content, please submit them via the Future of UC Retirement
Benefits website at http://www.Universityofcalifornia.edu/news/ucrpfuture/feedback.html.

On behalf of the University, I thank you in advance for your efforts.

Sincerely,




Lawrence H. Pitts
Interim Provost and Executive Vice President, Academic Affairs and
Chair of the Post Employment Benefits Task Force




                                                                Page 131
TASK FORCE FINAL REPORT July 2010


WELCOME AND INSTRUCTION PAGE

University of California
2010 Post Employment Benefits Survey

Welcome to the University of California's 2010 Post Employment Benefits Survey.

The survey was developed by the independent consulting firm Towers Watson, in partnership with the University of
California, Office of the President Human Resources. The survey should take approximately 15 minutes to
complete. Please be assured that your individual responses to the survey will be kept strictly confidential. Individual
responses will go directly to Towers Watson and kept in strict confidence. Aggregated results will be summarized in a
written report to the University at the completion of the survey process.

If you experience technical difficulties in completing the survey, please contact Koki Mori at 703.258.7436 or send an
email to twsurvey@towerswatson.com.

Instructions: Please answer the following questions to the best of your knowledge. After completing the questions on
each page, please click "Next" to proceed to the next page. If you wish to save this survey and return to complete it at a
later time, simply click "Save" found on the bottom of each page. The URL can then be bookmarked for later use.


FILTER

F1 Which of the following best describes your UC employment and appointment status?

             1    Career Appointment (eligible for UC retirement benefits - defined benefit plan)
             2    Retired (no longer actively employed at UC)
             3    UC rehired retiree
             4    Retired from UC, but employed outside of UC
             5    Part-time/Student
             6    None of the above

F2   Are you currently represented by a union?

          1 Yes
          2 No


A Note to Exclusively Represented Employees

Represented employees who wish to complete this survey should direct their interest and comments to their union leadership. If you are
represented by a union you should be aware that your union leadership has not agreed to participate. Please contact your union
representative if you have questions about the post employment benefits at the University.

Please click 'Next' to continue and 'Finish' on the next page to exit the survey.




                                                             Page 132
TASK FORCE FINAL REPORT July 2010

ABOUT YOUR RETIREMENT PLANS

The UC Retirement Plan (UCRP) provides pension and post-retirement survivor benefits, as well as personal and family
income protection in the event of pre-retirement disability or death. UCRP membership is automatic and mandatory for
eligible employees and begins the first day of an eligible appointment. UCRP is a defined benefit plan, which means that
benefits are determined not by contributions to the Plan, but by formulas based on a member's age at retirement, covered
compensation, and years of service credit.

The University also has three retirement savings plans - the Defined Contribution Plan (DC Plan), the Tax-Deferred 403(b)
Plan and the 457(b) Deferred Compensation Plan. In these plans your benefits are determined by the amount of your
contributions during your employment and your investment return over time.

Q1      Are you eligible to participate in the UC Retirement Plan (UCRP)?
     m) Yes
     n) No
     o) Don’t know


Q2      Thinking about all of the University’s retirement plans for which you are eligible, please indicate the extent to which
you agree with the following statements.

              1    Strongly disagree
              2    Somewhat disagree
              3    Neither agree nor disagree
              4    Somewhat agree
              5    Strongly agree
              6    Don’t know/Not Applicable

     a)   Overall, I’m satisfied with the University’s retirement program.
     b)   The University’s retirement program was an important reason I decided to work for the University.
     c)   The University’s retirement program is an important reason I will stay with the University.
     d)   The University’s retirement program is the primary way I save for retirement.
     e)   I would rather receive higher pay today for a lower retirement benefit.
     f)   I would be willing to pay 5% to 7% of my pay each month to ensure I have a lifetime monthly pension benefit.



ABOUT YOUR RETIREE MEDICAL PLAN
The University currently contributes to medical and dental coverage and allows retirees to participate in the same
programs as eligible staff, e.g., vision, legal and accidental death and dismemberment (AD&D) insurance. Unlike your
UCRP benefits, you cannot become vested in your health and welfare benefits. Eligibility for continuation of medical and
dental coverage requires a minimum of 10 years of service credit in most cases.

Q3        Please indicate the extent to which you agree with the following statements.

              7    Strongly disagree
              8    Somewhat disagree
              9    Neither agree nor disagree
              10   Somewhat agree
              11   Strongly agree
              12   Don’t know/Not Applicable

     a.     Overall, I’m satisfied with the University’s current retiree medical program.
     b.     The University’s retiree medical program was an important reason I decided to work for the University.
     c.     The University’s retiree medical program is an important reason I will stay with the University.
     d.     I would rather receive higher pay today for lower retiree medical benefits.
     e.     I would be willing to pay a higher amount each month to ensure I have access to retiree health care benefits, if I retire before
            I’m eligible for Medicare.
     f.     I would be willing to pay a higher amount in monthly premiums in order to keep lower, predictable health care costs when I
            retire.
     g.     I will likely work long enough in order to keep my health care benefits until I’m eligible for Medicare.

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TASK FORCE FINAL REPORT July 2010

RETIREMENT PLANNING

Q4       Rank your top 3 most important expected sources of retirement security for you (or for you and your spouse/partner
if applicable). Please use a “1” to indicate the most important, a “2” to indicate the 2nd most important, and a “3” to indicate
the 3rd most important source.


            13   Social Security                                                                |_|
            14   University California Retirement Plan (defined benefit plan)                    |_|
            15   The University’s 403(b)/457(b) plan (voluntary pre-tax contributions)          |_|
            16   The University’s defined contribution plan (mandatory pre-tax contributions)   |_|
            17   The University’s retiree medical plan                                          |_|
            18   My spouse/partner’s retirement benefits                                        |_|
            19   Personal savings (e.g., IRA funds, brokerage accounts, variable annuities)     |_|
            20   Home equity or rental income (i.e., primary home and investment properties)    |_|
            21   Inheritance                                                                    |_|
            22   Income from work after I leave the University                                  |_|
            23   Pension, retirement income from another employer                               |_|
            24   Other ____________________________________                                     |_|


ATTRACTION/RETENTION
Q5 Choosing from the list below, what are the top three reasons you joined the University?

                 Base pay
                 Health care benefits
                 Post employment benefits (e.g., pension, retiree medical)
                 Career development opportunities
                 Promotion opportunity
                 Work/life balance
                 University’s reputation
                 Job security
                 Nature of work
                 Length of commute
                 To work with highly visible colleagues in my field
                 To pursue my particular scholarly research interests


Q6 Choosing from the list below, what are the top three reasons you stay with the University?

                 Base pay
                 Health care benefits
                 Post employment benefits (e.g., pension, retiree medical)
                 Career development opportunities
                 Promotion opportunity
                 Work/life balance
                 University’s reputation
                 Job security
                 Nature of work
                 Length of commute
                 To work with highly visible colleagues in my field
                 To pursue my particular scholarly research interests
                 Relationship with supervisor/manager


Q7 Choosing from the list below, what are the top three reasons you might consider leaving the University?

                 Base pay
                 Health care benefits
                 Post employment benefits (e.g., pension, retiree medical)
                 Career development opportunities
                 Promotion opportunity
                 Work/life balance
                                                             Page 134
TASK FORCE FINAL REPORT July 2010
                   Job security
                   Nature of work
                   Length of commute
                   Stress levels
                   To work with highly visible colleagues in my field
                   To pursue my particular scholarly research interests
                   Relationship with supervisor/manager

DEMOGRAPHICS

D1      Which of the following categories best describes your current position?

              7    Senate faculty
              8    Policy Covered – Professional Support Staff ( PSS)
              9    Managers and Senior Professional (MSP/SMG)
              10   Position with Lawrence Berkeley National Lab (LBNL)
              11   Other Teaching/Research/Academic Titles
              12   Don't know


[For those selecting D1 option 1]
D1a      Which of the following best describes your position with the senate faculty?

              1.   Faculty Ladder Rank Assistant Professor
              2.   Faculty Ladder Rank Associate Professor
              3.   Faculty Ladder Rank Professor
              4.   Lecturer with SOE/PSOE
              5.   Acting Professor or Acting Associate Professor
              6.   Professor in Residence
              7.   Professor of Clinical X Series

[For those selecting D1 option 4]
D1b      Are you a faculty member participating in a Health Science Compensation Plan?
              4. Yes
              5. No
              6. Not applicable

D1c     Which of the following best describes your current position with the LBNL?
           4. Scientist/engineer
           5. Manager
           6. Other


D2      Please identify your primary work location.
            7. Campus
            8. Office of the President
            9. Health Science Center (Faculty and Academic Appointees)
            10. Medical Center / Health System (Staff Employees)
            11. Lawrence Berkeley National Lab
            12. Other

D3      Please indicate how long you have worked at the University.

        7.    Less than one year
        8.    One year, but less than 5 years
        9.    Five years, but less than 10 years
        10.   Ten years, but less than 20 years
        11.   20 years, but less than 30 years
        12.   30 years or more




D4 In what year were you born? Please enter as a four-digit number, e.g., 1963.

                                                               Page 135
TASK FORCE FINAL REPORT July 2010

        [RANGE: 1890-1999]

        |__|__|__|__|


D5 Which best describes your 2009 income before taxes and deductions earned from the University? Please include your pre-
furlough income and do not include your total household income.

            6  $46,000 or less
            7  $46,001 to 92,000
            8  $92,001 to $137,000
            9  $137,001 or more
            10 Decline to answer




                                                       Page 136
TASK FORCE FINAL REPORT July 2010

                                          UC PEB RETIREES SURVEY
UC Website: http://www.universityofcalifornia.edu/news/ucrpfuture/ret_survey2010.html

**********************

Retiree Survey

Dear University of California Retiree:

I am pleased to invite you to complete a voluntary and confidential survey regarding the University's post employment medical benefit
program. By completing the survey, your thoughts and impressions will help the Post Employment Benefits Task Force in
understanding retiree preferences as well as identify areas where additional education and communication efforts are needed.

The survey will be available for completion beginning February 5th and will close March 1 at 5 p.m. To take the survey, please go to:
https://inq.ehr.com/cgi-bin/qwebcorporate.dll?idx=HEK2AZ

The survey has been developed by the independent consulting firm Towers Watson, in partnership with the University of California,
Office of the President Human Resources. The survey is short and should take about 15 minutes to complete. Please be assured that
your individual responses to the survey will be kept strictly confidential. All responses will be collected and held in confidence by Towers
Watson and summarized in a written report for the University. The report will be posted on the Future of UC Retirement Benefits
website in the Spring 2010.

If you have technical difficulties in completing the survey, please contact Koki Mori at 703.258.7436 or send an email to
twsurvey@towerswatson.com. If you have questions about the survey content, please submit them via the Future of UC Retirement
Benefits website at http://www.universityofcalifornia.edu/news/ucrpfuture/emp_task.html.

On behalf of the University, I thank you in advance for your efforts.

Sincerely,

Lawrence H. Pitts
Interim Provost and Executive Vice President, Academic Affairs and
Chair of the Post Employment Benefits Task Force




                                                                Page 137
TASK FORCE FINAL REPORT July 2010


WELCOME AND INSTRUCTION PAGE

University of California
2010 Post Employment Benefits Survey

Welcome to the University of California's 2010 Post Employment Benefits Survey.

The survey was developed by the independent consulting firm Towers Watson, in partnership with the University of
California, Office of the President Human Resources. The survey should take approximately 10 minutes to
complete. Please be assured that your individual responses to the survey will be kept strictly confidential. Individual
responses will go directly to Towers Watson and kept in strict confidence. Aggregated results will be summarized in a
written report to the University at the completion of the survey process.

If you experience technical difficulties in completing the survey, please contact Koki Mori at 703.258.7436 or send an
email to twsurvey@towerswatson.com.

Instructions: Please answer the following questions to the best of your knowledge. After completing the questions on
each page, please click "Next" to proceed to the next page. If you wish to save this survey and return to complete it at a
later time, simply click "Save" found on the bottom of each page. The URL can then be bookmarked for later use.

FILTER


F1 Which of the following best describes your current relationship with the University of California (UC)?

             7    Retired (no longer actively employed at UC)
             8    UC rehired retiree
             9    Retired from UC, but employed outside of UC
             10   Career Appointment (eligible for UC retirement benefits – defined benefits plan)
             11   None of the above

[REDIRECT: If select options 4 or 5 then push to SHORT version of the survey.]




                                                              Page 138
TASK FORCE FINAL REPORT July 2010


ABOUT YOUR RETIREE MEDICAL PLAN

The University currently contributes to medical and dental coverage and allows retirees to participate in the same
programs as eligible staff, e.g., vision, legal and accidental death and dismemberment (AD&D) insurance. Unlike the
University's pension benefits, you cannot become vested in your health and welfare benefits. Eligibility for continuation of
medical and dental coverage requires a minimum of 10 years of service credit in most cases.

Q1 Are you currently enrolled in the University’s retiree medical program?
          1 Yes
          2 No (Skip to Q5)

Q2. I understand that the University's retiree health care benefits are funded from annual operating revenues and
budgetary appropriations.
             1.   Yes
             2.   No, I thought it was funded out of the pension trust
             3.   Don’t know

Q3    Please indicate the extent to which you agree with the following statements.

             7    Strongly disagree
             8    Somewhat disagree
             9    Neither agree nor disagree
             10   Somewhat agree
             11   Strongly agree
             12   Don’t know

     a.    Overall, I’m satisfied with the University’s retiree medical program.
     b.    The University’s retiree medical program was an important reason I decided to work for the University.
     c.    During my working years, I would have been willing to pay a higher amount out of my paycheck each month to ensure I
           have access to health care benefits, if I retire before I’m eligible for Medicare.
     d.    I would be willing to pay a higher amount each month in order to keep lower, predictable health care costs.
     e.    I would be comfortable if my monthly contributions to retiree medical were based on my final UC salary.
     f.    I would be comfortable if my share of retiree medical monthly premiums were based on the amount of my current pension
           benefit.
     g.    I would be comfortable sharing personal household financial information with the University to determine my monthly
           contributions to retiree medical.

RETIREMENT PLANNING

Q4 Rank your top 3 most important sources of retirement security for you (or for you and your spouse/partner if applicable)?
Please use a “1” to indicate the most important, a “2” to indicate the 2nd most important, and a “3” to indicate the 3rd most
important source.
[Programmer Instructions: Randomize Options]


             25   Social Security                                                                |_|
             26   University California Retirement Plan (defined benefit plan)                    |_|
             27   The University’s 403(b)/457(b) plan (voluntary pre-tax contributions)          |_|
             28   The University’s defined contribution plan (mandatory pre-tax contributions)   |_|
             29   The University’s retiree medical plan                                          |_|
             30   My spouse/partner’s retirement benefits                                        |_|
             31   Personal savings (e.g., IRA funds, brokerage accounts, variable annuities)     |_|
             32   Home equity or rental income (i.e., primary home and investment properties)    |_|
             33   Inheritance                                                                    |_|
             34   Income from work after I leave the University                                  |_|
             35   Pension, retirement income from another employer                               |_|
             36   Other ____________________________________                                     |_|




                                                              Page 139
TASK FORCE FINAL REPORT July 2010


ATTRACTION/RETIREMENT DECISION

Q5 Choosing from the list below, what are the top three reasons you joined the University?
[Programmer Instructions: Randomize Options]

                   Base pay
                   Health care benefits
                   Post employment benefits (e.g., pension, retiree medical)
                   Career development opportunities
                   Promotion opportunity
                   Work/life balance
                   University’s reputation
                   Job security
                   Nature of work
                   Length of commute
                   To work with highly visible colleagues in my field
                   To pursue my particular scholarly research interests

Q6 Choosing from the list below, what are the top three reasons you retired from the University? [Programmer Instructions:
Randomize Options]

                  My job dissatisfaction
                  My ability to afford retirement
                  A desire for more personal or family time
                  My own health or health of spouse/partner or other family member
                  A combination of age and service credit allowed me to receive certain benefits
                  A consideration related to the UC retiree medical program
                  An early retirement financial incentive offered by the University
                  A desire to do something different
                  Other career opportunities
                  My spouse’s/partner’s retirement status
              Other_________________________________


DEMOGRAPHICS

D1 Please indicate how long you worked (or have worked if currently working) at the University.

        13.   Less than one year
        14.   One year, but less than 5 years
        15.   Five years, but less than 10 years
        16.   Ten years, but less than 20 years
        17.   20 years, but less than 30 years
        18.   30 years or more

D2 Which of the following categories best describes your position before retiring from the University?

              13   Senate faculty
              14   Policy Covered - Professional Support Staff (PSS)/ former Staff or Administrative & Professional (A&PS)
              15   Management Senior Professional (MSP)/ former Management and Professional (MAP)
              16   Senior Manager (SMG)/ former Executive Program
              17   Position with Lawrence Berkeley National Lab (LBNL)
              18   Other Teaching/Research/Academic Titles
              19   Don't know


[For those selecting D2 option 1]
D2a Which of the following best describes your position with the senate faculty before retiring?

              1.   Faculty Ladder Rank Assistant Professor
              2.   Faculty Ladder Rank Associate Professor
              3.   Faculty Ladder Rank Professor

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TASK FORCE FINAL REPORT July 2010
             4.   Lecturer with SOE/PSOE
             5.   Acting Professor or Acting Associate Professor
             6.   Professor in Residence
             7.   Professor of Clinical X Series

[For those selecting D2 option 4]
D2b Which of the following best describes your current position with the LBNL before retiring?
              7. Scientist/engineer
              8. Manager
              9. Other


D3 Please identify your primary work location before retiring from the University.
           13. Campus
           14. Office of the President
           15. Health Science Center (Faculty and Academic Appointees)
           16. Medical Center / Health System (Staff Employees)
           17. Lawrence Berkeley National Lab
           18. Other

D4 In what year did you retire from the University? Please enter as a four-digit number, e.g., 2003.

        [PROGRAMMER NOTE: RANGE: 1900-2009]

        |__|__|__|__|


D5 In what year were you born? Please enter as a four-digit number, e.g., 1963.

        [PROGRAMMER NOTE: RANGE: 1890-1999]

        |__|__|__|__|

D6 Are you currently receiving benefits from Medicare?
       1. Yes
       2. No, I have not reached age 65
       3. No, I am not/will not be eligible for Medicare

D7 Which of the following income categories best describes your household income in 2009? (Please include all income
sources before taxes and deductions.)

             11 $46,000 or less
             12 $46,001 to 92,000
             13 $92,001 to $137,000
             14 $137,001 or more
             15 Decline to answer


D8 Approximately, what is the amount of your MONTHLY benefit from the University of California Retirement Plan (UCRP)?

             1    Less than $1,000
             2    $1,001 to $2,000
             3    $2,001 to $3,000
             4    $3,001 to $4,000
             5    $4,001 and over
             6    Decline to answer




                                                             Page 141
TASK FORCE FINAL REPORT July 2010




                                                APPENDIX F

                         Impact of Retirement Program Changes
                  on Workforce Behavior, University of California
                                                 June 6, 2007
                          Mercer Human Resources Consulting

  •   http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/08/peb_ax_f_impact-on-workforce-behavior.pdf




                                                      Page 142
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                                                APPENDIX G
                      UC Emeriti Bibliographic Survey 2007-2009
                              Council of University of California
                                  Emeriti Association (CUCEA)


  •   http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/08/peb_ax_g_emeriti-bibliographic-survey.pdf




                                                       Page 143
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                                                             APPENDIX H
                                     Update to 2009 Total Remuneration
                                              Study for New Tier Options

   Plan Design A (1a) - http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/08/peb_ax_h-1_2009-total-remuneration-study-a.pdf
   Plan Design B (1b) - http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/08/peb_ax_h-2_2009-total-remuneration-study-b.pdf
   Plan Design C (1c) - http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/09/peb_ax_h-3_2009-total-remuneration-study-c.pdf




                                                                     Page 144
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                                                 APPENDIX I
                                 Proposed Draft Attachment to
                                September 2010 Regents’ Item
                                        PEB Communications


  •   http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/08/peb_ax_i_peb-communications-plan-draft.pdf




                                                      Page 145
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PENSION APPENDICES




                                                 APPENDIX J
                           Sustaining State Retirement Benefits:
                              Recent State Legislation Affecting
                             Public Retirement Plans, 2005-2009
                       National Conference of State Legislatures


  •   http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/08/peb_ax_j_sustaining-state-retirement-benefits.pdf




                                                       Page 146
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                                                 APPENDIX K
                                          Background Articles
     Trends in Retirement Benefits, Hewitt Associates -
      http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/08/peb_ax_k-1_trends-in-retirement-benefits.pdf
     PERISCOPE article, National Assoc of State Retirement Administrators – Public plan DB DC
      choices; Redefining Traditional Plans by Keith Brainard -
      http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/08/peb_ax_k-2_nasra-periscope-article.pdf
     Different Pension Designs: Defined Benefit and Defined Contribution, Segal -
      http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/08/peb_ax_k-3_different-pension-designs-db-dc.pdf
     Overview of three discussion papers on Defined Benefit and Defined Contribution Pension
      Plans -
      http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/08/peb_ax_k-4_overview-discussion-db-dc-plans.pdf




                                                       Page 147
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                                         APPENDIX L
                                     UCRP Background


o University of California Retirement Plan, an Historical Perspective
o University of California Retirement Plan Contributions 1976 - 1993
o History of $19 member contribution offset
o Demographics
o Investment Rates of Return
o Normal Cost and Total Contributions
o Funded Ratio
o CalPERS, CalSTRS and Compator 8 Plans
o Comparison of Current and New Plan Provisions for Various California Public Sector Entities

o Proposed Pension Reform Highlights from Current Governor and Select 2010 California
  Gubernatorial Candidates

o Summary of Recent Plan Design Changes for Various State Plans
o The Regents’ Actuary, Segal – UCRP, Pension Plan Funding
                          and Investment Performance
                           o Covered Population
                           o Segments
                           o Active Members
                           o 2009 UCRP Valuation Report
                           o Pension Plan Funding
                           o UCRP Funding Policy
                           o Glossary of Funding Policy Terms
                           o Role of Investment Performance in UCRP




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           University of California Retirement System, an Historical Perspective



  1904   UC introduced its first employee pension plan, purchasing annuities for retiring
         professors at its two campuses: UC Berkeley and UC San Francisco.
  1918   UC professors gained access to pension provide by the Carnegie Foundation; the
         University’s plan became supplemental.
  1924   Carnegie Foundation’s assets were inadequate pension resources so UC instituted
         a dual program with a noncontributory Pension System and a contributory Retiring
         Annuities System (PRAS). Only academic instructors, professors and some high-
         ranking administrators were eligible for the plan.
  1937   Non-academic UC employees were covered by membership in the California State
         Employees’ Retirement System (SERS,) known today as the California Public
         Employees’ Retirement System (CalPERS).
  1961   The Regents established the University of California Retirement system (UCRS) to
         provide pension benefits to all full-time UC faculty and staff.
  1966   Supplemental Annuity Defined Contribution plans were established to provide
         UCRP members with savings options.
  1967   Eligibility for retirement was changed from age 55 and 20 years service credit to
         age 55 and 5 years service credit.
         A 3% contribution to the Supplemental Annuity Fixed annuity for faculty was added.
  1969   Contributions to the Supplemental Annuity plans could be tax-deferred.
  1971   Annual automatic cost-of-living adjustments (COLAs) were applied to retirement
         benefits; survivor and disability benefits were improved to parallel those from Social
         Security.
         New members were required to contribute to plan from date of hire, regardless of
         age. (Previously, members under age 30 were not required to make contributions
         but could elect to do so.)
         Member contributions became a single, fixed rate rather than varying by age and
         gender.
  1972   Pension formula was increased to 2% age 60, rather than age 63. Survivor and
         disability benefits were improved.
  1974   Special benefit provisions were added for members in police and firefighting
         appointments (Safety members).
         Survivor continuance with no reduction in retiree’s pension was added.
  1976   Social Security coverage was offered to UCRS members. Current members were
         given a choice of electing coverage; new members were covered automatically.
  1977   Current members were given a second opportunity for Social Security coverage.
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  1979   Mandatory retirement on July 1 following age 70 became effective for Staff and
         Officers of The Regents.
         2% Senior Management contribution added; may be directed to Supplemental
         Annuity plans.
  1982   Mandatory retirement on July 1 following age 70 became effective for faculty.
  1983   Member contributions became tax-deferred.
  1984   Mandatory retirement ended for staff; Officers of the Regents’ mandatory retirement
         remained July 1 following age 67; faculty, increased to July 1 following age 70.
  1987   Tier Two, a noncontributory plan option with reduced benefits, was offered.
         IRC 415(m) limits on benefits were added to plan.
  1988   Pension formula age factors increased for ages 60 through 63, approximating
         PERS factors.
         Ad-hoc COLA approved giving annuitants 75% of original UCRP pension’s
         purchasing power.
  1989   UCRS was reconfigured from corporate resolution into three plan documents: the
         University of California Retirement Plan (UCRP, the Defined Benefit plan,) the Tax-
         Deferred 403(b) Plan and the After Tax Contribution Plan (two Defined Contribution
         plans).
         University contributions to the Supplemental Annuity plans for faculty, Senior
         Management were ended.
  1990   Minimum retirement age was reduced to age 50 (from 55).
         All or part of required UCRP contributions were redirected a new, pre-tax Defined
         Contribution Plan. The University’s contribution to UCRP was set at zero percent.
         Tier Two was closed to new membership.
  1991   A Voluntary Early Retirement Incentive Program (VERIP, known as “Plus 5”) was
         offered to eligible members. Approximately 3,600 members elected early
         retirement, receiving 5 added years of UCRP service credit and a one-time lump-
         sum payment.
         Ad-hoc COLA giving annuitants 80% of original UCRP pension’s purchasing power
         was implemented.
  1992   Pension formula was changed to 2.4% at age 60 (from 63;) age factors from 50
         through 59 were adjusted upward.
         A supplement to existing UCRP benefits was approved by The Regents: Capital
         Accumulation Provision (CAP) credits, a percentage of covered compensation paid
         during a specified period, were accrued by eligible active members. The first
         accrual credited on April 1, equaled 5% of the member’s 1991 covered
         compensation. July 1, 1992 and July 1, 1993 accruals equaled 2.5% of covered
         compensation for each previous year.
         A Lump-Sum Cashout (LSC) was added, providing a one-time payment equal to
                                             Page 150
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         the actuarial equivalent of the basic retirement benefit. Individuals choosing this
         option are not eligible for Retiree Health benefits.
         A second Voluntary Early Retirement Incentive Program (VERIP, known as “Take
         5”) was offered to eligible members. Approximately 2,300 members elected early
         retirement, receiving 5 added years of UCRP service credit and a one-time lump-
         sum payment.
  1993   A third Voluntary Early Retirement Incentive Program (known as VERIP-III) was
         offered to approximately 15,000 eligible UCRP members. Eligible campus and
         UCOP members choosing early retirement received 8 added years of UCRP
         service credit and/or age credit. Eligible DOE Laboratory members choosing early
         retirement received 6 added years of UCRP service credit and/or age credit.
         The Regents approved two more Capital Accumulation Credits for eligible
         members. The November 1, 1993 credit equaled 5.26% of the member’s covered
         compensation for July 1, 1993 through October 31, 1993. The July 1, 1994 credit
         equaled 2.67% of covered compensation for November 1, 1993 through June 30,
         1994.
  1994   Mandatory retirement eliminated for faculty.
  2000   Restoration Benefits approved by The Regents.
  2001   Pension formula changed to 2.5% age 60 (from 2.4%); Safety members’ formula
         changed to 3% at age 50.
  2002   April 1 CAP equaled 3% of covered compensation for April 1, 2001 through March
         31, 2002.
  2003   April 1 CAP equaled 5% of covered compensation for April 1, 2002 through March
         31, 2003.
  2006   Los Alamos National Laboratory newly hired employees moved to a “spin-off” plan;
         current members could choose to transfer to the spin-off plan.
  2007   Lawrence Livermore National Laboratory newly hired employees moved to a “spin-
         off” plan; current members could choose transfer to the spin-off plan.
  2008   Regents adopt new UCRP funding policy.
  2010   UCRP contributions restarted.




                                             Page 151
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                                    Page 152
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              History of $19 Offset to UCRP Member Contributions
   In 1974, the California State Legislature enacted the “Total Equivalent Compensation” program to
    provide benefit improvements for State civil service employees that included a 1% reduction (from
    7% to 6%) in member contributions to the Public Employees’ Retirement System (now CalPERS).
   The 1974 Budget Act approved an allocation to The Regents for employee benefit improvements,
    “provided that those employees who are active or inactive members of the Public Employees’
    Retirement System shall receive the same benefit as their respective member groups received
    under legislation that implements the Total Equivalent Compensation Benefit Program for civil
    service employees.”
   Effective July 1, 1974, The Regents adopted benefit improvements that included a 1% reduction
    (from 8.1% to 7.1%) in UCRP member contributions.
   Effective July 1, 1975, as part of the Total Equivalent Compensation Benefit Program, PERS
    member contributions were further reduced by applying the 6% contribution rate to covered
    compensation above of $150 per month (6% of $150 equals $9).
   Effective July 1, 1975, The Regents adopted benefit improvements including applying the UCRP
    member contribution rate to covered compensation above $127 per month (7.1% of $127 equal
    $9.02). Since this approach did not produce an even $9 benefit, the provision was later re-
    characterized as a $9 offset to the member contribution.
       o The intent of a flat dollar offset was to give a more equitable benefit to lower-paid members
            in comparison to a percentage reduction in the contribution rate that is more favorable to
            higher-paid members.
   Effective July 1, 1976, as a continuation of the Total Equivalent Compensation Benefit Program,
    PERS member contributions were reduced again by applying the 6% contribution rate to
    compensation above $317 per month (6% of $317 equals $19).
   Effective July 1, 1976, The Regents approved a $19 per month offset to the 7.1% member
    contribution rate.
   Effective July 1, 1982, member contributions were reduced by $50 per month for a period of one
    year.
   The $50 per month offset to member contributions was extended another six months through
    December 31, 1983 since there were no salary range adjustments that year.
   Effective January 1, 1984, the offset reverted to $19 per month.



                                                 Page 153
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UCRP Demographics (7/1/09)
Terminated, vested members have at least 5 years UCRP service credit when their University
employment ends and their UCRP member contributions remain on deposit with UCRP.

Retirees and survivors are former University faculty and staff who receive a pension or Disability
Income from UCRP or eligible surviving family members of faculty, staff or retirees.

Active faculty and staff are currently employed UCRP members.




                                2009 UCRP Membership


                                                          16%
                                                          31,000

                             58%
                                                                              26%
                         116,000                                        52,000




           Terminated vested members     Retirees & Survivors   Active faculty and staff members




                                               Page 154
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                                 History of UCRP Investment Returns

There are two different measurements of a pension plan’s assets, market value and actuarial value.
The market value fluctuates with investment returns, reflecting investment results immediately. The
actuarial value “smoothes” or spreads investment gains/losses above or below the actuarial assumed
earnings rate (currently 7.5% for UCRP) over a period of years to dampen the volatility of the market
value returns. UCRP uses a five-year “smoothing” period.

Market returns in the last 20 years have been highly volatile, ranging from a 1994 high of over 26% to
a 2008 low of around -19% (about 27% short of the assumption of a positive 7.5%). The FY 08/09
loss will not be fully recognized in the actuarial value of assets until the 2013 actuarial valuation.
However, over the 20-year period ending 12/31/2009, UCRP’s average return on investments was
8.97%, which is higher than the 7.5% assumption for UCRP.

Investment returns are the largest driver of assets available to pay benefits. The University
Treasurer’s Office investment performance has been consistently above its benchmark and the
UCRP assumed rate of return, but investments alone cannot overcome a 20-year lack of
contributions. Without restarting contributions, it has been estimated that earnings would have to be
more than 15% per year over the next 10 years to return UCRP to 100% funded status. In addition,
contributions equal to the Normal Cost, along with investment earnings of 7.5% per year would still be
needed after returning to 100% funded status.
                               UCRP Investment Rates of Return




                                                 Page 155
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                                         Funding Policy History
Generally, employer and employee contributions to a pension plan are set to cover a plan’s Normal
Cost, plus an amount to amortize any unfunded liability. Between 1976 and 1990, contributions to
UCRP varied; employees paid between 5% and 7% and the employer contributions went as high as
16.37%. Currently, UCRP’s Normal Cost is 17.6% of covered payroll, approximately $1.4 billion/year.
It has increased over time due to benefit improvements, changes to actuarial assumptions, and a
later average entry age for new hires.

In October of 1990 The Regents adopted a “full funding limit” under which contributions would be
suspended when UCRP’s surplus was enough to cover the Plan’s Normal Cost. When contributions
were suspended in 1990, UCRP was 137% funded, meaning, at that time, the Plan had more assets
than liabilities that were allocated to date. Each subsequent year, the Normal Cost was “paid” out of
the surplus as it was added to the liability. As a result of the contribution holiday, it is estimated that
as of July 1, 2010 UCRP is 86% funded on an actuarial value of assets basis and 71% on a market
value of assets basis ($13.5 billion shortfall). Hypothetically, had contributions been made to UCRP
during each of the prior 20 years at the Normal Cost level, UCRP would be approximately 120%
funded today.
                         UCRP Normal Cost and Total Contributions




                                    Restart of UCRP Contributions
                                                  Page 156
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In February 2009, The Regents authorized restarting UCRP contributions at 4% for UC and 2%/4%1
for members beginning on or about April 15, 2010 subject to collective bargaining for represented
employees. The Regents’ approved action item included a commitment to review the contribution
level each year, balancing the actuarial policy contribution level with available funding and the impact
on total remuneration.

The restart of all employer contributions to UCRP was delayed due to the lack of State support for the
funding of even a portion of the State’s share on State-funded salaries. The State has enjoyed a
nearly 20-year period of zero contributions to UCRP for State-funded members. The decision was
made to proceed with the restart of contributions this year without State funding because of the
decrease in UCRP’s funded status. Student fees had to be used to partially cover the State share of
the contributions and campuses had to redirect resources to cover the 4% employer cost, which even
with employee contributions is far less than the Normal Cost of 17.6%. University and State
discussions on the State’s obligations are ongoing; however, the financial condition of the State is not
expected to improve for many years. For 2010 the combined UC and member contributions are
about 6% of covered payroll but, since the Normal Cost is 17.6%, the unfunded liability continues to
grow.

Because benefit charges must be the same across all fund sources and more than two-thirds of
University funding is non-State based, for each dollar the State fails to pay, UC loses more than two
dollars that could be collected from other fund sources. Additionally, deferring full contributions
means that the University is not capturing monies from the fund sources incurring the annual increase
in liability (Normal Cost).




1
 UCRP members coordinated with Social Security contribute 2% of covered pay below the Social Security wage base
and 4% above it. Contributions are reduced by a $19 per month offset.
                                                      Page 157
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                                                                              UCRP Funded Ratio History


This chart shows the funded ratio of UCRP from 1995, projected through 2010. The figures are
based on the actuarial value of plan assets.



                                                                                       UCRP
Funded
Ra/o

                                                                                (Based
on
Actuarial
Value
of
Assets)

                                       165%

                                                                                      156%

                                       155%

                                                                                              149%

                                                                              146%

                                       145%
                                                          140%

       Ra/o
of
Assets
to
Liabili/es





                                       135%
                          132%

                                                                                                              128%

                                       125%
                                                                         119%

                                                              119%

                                       115%
       111%
                                                                    112%
                                           100%

                                               107%
                                                                            106%
                                       Funding

                                                                                                                                           105%

                                       105%
                                                                                                       103%
                    Level

                                                                                                                                                                            UCRP

                                        95%
                                                                                                                                Funded

                                                                                                                                                  95%

                                                                                                                                                                            Ra/o

                                        85%

                                                                                                                                                               86%
 (es/mated)

                                        75%

                                                                                                                     2004

                                                                                                                            2005

                                                                                                                                   2006

                                                                                                                                          2007

                                                                                                                                                 2008

                                                                                                                                                        2009

                                                                                                                                                                 2010
                                                1
     2
      3
      4
      5
      6
      7
     8
      9
     10
 11
 12
 13
 14
 15
 16

                                                                                       2000



                                                                                                      2002

                                                                                                              2003
                                                       1996

                                                               1997

                                                                       1998

                                                                               1999



                                                                                               2001
                                                1995




                                                                                                       Year





                                                                                                      Page 158
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                           CalPERS, CalSTRS, and Comparator 8 Plans

In comparison with the two other large California pension plans2 covering educational institutions, the
UCRP’s funded status is much better, but the other plans have been receiving full policy level
contributions.

                                          UCRP                  CalPERS                CalSTRS
           Who is covered          Faculty and staff      CSU faculty and         Community College
                                   (covered by Soc        staff; Community        faculty
                                   Sec)                   College staff           (not covered by Soc
                                                          (covered by Soc         Sec)
                                                          Sec)
           Contributions           4%                     19.922%                 8.25% from college;
           Employer                                                               4.517% from State
                                                                                  (2.017% basic +
                                                                                  2.5% for purchasing
                                                                                  power protection)

           Member/Employee         2% to Soc Sec          5% of earnings over     8% (no Soc Sec
                                   wage base;             $513/mo                 contribution)
                                   4% above Soc Sec
                                   wage base; $19 per
                                   month offset
           Funded Ratio 2009       95% based on           estimated at 81%        estimated at 77%
                                   actuarial value of     based on actuarial      based on actuarial
                                   assets; 71% based      value of assets;        value of assets;
                                   on market value        59% based on            60% based on
                                                          market value            market value
           Maximum Benefit         2.5% at age 60         2.5% at age 63          2.4% at age 63
           Factor
           Salary used to          Highest 36 months      Generally highest       Highest 36 months
           calculate pension                              12 months               (Highest 12 if 25+
           benefits                                                               years of service)

While CalPERS and CalSTRS provide traditional Defined Benefit pension plans, the University’s
Comparator 8 institutions show more variation. For faculty, four offer only a Defined Contribution
plan, one offers only a cash balance plan and three provide choice between a Defined Benefit and a
Defined Contribution plan. The institutions’ staff plans are equally varied. For exempt staff, three
have a Defined Contribution plan; one has a cash balance plan; and four offer a choice between a
Defined Benefit plan and a Defined Contribution plan. For non-exempt staff three have a Defined


2
 California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System
(CalSTRS)
                                                     Page 159
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Contribution plan; one has a cash balance plan; one has a Defined Benefit plan; and three offer a
choice between a Defined Benefit plan and a Defined Contribution plan.


Comparator 8 Retirement Plans for Ladder Rank Faculty
                                                                        Maximum        Defined
            Defined           DB Plan Basic            DB Employee      Benefit        Contribution         DC Plan Employer         DC Employee
Institution Benefit Plan      Benefit Formula          Contributions    Applies        Plan                 Contributions            Contributions
U. of        Highest 3-       2.5% HAP less            2% pay to        Age 60         Unmatched savings    None
California   year average     $1,596 (if               SSWB + 4%
                              coordinated with         pay over less
                              social security) x svc   $228 (if coord                  Tax-sheltered annuity None                    Up to IRS limits
                              (max 40 yrs)             with SS)                        403(b)                                        (pretax)
                                                       (pretax)
Harvard      None (Frozen --                           --               --             Noncontributory      <age 40: 5% to SSWB      None
             7/1/95)                                                                   savings              + 10% over; age 40+:
                                                                                                            10% to SSWB + 15%        Up to IRS limits
                                                                                       Unmatched savings    over                     (pretax)
                                                                                       403(b)               None
M.I.T.       Cash Balance 5% of pay                    None             Age 65         Savings              $1.00 per $1.00 match    Match 1% to 5% of
                                                                                                                                     pay; Up to 95%
                                                                                                                                     total (pretax)
Stanford     None             --                       --               --             Noncontributory      1% pay at 1 yr svc, 2% None
University                                                                             savings              at 2 yrs, 3% at 3 yrs,
                                                                                                            4% at 4 yrs, 5% at 5+     Match 1% to 4% of
                                                                                       Savings              yrs                       pay (pretax or
                                                                                                                                   st
                                                                                                            $1.50 per $1.00 on 1      posttax); Up to
                                                                                                            2% of pay, $1.00 per      IRS limits (pretax)
                                                                                                            $1.00 on next 2% of
                                                                                                            pay
SUNY         Highest 3-       By service at         3.5% of pay         Age 62 or      Savings              Based on svc: <8 yrs:  3% required
Buffalo      year average     termination: <20 yrs:                     age 57 and                          8% of pay, 8+ yrs: 10% Up to IRS limits
             (one-time        1.67% HAP x svc;                          30 years       Unmatched savings    of pay                 (pretax)
             election of DB   25+ yrs: 2% HAP x                                        403(b)               None
             or savings)      svc over 25 yrs
U. of        Highest 4-     2.2% HAP x svc             8% of pay        Age 60 or 30   Savings 403(b)       7.1% of pay (employee 8% (pretax)
Illinois     year average (max 80% HAP)                (pretax)         years          Unmatched savings    must contribute)      Up to IRS limits
             (one-time                                                                 403(b), 457(b)       None                  (pretax)
             election of DB
             or savings)
U. of        None             --                       --               --             Savings 401(a)       10% of pay (5% to        5% (optl: 5% over
Michigan                                                                                                    SSWB + 10% over if in    SSEL if mandatory
                                                                                       Unmatched savings    optional plan)           cvg) (pretax)
                                                                                       403(b), 457(b)       None                     Up to IRS limits
                                                                                                                                     (pretax)
U. of        Highest 5-     1.7% HAP x svc             5% of pay        SSNRA or       Savings 401(a)       8.9% of pay              5% required
Virginia     year average                                               age 60 + 90    Savings 403(b),      $.50 per $1.00           Match up to
             (one-time                                                  points         457(b)                                        $40/mo; Up to IRS
             election of DB                                                                                                          limits (pretax)
             or savings
             401(a))
Yale         None             --                       --               --             Money purchase       5% of pay to SSWB +      Up to IRS limits
                                                                                       Mandatory savings    7.5% over                (pretax)
                                                                                       403(b)               $1.00 per $1.00          Match 1% to 5%;
                                                                                                            (employee must           Up to IRS limits
                                                                                                            contribute)              (pretax)




                                                                         Page 160
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Comparator 8 Retirement Plans for Exempt Staff
                                                                        Maximum          Defined
            Defined           DB Plan Basic            DB Employee      Benefit          Contribution        DC Plan Employer            DC Employee
Institution Benefit Plan      Benefit Formula          Contributions    Applies          Plan                Contributions               Contributions
U. of        Highest 3-       2.5% HAP less            2% pay to        Age 60           Unmatched savings None
California   year average     $1,596 (if               SSWB + 4%
                              coordinated with         pay over less
                              social security) x svc   $228 (if coord                    Tax-sheltered       None                        Up to IRS limits
                              (max 40 yrs)             with SS)                          annuity 403(b)                                  (pretax)
                                                       (pretax)
Harvard      None (Frozen --                           --               --               Noncontributory   <age 40: 5% to SSWB           None
             7/1/95)                                                                     savings           + 10% over; age 40+:
                                                                                                           10% to SSWB + 15%             Up to IRS limits
                                                                                         Unmatched savings over                          (pretax)
                                                                                         403(b)            None
M.I.T.       Cash Balance 5% of pay                    None             Age 65           Savings             $1.00 per $1.00 match       Match 1% to 5% of
                                                                                                                                         pay; Up to 95%
                                                                                                                                         total (pretax)
Stanford     None             --                       --               --               Noncontributory     1% pay at 1 yr svc, 2%      None
University                                                                               savings             at 2 yrs, 3% at 3 yrs,
                                                                                                             4% at 4 yrs, 5% at 5+       Match 1% to 4% of
                                                                                         Savings             yrs                         pay (pretax or
                                                                                                                                    st
                                                                                                             $1.50 per $1.00 on 1        posttax); Up to
                                                                                                             2% of pay, $1.00 per        IRS limits (pretax)
                                                                                                             $1.00 on next 2% of
                                                                                                             pay
SUNY         Highest 3-       By service at         3% of pay           Age 62           Savings           Based on svc: <8 yrs:  3% required
Buffalo      year average     termination: <20 yrs:                                                        8% of pay, 8+ yrs: 10% Up to IRS limits
             (one-time        1.67% HAP x svc;                                           Unmatched savings of pay                 (pretax)
             election of DB   20+ yrs: 2% HAP x                                          403(b)            None
             or savings)      svc over 20 yrs
U. of        Highest 4-     2.2% HAP x svc             8% of pay        Age 60 or 30     Savings 403(b)    7.1% of pay (employee 8% (pretax)
Illinois     year average (max 80% HAP)                (pretax)         years            Unmatched savings must contribute)      Up to IRS limits
             (one-time                                                                   403(b), 457(b)    None                  (pretax)
             election of DB
             or savings)
U. of        None             --                       --               --               Savings 401(a)    10% of pay (5% to             5% (optl: 5% over
Michigan                                                                                                   SSWB + 10% over if in         SSEL if mandatory
                                                                                         Unmatched savings optional plan)                cvg) (pretax)
                                                                                         403(b), 457(b)    None                          Up to IRS limits
                                                                                                                                         (pretax)
U. of        Highest 5-     1.7% HAP x svc             5% of pay        SSNRA or age     Savings 401(a)      8.9% of pay                 5% required
Virginia     year average                                               60 + 90 points   Savings 403(b),     $.50 per $1.00              Match up to
             (one-time                                                                   457(b)                                          $40/mo; Up to IRS
             election of DB                                                                                                              limits (pretax)
             or savings
             401(a))
Yale         Highest 5-       1.5% HAP up to           None             Age 65 or age    Money purchase      5% of pay to SSWB +         Up to IRS limits
             year average     $38k, 1.4% from                           60 + 25 years    Mandatory savings   7.5% over                   (pretax)
             (one-time        $38k-$70k, 1.3%                                            403(b)              $1.00 per $1.00             Match 1% to 5%;
             election of DB   over $70k x svc                                                                (employee must              Up to IRS limits
             or savings)                                                                                     contribute)                 (pretax)




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Comparator 8 Retirement Plans for Nonexempt Staff
                                                                        Maximum          Defined
            Defined           DB Plan Basic            DB Employee      Benefit          Contribution       DC Plan Employer            DC Employee
Institution Benefit Plan      Benefit Formula          Contributions    Applies          Plan               Contributions               Contributions
U. of        Highest 3-       2.5% HAP less            2% pay to        Age 60           Unmatched savings None
California   year average     $1,596 (if               SSWB + 4%
                              coordinated with         pay over less
                              social security) x svc   $228 (if coord                    Tax-sheltered      None                        Up to IRS limits
                              (max 40 yrs)             with SS)                          annuity 403(b)                                 (pretax)
                                                       (pretax)
Harvard      None (Frozen --                           --               --               Noncontributory   <age 40: 5% to SSWB          None
             7/1/95)                                                                     savings           + 10% over; age 40+:
                                                                                                           10% to SSWB + 15%            Up to IRS limits
                                                                                         Unmatched savings over                         (pretax)
                                                                                         403(b)            None
M.I.T.       Cash Balance 5% of pay                    None             Age 65           Savings            $1.00 per $1.00 match       Match 1% to 5% of
                                                                                                                                        pay; Up to 95%
                                                                                                                                        total (pretax)
Stanford     None             --                       --               --               Noncontributory    1% pay at 1 yr svc, 2%      None
University                                                                               savings            at 2 yrs, 3% at 3 yrs,
                                                                                                            4% at 4 yrs, 5% at 5+       Match 1% to 4% of
                                                                                         Savings            yrs                         pay (pretax or
                                                                                                                                   st
                                                                                                            $1.50 per $1.00 on 1        posttax); Up to
                                                                                                            2% of pay, $1.00 per        IRS limits (pretax)
                                                                                                            $1.00 on next 2% of
                                                                                                            pay
SUNY         Highest 3-       By service at         3% of pay           Age 62           Savings           Based on svc: <8 yrs:  3% required
Buffalo      year average     termination: <20 yrs:                                                        8% of pay, 8+ yrs: 10% Up to IRS limits
             (one-time        1.67% HAP x svc;                                           Unmatched savings of pay                 (pretax)
             election of DB   20+ yrs: 2% HAP x                                          403(b)            None
             or savings)      svc over 20 yrs
U. of        Highest 4-     2.2% HAP x svc             8% of pay        Age 60 or 35     Savings 403(b)    7.1% of pay (employee 8% (pretax)
Illinois     year average (max 80% HAP)                (pretax)         years            Unmatched savings must contribute)      Up to IRS limits
             (one-time                                                                   403(b), 457(b)    None                  (pretax)
             election of DB
             or savings)
U. of        None             --                       --               --               Savings 401(a)    10% of pay (5% to            5% (optl: 5% over
Michigan                                                                                                   SSWB + 10% over if in        SSEL if mandatory
                                                                                         Unmatched savings optional plan)               cvg) (pretax)
                                                                                         403(b), 457(b)    None                         Up to IRS limits
                                                                                                                                        (pretax)
U. of        Highest 5-       1.7% HAP x svc           5% of pay        SSNRA or age     Savings 403(b),    $.50 per $1.00              Match up to
Virginia     year average                                               60 + 90 points   457(b)                                         $40/mo; Up to IRS
                                                                                                                                        limits (pretax)
Yale         Highest 5-       1.5% HAP up to           None             Age 65 or age    Savings 403(b)     $1.00 per $1.00             Match 2% of pay,
             year average     $38k, 1.4% from                           60 + 25 years                       (employee must              4% of pay if age
             (one-time        $38k-$70k, 1.3%                                                               contribute)                 45 & 5 yrs; Up to
             election of DB   over $70k x svc                                                                                           IRS limits (pretax)
             or savings)




                                                                         Page 162
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 Comparison of Current and New Plan Provisions for Various California Public Sector Entities
                   State Employees (CalPERS) – Tentative Agreements Reached Between Governor and Unions
 (Tentative union agreements reached for 6* of the 12 unions representing roughly 37,000 of the state’s public employees. Subject to
ratification by union members and the legislature. After ratification, the changes apply to new hires only, with the exception being that
the increase in the member rate also applies to current members. Negotiations for Service Employees International Union Local 1000,
                                  representing approximately 95,000 workers, currently in progress.)

                                              Current Provisions                                         New Provisions
         Age Factor                  Miscellaneous and Industrial:                         Miscellaneous and Industrial:
                                             2.00% @ 55                                            2.00% @ 60
                                     Highway Patrol & Firefighters:                        Highway Patrol & Firefighters:
                                             3.00% @ 50                                            3.00% @ 55
   Final Average Salary           Miscellaneous and Industrial: 3 years                Miscellaneous and Industrial: 3 years
                                  Highway Patrol & Firefighters: 1 year                Highway Patrol & Firefighters: 3 years
      Member Rate                Miscellaneous and Industrial: 5.00%                   Miscellaneous and Industrial: 10.00%
 (excludes varying offsets)
                                 Highway Patrol & Firefighters: 8.00%                  Highway Patrol & Firefighters: 10.00%
* Unions representing the California Association of Highway Patrolmen, California Department of Forestry Firefighters, California
  Association of Psychiatric Technicians, American Federation of State, County and Municipal Employees, Union of American
                          Physicians and Dentists, and the International Union of Operating Engineers.
                                San Diego County Employees Retirement Association (SDCERA)
                               (General employees hired on or after August 28, 2009; Ordinance 9993)
         Age Factor                   General Tier A: 3.00% @ 60                            General Tier B: 2.62% @ 62
   Retirement Eligibility        Generally age 50 w/ 10 years of service               Generally age 55 w/ 10 years of service
   Final Average Salary                           1 year                                               3 years
           COLA                                3% per year                                           2% per year
       Member Rate                  General Tier A Average: 10.73%                       General Tier B Average: 7.65%
                                      City of San Francisco (SFERS and CalPERS members)
                                           (All employees hired on or after July 1, 2010)**
   Final Average Salary                           1 year                         2 years (to the fullest extent possible for CalPERS
                                                                                                       members)
     Member Rate***                         SFERS Members:                                SFERS Members: Safety: 9.0%
                                        Misc. and Safety: 7.5%                       CalPERS Members: All employees: 9.0%
                                           CalPERS Members:
                                          Most employees: 7.5%
                                  ** Proposition D was approved by voters (78%) on June 8, 2010.
 ***A Measure entitled “The Sustainable City Employee Benefits Reform Act” by the City’s Public Defender, Jeff Adachi, qualified
  for the November 2010 ballot. The Act states that all active Miscellaneous employees of SFERS shall contribute 9% of pay to the
    Retirement System and it would not allow the City to pick up any portion of the contribution (currently some members do not
contribute due to the employer pick up of their member contributions). If passed, the Act would become effective January 1, 2011 and
                            would apply to all then active employees as well as those hired after that date.

                                   Orange County Employees Retirement System (OCERS)
     (All eligible new General employees hired on or after May 7, 2010 have an irrevocable choice between Plans J and P.)****
        Age Factor                  General Plan J: 2.70% @ 55                          General Plan P: 1.62% @ 65
       Member Rate               Entry Age 35 Sample: 11.05% (Plan J)                  Entry Age 35 Sample: 7.20% (Plan P)
****Voluntary participation in new DC plan is also available. County match is 2% of pay for first year after plan commencement and
                                   50% of employee contributions, up to 2% of pay, thereafter.



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                Proposed Pension Reform Highlights from Current Governor and
                       Select 2010 California Gubernatorial Candidates

Governor Arnold Schwarzenegger:
   Roll back pension benefits adopted in 1999 as Senate Bill 400
   Require a permanent 5% of pay increase in employee contribution rate
   Calculate retirement benefits on a 3-year final average salary (instead of 1-year in some cases)
   Require full disclosure by pension funds and honest funding of pension promises as and when
    those promises are made

Candidate Meg Whitman:
   Adopt 401(k)-style defined contribution plan for new hires
   Maintain defined benefit plan for current employees and increase employee contributions
   Increase retirement age for current and new employees (from 50 to 55 for public safety and from
    55 to 65 for non-public safety)
   Increase vesting periods
   Prohibit pension spiking

Candidate Jerry Brown:
   Increase employee contributions for current and new employees
   Increase retirement age for new hires (from 55 to 60)
   Eliminate spiking by removing bonuses, promotions, overtime, and unused vacation in final
    average salary
   Use a 3-year final average salary
   Cap payments at “reasonable” level (undefined)
   Bar retroactive payments if benefits enhanced
   Ban contribution “holidays”




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   Summary of Recent Plan Design Changes for Various State Plans

                                               Change                      Approach
  Contribution Rates      Employer       CO, IA, MN, NJ,          Raise contribution rates
                                         NM                       Lower contribution rates
                          Employee       CO, IA, MN, MO,          Raise contributions
                                         MS, VA, VT, WY           Mandate contributions
  COLA                    New Hires      CO, IL, MI, MN,          Suspension tied to funding or
                                         SD, UT, VA                CPI
                          Actives        CO, MN, SD               Tied to funding percentage
                          Retirees       CO, MD, MN, SD           Delay start

  Sponsor                                IA, NJ, VA, VT           Additional contributions to
  Contribution Rules                                               Annual Required Contribution
                                                                  Require Annual Required
                                                                   Contribution
  Anti-Spiking                           AZ, CO, IA, IL, NJ,      Pensionable compensation
                                         VA                       Longer FAS period
                                                                  Longer vesting periods
                                                                  Cap compensation growth in
                                                                   FAS period
  Multiplier              New Hire       GA, NJ                   Lower multiplier
                          Active         VT                       Reduce longevity multiplier
  Retirement              New Hire       IL, MN, MO, MS           Raise service requirements
  Eligibility                                                     Eliminate combined
                          Active         AZ, CO                    age/service rule
                                                                  Increase combined
                                                                   age/service rule
  Retirement Age          New Hire       MO                       Raise normal retirement age
                          Active         AZ, CO, VT               Coordinate with social security
                                                                   normal retirement age
  Hybrid                  New Hire       GA, MI, UT               Combine defined benefit plan
                          Active                                   with a lower multiplier with
                                                                   defined contribution overlay
                                                                  Choice of hybrid or defined
                                                                   contribution
  Defined                 New Hire       NJ, UT                   Part-time workers
  Contribution                                                    Elected officials provided an
                                                                   employer match
Source: National Conference of State Legislators – May 2010




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                     The Regents’ Actuary, Segal
        UCRP, Pension Plan Funding and Investment Performance
Covered Population

The University of California has about 185,000 active employees in total. As of July 1, 2009, the
number of career employees that are covered by UCRP is about 115,700. The rest of the
employees are “casual” employees and they number about 69,000. The “casual” employees are
not covered by any employer-provided retirement plan benefit or Social Security. In lieu of
Social Security, these employees make a contribution equal to 7.5% of compensation to the
University of California Defined Contribution Plan. The remainder of this section pertains only
on the membership population that is covered by UCRP.

The tables on the following pages are from the July 1, 2009 Actuarial Valuation Report for the
UCRP. They contain “snap-shot” counts of the UCRP population as of the valuation dates
shown. The tables include various statistics on the demographics of the covered UCRP
population.

The information shown for active members is broken up among three different membership
classifications:

        Members with Social Security coverage

        Members without Social Security coverage

        Safety members

Overall, there are minor differences in the UCRP provisions for members with Social Security
coverage versus members without Social Security coverage. Safety members receive higher age
factors as compared to non-Safety members.

In the July 1, 2009 valuation, there were 115,745 active members with an average age of 44.5
years, average service of 9.2 years and average annual compensation of $75,506.

The tables also show the number of terminated vested members who are entitled to a deferred or
immediate vested benefit and terminated nonvested members who are entitled to a refund of
member contributions or payment of their Capital Accumulation Provision (CAP) balance. As of
July 1, 2009 there were 31,215 terminated vested members with an average monthly immediate
or deferred benefit of $1,420. There were also 23,668 terminated nonvested members whose
average member contribution or CAP balances were about $7,032.

The tables conclude with information pertaining to members currently receiving benefits: retired
members, disabled members and beneficiaries. As of July 1, 2009 there were 42,969 retired
members, 2,157 disabled members and 6,527 beneficiaries, receiving total monthly benefits of
$139.4 million (nearly $1.7 billion annually).




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       Table of Plan Coverage
       i. Active Members
                                                                  Year Beginning July 1
                                                                                                Change From
       Category                                                   2009              2008         Prior Year
       Active members with Social Security:
         Number                                                    113,129           111,261            1.7%
         Average age                                                  44.3              44.0             N/A
         Average service credit                                         8.8               8.5           3.5%
         Total compensation                                 $8,470,183,198    $7,994,312,587            6.0%
         Average compensation                                      $74,872           $71,852            4.2%
       Active members without Social Security:
         Number                                                     2,199             2,570            -14.4%
         Average age                                                 57.7              56.9               N/A
         Average service credit                                      27.4              26.9              1.9%
         Total compensation                                  $231,322,247      $258,876,105            -10.6%
         Average compensation                                    $105,194         $100,730               4.4%
       Safety members:
         Number                                                       417               411             1.5%
         Average age                                                 41.0              40.5              N/A
         Average service credit                                        9.5               9.4            1.1%
         Total compensation                                   $37,927,838       $35,364,951             7.2%
         Average compensation                                     $90,954           $86,046             5.7%
       All active members:
          Number                                                   115,745           114,242            1.3%
          Average age                                                 44.5              44.2             N/A
          Average service credit                                        9.2               8.9           3.4%
          Total compensation                                $8,739,433,283    $8,288,553,643            5.4%
          Average compensation                                     $75,506           $72,553            4.1%




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          Table of Plan Coverage
          ii. Nonactive Members
                                                                                               Year Beginning July 1*
                                                                                                                              Change From
          Category                                                                             2009                2008        Prior Year
          Terminated vested members:
            Number                                                                               31,215              29,436            6.0%
            Average age                                                                            48.2                47.9             N/A
            Total monthly benefit**                                                         $44,312,526         $42,690,061            3.8%
            Average monthly benefit                                                              $1,420              $1,450           -2.1%
          Terminated nonvested members:***
            Number                                                                               23,668             35,130           -32.6%
            Average member refund and CAP balance                                                $7,032             $5,099            37.9%
          Retired members:
            Number in pay status                                                                 42,969              41,584           3.3%
            Average age                                                                            69.8                69.5            N/A
            Total monthly benefit                                                          $124,462,877        $116,705,354           6.6%
            Average monthly benefit                                                              $2,897              $2,806           3.2%
          Disabled members:
             Number in pay status                                                                 2,157               2,218           -2.8%
             Average age                                                                           56.2                55.9             N/A
             Total monthly benefit                                                           $3,506,426          $3,500,321            0.2%
             Average monthly benefit                                                             $1,625              $1,578            3.0%
          Beneficiaries (includes Eligible Survivors, Contingent Annuitants, and Spouses/Domestic Partners):
            Number in pay status                                                                   6,527              6,369           2.5%
            Average age                                                                             73.5               73.1            N/A
            Total monthly benefit                                                           $11,454,299         $10,880,911           5.3%
            Average monthly benefit                                                               $1,755             $1,708           2.8%
* CAP balances total $1.25 billion as of July 1, 2009 and $1.23 billion as of July 1, 2008 for all members.
** Benefit is calculated based on assumed retirement age (age 59 or current age if later).
*** For July 1, 2009, includes 7,601 members that transferred to the LANS or LLNS defined benefit plans who will be entitled to a
   CAP balance payment from UCRP after they separate employment with LANS or LLNS.




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Segments

An important concept to keep in mind about UCRP pertains to the various “segments” of UCRP. UCRP assets,
liabilities and costs are determined separately for these segments of UCRP:

                Campus and Medical Centers – Costs are determined in accordance with the UCRP funding
                 policy that is described in this report

                Three National Laboratories – Each laboratory has their own separate funding agreement based
                 on contract provisions with the Department of Energy (DOE)

Segment valuations are used only to allocate assets and liabilities for cost calculations. All assets continue to be
maintained and invested in one trust and are available to pay benefits of all members.

The table on the following page shows the UCRP population by segments. Note that the Hastings College of
Law segment is included with the campus and medical center segment for purposes of determining the total
funding policy contribution. However, it is excluded for UC financial statement reporting purposes.

More discussion on the possible “segmentation” of different groups of the employee population follows below.
The focus of most of the rest of this report is on the campus and medical center segment of UCRP (also
including Hastings College of Law). This is due to the separate funding agreements for each of the national
laboratories, based on contract provisions between the DOE and UC.

More detailed information on some of the various segments of UCRP may be found in the various addendum
reports that are prepared each year in conjunction with the annual UCRP actuarial valuation report.

                                     University of California Retirement Plan Segments

       University of California Retirement Plan        Campuses and        DOE         University of              University of
                                                         Medical         National       California                 California
                                                         Centers        Laboratories     Subtotal      Hastings      Total
       Retirees and beneficiaries receiving benefits       39,116          12,415           51,531      122          51,653


       Inactive members entitled to, but not yet           41,081          13,718           54,799       84          54,883
       receiving benefits*


       Active members:
        Vested                                             63,992            1,696          65,688      117          65,805
        Nonvested                                          49,142              692          49,834      106          49,940
       Total                                              113,134            2,388         115,522      223        115,745


       Total membership                                   193,331          28,521          221,852      429        222,281



Currently, segment valuations are used only to allocate assets and liabilities for cost calculations. All assets
continue to be maintained and invested in one trust and are available to pay benefits of all members.

In order to better track benefit cost per employee group, one alternative available is to further segment out a
portion of UC employees from UCRP. For example, there could be a UCRP medical center segment. This
would allow a segment of the population, such as the medical centers in this example, to separate both their
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normal cost and current UAAL from the UCRP segment that they are currently part of. Segmentation would
also facilitate the possible implementation of a separate benefit structure for these employee groups.
Summary of Types

There are generally two types of segmentation that serve different purposes.

For Cost Allocation
Segmentation for cost allocation purposes, which currently occurs to some extent as noted above, allows normal
cost and/or UAAL to be separated for a segment of the population.

For purposes of federal reimbursement, a “segment” is generally defined as an operational unit of an
organization. Currently, UC operations are reported financially as one segment. However, for UCRP the
campus and medical center segment results are shown separately from the DOE national laboratories.

To Reflect Different Benefits
As noted above, segmentation would help allow the possible implementation of a separate benefit structure for
the segmented employee groups. For example, if the employees of the medical centers were covered under a
different benefit formula then it would make sense to segment those members from the rest of UCRP. This
would provide for costs to be allocated solely based on the benefit formula, demographics and other experience
for just the employees in that segment.

From an actuarial standpoint, allocating normal cost and/or UAAL across all of a segment is fine as long as all
members in the segment are part of UCRP. This means that if a DC plan were to be adopted for some members
(possibly new hires), then allocating the UCRP normal cost and/or UAAL across all members payroll (including
those in the DC plan) may not make sense. This seems intuitive and also does not appear to be supported from
accounting or federal reimbursement perspectives either.

Challenges to Segmentation

Administrative – Data may not current exist that denotes which members worked for certain segments. This is
the case for inactive and retired members that worked at the medical centers. It may be difficult to go back in
time to historically track data for these members or for members that have transferred between certain
segments. For the same reason, there would still be challenges trying to implement this on a prospective basis.
Improvements in the current data reporting systems would be necessary.

Based on this it may be difficult to accurately allocate costs to a segment such as the medical centers.

Financial – Would need to assess implications for total system before implementing.

Policy- There may be complicating factors involving labor relations and negotiations with collectively
bargained employees. Methodologies for allocating the current UAAL across new segments would have to be
determined. Impacts on the retiree health plan would also have to be considered.

Effect on Funding Sources

It seems that funding sources would generally want to be charged costs specific to the members that they
provide funding for. Segmentation could allow for more specific UCRP costs for segments to be allocated to the
specific funding source. For example, if one funding source only provides funding for employees that are at the

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medical centers, then implementation of a segment for the medical centers could lead to a cost charged to
funding sources that is more specific to the employees that are funded by that source.

The effect of segmentation on federal contracts and grants was studied by the Finance Workgroup. The
definition of a segment for federal contracts and grants purposes is noted earlier and is defined as various
operational units within an organization. It appears that UC can continue to define a segment they way that it
has in the past and charge federal contracts and grants costs based on this definition of a segment even if a new
tier is implemented as long as the employees are members of UCRP.

Active Members
Faculty, Senior Management and Staff

The following pie chart shows the distribution of all active UCRP members by those who are “Academics”
(includes Faculty members), “Management and Senior Professionals”, “Professional Support Staff” or working
at the Lawrence Berkeley National Laboratory (LBNL).




As the chart shows, most UCRP active members are “Professional Support Staff.”




                                                    Page 171
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The next two graphs show the distribution of the total UCRP active membership by age and by years of service.




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Represented and Policy-Covered

Another important categorization of the UCRP active membership involves representation under a collective
bargaining agreement. The distribution of “Represented” active members (i.e. those covered by a collective
bargaining agreement) versus those that are “Policy Covered” (i.e. not covered by a collective bargaining
agreement) is shown in the graph on the left side of the chart below. About 47% of UCRP active members are
“Represented” with the remaining 53% being “Policy Covered.”

The graphs on the right side of the chart show the distribution of “Represented” and “Policy Covered” members
separately by the categories shown in the box on the right side. Most “Represented” members are “Staff and
Professional”. The same is true for “Policy Covered Members”, but to a much lesser extent.




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               UCRP July 1, 2009 Actuarial Valuation Report – Segal
                                              (Includes plan description)


http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/08/peb_ax_l_ucrp-actuarial-valuation-report-segal.pdf




                                                          Page 174
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                                               APPENDIX M


                                 Pension Work Team Materials


  •   June 1, 2010 – New Tier Modeling -
      http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/08/peb_ax_m_work-team-new-tier-modeling.pdf




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Retiree Health Appendices




                                                APPENDIX N
                             Retiree Health Background Articles


  •   At a Crossroads: The Financing and Future of Health Benefits for State and Government Employees, Center for
      State and Local Government Excellence -
      http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/08/peb_ax_n-1_at-a-crossroads-future-state-health.pdf

  •   Health Care in Retirement: Methods for Coverage and Funding, National Business Group on Health -
      http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/08/peb_ax_n-2_health-care-in-retirement.pdf




                                                       Page 176
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                                  APPENDIX O


                        Retiree Health Background
                             Demographics
                             Program Summary
                             Projected “Pay-as-You-Go” Costs 2009-2014
                             Projected Balance Sheet Obligation 2009-2014
                             Retiree Health Programs for other California Public
                              Employers and Comparator 8 Institutions




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                                   Retiree Health Demographics




This separate post-employment benefit began in 1962 with a $5/month University contribution.
Based on a Regents’ delegation, the University of California Human Resources Department, in
consultation with the Academic Senate, designs and annually negotiates plan and rate changes.
Plan options, benefits and rates are subject to change each year and are not a vested benefit.
Periodically, the University has changed the benefit and eligibility terms for the Retiree Health
Program.

The program now covers almost 35,000 UC retirees and 18,000 family members at an annual cost of
$250 million for 2009/2010. Eligible individuals who retire from UC with a monthly pension have
health care coverage options similar to those offered to active employees. The monthly UC
contribution varies from a low of $372 (single) to a high of $1,193 (family) for non-Medicare Plans and
from $247 (single) to $1,142 (family) for Medicare Plans3. If a UC retiree or dependent is eligible for
Medicare, Medicare is the primary coverage and the UC coverage is secondary. UC’s policy requires
that all retirees or dependents eligible for Medicare must enroll. On average UC pays 89% of retiree
medical premiums.




3
  The University also currently reimburses the allowed amount for a Medicare Part B premium if the plan’s premium is less
than the total available University contribution. For 2010 the maximum allowed Medicare Part B reimbursement is up to
$96.40 (single) and up to $192.80/month for a retiree plus a Medicare-enrolled dependent.
                                                          Page 178
TASK FORCE FINAL REPORT July 2010

                            Retiree Health Program Summary
This chart summarizes the current medical and dental plan choices and premium sharing for eligible
University retirees.


                               Retirees without Medicare          Retirees with Medicare
                              7 Plans:                      7 Plans
                              HMOs, Preferred Provider,     HMOs, Preferred Provider, Point-
     Plan choices             Point-of-Service,             of-Service, catastrophic, Medicare
                              catastrophic                  supplement
                                                            Dental
                              Dental
     UC 2010 contribution

     Medical                  Approximately 84% on          Approximately 92% on average
                              average                       (Contribution not used for UC
                                                            medical plan applies to Medicare
                                                            Part B cost.)
     Dental
                              100%                          100%
     Range of retiree costs
     for UC plans                                           (assumes spouse has Medicare)
     Single                   $ 47 to $129                  $0 to $ 8
     Two Party                $104 to $316                  $0 to $15
     Family                   $142 to $419                  $0 to $37




                                              Page 179
TASK FORCE FINAL REPORT July 2010

                                 Retiree Health
                 Projected “Pay-as-You-Go” Costs 2009 to 2014




In 2009, the annual cash, or “pay-as-you-go,” cost for medical and dental plan premiums covering
retirees and their family members was $242 million. Absent any program changes, that is projected
to be around $447 million within five years.




                                               Page 180
TASK FORCE FINAL REPORT July 2010

                                  Retiree Health
                   Projected Balance Sheet Obligation 2009-2014




The balance sheet obligation is the cumulative shortfall between actual funding and the program’s
Normal Cost plus the amortized unfunded liability.

Valuation Concepts
Each year a valuation is performed as of July 1 and presented to The Regents in November. In 2003
the University began to examine the implications of the Government Accounting Standards Board
Regulation (GASB 45) that, beginning in 2005, required public employers to include retiree health
plan unfunded liability in their annual accounting – as they do for unfunded pension liability. The
University is not alone in this; every other public entity with a retiree health plan is assessing the plan
design and liabilities.

As part of a longer-term strategy, The Regents created a trust under Section 115 of the Internal
Revenue Code that could be used to pre-fund the Retiree Health Program at a future date. Currently,
pay-as-you-go contributions flow through the trust. The unfunded liability of the program in 2009 was
$14.5 billion and, if no program changes are made, is projected to be $20.6 billion in 2014. GASB 45
requires that the University post the balance sheet obligation. This was $2.3 billion in 2009 and is
projected to be $9.7 billion by 2014 if no changes are made. These large liabilities on University
balance sheets may impact the availability of unrestricted net assets and the University’s credit rating.

During the years from 2000 to 2005 medical care costs increased nationally at an annual rate
between 9% and 14%. During the last three years the average annual increase has been between

                                                 Page 181
TASK FORCE FINAL REPORT July 2010

5% and 7%. For 2011 costs are expected to increase by 8 to 10%, varying by geographic region.
During the past six years the average increase in the aggregate rates charged by UC medical plans
and in the aggregate UC contributions has been over 9%.

   Retiree Health Programs for other California Public Employers and
                       Comparator 8 Institutions
CalPERS state retirees may choose from a variety of medical plans similar to those offered by UC,
and their contributions toward the premium cost are determined using a sliding scale based on
service similar to that used to determine UC retiree medical premium contributions. There is no
system-wide program of retiree medical coverage for California Community College faculty as these
benefits are established by each community college district. All of the Comparator 8 institutions offer
retirees the opportunity to continue their preretirement medical coverage, with the retiree contribution
in some cases based on service (like UC), pay at retirement, or age.




                                                Page 182
TASK FORCE FINAL REPORT July 2010




                                    APPENDIX P
                                 DELOITTE LLP
                          Health Care Consultants
                       to the University of California

                                Background
                                Program Design
                                    o Framework
                                    o Scenarios
                                    o Transition
                                    o Behavioral Changes
                                    o Protected Groups
                                    o Prefunding




                                      Page 183
TASK FORCE FINAL REPORT July 2010


PEB Task Force Narrative –
Retiree Health Work Group
Background
Retiree
health
benefits
have
become
a
recent
focus
of
attention
for
many
employers
especially
those
in
the
public

sector.


These
benefits
create
a
financial
burden
on
employers
that
are
much
greater
than
were
expected
when
these

plans
were
originally
implemented.

This
is
largely
due
to
the
increases
in
health
care
costs
that
have
significantly

exceeded
consumer
inflation
for
the
past
50
years
and
are
expected
to
continue
to
do
so
for
the
foreseeable
future.

In

addition,
the
Baby
Boomer
generation
is
reaching
retirement
age,
which
will
significantly
increase
the
number
of

retirees
receiving
benefits
in
the
coming
years.


Historically,
most
employers
paid
these
health
benefits
annually
for
retirees
and
did
not
value
or
report
any
future

obligations.

This
changed
in
the
early
1990s
for
private
sector
employers
when
the
Financial
Accounting
Standards

Board
(FASB)
issued
Statement
No.
106
(SFAS
106).

This
statement
required
non‐governmental
employers
to
report
the

liability
and
annual
accrued
costs
associated
with
these
retiree
health
benefits
as
they
were
earned
by
employees
(in
a

similar
manner
as
is
required
for
pension
plans).

The
Governmental
Accounting
Standards
Board
(GASB)
followed
suit

with
a
similar
set
of
requirements
when
it
issued
Statement
Nos.
43
and
45
in
2004.

These
statements
became
effective

for
the
University
of
California
for
the
Fiscal
Year
End
June
30,
2008.


The
requirement
to
report
the
future
obligations
of
retiree
health
benefits
as
they
were
being
earned
increased
the

visibility
of
these
benefits
and
the
newly
required
actuarial
valuations
helped
employers
better
understand
the
long‐
term
costs
associated
with
the
benefits.

Additionally,
since
these
programs
were
generally
not
prefunded
as
most

pension
plans
are,
these
programs
could
affect
an
employer’s
credit
rating
and
cost
of
issuing
debt.


Many
private
sector
employers
responded
after
the
release
of
SFAS
106
by
reducing
or
eliminating
their
retiree
health

benefits.




The
left
side
of
the
first
table
shows
the
decline
in
the
percentage
of
private
employers
offering
retiree
health
coverage

over
the
past
20
years.

In
the
private
sector,
retiree
health
programs
that
remain
are
often
drastically
reduced
from

previous
programs.

Additionally,
few
of
these
programs
have
any
prefunding
as
there
are
limited
tax
advantages
to
the

employers.




The
right
side
of
the
table
shows
that,
as
of
2008,
many
state
and
local
governmental
employers
still
offered
retiree

health
coverage
as
compared
to
less
than
half
of
the
private
sector
employees.

Many
of
these
governmental
employers

have
recently
begun
to
analyze
and
make
changes
to
their
retiree
health
benefits
as
the
new
financial
standards
have

become
effective
over
the
past
couple
of
years.

















                                                         Page 184
TASK FORCE FINAL REPORT July 2010

Private
Sector
Response
to
FAS106
–
Reduced
Retiree
Health
Coverage





                                                                                                           

                                                           

States
also
have
been
making
changes
to
their
Retiree
Health
coverage
as
shown
in
this
table:

                           Retiree
Health
Benefits
at
the
States
–
2008*

    Medical
Plan
Premium‐Sharing
&

                 Changes
Made
in
             Likely
to
change
over

       Benefit
Design
Changes
                      the
Past
Five
Years
           the
Next
Five
Years

 Increase
Retiree
Share
of
Premiums
                            66%
                         76%

 Increase
Deductible
                                           50%
                         64%

 Increase
Co‐pay
(non‐Rx)
                                      56%
                         68%

 Increase
Co‐pay
(Rx)
                                          66%
                         70%

 Increase
Coinsurance
                                          26%
                         50%

 Increase
Out‐of‐Pocket
Maximum


                                                                34%
                         38%

 (limit
on
total
benefits
plan
pays)

                                                            

                                                    Changes
Made
in

             Likely
to
change
over

    Retiree
Health
Program
Changes

                                                   The
Past
Five
Years
            the
Next
Five
Years

 Catastrophic
Plan
Plus
an
Individual
Account
             8%
                              14%

 Eliminate
Prescription
Drug
Coverage
                     4%
                              0%

 Increase
Age
Requirement
for
Eligibility
                 6%
                              20%

 Increase
Service
Requirement
for
Eligibility
             14%
                             32%

*Results
from
Retiree
Health
Care
in
the
American
States


produced
by
the
Center
for
State
and
Local
Government
Excellence.


Deloitte
Consulting
LLP

                                                       Page 185
TASK FORCE FINAL REPORT July 2010

In
2008,
the
State
of
California
Governor’s
Public
Employee
Post‐Employment
Benefits
Commission
issued
a
report
titled

“Funding
Pensions
&
Retiree
Health
Care
for
Public
Employees”.

Some
of
the
recommendations
of
this
report
related
to

retiree
health
benefits
include:

    •   
Pre‐funding
retiree
health
benefits
(i.e.,
contributing
more
than
the
annual
employer
costs
for
retiree
health

        benefits)

    •   Improve
plan
design
and
communication
with
employees

    •   Strengthen
governance
and
enhance
transparency


The
report
from
the
Governor’s
Commission
also
included
a
survey
of
public
retirement
systems.

Findings
of
the
survey

related
to
retiree
health
benefits
include:

    • 
Majority
(82%)
of
California
public
employers
provide
OPEB
benefits
to
retirees

    • 
The
pay‐as‐you‐go
approach
continues
to
be
the
predominant
funding
strategy
used
by
those
agencies
that

        offer
OPEB
benefits

    • 
The
ratio
of
employees
to
retirees
(2.8
to
1)
is
similar
throughout
public
agencies
(the
University
of
California’s

        ratio
is
approximately
3.4
to
1)


The
University
of
California
began
to
address
its
retiree
health
benefits
in
2003
when
the
first
actuarial
valuation
was

performed
to
estimate
the
liability
of
these
benefits.

A
second
actuarial
valuation
of
the
retiree
health
plans
was

completed
in
2005.

The
results
of
the
2005
valuation
were
used
by
the
University
of
California
Office
of
the
President

(UCOP)
to
review
the
retiree
health
program
and
consider
potential
changes.

In
2005
and
2006,
UCOP
consulted
with

the
faculty
and
other
stakeholder
groups
about
the
cost
of
the
program
and
possible
changes
to
be
considered.

Design

principles
articulated
at
that
time
included:

    • 
Reward
long
service
by
continuing
to
provide
retiree
health
benefits

    • 
Align
changes
with
competitive
and
total
remuneration
objectives
for
various
workforce
segments
and

        operating
units

    • 
Allow
retirees
and
current
employees
time
to
plan
for
effect
of
changes

    • 
Balance
retiree
affordability
with
the
University’s
need
to
limit
increases
in
future
retiree
health
expense


Some
of
the
specific
program
provision
changes
that
were
considered
during
that
process:

   • Eligibility

       o Basic
eligibility

       o 
Graduated
eligibility

   • 
Employer
contribution
(for
retirees)

       o 
Relationship
to
increase
in
gross
medical
rate

       o 
Medicare
Part
B
premium
reimbursement

       o 
Relationship
to
employer
contribution
for
employees

   • Unblended
rates
for
Non‐Medicare
(pre‐65
only)
retirees
(disabled
and
post‐65
Non‐Medicare
exempted)

   • Percent
paid
by
all
retirees,
on
average,
same
as
percent
paid
by
employees
(proposed
by
Faculty)

   • Retiree
“Pay
Bands”

   • Population
segmentation

       o Future
hires
only

       o Some
or
all
employees
and
future
hires

       o All
retirees,
employees,
and
future
hires

   • Workforce
segmentation

   • Phase‐in



                                                        Page 186
TASK FORCE FINAL REPORT July 2010

No
action
was
taken
as
a
result
of
these
discussions
as
it
was
determined
that
restarting
of
contributions
for
the
pension

plan
took
priority.


On
July
1,
2007,
the
University
of
California
Retiree
Health
Benefit
Trust
was
established.

The
date
of
establishment
was

made
to
coincide
with
the
beginning
of
the
fiscal
year
that
GASB
Statement
No.
45
became
effective
for
the
University.



The
establishment
of
the
Trust
was
approved
by
The
Regents
in
May
2007
after
consultation
with
UC
Faculty.

The
trust

operates
under
Section
115
of
the
IRS
Code,
with
any
funds
generally
required
to
be
used
to
pay
retiree
health
benefit

costs.

The
trust
currently
receives
retiree
health
assessments
and
pays
(administratively
through
UCOP)
the
retiree

health
premiums,
claims,
and
fees
to
carriers
and
administrators.

Establishing
the
trust
did
not
imply
that
prefunding

would
occur,
but
it
does
allow
for
this
option
in
the
future.


Current Retiree Health Benefit Program
The
University
currently
provides
eligible
retirees
with
medical,
dental,
and
wellness
benefits.

The
medical
plans

available
to
retirees
are
similar
to
those
available
to
employees.

Prior
to
2010,
the
maximum
University
contribution

was
the
same
as
the
contribution
for
employees
in
Pay
Band
2.

For
calendar
year
2010,
the
maximum
University

contribution
for
retirees,
as
a
percent
of
total
premiums,
was
changed
to
be
more
closely
aligned
with
the
percent

contributed
for
employees.


Basic
Eligibility
for
the
program
is
defined
as
age
50
with
at
least
10
years
of
service
or
“Age
+
Service”
≥
75
with
at
least

five
years
of
service.

Graduated
Eligibility
is
defined
as
follows:


    •   
At
20
years,
retiree
receives
100%
of
UC
maximum
contribution

    •   
At
10
years,
retiree
receives
50%
of
UC
maximum
contribution

    •   
This
percentage
increases
by
5%
for
each
year
of
service

    •   
Applies
to
both
medical
and
dental
benefits

    •   Does
not
apply
to
employees
hired
before
1990
(i.e.,
retirees
receive
100%
of
UC
maximum
contribution)


The
Graduated
Eligibility
provision
is
a
change
that
was
made
to
the
retiree
health
program
by
the
University
in
1990
as

a
first
step
in
managing
future
UC
costs
for
retiree
health
benefits.




The
full
medical
premiums
for
non‐Medicare
retirees
are
the
same
as
those
for
employees.

The
reason
is
that
the
non‐
Medicare
retirees
are
blended
with
the
employee
population
for
premium
setting
purposes.

This
policy
of
blending
the

premiums
creates
an
additional
cost
beyond
the
University’s
cash
contributions
for
retirees
called
an
Implicit
Subsidy.


An
Implicit
Subsidy
is
created
because
Non‐Medicare
retirees,
on
average,
have
much
higher
claims
than
employees.


Therefore,
a
portion
of
the
University’s
contributions
for
employees
is
actually
attributable
to
these
retirees
who
as
a

group
have
higher
claims.

Another
way
of
considering
the
Implicit
Subsidy
is
that
if
the
non‐Medicare
retirees
were

rated
separately
from
employees,
the
total
premiums
for
non‐Medicare
retirees
would
increase
considerably
and
the

total
premiums
for
employees
would
decrease
slightly
(there
are
many
more
employees
than
non‐Medicare
retirees.


The
last
actuarial
valuation
of
the
Retiree
Health
Program
was
completed
as
of
July
1,
2009.

Some
of
the
key
results
of

that
valuation
for
Campuses
and
Medical
Centers
are
shown
below
(the
entire
actuarial
valuation
report
is
included
in

the
appendix).


Census

   • 114,000
covered
employees

   • 32,000
covered
retirees
currently
receiving
benefits

        o Medicare
–
22,000

        o Non‐Medicare
<
65
–
8,500

        o Non‐Medicare
65+

–
1,500

                                                          Page 187
TASK FORCE FINAL REPORT July 2010

Contributions
(Benefit
Payments)

   • For
the
Fiscal
Year
Ended
June
30,
2009,
the
University
contributed
$292
million
for
retiree
health
benefits


       o $242
million
of
cash
payments
for
retiree
medical,
dental,
and
wellness
benefits

       o $50
million
reallocated
from
contributions
made
by
the
University
for
employee
medical
premiums

            attributable
to
retirees

       o Without
any
change
in
plan
provisions,
the
total
annual
University
contributions
for
retiree
health
benefits
is

            expected
to
grow
to
over
$800
million
in
10
years


Financial
Accounting
Results


    • Unfunded
Actuarial
Accrued
Liability:

$14.5
billion

    • Normal
Cost:

$602
million
(8%
of
pay)

    • End
of
Fiscal
Year
Balance
Sheet
Obligation:

$3.7
billion

    • End
of
Fiscal
Year
Annual
Required
Contribution
(ARC):

$1.75
billion
(23%
of
pay)


Program Design
The
first
meetings
of
the
retiree
health
work
group
were
focused
on
gaining
an
understanding
of
the
background
of

retiree
health
in
general
and
specifically
the
University’s
retiree
health
program.

The
work
group
also
wanted
to

understand
how
other
entities
were
responding
and
what
discussions
had
already
taken
place
at
the
University
during

the
2005‐06
analysis.


The
work
group
began
the
process
by
discussing
a
broad
range
of
potential
changes
to
the
retiree
health
benefit

program.

Considerations
ranged
from
no
change
to
the
complete
elimination
of
benefits
and
all
suggestions
in
between.



To
determine
which
program
design
changes
to
analyze
in
more
depth,
the
initial
focus
of
the
work
group
was
the

effects
on
talent
management.

When
the
financial
impact
of
the
changes
being
considered
were
understood,
the
work

group
began
narrowing
the
proposed
design
changes
to
ones
that
responded
to
the
fiscal
realities
facing
the
University.


Framework

To
create
a
framework
for
the
discussions,
the
work
group
began
by
evaluating
each
of
the
program
elements:

    • Basic
eligibility
–the
minimum
age
and
service
requirements
to
receive
a
retiree
health
benefit

    • Graduated
eligibility
–
the
method
for
determining
the
percentage
of
the
maximum
University
contribution
that

        a
retiree
will
receive

    • Maximum
University
contribution
–
this
topic
includes
the
initial
level
of
University
contributions
as
well
as
the

        annual
increase
of
contributions

    • 
Plan
offerings
and
benefit
design
–
the
choices
of
plans
offered
and
the
specific
benefit
provisions
of
each
plan

    • 
Funding
Policy
–
the
decision
of
whether
or
not
to
prefund
the
program


The
work
group
then
began
to
gather
input
on
Individual
Program
Changes
within
each
of
these
program
elements
by

applying
the
following
steps

    • 
Review
current
program
provisions

    • 
Discuss
potential
changes
and
identify
selected
provisions
for
consideration
and/or
evaluation

    • 
Discuss
potential
populations
to
be
affected
by
changes

    • 
Identify
changes
that
could
be
phased
in
to
allow
retirees
time
to
prepare

    • 
Identify
subject
areas
needing
additional
background
material


Scenarios

One
of
the
first
program
elements
that
was
an
area
of
focus
for
the
work
group
was
the
University’s
policy
of
blending

premiums
for
employees
and
non‐Medicare
retirees.

While
a
common
practice
in
retiree
health
programs,
it
creates
the

issue
of
obscuring
the
full
costs
for
retirees.

In
addition
to
making
retiree
costs
more
transparent,
unblended
rates

                                                       Page 188
TASK FORCE FINAL REPORT July 2010

would
permit
the
University
to
contribute
the
same
percentage
of
the
premium
to
retirees
as
to
employees
(as
opposed

to
the
same
dollar
amount).

This
was
an
early
proposal
from
the
work
group
as
it
would
create
some
cost
savings
for

the
University
and
might
encourage
later
retirements.


The
discussion
in
the
work
group
of
considering
unblended
rates
occurred
at
the
same
time
as
a
review
by
senior

management
and
the
President
of
the
2010
contribution
policy.

Discussions
of
the
work
group
were
shared
with
senior

management
to
help
them
shape
the
2010
contribution
policy.

The
2010
maximum
University
contribution
is

approximately
half
way
between
the
2009
contribution
policy
and
the
work
group’s
original
goal
of
applying
the
same

percentage
to
unblended
retiree
premiums
as
is
applied
to
employees
(87.7%
in
2010).



After
the
2010
changes
had
been
implemented,
the
work
group
focused
on
the
basic
and
graduated
eligibility
rules
for

retirement.

The
specific
eligibility
ages
and
service
definitions
that
were
analyzed
included:


     • Basic
eligibility
ages
of
50,
55,
and
60

     • Graduate
eligibility
based
on
service
using
10‐20
years,
15‐25
years,
20‐30
years,
10‐25
years,
and
10‐30
years

     • Multiple
combinations
of
these
two
eligibility
provisions
were
also
analyzed


A
scenario
was
also
proposed
to
determine
graduated
eligibility
as
a
combination
of
age
and
service.

This
proposal

(eventually
titled
the
“Integrated
Model”)
uses
an
age
factor
of
10%
to
100%
for
ages
56
to
65,
which
is
multiplied
by
a

service
factor
of
50%
to
100%
for
10
to
20
years
of
service
to
determine
the
final
graduated
eligibility.

The
use
of
an
age

factor
is
intended
to
encourage
delaying
retirement
to
Medicare
eligibility
when
costs
are
subsidized
by
the
federal

government.


The
various
scenarios
were
analyzed
to
determine
the
associated
cost
and
liability
savings.

The
work
group
also

discussed
the
effects
on
retirement
behavior
of
the
scenarios
and
the
effect
on
talent
management.

Approximately
20

scenarios
were
reviewed
over
several
meetings
until
the
options
were
narrowed
to
two
scenarios:

the
“Integrated

Model”
as
previously
explained
and
“Scenario
4”,
which
used
basic
eligibility
of
age
60
and
graduated
eligibility
of
20%

to
100%
for
10
to
30
years
of
service.


As
the
eligibility
scenarios
were
being
analyzed,
a
more
detailed
review
of
the
University’s
contribution
policy
was
also

considered.

As
previously
stated,
the
initial
consideration
was
to
contribute
the
same
percentage
of
unblended

premiums
(87.7%
in
2010)
for
retirees
as
determined
by
the
policy
for
employees.

This
presented
limited
liability
and

cost
savings,
so
other
proposal
were
analyzed
that
could
help
the
University
meet
its
fiscal
goals.


The
work
group
considered
the
effects
of
lowering
the
contribution
percentages
for
all
current
and
future
retirees
to

80%
or
70%
to
understand
the
range
of
potential
savings.

A
proposal
was
also
made
to
start
at
one
of
these
levels
and

cap
the
annual
increase
in
the
University’s
contribution
to
the
Consumer
Price
Index
(CPI)
plus
two
percent
(2%).

While

the
potential
long‐term
cost
savings
of
limiting
the
annual
increases
in
the
University’s
contribution
was
viewed

favorably
by
the
work
group,
concerns
were
raised
that
continued
high
medical
inflation
could
shift
too
much
of
the
cost

to
retirees.

A
revised
proposal
was
made
to
step
down
the
University’s
contributions
as
a
percent
of
the
total
premium

in
a
way
that
mimicked
a
rate
cap.

This
still
presented
the
problem
that
certain
proposals
were
creating
University

contributions
as
low
as
58%
of
the
total
premium.

A
decision
was
made
by
the
work
group
to
place
a
floor
on
the

University’s
contribution
policy
of
70%.

This
level
of
contribution
was
considered
to
still
be
a
significant
benefit
for

those
retirees
that
qualified
for
the
full
graduated
eligibility.


Transition


One
of
the
guiding
principles
of
the
task
force
is
that
the
program
“should
be
designed
and
implemented
so
as
to
allow

for
sufficient
time
for
retirees,
as
well
as
current
faculty
and
staff,
to
plan
for
the
effects
of
post
employment
benefit

changes.”

For
each
of
the
scenarios,
the
work
group
considered
two
methods
to
meet
the
goals
of
this
principle:

grandfathering
and
phase‐in.

                                                         Page 189
TASK FORCE FINAL REPORT July 2010

Grandfathering
means
that
a
certain
portion
of
the
population
would
not
be
subject
to
some
of
the
proposed
changes.


For
the
changes
being
considered
by
the
work
group,
grandfathering
specifically
applied
to
any
changes
to
the
basic
or

graduated
eligibility
that
could
affect
current
employees.

In
an
effort
to
provide
employees
sufficient
time
to
prepare

for
new
retirement
eligibility
rules,
the
work
group
identified
certain
portions
of
the
population
that
needed
to
be

protected
from
change:


    •   Employees
currently
eligible
to
retire

    •   Employees
that
would
reach
retirement
age
in
the
near
future

    •   Long
service
employees
who
had
spent
the
majority
of
their
career
with
UC


Multiple
options
for
grandfathering
were
considered
including
grandfathering
no
employees
and
grandfathering
all

employee
as
well
as
several
options
in
between.

The
work
group
eventually
decided
that
the
appropriate
level
of

grandfathering
was
for
those
employees
whose
age
+
service
≥
50
with
at
least
five
years
of
service.

This
level
of

grandfathering
covered
almost
half
of
the
population
(46%)
and
protected
those
nearing
retirement
eligibility
under
the

current
program
provisions.

This
group
would
be
protected
from
any
changes
to
the
eligibility
rules.


The
topic
of
phase‐in
of
program
changes
for
the
work
group
referred
to
the
implementation
of
the
University’s
new

contribution
policy.

The
goal
of
a
phase‐in
is
to
allow
current
retirees
a
number
of
years
to
prepare
for
increased

contribution
requirements
instead
of
a
sudden
increase
in
one
year.

The
2010
contribution
policy
was
the
first
step
of

the
phase‐in.


Behavioral
Changes


Once
the
work
team
had
narrowed
the
number
of
scenarios
down
to
a
manageable
number,
it
was
important
to

understand
the
behavioral
impact
of
the
retiree
health
program
proposals.

Changes
in
the
retirement
patterns
will

affect
the
liability
and
costs
of
both
the
retiree
health
program
and
UCRP.


It
is
very
difficult
to
predict
the
effect
that
any
retiree
health
program
changes
would
have
on
an
employee’s
decision
to

retire,
including:


             
Wealth
accumulation

             Physical
and
mental
fitness

             
Future
job
opportunities

             
Family
needs

             
Current
economic
environment

             Retirement
income
benefits
(pension,
social
security,
etc)

             
Retiree
health


                  o Coverage



                  o Access



                  o Medicare
eligibility
when
retired



                  o Cost


To
determine
the
best
approach
of
analyzing
retirement
behavior,
the
work
group
took
the
following
steps:

requested
a

search
of
academic
research
papers,
engaged
members
of
the
faculty
with
related
expertise,
consulted
with
actuaries

who
specialize
in
predictive
modeling.

The
search
revealed
some
papers
on
the
topic
of
how
changes
in
retiree
health

coverage
affect
retirement
behavior;
however,
these
papers
generally
concluded
that
there
is
not
enough
empirical
data

to
test
specific
predictive
models.


Discussions
between
the
actuarial
consultants
and
members
of
the
faculty
resulted
in
the
analysis
of
a
range
of
potential

behavioral
effects.

The
scenarios
that
were
under
consideration
generally
encouraged
delaying
retirement
up
to

Medicare
eligibility
at
age
65.

The
range
of
behavioral
effects
analyzed
included
the
following
two
end
points:
no

                                                        Page 190
TASK FORCE FINAL REPORT July 2010

change
in
retirement
behavior
and
nearly
all
employees
delaying
retirement
to
age
65.

This
provided
a
range
of
possible

outcomes
to
help
the
work
team
make
decisions
about
the
potential
effects
of
the
provision
changes.

The
actuaries
also

recommended
a
single
set
of
retirement
assumptions
within
that
range
that
they
felt
was
a
reasonable
estimate
of

where
the
retirements
might
fall.

A
single
set
of
retirement
assumptions
was
needed
to
consistently
compare
various

scenarios.

The
same
retirement
assumptions
were
applied
to
both
the
pension
and
retiree
health
programs.


Protected
groups

The
retiree
health
work
group
recognized
that
certain
portions
of
the
population
may
need
to
be
protected
from
the

policy
changes
for
a
variety
of
reasons.

The
populations
that
were
discussed
included
low
income
employees,

individuals
that
elected
in
the
mid‐1970’s
not
to
participate
in
Social
Security
and
Medicare
and
disabled
employees.


For
low
income
employees,
several
proposals
were
considered
including
setting
up
retiree
pay
bands,
placing
a
cap
on

retiree
contributions
as
a
percentage
of
UCRP
benefits,
and
using
a
needs‐based
method
with
retirees
self‐reporting

income.


Each
proposal
created
several
complications
that
would
make
it
difficult
to
implement
and
administer.

A
summary
of

the
considerations
follows:


•   Retiree
pay
bands


        o What
pay
should
be
considered?

                 
Current
Pension,
Highest
Average
Plan
Compensation

                 Income
from
other
sources

                 Retiree’s
assets

        o How
many
pay
bands?

•   Cap
on
retiree
contributions
as
a
percentage
of
UCRP

        o Who
is
this
measure
intended
to
protect?

                 Full‐time
vs.
part‐time
employees

                 Full
vs.
partial
career
employees
(and
definition
of
“full”
career)

                 Post‐65
vs.
pre‐65
retirees

                 Retiree
only
vs.
spouse/family

        o Would
equitable
adjustments
be
made
for
pension
/
retiree
health
variables?

                 Form
of
benefit
(life
annuity
vs.
joint
and
survivor)

                 Years
of
service
/
level
of
graduated
eligibility

                 Plan
choice
(Health
Net
vs.
Kaiser
vs.
Anthem,
etc)

        o Other
resources
to
consider
for
income
(e.g.,
social
security,
spouse
retirement
income,
etc.)

•   Needs‐based
with
retirees
self‐reporting
income

        o PEB
on‐line
survey
of
retirees
on
health
care
issues
showed
that
the
majority
would
not
be
willing
to

            disclose
total
household
income
to
the
University


The
work
group
decided
that
due
to
the
complexities
associated
with
providing
a
uniform
policy
for
protecting
low‐
income
retirees,
the
responsibility
should
fall
to
the
retiree
to
reach
out
to
their
local
emeriti
for
assistance.


For
employees
over
the
age
of
65
who
were
not
eligible
for
Medicare
benefits
due
to
opting‐out
of
Social
Security
and

Medicare
in
the
mid‐70’s,
the
work
group
felt
that
the
new
contribution
policy
should
not
apply
to
them.

This
group

would
not
realize
the
reduction
in
healthcare
costs
at
age
65
that
their
Medicare‐eligible
peers
would.

Given
that
this

group
saved
the
University
money
throughout
their
career
due
to
the
absence
of
Social
Security
and
Medicare
taxes,
the

decision
to
not
reduce
the
contribution
policy
was
deemed
appropriate.



                                                        Page 191
TASK FORCE FINAL REPORT July 2010

For
disabled
employees,
the
work
group
recognized
that
their
retirement
planning
was
interrupted
by
illness
or

accident;
therefore,
they
needed
some
form
of
protection.

Due
to
the
complexities
associated
with
the
multiple
sources

of
disability
protection,
the
work
group
decided
to
direct
the
administration
to
undertake
a
review
of
all
University‐
provided
disability
benefits.




Prefunding

One
of
the
guiding
principles
of
the
task
force
was
that
the
new
program
“should
consider
a
long
term
strategy
for

seeking
the
ways
and
means
for
paying
for
the
costs
and
prefunding
incurred
liabilities
of
post
employment
benefits,

within
the
working
career
of
those
faculty
and
staff
who
will
receive
these
benefits.”

There
are
several
benefits
to

prefunding
including
paying
for
the
retirement
benefits
as
they
are
being
earned
and
earning
higher
investment
returns.


This
issue
of
recognizing
benefits
as
they
are
earned
was
the
primary
driver
behind
the
issuance
of
the
financial

accounting
standards
discussed
in
the
background
(SFAS
106
and
GASB
Statement
Nos.
43
and
45).

Paying
benefits
as

they
are
earned
avoids
shifting
costs
to
future
generations.

One
of
the
primary
drawbacks
of
this
policy
is
that
it
is
very

difficult
to
predict
future
health
care
costs.

There
are
multiple
factors
including
medical
inflation
and
government

regulations
that
could
significantly
affect
long‐term
health
care
costs.

Therefore,
contributions
made
during
a

participant’s
career
could
be
shifting
the
cost
away
from
future
generations
to
the
current
one.

This
is
in
addition
to
the

payments
the
current
generation
is
making
for
past
generations
that
have
already
retired.


The
issue
of
earning
higher
investment
returns
is
related
to
the
long‐term
nature
of
an
ongoing
retiree
health
program.


If
the
assets
that
will
eventually
be
used
to
pay
health
costs
can
be
invested
for
a
long
period
of
time
without
the
need

for
liquidity,
a
strategy
for
taking
on
more
short‐term
risk
that
would
lead
to
higher
expected
rates
of
return
could
be

implemented.

These
additional
investment
earnings
would
be
used
to
pay
benefits
lowering
the
overall
cost
of
the

program.

For
accounting
purposes,
a
higher
discount
rate
would
also
be
used
to
measure
liabilities
resulting
in
lower

reported
costs.


The
problem
remains
with
prefunding
that
there
has
to
be
a
source
of
contributions,
which
is
very
difficult
in
the

economic
climate
currently
facing
the
University.

One
option
that
the
retiree
health
work
group
discussed
was
the

possibility
of
issuing
OPEB
obligation
bonds.

The
potential
benefit
of
issuing
OPEB
obligation
bonds
is
that
money
could

be
borrowed
at
a
lower
rate
of
return
than
the
expected
investment
returns
of
the
trust.

However,
there
are
many

drawbacks
of
issuing
obligation
bonds.

One
of
the
biggest
is
market
timing.

Many
governmental
entities
issued
pension

obligation
bonds
in
the
late
1990’s
and
early
2000’s
only
to
watch
their
funding
levels
plummet
when
the
economy

turned
down.

Now
these
entities
have
the
responsibility
of
making
the
bond
payments
while
trying
to
find
new
sources

to
fund
their
pension
plans.

Another
concern
for
the
University
is
its
debt
capacity.

Issuing
bonds
to
fully
fund
the

pension
and
retiree
health
programs
would
require
four
times
the
University’s
current
debt
capacity
and
would
restrict

the
University
from
borrowing
for
any
other
purposes.


The
work
group
determined
that
full
funding
of
the
pension
plan
should
take
precedence
over
funding
the
retiree
health

plan.

The
increased
contributions
provide
the
same
benefits
regardless
of
which
program
they
are
used
to
fund,
and
the

pension
plan
has
vested
benefits,
which
follow
a
more
predictable
pattern.

The
work
group
did
agree
that
one

University
goal
should
be
funding
the
normal
cost
and
eventually
the
ARC.





                                                         Page 192
TASK FORCE FINAL REPORT July 2010




                                               APPENDIX Q


                            Retiree Health Work Team Materials


  •   May 6, 2010 – Analysis of Final Proposed Plan Design -
  •   http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/09/peb_ax_q_work-team-analysis-of-proposed-
      design.pdf




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                                 APPENDIX R
                       The Regents’ Actuary – Segal
                             Pension Plan Funding
                             UCRP Funding Policy
                             Glossary of Funding Policy Terms
                             Role of Investment Performance in UCRP




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Pension Plan Funding

  I. General Discussion of Pension Plan Funding Policies

A pension plan funding policy is designed to determine how much should be contributed each year in total by
the employer and the active members to provide for the secure funding of benefits in a systematic fashion. The
funding policy starts with an actuarial cost method that allocates a portion of the total present value of the
members’ benefits to each year of service. In theory, contributing that “Normal Cost” for each year of service
will be sufficient to fund all plan benefits, assuming that all actuarial assumptions are met including the
assumed rate of investment return. In that ideal situation, plan assets will always be exactly equal to the value
today of all the past Normal Costs (the Actuarial Accrued Liability or AAL), and the current contribution will
be only the current Normal Cost.

Segal’s glossary of these and other funding policy terms is provided at the end of this section. See Appendix B
for the Report glossary.

In practice, for a variety of reasons, the assets will be greater than or less than the AAL, leaving the plan
overfunded (i.e., with a surplus) or underfunded (with an Unfunded Actuarial Accrued Liability or UAAL). The
funding policy adjusts contributions to reflect any surplus or UAAL in a way that reduces short term, year-by-
year volatility, but still assures that future contributions, together with current assets, will be enough to provide
all future benefits.

A comprehensive funding policy is made up of three components:

   1) An actuarial cost method, which allocates the total present value of future benefits to each year
      (Normal Cost) including all past years (AAL).

   2) An asset smoothing method, which reduces the effect of short term market volatility while still tracking
      the overall movement of the market value of plan assets.

   3) A contribution policy, which determines the total funding policy contribution for each year based on
      the Normal Cost, the AAL and the smoothed value of assets.

For UCRP, as for many plans, the actuarial cost method and asset smoothing method are well
established and reflect current industry standards. For that reason, recent discussions of funding policy have
mainly focused on the contribution policy component. With that in mind, the more general term “funding
policy” will continue to be used throughout this document.

For governmental or public defined benefit plans, like UCRP, there are no specific external funding or funding
policy requirements such as those established for single employer (corporate) and multi-employer (Taft-
Hartley) defined benefit pension plans under the Employee Retirement Income Security Act (ERISA) and the
Internal Revenue Code (IRC). The accounting standards promulgated by the Governmental Accounting
Standards Board (GASB) define an Annual Required Contribution (ARC) that, despite its name, is actually the
amount of accounting expense that the employer must recognize each year. Also, the GASB accounting
standards provide considerable policy latitude when determining the ARC.

Even though this leaves governmental or public plans relatively free to set funding policy, it is worth noting that
all long term funding policy structures – corporate, multi-employer and GASB – take the same form, at least for
underfunded plans (plans with a UAAL):
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   1) Contribute the Normal Cost for the year, and

   2) Contribute an additional amount that will fully fund (“amortize”) any UAAL over a period of years.

Implicit in this form of policy is a funding target of 100 percent, since at the end of the amortization period the
plan will be fully funded. This is in contrast to “corridor” methods that allow contributions equal to only the
Normal Cost as long as the plan is within, for example, 5 percent of being fully funded. The funding policy
adopted by The Regents in September 2008 is based on the UAAL amortization method because it is well
established for all types of pension plans as it targets 100 percent funding of the AAL and is consistent with the
Regents’ prior action in 2006 to establish a target of 100 percent funding.

 II. UCRP Funding Policy

As discussed earlier in this report, the “Full Funding Limit” adopted by The Regents in 1990 called for
contributions to be suspended when the Plan’s surplus is enough to cover the Plan’s Normal Cost. This funding
policy defined the conditions under which contributions would be suspended, but did not provide a framework
for restarting contributions.

In March 2006, The Regents adopted a long-term targeted funding level of 100%.

In September 2008, the Regents approved a funding policy for UCRP. The new funding policy is based on the
UAAL (Unfunded Actuarial Accrued Liability) amortization method. A funding target of 100 percent is implicit
in the UAAL amortization method, since at the end of the amortization period the plan is expected to be fully
funded.

The specifics of this funding policy are shown below:

   1) The new funding policy would be effective with the July 1, 2008 actuarial valuation and would
      determine total funding policy contributions starting with the Plan Year beginning July 1, 2009.

   2) Each year the funding policy contributions would be effective for the Plan Year starting one year after
      the date of the actuarial valuation.

   3) Each year the Regents would determine both the actual total contributions and the split between Member
      Contributions and University Contributions based on the total funding policy contributions and various
      other factors, including the availability of funds, the impact of employee contributions on the
      competitiveness of UC’s total remuneration package, and collective bargaining. In no event would the
      University Contributions be lower than the Member Contributions.

   4) The new funding policy would determine total funding policy contribution rates based on an actuarial
      valuation of the non-laboratory segment of UCRP (e.g.,campuses, medical centers and Hastings College
      of the Law). The Lawrence Berkeley National Laboratory would contribute on the same basis as
      determined for the non-laboratory segment of UCRP, subject to the terms of the University’s contract
      with the Department of Energy. The Lawrence Livermore National Laboratory and Los Alamos
      National Laboratory Retained Segments in UCRP would be subject to the funding policies outlined in
      the University’s contracts with the Department of Energy. Throughout this section the term “UCRP”
      shall refer to the non-laboratory segment of UCRP.

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  5) The total funding policy contributions to UCRP would consist of the Normal Cost plus an amortization
     charge for any Unfunded Actuarial Accrued Liability (UAAL) or minus an amortization credit for any
     surplus.

  6) Consistent with current practice, the Regents’ Consulting Actuary would conduct an annual actuarial
     valuation of UCRP. The Normal Cost and the Actuarial Accrued Liability (AAL) in each actuarial
     valuation would be determined under the Entry Age Normal Actuarial Cost Method, using actuarial
     assumptions adopted by the Regents.

  7) Consistent with current practice, the asset smoothing method used to determine the Actuarial Value of
     Assets would be based on the Market Value of Assets adjusted for “unrecognized returns” in each of the
     then last five years. Unrecognized return is the difference between actual and expected returns on a
     market value basis and is recognized over a five-year period.

  8) As of the effective date of this policy, any initial surplus as of that date would be amortized as a level
     dollar amount over a period of three to seven years, as was specified by the Regents in the adoption of
     this policy. The proposed period is three years.

     a. Any changes in surplus after the effective date due to actuarial gains and losses (including
        contribution gains and losses) would be amortized as a level dollar amount over 15 years.

     b. Any change in surplus due to a change in actuarial assumptions, cost method or asset smoothing
        method would be amortized as a level dollar amount over 15 years.

     c. Any change in surplus due to a Plan amendment would be amortized as a level dollar amount over
        15 years.

     d. In the first year after the effective date when UCRP has a UAAL (as opposed to a continuation of the
        current surplus condition) all amortization bases would be considered fully amortized and
        contributions would be determined under the remaining provisions of this policy.

  9) For any future year when UCRP has a UAAL (as opposed to a continuation of the current surplus
     condition), the calculation of the UAAL would be maintained by source (as listed below) and each new
     portion of or change in UAAL would be amortized as a level dollar amount over a fixed amortization
     period.

     a. Any initial UAAL (after a period of surplus) or change in UAAL due to actuarial gains and losses
        (including contribution gains and losses) would be amortized over 15 years.

     b. Any change in UAAL due to a change in actuarial assumptions, cost method or asset smoothing
        method would be amortized over 15 years.

     c. Any change in UAAL due to a Plan amendment would be amortized over 15 years, unless the nature
        of the Plan amendment would suggest a shorter period.

  10) For any future year in which UCRP has a surplus (other than a continuation of the current surplus
      condition), such surplus would be amortized as a level dollar amount over 30 years, and all prior UAAL
      amortization bases would be considered fully amortized.

  11) This new funding policy would supersede any previous funding policies.
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III. Normal Cost

The UCRP funding policy retained the “Entry Age Normal” actuarial cost method for determining the plan’s
Normal Cost and Actuarial Accrued Liabilities. This method has been used by UCRP for over 20 years and is
the most common actuarial cost method used by public sector pension plans. In the 2009 public fund survey
published by the National Association of State Retirement Administrators, about 74% of the large public
retirement funds surveyed used the “Entry Age Normal” actuarial cost method in their 2008 valuations.

The Normal Cost should be regarded as a “basic” or minimum cost of the pension plan. As determined in the
July 1, 2009 valuation, the Normal Cost was about 17% of pay (assuming beginning of year payment) or $1.3
billion for the campus and medical center segment of UCRP.

IV. Amortization of UAAL

As noted earlier, for a variety of reasons, the assets will be greater than or less than the AAL, leaving the plan
overfunded (surplus) or underfunded (the Unfunded Actuarial Accrued Liability or UAAL).

Setting an amortization policy involves a few choices in addition to selecting the amortization
periods. Here is a brief description of the alternatives, followed by the bases for the policy adopted by the
Regents in 2008.

   •   Single amortization layer for the entire UAAL or surplus, or separate amortization layers for each source
       of UAAL or surplus.

   •   Closed (fixed) period amortization or open (rolling) period amortization.

   •   Level dollar or level percent of pay amortization payments.

   •   For separate amortization layers, when is it appropriate to “restart” the amortization layers.

For any future UAAL, the new policy is to use separate, fixed period amortization layers for each source of
UAAL. This has the advantage of tracking separately each new portion of underfunding and identifying a date
certain by which each will be funded. This is the structure required by the ERISA/IRC rules for corporate and
multiemployer plans, and is increasingly common for public pension plans, especially in California.

For any future surplus the policy uses a single rolling amortization period for the entire surplus. In effect, each
year of surplus is treated as the first year and reamortized over the full amortization period. The reasons for this
different treatment stem from industry experience over the last several years suggesting that surplus should be
used sparingly when producing contribution levels less than Normal Cost.

Level Dollar vs. Level Percent of Pay Amortization
The amortization payments may be patterned in one of two ways, as a level dollar amount or as a level
percentage of pay. The ERISA/IRC rules for corporate and multiemployer plans require level dollar
amortization, similar to a typical home mortgage. However, by far most public plans use level percent of pay
amortization where the payments increase each year in proportion to assumed payroll growth. That means they
start lower than the corresponding level dollar payments, but then increase until they are higher.

The level dollar method is more conservative in that it funds the UAAL faster in the early years. For the same
reason it also incurs less interest cost over the amortization period. The new policy uses level dollar
                                                     Page 198
TASK FORCE FINAL REPORT July 2010

amortization. For years when UCRP has a UAAL it provides somewhat earlier funding, consistent with The
Regents’ generally prudent approach to funding policy issues. Furthermore, for the current surplus condition it
provides a somewhat more gradual restart of contributions, since the amortization credit starts out greater than it
would be under level percent of pay amortization.

Another advantage of level dollar amortization is that it avoids the possibility of “negative amortization.” With
level percent of pay amortization the lower early payments can actually be less than interest on the outstanding
balance, so that the outstanding balance increases instead of decreases. For typical public plan assumptions, this
happens whenever the amortization period is longer than about 17 years. Level dollar amortization precludes the
possibility of negative amortization, regardless of the amortization period.

When is it appropriate to “restart” the amortization layers
The new funding policy includes conditions where all the amortization layers are wiped out (“considered fully
amortized”) and the series is restarted based on the UAAL or surplus at that time. This happens whenever the
total UCRP funded status goes from surplus to UAAL, or from UAAL to surplus. This is done to avoid possible
anomalies as well as results that might fail to comply with the GASB accounting standards.

In particular, under the layered approach, it is possible for a plan with a UAAL to nevertheless have a net
amortization credit in the current year. While that result is actuarially consistent it is also very counterintuitive,
since a UAAL would seem to require a net amortization charge. In fact, for that very reason this result would
fail to meet a GASB requirement that a plan with a UAAL must have a net amortization charge. Both those
drawbacks can be readily avoided by the policy of treating each “new” UAAL or surplus condition as the
beginning of a new series of amortization layers.

Amortization Policy: Selection of Amortization Periods
Currently, UAAL amortization periods for public plans typically range from 15 to 30 years, with 30 years being
the maximum allowable period under the GASB accounting standards. The amortization period should not be
set so short that it creates too much volatility in the contributions yet it should not be so long that it contributes a
shift of cost to future funding sources.

Plans that amortize the UAAL in layers by source (like UCRP) sometimes use different amortization periods for
different sources of UAAL. Generally such plans amortize actuarial gains and losses over shorter periods (15
years or less) and UAAL changes due to assumption or method changes over longer periods (often the 30 year
GASB limit). This is also the approach used in the ERISA/IRC rules for multi-employer plans and also for
corporate plans prior to the 2006 overhaul of the corporate pension funding rules. However, this policy also
leads to inconsistencies and even short term conflicts with the GASB 30 year standard. For that reason the
policy uses the same periods for all sources of UAAL.

As for selecting the period, here again, recent experience is instructive. By the late 1990s, as plans came close
to being fully funded or even over funded there was a trend toward amortization periods as short as 10 or even 5
years. For example, in 1987, the ERISA/IRC rules for corporate plans were changed to reduce the amortization
period for gains and losses from the original 15 years to 5 years. This led to rapid reductions in contributions
when the large investment gains from that period were recognized over such short periods. The investment
losses in the early 2000s led to similar cost increases except for public plans that lengthened their amortization
periods substantially once those losses started to arise.

Based on this experience the new policy uses a 15 year amortization for actuarial gains and losses and for
changes in UAAL resulting from assumption or method changes. For plan amendments the policy is the same
15 year period, unless the nature of the plan amendment would suggest a shorter period.
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V. Relationship Between Funding Policy and Actual Contributions

The funding policy defines how “total funding policy contributions” are determined. Each year, the Regents set
actual contribution level based on available funding and other factors.

The Regents adopted employer and employee contribution rates for FY 2009/2010 and FY 2010/2011 (through
June 30, 2011) in February 2009. The employer contribution rate is 4% starting April 15, 2010. Rates for FY
2010/2011 will continue at the 4% level. Employee contribution will also start at around April 15, 2010 at
amounts currently redirected to the DC Plan, which is about 2% for most employees. Rates for FY 2010/2011
will continue at these rates. These are substantially less than the total funding policy contribution rates of
11.61% for FY 2009/2010 and 20.40% for FY 2010/2011.

Each year, the total funding policy contributions are determined as though all future actual contributions will be
at the funding policy level. Since actual contributions are less than the funding policy level, this creates an
additional UAAL which in turn will increase future funding policy contributions. This increase in future
funding policy contributions shows the cost of not making funding policy contributions.

Below are the “projected” and total funding policy contributions for campus and medical centers only, assuming
7.5% market value return per year beginning July 1, 2009. The projected contributions assumed in the
projections start from the contributions approved by The Regents as noted above and then factor in the follow
increases for illustration purposes:

   •   Employer contributions increase 2% per year
   •   Member contributions increase 1% per year
   •   Maximum of 5% (current CalPERS rate)
                           Projected UCRP Contributions: Actual vs “Policy”




As the chart shows, there is a significant increase in the total funding policy contribution rate due to the shortfall
of the “projected” vs “policy” contributions for many years.
                                                      Page 200
TASK FORCE FINAL REPORT July 2010


The total funding policy contribution rates shown by the blue line increase for a few years because of the
recognition of deferred market value losses and the one-year delay between the calculation date and the actual
date for the contributions. As noted above, each future funding policy contribution rate shown on the blue line
assumes that prior years’ contributions were actually made at those funding policy levels.

The shortfall of projected contributions shown by the red line relative to the total funding policy contribution
rates on the blue line is illustrated by the pink area. Over the time period shown on the graph, the shortfall of
projected versus funding policy contributions (pink area) is about $14 billion. This shortfall represents an
additional UAAL that was not anticipated when the “blue line” funding policy contributions were determined.

This means that actual future funding policy contribution rates will increase even further so as to fund this
additional UAAL. These higher funding policy contributions are shown by the green line. Over the time period
shown, the additional future cost of the shortfalls is illustrated by the yellow area. These total about $17.5
billion over the time period shown and would extend further out until the projected contributions shown by the
red line eventually intersect with the green line.

The graph that follows shows the UAAL of the campus and medical center segment of UCRP under two future
contribution scenarios that were just discussed: either the funding policy contribution scenario or contributions
at the projected level. Again, these projections assume a 7.5% market value return per year starting July 1,
2009. As shown in the graph, the UAAL grows significantly under the projected contributions scenario due to
contributing less than the funding policy contribution, even after recent asset losses are recognized in the
actuarial value of assets.

                                     Campus and Medical Center UAAL




The graph below shows a comparison of the projected UCRP funded ratios (on an actuarial value basis) for the
campus and medical center segment of UCRP based on the projected contributions versus the total funding
policy contributions. This is just another way of expressing information similar to the last slide.
                                                     Page 201
TASK FORCE FINAL REPORT July 2010


                                       Projected UCRP Funded Ratios




VI. Relationship to Funding Sources

The employer contribution for UCRP as determined for each active member is charged to the fund source that
provides that member’s compensation. State funds account for slightly less than one-third (about 31.67%) of
UCRP compensation. Federal contracts and grants, self-supporting entities (such as the clinical enterprises)
make up the other roughly two-thirds of the funding. These other fund sources generally do not make employer
contributions to UCRP larger than those made on behalf of State funded active members, but they do contribute
at the same contribution rate.

As a result, for every dollar of State funded employer contributions to UCRP there would be about another two
dollars in employer contributions to UCRP from other funding sources. Each dollar of employer contributions
that would be State funded that is deferred into the future leads to the deferral of about another two dollars in
employer contributions from all other funding sources. Some of these deferred employer contributions may not
be able to be recovered from other funding sources in the future.

This means that, reaching the total funding policy level of contributions sooner not only prevents the increase in
the total funding policy contribution due to making only the projected contributions, but also allows all funding
sources to be charged in a more timely and reliable manner.

In a later section we include a discussion on the possibility of issuing Pension Obligation Bonds (POBs) for the
state funded portion of the excess of each year’s total funding policy contribution over the projected
contribution.

VII.   Pension Obligation Bonds For UAAL

Pension Obligation Bonds (POBs) or Other Post Employment Benefits (OPEB) Bonds are taxable bonds issued
by states and local municipalities (Plan Sponsors) to refund, in the capital markets, all or a portion of their
                                                    Page 202
TASK FORCE FINAL REPORT July 2010

pension or retiree healthcare benefits UAAL. The Plan Sponsor is essentially exchanging one liability, the
Unfunded Actuarial Accrued Liability, for another liability the POB or OPEB bonds. The issuer uses bond
proceeds to retire all or a portion of the UAAL.

The overall purpose of POBs is to allow governmental/public plan sponsors to issue fixed obligation debt
instruments and invest the proceeds. It reduces overall unfunded liabilities on assumption that yields on assets
will exceed cost of bond payments.

The ultimate goal of POBs is to lower funding cost for the system. The POBs/OPEB Bonds allow the issuers to
capture potential saving s between prevailing taxable market borrowing costs and the actuarial earnings rate
they are charged on their unfunded pension liabilities. Within the pension system, the UAAL is charged with
the actuarial earnings rate. If the Plan Sponsor can borrow from the capital market at a rate lower than the
actuarial earnings rate to “pay off” the UAAL, the Plan Sponsor can save in the amount of interest payable on
the UAAL. For UCRP’s case, the actuarial earnings rate is 7.5% versus a POB rate of between 6.5% to 7.5%.

POBs can be a constructive element of a comprehensive pension funding strategy. Without POBs, the Plan
Sponsor pays both Normal Cost and UAAL amortization payments. After issuing POBs, the Plan Sponsor pays
Normal Cost, but Debt service payment replaces UAAL amortization payments.

Reasons why POB/OPEB bonds are issued

   •     Interest Rate Savings: Any UAAL balance incurs an implicit annual interest charge (7.5% in UCRP’s
         case). If current taxable market borrowing costs are lower than the actuarial earnings rate charged on the
         unfunded liabilities, savings can be achieved.

   •     Investment Earnings: Pre-funding the UAAL for OPEB reduces total liability. It allows use of higher
         discount rate (7.5% versus 5.5%) that reflects longer-term asset allocation for plan assets, increasing plan
         asset growth rate. When bond proceeds are invested, they could earn a higher interest rate than expected,
         thereby reducing the liability.

   •     Budget Relief: Currently, UCRP’s UAAL is amortized over 15 years. Replacing the obligation to the
         pension/retiree healthcare fund with POB/OPEB bonds having a longer term (for example 30 years) can
         lower annual cost. Short-term issue could cover lack of State funding for the next few years allowing
         other fund sources to contribute.

   •     Labor Relation Benefits: Issuance of POB/OPEB bonds can help improve relations or negotiations with
         employees/unions by providing benefit security for current and future retirees and/or allowing for
         negotiation trade-offs with represented groups.

Potential risks of POB/OPEB bonds

       • Investment Risk: The actual return on the purchased investments can be less than the cost of the debt
          over the life of the bonds. Bond rates are at 6.5%-7.5% right now, and investment return might fall
          below this rate.

       • Loss of Financial Flexibility: The POB/OPEB bond converts “soft liability” to a bonded debt (“hard
         liability”), reducing budget flexibility in times of economic downturn. It also takes up valuable debt
         capacity that might otherwise be used for capital projects.

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    TASK FORCE FINAL REPORT July 2010

        • Market Risk: It takes several months to implement the POBs during which bond rates could turn
          unfavorable.

        • Political Risks: Poor investment returns can result in negative publicity. Good investment return may
           encourage labor unions to seek additional benefits.

    Source of Revenue for Debt Repayment

    The TFIR Concept Paper recommends issuance of POB/OPEB bonds by December 31, 2012. The projected
    UAAL by 2012 is $32 billion ($15 billion under UCRP and $17 billion under OPEB). If UC were to issue
    bonds to 100% prepay its total UAAL, UC would need to issue $24 billion of bonds This is because if UC
    issued POB/OPEB bonds to cover 100% of its UAAL, the OPEB discount rate would be increased to 7.5% to
    reflect a longer-term asset allocation versus the current discount rate of 5.5%. This would decrease the UAAL
    by approximately 25%. The $24 billion bond could require $2.7 billion annual debt service per year if issuing
    15 year bonds, or $2.0 billion if issuing 30 year bonds. This represents about 10% to 15% of total operating
    budget.

    Bond Market Reception

    A $24 billion bond issuance would represent over three times the amount of debt the University of California
    currently has outstanding. The bond market would have no appetite for a one-time $24 billion issuance. The
    market is more focused on short-term issuances. Consideration would need to be given over staggering the bond
    issuance over several years or only issue a percentage of the total UAAL balance.

    VIII. Pension Obligation Bonds For Funding Policy Contributions

    In general, POBs have focused on total UAAL and not as a substitute for short-term contribution requirements.
    However, specific circumstances in merit consideration of alternate approaches to the use of POBs:

•   Can POBs be issued to finance State contributions to pension plan, thereby allowing UC to obtain contributions
    from other funding sources?

•   Does funding provide a negotiation tool in the collective bargaining process?

•   Should UC pursue POBs to cover multi-year state funding obligation?

    If UC issue POBs to cover the State’s contributions for several years (i.e. approximately $400 million), then the
    following questions should be answered:

•   What is the impact on UC financial statements?

•   Does this affect any of the funding negotiations between UC and the State?

•   Can UC obtain a commitment from the State to make regular payments reflecting bond payments?

•   If bonds are issued to cover State annual contributions (and capture other funding sources), can bonds be issued
    in single tranche or are annual issuances required? Annual issuances will increase transaction costs.



                                                        Page 204
TASK FORCE FINAL REPORT July 2010

The graph below is similar to a graph shown earlier, but is expanded to show the portions of the contribution
rates allocated to funding sources. In particular, the State funded portion could possibly be paid by issuing
POBs.




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GLOSSARY OF FUNDING POLICY TERMS

  • Present Value of Benefits (PVB) or total cost: the “value” at a particular point in time of all projected
  future benefit payments for current plan members. The “future benefit payments” and the “value” of those
  payments are determined using actuarial assumptions as to future events. Examples of these assumptions are
  estimates of retirement patterns, salary increases, investment returns, etc. Another way to think of the PVB
  is that if the plan has assets equal to the PVB and all actuarial assumptions are met, then no future
  contributions would be needed to provide all future service benefits for all members, including future
  service and salary increases for active members.

  • Actuarial Cost Method: allocates a portion of the total cost (PVB) to each year of service, both past
  service and future service.

  • Normal Cost (NC): the cost allocated under the Actuarial Cost Method to each year of active member
  service.

  • Actuarial Accrued Liability (AAL): the value at a particular point in time of all past Normal Costs.
  This is the amount of assets the plan would have today if the current plan provisions, actuarial assumptions
  and participant data had always been in effect, contributions equal to the Normal Cost had been made and
  all actuarial assumptions came true.

  • Actuarial Value of Assets (AVA) or smoothed value: a market-related value of the plan assets for
  determining contribution requirements. The AVA tracks the market value of assets over time, smoothes out
  short term fluctuations in market values and produces a smoother pattern of contributions than would result
  from using market value.

  • Market Value of Assets: the fair value of assets of the plan as reported by the plan’s trustee, typically
  shown in the plan’s audited financial statements.

  • Unfunded Actuarial Accrued Liability (UAAL): the positive difference, if any, between the AAL and
  the AVA.

  •   Surplus: the positive difference, if any, between the AVA and the AAL.

  •   Actuarial Value Funded Ratio: the ratio of the AVA to the AAL.

  •   Market Value Funded Ratio: the ratio of the MVA to the AAL.

  • Actuarial Gains and Losses: changes in UAAL or surplus due to actual experience different from what
  is assumed in the actuarial valuation. For example, if during a given year the assets earn more that the
  current assumption of 7.5 percent, the amount of earnings above 7.5 percent will cause an unexpected
  reduction in UAAL, or “actuarial gain” as of the next valuation. These include contribution gains and losses
  that result from actual contributions made being greater or less than the level determined under the policy.




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Role of Investment Performance in UCRP

The financial condition of the University of California Retirement Plan (UCRP) is mainly dependent upon three
factors:
    1. contributions to support the normal cost (cost allocated to each year of active member service) and to
         fund any shortfall of assets relative to liabilities (cost allocated to past years of active and inactive
         member service);
    2. investment performance; and
    3. payments to retirees and their beneficiaries.

This section of the report focuses on investment performance only.

  I. Actual Returns as Compared to Benchmark

Market returns during the periods prior to 1990 and 1999 were extraordinary, while returns over the past 5- and
10-year periods have been modest in comparison. See the Table of 5, 10 and 15 year periods below.

                                   UCRP Market Returns and Benchmarks

                                         End of Contributions 6/30/1990
              Periods ending                                   UCRP Policy
                 6/30/90              UCRP Total                Benchmark                Excess
                  5 years              16.04%                    16.00%                  0.04%
                 10 years              15.88%                    15.78%                  0.10%
                 15 years              12.82%                    13.17%                  -0.35%

                                         Pre-Transition Period 6/30/1999
              Periods ending                                   UCRP Policy
                 6/30/99              UCRP Total                Benchmark                Excess
                  5 years              21.32%                    21.48%                  -0.15%
                 10 years              15.66%                    15.58%                  0.08%
                 15 years              16.95%                    17.11%                  -0.16%

                                            Current Period 6/30/2009
              Periods ending                                   UCRP Policy
                 6/30/09              UCRP Total                Benchmark                Excess
                  5 years               1.43%                     1.39%                  0.04%
                 10 years               2.30%                     1.77%                  0.53%
                 15 years               8.29%                     7.96%                  0.33%

 II. Market Volatility

Prior to 2000, the asset allocation of the UCRP was similar to most other public pension funds: a 65%/35%mix
of stocks and bonds. The stocks were primarily large capitalization (large cap) growth stocks, selected and
overseen by a small internal staff. From year to year, various asset classes will be “best performers”. In the
years leading up to 2000, large cap growth stocks experienced excellent growth, while a portfolio with a
concentration in that asset class would have performed poorly in 2000-2002.

In 2000 The Regents concluded that increased diversity in the UCRP portfolio was appropriate
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TASK FORCE FINAL REPORT July 2010

and they adopted a broader asset allocation plan to increase return opportunity and control investment return
volatility risk.

The UCRP assets have had investment returns very similar to the policy benchmark over a
long period of time. The volatility in UCRP returns is almost wholly due to market volatility.




III. Relative Effect on Unfunded Actuarial Accrued Liability (UAAL)

The current need for contributions is not a result of inferior investment performance.

Liabilities increase each year by the sum of the following:
   • Normal Cost, that is, the cost allocated to each year of active member service. For UCRP, this is
        approximately 17% of covered payroll, or 4% of assets
   • Interest Cost, that is, the passage of time. This “Actuarial Rate of Return” is 7.5% of assets

Thus, without contributions, investment returns would need to be about 11.5% per year to maintain full funding
without future contributions.




                                                    Page 208
TASK FORCE FINAL REPORT July 2010




An investment return of 11.5% per year is unlikely in the current environment. The investment community
forecasts investment returns in the following ranges:
    • Equity returns forecast around 8-9%
    • Fixed income returns forecast in the range of 4.5%-5.5%
    • Alternatives may add 1-3% over equity

The actuarial return target is only a target – there are no investments that provide a consistent
7.5% annual return. The assumption is that over a long term, investment is assumed to return 7.5% on average.

Therefore, there is no prudent investment policy or management that can permanently allow the UCRP to avoid
the need for contributions.




                                                  Page 209
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                                    Appendix S
                          Risk Valuation Analyses
                             Finance Office Discussion
                             Faculty Comments




                                       Page 210
TASK FORCE FINAL REPORT July 2010

              Risk Valuation Analysis Discussion – Finance Office
                                              August 3, 2010
Identifying the Value of a Defined Benefit Plan to UC Employees: The methodology used in the Total
Remuneration study (“TRS”) was developed in order to put together a comprehensive description of market
competitiveness for salary and benefits for all faculty and staff groups. It was not, however, developed to serve
as a foundation for new plan design for a new tier for UCRP with the commitment of billions of dollars from
taxpayers and families. Specifically TRS is calculated based on the expected value of all components of
employee compensation at a point in time. Due to this “expected value” methodology TRS does not
appropriately capture the complete value of the benefits UC provides to our employees; for example, TRS gives
no value to the guarantee of investment performance underwritten by our defined benefit retirement plan versus
a defined contribution plan. As such, it understates the value of the proposed New Hire Tier 1(A) or any
defined benefit plan for that matter, and falsely gives the impression that the new tier plan is greatly
disadvantageous to our staff and faculty.
Based on the information from Hewitt/Mercer regarding our comparator 8 institutions (primarily DC plans), the
average current employer contribution for our comparators is 8.8% for retirement benefits. The New Tier Plan
1(A) would cost UC 7.3%. According to TRS, Plan 1(A) is 41% below the market average even though the
contribution rate is only 17% below the comparator average. To illustrate how dramatically the TRS analysis
undervalues the DB plans analyzed, we calculate that it would take an Employer contribution of between 13%
and 14% in a new DB plan to be considered EQUAL to market average DC plans which average 8.8% employer
contribution. Thus, the TRS methodology assumes that even with the University underwriting 7.5% investment
performance [the significant value to employees of this will be addressed later in this paper], UC as the
employer would need to contribute between 47% and 59% more dollars every year over the working life of an
employee in order for the employee to be delivered equal value to a DC plan where the employee assumes
100% of the mortality risk and 100% of the investment risk. Further you will see that even at the 9% Employer
contribution favored by some Steering Committee members, UC is still 22% below market, even though our
comparator average is 8.8%. After discussions with Hewitt, Mercer and Segal regarding this issue, we believe
these calculations to be misleading for the following reasons: salary differences and actuarial assumption
differences.

   •   Salary Differences: Since the Total Remuneration Study is based on absolute dollars and UC’s average
       salary is lower than the market average, for any given level of benefit, UC’s benefit per the
       Remuneration Study will always be lower. For example, if both UC and its comparators had a 10% cost
       retirement benefit, since UC’s total population salary average is $112,198 and the market average is
       $124,177, UC’s benefit would be lower in total dollar terms. Salary differences account for 30% of the
       discrepancy.

   •   Actuarial Assumption Differences: There are actuarial methods and population assumptions that are
       different between the Segal Normal Cost calculations and the Hewitt Total Remuneration Study. Due to
       these differences, UC is getting credit for only a 6% employer contribution in the study versus our 7.3%
       cost of providing our pension plan. Due to this phenomenon a 7.3% DC contribution by UC would
       actually result in higher total remuneration for UC employees than our current modeled plan.
       Methodology differences account for 70% of the discrepancy.


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TASK FORCE FINAL REPORT July 2010

       Thus, once you account for these differences, Plan 1(A) is approximately 17% below market (7.3% vs.
       8.8%) (this is true only if you give NO VALUE to the guarantee of investment performance that a DB
       plan provides to an employee – see below).

Finally, of particular importance is the value employees derive from having UC shoulder 100% of the
investment performance risk for both the employer and employee contributions from the year they are made
through the death of the employee, which in some cases encompasses over a 30 year period or longer. This
value was clearly evident when we consider that the UCRP portfolio lost $15.6 billion during the market
downturn of FY 2008 and FY 2009. Currently, UCRP still has $10.5 billion of losses left to be amortized, the
interest expense on these losses will amount to an additional pension payment of $780 million each year for the
next 15 years (using current amortization policy) that UC as an employer will be required to make. We suspect
that given numbers like this – and the losses friends and colleagues with 401(k)-style plans suffered – our
employees see clear value in being insulated from such a financial collapse.

Indeed, the Academic Senate in 2009 acknowledged as much when, in a discussion on the pros and cons of a
lump-sum cash out payment stated,

       “…A retiree could instead use the lump sum cashout to purchase a commercial annuity which would
       provide lifetime benefits; however, because the interest rate on commercial annuities is well below the
       7.5% actuarial rate of return assumed in computing the lump sum cashout for UCRP, the commercial
       annuity would yield a much smaller monthly benefit than the employee would receive by electing
       monthly retirement income from UCRP.
       “…In short, an employee who elects the lump sum cashout assumes substantial investment risk.”

Surely nobody believes that this “substantial investment risk” only exists at retirement, but somehow is
nonexistent prior to age 65?

In our view, the challenge is to quantify the value of the benefit to an employee of not having to assume
“substantial investment risk.” Yet the TRS doesn’t calculate this valuable benefit at all. As such, for purposes
of advising the President and our Board of Regents, the PEB Steering Committee cannot recommend a pension
design that relies solely on the incomplete analysis in the TRS. It is important and appropriate that we consider
and calculate a value to the employee when UC, as the employer, assumes 100% of the investment risk on their
behalf in the defined benefit UCRP program.

Alternative Ways To Quantify The Value To Employees For NOT Taking Investment Risk:

In late June, the PEB Steering Committee asked us to attempt to quantify the value of the University’s
investment risk during the life of an employee. We could find no simple, widely accepted methodology that
addresses the charge from the Steering Committee. Below we discuss three risk valuation methods, which are
accepted by the pension experts we spoke with as valid approaches.

Annuity: DB and DC plans have two distinct purposes, income replacement and capital accumulation,
respectively. From a benefit standpoint, a DC plan becomes a DB plan at annuitization. Thus, to compare the

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TASK FORCE FINAL REPORT July 2010

relative value of the two types of plans, we calculated the annuity value of UCRP for one sample faculty
member in the New Tier Plan(1A) with a full UC career and compared it to a similar annuity purchased by an
individual with a DC cash balance at retirement, assuming a higher 8.8% employer annual contribution. In order
for an employee to receive the same benefit they would receive under our Tier 1A plan (7.3% employer
contribution), they would need to be in a DC plan with a 15.6% employer contribution (assuming an annuity
discount rate of 4.5%). At a 7.5% discount rate (well above current market levels), the required DC contribution
rate would be 10.7% of payroll. At either level, the benefit from our New Tier Plan would be more valuable to
the employee by a comfortable margin.

It is important to note that while the value of the annuity earned for employees that leave mid-career is lower
than that of full career employees, the TRS, along with our actuarial study, does incorporate employee turnover
into their analysis and thus accounts for employees that leave mid-career in their total values. While UC may
benefit from some employees choosing not to leave mid-career, due to the potential upside in retirement
benefits that they would be giving up if they stayed until retirement, quantifying what a UC employee “gives
up” in retirement benefits if they leave early is not an accurate way to compare their position had they been in a
DC plan.

What is really being compared is the value of the annuity benefit the UC employee has accrued, over the cash
balance that the employee would have been able to take with them, had they been in a DC plan. In addition,
when valuing the UC annuity, we would need to use an annuity factor for the calculation, as simply using the
expected value of the years of payout does not take into consideration individual longevity risk. Thus, similar
to the analysis above, we believe a more accurate comparison would entail calculating the present value of the
annuity stream a UC employee has earned and comparing it with the DC balance an employee would have
accrued at another employer at the time of departure. In addition, the annuity stream should be discounted at the
rate that it could be purchased in the market. A key portion of this analysis is to include an annuity factor, as
these take longevity risk into account; that is, the risk that you could live much longer than the expected payout
period.

Black-Scholes: The Black Scholes option pricing model – which admittedly has limitations – is another way to
get at a value that the Committee seeks to establish. UCRP is invested in risky assets and if these assets are not
sufficient to pay accrued benefits in the future, additional money would need to be put in to cover the total
accrued benefits. This arrangement resembles a financial instrument known as a “put option.” A put option
guarantees against the value of a stock falling below a certain level. UCRP, as a defined benefit plan, effectively
provides such a put option via their legal ability to pay benefits accrued. While providing a put, they are also
selling a call, as any upside is retained by UCRP. Thus, we calculated the net value of buying a put and selling
a call. For the variables outlined in the Black-Scholes analysis presented to the Steering Committee on July
15th, a Share Price of $1,070M (normal cost of 11.9%), a Strike Price of $3,166.9M and a 15 year expiration
period (estimate of the midpoint of a public pension’s stream of future benefit payments), a 4.5% riskless rate
and an annual volatility of 10.6%, the net cost to UC of buying a put and selling a call can be calculated as
approximately $542 million or 6.28% of payroll. Changing the riskless rate to 6%, changes the value to
approximately $251 million or 2.7% of payroll. Some might argue that the Black-Scholes model cannot be
applied given the long-dated nature of pension benefits; however, the Black-Scholes model provides a
theoretical framework with which to assess the magnitude of UC’s risk.
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TASK FORCE FINAL REPORT July 2010


Normal Cost: If we were to assume that a 4.5% discount rate is the appropriate comparable rate and were to
discount our UCRP benefits at a 4.5% rate, total normal cost necessary to remove investment risk to the
employer (UC), and thus mirror the residual investment risk of those comparator institutions with a DC plan,
would increase to 24.1% from 11.9% for the New Hire Tier (1A) plan. With an average employee contribution
of 4.6%, UC’s employer normal cost contribution would increase from 7.3% to 19.5%. At a 6.0% discount rate,
UC’s contribution rate would increase to 13.2%. That is to say, it is UC’s ability and willingness to assume
investment risk on behalf of its employees that reduces its required contribution rate. If UCRP were to
actuarially reduce that risk, it would require a much higher contribution rate, even though there would be no
change in the benefit payout to employees. At an employer contribution rate of 13.2%-19.5% for the New Hire
Tier 1(A), UC would be way above the average 8.8% contribution rate of its comparators.

The valuation exercises above are modeled using a 4.5% riskless rate, the 10 year average of a 15 year Treasury
bond. We also calculated each analysis at a 6.0% discount rate, to approximate the Senate analysis, primarily
focused around the yields on UC Taxable Revenue Bonds, currently 5.62% for a 20 year bond, 5.98% for a 30
year bond. (We would note the difference between a bond with the full faith and credit of the US government
and a UC revenue bond, as UC cannot issue full faith & credit debt).

We believe the use of a risk-free rate (in this case 4.5%) is appropriate for several reasons. First, is the premise
that once risk is taken into account, all securities have the same value, and thus any cost difference represents
the cost of risk. Thus, securities with identical future payoffs must be priced equally. A defined contribution
plan is essentially riskless to an employer, as once the contribution is made as the employer has no further
obligation to the employee. A defined benefit plan however, guarantees a certain benefit pay-out to its
employees in the form of an annuity payment once they retire. In order for UC to eliminate all of its future
investment risk and thus make its situation comparable to that of employers with defined contribution plans, it
would need its assets to be risk-free, such as US Treasuries, and therefore would essentially earn an annual risk-
less rate. Thus, the three analyses above utilized a riskless rate as the discount factor in order to make the two
plans comparable.

Secondly, employees in UCRP are not all subject to UC’s credit risk. That is, UCRP currently has over $34
billion of assets ready to pay its benefit obligations. Just as a loan rate offered to an individual is lower when
there is collateral involved, the assets in UCRP represent collateral to UC employees, lowering the credit risk.
Employees have substantial collateral in the form of UCRP assets and future projected contributions to the plan.
Thus, a more accurate rate would be a combination of the risk-free rate for the portion of the plan obligations
that are funded/projected to be funded and UC’s taxable rate for the portion projected to be unfunded. As UC’s
plan is to achieve 100% funding status, that is have enough money in the plan to pay for all its obligations, then
a risk free rate would be more a appropriate discount rate.4 (It is important to note that even at a 6% discount



4
  Unlike securities where any price differentials would be arbitraged immediately, pension plans cannot be sold
in the market, and thus, cannot be arbitraged. However, just because it is not possible to take advantage of the
arbitrage value, does not mean that this value does not exist. This is the reason it is perfectly valid to use UC’s
taxable bond rate as a proxy for its UCRP unfunded liability discount rate.
                                                     Page 214
TASK FORCE FINAL REPORT July 2010

rate, each analysis shows there is tremendous additional value to a DB plan to the employee over and above that
which is quantified in the Total Remuneration Study).

Finally, we do not believe a responsible investment professional, anywhere in the country, would consider it
possible to secure a guaranteed return of 6% over 15 years without risk. One cannot make such broad
assumptions just because our taxable pension obligation bonds would price at 6.00 – 6.50%. For example, last
we checked, the market hardly sees securities from the State of California as riskless.

A central question, in this regard, for the PEB Steering Committee is this: do we want a report to go to the
President and the Board of Regents that pretends there is no investment risk in achieving 7.50% per year
forever? As stated above, UCRP lost over $15 billion during the recent financial meltdown, a loss that will cost
the University over $780 million annually in interest costs, or 9% of payroll, not including the UAAL
principal. Is that how we define “no risk?” How much credibility should a report have which suggests our
guaranteed 7.50% return has no risk?

Conclusion: It should be very clear that a DB plan delivers benefit to the employee (and the associated cost of
this benefit to the employer) BEYOND the dollar contributions put into the plan. These benefits relate
primarily, but not completely, to the risk transfer from employee to employer related to investment
performance. Some have argued that this risk transfer has no cost. We need only look at the State of
California’s own massively unfunded DB plans, which have not had any contribution holiday, to see a vivid and
proximate example of the cost of this risk. As stated by the Wall Street Journal on August 2, 2010:

       This year, the Golden State is running a $19 billion deficit, at least $6.2 billion of which is owed for retiree
       pension and benefit payments. That number is expected to nearly triple in the next decade as the pension tsunami
       gains speed. All told, California's unfunded pension liability is scored at more than $120 billion, with some
       estimates rising to $500 billion.

       For that, Californians can thank the state's bloated benefits, low employee and employer contributions to the
       pension plans, and the inflated investment-return assumptions used to hide pension costs. As investment returns
       have turned south, the state has had to make up for shortfalls by cutting back on higher education, parks and
       social services.


If we are to continue with a DB plan, as the PEB Task Force is recommending to do, we must embrace the
reality that such a plan is more expensive than it appears. As shown below, the same “value” or “benefit” to our
employees (using a methodology other than the incomplete TRS) would require substantially greater
contributions from taxpayers and tuition-paying parents to our employees for either a more generous DB plan or
a similarly constituted DC plan.

                           Alternative Normal Cost Valuation Metrics –
                                      DB vs. DC Comparison
             UCRP Tier 1A          7.3% Employer Contribution
             Additional Unrecorded Value Above 7.3% Employer Contribution
             Annuity Method        3.4%-8.3% Employer Contribution

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TASK FORCE FINAL REPORT July 2010

             Black-Scholes            2.7%-6.3% Employer Contribution
             Normal Cost              5.9%-12.2% Employer Contribution




It is for this reason that we support Plan 1A as fair to employees vs. other comparator plans. In a nutshell, we
believe our employees will be fairly and well served by a defined benefit plan that, after a career of service to
the University and when integrated with Social Security benefits, will provide an adequate lifetime retirement
income - unaffected by investment risk and performance or by the risk of outliving an account balance. The
UCRP benefit will in fact have a guaranteed maintenance of purchasing power at the 80% level to protect
retirees from inflation. This proposed purchasing power protection provision is in addition to an annual, base
building COLA. For the reasons stated in this paper we also believe that a design such as Option A is on the
generous side of fair versus comparator defined contribution plans and one that has an even distribution of total
replacement income across all salary levels. The other final option under consideration does not provide as
even of a level of replacement income across all salary levels.




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TASK FORCE FINAL REPORT July 2010

                 Faculty Comments on “Risk Valuation Analysis Discussion
                              Robert
M.
Anderson,
James
A.
Chalfant,
and
Helen
Henry5


                                                       August
5,
2010


Introduction
and
Overview
of
the
Issues

The
President’s
Task
Force
on
Post‐Employment
Benefits
(PEB)
has,
as
part
of
its
charge,
the
responsibility
to

consider
the
competitiveness
of
any
new
designs
recommended
for
pensions
or
retiree
health
benefits.

Since

2007,
UC
has
worked
with
both
Hewitt
Associates,
LLC
(Hewitt)
and
Mercer,
LLC
(Mercer)‐‐‐two
national

consulting
firms‐‐‐to
gauge
the
competitiveness
of
total
remuneration
at
UC.

This
work
culminated
in
a
study

posted
on
UCOP’s
web
site
last
fall,
the
Total
Remuneration
Study6.

As
UCOP
states,
that
study
was
conducted

“follow[ing]
standard
industry
practices”.
Those
industry
practices
have
not
included
an
attempt
to
attribute
a

value
to
a
defined
benefit
plan
from
shifting
investment
risk
to
an
employer,
nor
did
any
of
the
three
bids
for

conducting
the
total
remuneration
study
indicate
the
availability
of
any
methodology
to
assess
the
value
of

the
shift
of
investment
risk.


The
total
remuneration
study
methodology
was
intended
to
serve
as
the
basis
for
studying
the
effects
on
UC’s

competitive
position
from
adopting
proposed
new
designs
for
pension
and
retiree‐health
benefits.

Results

provided
to
the
PEB
Steering
Committee
(Steering
Committee)
in
June/July
2010
show
that
the
two
pension

plans
included
in
the
draft
executive
summary
to
be
forwarded
to
the
President
are
uncompetitive.

As

Academic
Senate
participants
in
the
PEB
process,
each
of
us
a
member
of
one
of
the
three
workgroups

(Pensions,
Retiree
Health,
and
Finance),
we
have
emphasized
since
the
PEB
process
began
in
Spring,
2009
that

it
is
essential
to
maintain
competitive
total
remuneration;
to
do
otherwise
would
be
highly
detrimental
to
UC’s

ability
to
recruit
and
retain
excellent
faculty
and
staff,
ultimately
compromising
the
quality
of
our
ten

campuses
and
five
medical
centers,
and
threatening
our
standing
as
the
world’s
preeminent
public
research

university.

In
spite
of
the
critical
need
for
maintaining
competitive
total
remuneration,
no
analysis
of
the

5


   Anderson
is
Professor
of
Economics
and
Mathematics
at
UC
Berkeley,
Director
of
the
Coleman
Fung
Risk
Management
Research

Center,
and
Chair,
Academic
Senate
Task
Force
on
Investments
and
Retirement
(TFIR);
Chalfant
is
Professor
of
Agricultural
and

Resource
Economics,
UC
Davis,
and
member
of
the
University
Committee
on
Planning
and
Budget,
and
TFIR);
Henry
is
Professor

Emerita
of
Biochemistry,
UC
Riverside
and
a
member
of
TFIR.

Anderson
served
as
a
member
of
the
Pensions
Workgroup
of
the
PEB

Task
Force;
Chalfant
served
as
a
member
of
the
Finance
Workgroup
of
the
PEB
Task
Force;
and
Henry
served
as
a
member
of
the

Retiree
Health
Workgroup
of
the
PEB
Task
Force.

All
three
are
former
chairs
of
the
University
Committee
on
Faculty
Welfare

(UCFW).


This
paper
also
reflects
the
comments
of
Daniel
Simmons,
Professor
of
Law
at
UC
Davis
and
current
vice‐chair
of
the

Academic
Council,
a
member
of
TIFR,
and
who
served
on
the
Steering
Committee
and
Retiree
Health
workgroup,
and
participated
in

the
Pension
Design
and
Finance
workgroups.



6
  
http://www.universityofcalifornia.edu/news/compensation/total_comp_facts_nov2009.pdf

                                                          Page 217
TASK FORCE FINAL REPORT July 2010

consequences
of
the
proposals
for
benefits
reductions
were
performed
before
the
three
PEB
workgroups

ceased
their
deliberations.



After
reviewing
the
total
remuneration
study
results
showing
that
the
proposed
plans
are
uncompetitive,
two

members
of
the
steering
committee
and
a
UCOP
co‐author
drafted
a
document
that
purports
to
demonstrate

substantial
bias
in
the
total
remuneration
study
results.7


This
analysis
was
introduced
only
after
the
total

remuneration
study
demonstrated
that
pending
proposals
for
plan
design
considered
by
the
Pension

Workgroup
were
uncompetitive
across
all
employee
groups.


We
were
asked
by
Steering
Committee

Members
Henry
Powell
(Chair
of
the
Academic
Senate)
and
Daniel
Simmons
(Vice
Chair
of
the
Academic

Senate)
to
comment
on
the
analysis
after
its
presentation
to
the
Steering
Committee.

The
full
document

summarizing
those
earlier
analyses
was
drafted
by
Steering
Committee
members
Peter
Taylor
and
Frank
Yeary

and
the
Associate
Director
in
the
Office
of
the
Chief
Financial
Officer,
Maria
Anguiano
(hereafter

Taylor/Yeary/Anguiano).

Their
document
has
not
been
reviewed
by
the
Steering
Committee
and
does
not

represent
a
position
of
the
Committee.


The
assertion
that
total
remuneration
study
is
biased
is
based
on
a
claim
that
the
University,
as
the
employer

sponsor
of
a
Defined
Benefit
(DB)
plan,
UCRP,
takes
on
“uncompensated
investment
risk”
and
that
a
“risk

adjustment”
is
needed
to
fairly
reflect
the
value
to
employees
of
a
DB
pension
plan.
This
claim
is
simply

incorrect.

In
fact,
the
actuarial
assumed
discount
rate
recommended
by
the
Segal
Company,
the
Regents’

actuary,
contains
a
substantial
risk
adjustment.

Segal
estimates
the
expected
return
of
the
UCRP
portfolio
to

be
9.25%,
and
applies
a
1.75%
risk
adjustment,
reducing
the
assumed
rate
of
return
to
7.5%.

Segal
estimates

that
there
is
a
74%
probability
that
the
actual
return
will
equal
or
exceed
the
assumed
rate
of
return
in
any

given15‐year
period.8

Thus,
the
rate
of
return
assumption
adopted
by
the
Regents
for
purposes
of
valuing

UCRS
benefits
and
liabilities
already
incorporates
an
adjustment
for
the
investment
risk
inherent
in
the
plan.


In
addition,
the
actuarial
assumptions
recommended
by
Segal
and
adopted
by
the
Regents
are
appropriately

conservative
in
many
respects,
and
this
conservatism
provides
further
assurance
that
the
plan,
if
properly

funded
by
contributions,
will
have
sufficient
funds
to
meet
its
obligations.








7
    
“Risk
Valuation
Analysis
Discussion”,
by
Peter
Taylor,
Frank
Yeary,
and
Maria
Anguiano.



8
 
University
of
California
Retirement
Plan
ACTUARIAL
EXPERIENCE
STUDY:
Analysis
of
Actuarial
Experience
During
the
Period
July
1,

2002
through
June
30,
2006.

(April,
2007)

(http://www.universityofcalifornia.edu/regents/regmeet/may07/c14attach2.pdf)


                                                                Page 218
TASK FORCE FINAL REPORT July 2010

The
actuarial
assumptions
adopted
by
the
Regents
are
appropriately
conservative
in
another
important

respect.

The
actuarial
assumed
rate
of
salary
growth
used
by
Segal
is
5.5%,
which
is
significantly
higher
than

the
4.0%
rate
used
by
Hewitt
and
Mercer
in
the
total
remuneration
study.
The
use
of
a
higher
rate
increases

the
projected
future
pension
benefits,
raising
normal
cost.


If
the
Hewitt‐Mercer
assumption
turns
out
to
be

correct,
then
Segal’s
normal
cost
calculation
will
turn
out
to
have
been
too
high,
and
the
recommended

employer
and
employee
contributions
will
be
more
than
sufficient
to
ensure
that
the
plan
will
have
sufficient

funds
to
meet
its
obligations.


In
other
words,
the
conservative
actuarial
assumption
on
salary
growth
and

other
key
factors
significantly
reduce
the
risk
that
the
plan
will
be
underfunded
in
the
future,
provided
that
it

is
properly
supported
by
contributions.

The
conservatism
of
the
actuarial
assumptions
is
an
implicit
risk

adjustment
not
considered
in
the
Taylor/Yeary/Anguiano
analysis.



All
three
firms
that
bid
for
the
total
remuneration
study
contract
use
methodologies
with
no
explicit
risk

adjustment,
beyond
the
inherent
conservatism
in
the
actuarial
assumptions,
on
investment
risk,
salary

growth,
and
other
factors.

The
University
has
accepted
this
methodology
in
its
published
descriptions
of
total

remuneration
as
the
basis
for
the
University’s
assessment
of
compensation
levels
for
all
employee
groups.


Taylor/Yeary/Anguiano
nonetheless
insist
that
those
results
are
biased
and
flawed
because
of
the
absence
of

what
they
believe
is
the
value
of
the
investment
risk
borne
by
the
University.



We
assume
that
the

consultants
who
have
prepared
this
methodology
do
not
agree;
we
certainly
do
not.


Investment
risk
was
not
the
main
cause
of
UCRP’s
current
difficulties.

The
Office
of
the
Treasurer
has

calculated
that,
if
UC
had
made
contributions
equal
to
normal
cost,
rather
than
stopping
contributions
for

nineteen
years,
UCRP
would
have
been
120%
funded
as
of
6/30/09,
despite
the
market
turmoil
of
2008‐09.


Over
the
long
run,
UCRP’s
earnings
have
exceeded
the
7.5%
actuarial
assumption;
we
face
an
unfunded

liability
because
of
the
contribution
holiday,
not
because
of
investment
risk.



While
focusing
solely
on
downside
investment
risk,
the
Taylor/Yeary/Anguiano
analysis
ignores
substantial

institutional
value
to
the
maintenance
of
a
defined
benefit
plan,
much
of
which
translates
into
substantial

reductions
in
employer
costs
and
reduces
the
overall
value
of
the
plan
to
employees.


   •   An
employee
leaving
UC
in
midcareer
gives
up
a
large
fraction
of
the
value
of
their
pension

       accumulation,
amounting
to
two
or
more
years
of
salary
for
many
employees.

This
“golden
handcuff”

       provides
substantial
institutional
benefits
to
UC
in
retaining
employees
midcareer.






                                                     Page 219
TASK FORCE FINAL REPORT July 2010

   •   The
University
also
benefits
from
the
fact
that
UCRP
encourages
retirements
near
the
targeted

       retirement
age
in
the
Plan;
employees
at
institutions
with
a
defined‐contribution
(DC)
plans
have

       considerably
greater
incentives
to
delay
retirement.

In
our
analysis
below,
we
term
this
the
“golden

       tennis
court”,
an
adverse
outcome
that
UC
avoids.

These
institutional
benefits
provide
significant

       compensation
to
UC
in
return
for
accepting
investment
risk.


The
Taylor/Yeary/Anguiano
analysis
asserts
that
the
plan
design
Option
B,
which
Segal
estimates
to
have

employer
normal
cost
of
9.0%,
appears
uncompetitive
when
compared
with
a
9.0%
employer
contribution
DC

plan,
and
uses
this
as
an
argument
to
discredit
the
total
remuneration
study.

If
the
Segal
5.5%
salary
growth

figure
is
correct,
then
the
total
remuneration
study
does
understate
the
value
of
UCRP
to
employees.

We

suspect
that
using
a
5.5%
salary
growth
assumption
in
the
total
remuneration
study,
and
bringing
UC
salaries

up
to
competitive
levels,
would
result
in
Option
B
being
valued
as
roughly
competitive.

On
the
other
hand,
if

the
Hewitt‐Mercer
salary
growth
figure
is
correct,
then
Option
B
is
uncompetitive,
even
after
closing
the
UC

salary
lag,
and
its
normal
cost
is
significantly
lower
than
estimated
by
Segal;
holding
employee
contributions

constant,
it
would
cost
UC
significantly
less
than
the
estimated
9.0%
employer
normal
cost.

There
is
no
great

mystery
here.


Even
if
the
Segal
5.5%
salary
growth
assumption
turns
out
to
be
correct,
so
that
Option
B
turns
out
to
be

competitive,
the
proposed
Option
A
remains
uncompetitive
for
all
employee
groups.

Nonetheless,
several

members
of
the
Steering
Committee
advocate
adoption
of
Option
A.


Taylor/Yeary/Anguiano
indicate
that
they
“could
find
no
simple,
widely
accepted
methodology
that
addresses”

the
appropriate
risk‐adjustment,
but
that
their
three
approaches
are
“accepted
by
certain
pension
experts
we

spoke
with
as
valid.”


The
first
phrase
speaks
for
itself.

Unfortunately
Taylor/Yeary/Anguiano
fail
to
cite
the

pension
experts
to
whom
they
refer
or
any
work
that
supports
the
application
of
their
analysis.




Taylor/Yeary/Anguiano
assert
that
the
7.5%
discount
rate,
recommended
by
Segal,
and
which
all
three
firms

bidding
to
produce
the
total
remuneration
study
would
have
used,
is
inappropriate,
and
they
argue
instead
for

a
risk‐free
rate
over
a
fixed
fifteen
year
term.

This
same
recommendation
was
made
in
the
highly
publicized

recent
term
project
by
a
group
of
Masters
students
at
Stanford,
and
the
two
analyses
share
the
same

misconception
about
risk.

The
Taylor/Yeary/Anguiano’s
analysis
includes
three
proposed
approaches,
two
of

which
we
have
previously
demonstrated
to
be
flawed.

The
third,
newly
proposed,
suffers
from
the
same

problems.



                                                     Page 220
TASK FORCE FINAL REPORT July 2010

The
written
analysis
provided
by
Taylor/Yeary/Anguiano
does
not
address
our
criticism
of
the
approaches
they

have
put
forward.

In
the
next
section
of
this
document,
we
restate
our
criticisms.


In
addition,
we
propose

two
methodologies
measure
the
risk
and
institutional
benefits
that
UC
assumes
in
offering
a
DB
plan.

The
first

focuses
on
the
appropriate
valuation
of
the
benefits
to
employees,
while
the
second
focuses
on
the
risk

adjustments
and
institutional
benefits
already
built
into
the
Total
Remuneration
methodology.

Both
methods

indicate
that
the
7.5%
discount
factor
is
appropriate.


Detailed
Critical
Analysis
of
Taylor/Yeary/Anguiano
Arguments


Taylor/Yeary/Anguiano
suggested
three
approaches
to
valuing
the
benefit
to
employees
from
that
risk‐bearing

role:
an
annuities
approach;
a
Black‐Scholes/option
pricing
approach;
and
a
normal
cost
approach.

We
discuss

these
in
turn.


1.
The
Annuities
Approach


The
Taylor/Yeary/Anguiano
analysis
values
a
DC
plan
by
using
the
accumulation
at
retirement
to
purchase
a

commercial
single‐life
fixed
annuity
at
retirement;
the
payments
from
such
an
annuity
would
be
computed

using
an
interest
rate
of
about
4.5%.

However,
only
a
small
proportion
of
DC
plan
participants
choose
to

purchase
commercial
annuities.

The
vast
majority
keep
their
accumulation
intact
and
invested
within
the
DC

plan,
drawing
it
down
through
the
course
of
retirement.

In
other
words,
retirees’
choices
reveal
that
they

view
a
commercial
annuity
as
an
unattractive
option,
perhaps
because
they
wish
to
take
on
investment
risk
in

order
to
earn
a
higher
return,
or
they
wish
to
leave
a
bequest
to
their
children
or
grandchildren.

In
addition,

we
note
that
TIAA‐CREF,
which
provides
DC
retirement
savings
vehicles
to
employees
of
many
competing

universities,
heavily
markets
variable
annuities
which
provide
retirees
with
protection
against
mortality
risk

(specifically,
the
risk
of
dying
very
old
and
possibly
outliving
one’s
savings)
while
allowing
for
the
higher
rates

of
return
available
in
equities.

Thus,
Taylor/Yeary/Anguiano
value
DC
plans
as
if
retirees
in
those
plans
were

forced
to
make
a
choice
that
the
vast
majority
of
DC
plan
participants
find
unattractive
and
reject.


The
Taylor/Yeary/Anguiano
analysis
is
based
on
one
hypothetical
faculty
member,
who
begins
service
at
age

39
and
retires
at
age
65.

We
have
indicated,
for
several
years,
that
it
is
essential
not
to
base
comparisons

between
DB
and
DC
plans
on
such
a
single
“typical”
employee
profile,
as
the
results
will
be
unrepresentative

of
the
experience
of
all
employees.

DC
plans
are
worth
more,
early
in
the
career
(due
to
the
compounding
of

interest
over
a
large
number
of
years
until
retirement);
indeed,
the
DC
contribution
from
an
Assistant

Professor’s
first
year
of
employment
will,
with
accumulated
earnings,
typically
contribute
more
dollars
at

                                                      Page 221
TASK FORCE FINAL REPORT July 2010

retirement
than
the
DC
contribution
from
the
last
year
of
employment
as
a
full
Professor.

By
contrast,
DB

plans
accumulate
more
of
their
value
later
in
the
career.

It
is
highly
misleading,
as
a
result,
to
compare
two

dissimilar
plans
based
on
any
one
year
and
any
one
hypothetical
employee.

The
Taylor/Yeary/Anguiano

analysis
omits
the
portion
of
the
career
when
the
DC
plan
accumulates
most
value,
and
focuses
solely
on
the

portion
of
the
career
when
the
DB
plan
accumulates
most
value.

The
total
remuneration
study
correctly

averages
over
the
entire
population
of
UC
employees.


2.
The
Black‐Scholes/Option
Value
Approach


The
first
version
of
the
Taylor/Yeary/Anguiano
analysis
using
the
Black‐Scholes
method
contained
a
number
of

elementary
errors
that
indicated
a
serious
misunderstanding
of
option
pricing.9

The
present
version
corrects

the
errors,
but
their
argument
still
reduces
to
the
argument
of
the
Stanford
graduate
student
study,
disguised

in
a
phony
layer
of
sophistication.







    1. The
Taylor/Yeary/Anguiano
analysis
assumes
that
UCRP
holds
its
current
portfolio,
but
then
purchases

        a
put
option
and
sells
a
call
option
on
that
portfolio,
in
order
to
eliminate
the
investment
risk
on
a

        specific
date
exactly
15
years
from
today.

They
correctly
compute
the
net
cost
of
buying
a
put
and

        selling
a
call
on
the
UCRP
portfolio
as
$542M.

Taylor/Yeary/Anguiano
seem
unaware
of
an
elementary

        relationship
for
options
know
as
put‐call
parity.

If
a
portfolio
contains
one
share
of
a
stock
at
price
S,

        along
with
a
put
on
the
stock
at
exercise
price
X
and
expiration
date
T,
and
is
also
short
a
call
on
the

        stock
at
the
same
exercise
price
and
date,
the
portfolio
at
date
T
is
worth
exactly
X;
the
value
of
this

        portfolio
today
must
be
exactly
X,
discounted
back
to
today
at
the
risk‐free
rate.

This
does
not
depend

        on
the
Black‐Scholes
model
at
all.

Taylor/Yeary/Anguiano
are
simply
computing
the
normal
cost
of

        UCRP,
assuming
that
the
UCRP
pension
portfolio
were
invested
entirely
in
15‐year
Treasury
bonds

        paying
a
risk‐free
rate
of
4.5%;
it
is
the
analysis
done
by
Stanford
graduate
students
in
elaborate

        disguise.

The
calculation
via
Black‐Scholes
simply
obscures
this
fact,
disguising
it
in
a
phony
layer
of

        sophistication.

    2. Because
Taylor/Yeary/Anguiano’s
calculation
replicates
the
argument
of
the
Stanford
graduate
student

        study,
it
suffers
all
of
the
flaws
of
that
study:

             a. When
UC
last
bid
the
total
remuneration
study,
none
of
the
three
finalist
bidders
proposed

                 using
a
risk‐free
rate
in
valuing
the
pension
benefit.

All
three
used
an
estimated
rate
of
return


9
 
For
example,
they
asserted
the
Black‐Scholes
value
of
a
particular
call
option
was
approximately
$500,000,
when
the
correct
figure

is
approximately
$390,000,000.

                                                              Page 222
TASK FORCE FINAL REPORT July 2010

                  on
a
diversified
portfolio
of
equities
and
fixed‐income
securities.

Now
Taylor/Yeary/Anguiano

                  propose
overvaluing
benefits
by
valuing
UCRP
benefits
as
if
they
were
funded
by
investments
in

                  15‐year
Treasury
bonds.

             b. GASB
requires
that
the
unfunded
liability
and
normal
cost
of
UCRP
be
calculated
using
an

                  interest
rate
that
reflects
the
long‐run
return
on
a
portfolio
with
the
actual
asset
allocation
held

                  by
UCRP;
Taylor/Yeary/Anguiano’s
approach,
like
that
of
the
Stanford
graduate
students,
is
to

                  substitute
a
risk‐free
rate
for
the
GASB
rules.


             c. In
the
absence
of
bid‐ask
spreads,
Taylor/Yeary/Anguiano’s
proposed
portfolio
would
perform

                  identically
to
a
portfolio
invested
entirely
in
15‐year
U.S.
Treasury
bonds.10

Taking
bid‐ask

                  spreads
into
account,
the
proposed
portfolio
is
dominated
by
a
portfolio
invested
entirely
in
15‐
                  year
U.S.
Treasury
bonds.

The
analysis
would
suggest
that
the
Regents
direct
the
Treasurer
to

                  replace
UCRP
the
entire
portfolio
in
15‐year
Treasury
bonds,
which
would
be
superior
to

                  Taylor/Yeary/Anguiano’s
proposed
portfolio.

If
the
Regents
were
to
do
so,
they
would
be

                  acting
in
a
way
that
is
clearly
contrary
to
their
own
long‐established
investment
policy.

It
would

                  be
unwise
for
reasons
explained
in
the
Regents’
Investment
Policy,
as
well
as
in
material

                  supplied
on
behalf
of
the
University
to
University
employees
and
retirees,
by
Fidelity

                  Investments.


If
the
University
did
adopt
a
portfolio
of
15‐year
Treasuries,
it
would
be
required

                  under
GASB
to
reduce
its
assumed
rate
of
return
to
4.5%,
which
would
greatly
increase
the

                  unfunded
liability
of
UCRP
and
require
a
dramatic
increase
in
employer
contributions
simply
to

                  amortize
the
unfunded
liability.

In
other
words,
the
“savings”
that
would
be
obtained
by
using

                  this
argument
to
justify
reduced
benefits
would
be
overwhelmed
by
the
additional
cost
to
the

                  operating
budget
of
amortizing
the
unfunded
liability.

If
UCRP
retains
its
present
portfolio
and

                  present
GASB
earnings
assumption,
the
University
cannot
defend
using
a
much
lower
earnings

                  assumption
as
a
justification
for
cutting
benefits
or
increasing
employee
contributions.

It
is
as
if

                  UCRP
were
making
a
DC
employer
contribution,
but
only
offering
a
single
investment
option

                  (15‐year
Treasury
bonds);
a
DC
plan
with
only
that
single
option
would
almost
certainly
not

                  meet
UC’s
obligations
under
federal
law.



             d. UCRP’s
obligations
do
not
come
due
all
at
once
in
15
years;
they
are
spread
over
many
years,

                  and
stock
returns
exhibit
mean
reversion.

This
mean
reversion,
which
is
not
taken
into
account


10
  
It
is
actually
infeasible
to
buy
Taylor/Yeary/Anguiano’s
proposed
portfolio,
which
consists
of
holding
the
UCRP
portfolio,
buying
a

put
on
the
portfolio,
and
selling
a
call
on
the
portfolio,
since
equity
index
options
with
a
15‐year
time
horizon
are
not
currently

traded.



                                                                  Page 223
TASK FORCE FINAL REPORT July 2010

                in
the
Black‐Scholes
Model,
means
that
the
risk
at
a
fixed
horizon
can
to
a
significant
extent
be

                insured
away
when
obligations
are
spread
over
many
years.

             e. The
most
respectable
version
of
the
Stanford
graduate
student
argument
is
that
pension

                obligations
are
“like”
state
government
bonds,
and
so
the
obligation
should
be
discounted
by
a

                rate
“like
the
rate”
on
state
government
bonds.

However,
since
it
would
not
be
appropriate
to

                place
tax‐exempt
bonds
into
a
tax‐deferred
pension
plan,
the
appropriate
rate
would
be
the

                rate
on
taxable
state
bonds,
which
is
more
like
6‐6.5%,
rather
than
the
4.5%
rate
that
might
be

                appropriate
for
15‐year
Treasury
bonds.

Thus,
the
appropriate
interest
rate
here
should
be
6‐
                6.5%,
not
4.5%.

             f. As
we
have
noted,
pension
obligations
share
some
characteristics
of
state
government
bonds,

                but
they
are
very
different
in
other
respects.

The
pension
accumulation
of
a
mid‐career

                employee
declines
by
half
or
more
if
that
employee
is
laid
off
or
quits.

By
contrast,
if
an

                employee
buys
a
state
bond,
he
or
she
can
quit
UC
to
take
another
job
and
suffer
no
decline
in

                the
value
of
that
bond.

For
a
45‐year
old
employee
planning
to
retire
at
age
65,
the
“bond”

                (the
value
of
the
portion
of
his/her
pension
accumulation
related
to
past
service)
earns
8.6%

                interest
annually
if
s/he
remains
at
UC;
the
rate
is
high
precisely
because,
by
continuing
to
work

                at
UC,
the
employee
gradually
unlocks
the
golden
handcuff
over
time.

So
the
interest
rate
on

                these
peculiar
state
“bonds”
is
8.6%,
not
6‐6.5%,
and
certainly
not
4.5%.


3.
The
Normal
Cost
Approach


It
is
difficult
to
sort
out
what
Taylor/Yeary/Anguiano
have
in
mind
here.


They
appear
to
have
calculated

normal
cost
based
on
investing
all
UCRP
assets
at
4.5%.

The
case
against
doing
so
is
overwhelmingly
strong,

and
the
normal
cost
of
24.1%
that
they
derive
from
this
analysis
indicates
why
it
would
be
a
bad
idea.

Since

Taylor/Yeary/Anguiano
do
not
actually
advocate
such
an
investment
policy,
nor
are
we
aware
of
public

pension
plans
that
follow
this
approach,
it
must
be
the
case
that
the
compensation
for
bearing
risk
within
the

plan
is,
in
fact,
adequate.

As
we
have
noted,
the
risk
is
overstated
by
implicitly
equating
it
to
what
one

individual
faces,
or
by
asserting
that
the
plan
must
be
100%
funded
at
a
specific
date
15
years
in
the
future.


But
the
risk
that
remains
is
compensated
for,
by
a
risk
premium
embedded
in
the
plan,
and
by
the
golden

handcuff
and
golden
tennis
court
values.

In
spite
of
this,
Taylor/Yeary/Anguiano
prefer
to
remain
within
the

confines
of
a
highly
imperfect
analogy
between
a
pension
and
an
investment
in
a
single,
state
government
(or

UC)
bond.


                                                      Page 224
TASK FORCE FINAL REPORT July 2010

Taylor/Yeary/Anguiano
also
seem
to
think
that
the
assets
in
the
plan
represent
collateral
to
justify
a
risk‐free

rate.

Since
Taylor/Yeary/Anguiano
emphasize
the
fact
that
these
assets
can
decline
in
value,
it
is
hard
to

accept
this
argument;
they
can’t
have
it
both
ways.
Indeed,
if
the
assets
in
the
portfolio
were
presented
as

collateral
to
an
investment
bank,
that
bank
would
insist
on
marking
the
assets
to
market
each
day.

If
the
value

of
the
assets
declined,
UC
would
be
required
to
post
additional
collateral;
do
Taylor/Yeary/Anguiano
propose

immediately
providing
additional
collateral
to
UC
employees
and
retirees,
now
that
UCRP
is
substantially

underfunded?

Their
argument
ignores
the
fact
that
UC
retirees’
pensions
are
treated
the
same
as
the
claims

of
holders
of
UC
bonds,
and
that
no
rational
investor
would
equate
a
University
of
California
pension
with
risk‐
free
securities
backed
by
the
full
faith
and
credit
of
the
U.S.
government,
regardless
of
the
plan’s
funding

status.

Taylor/Yeary/Anguiano
also
ignore
the
fact
that
other
State
of
California
and
University
of
California

bonds
are
also
secured
by
collateral.

For
example,
bonds
used
to
fund
student
housing
are
secured
by
the

revenues
the
housing
facilities
generate;
general
obligation
bonds
are
secured
by
all
the
University’s
revenues

and
assets,
including
real
estate
in
La
Jolla,
Westwood
and
San
Francisco.

Nonetheless,
taxable
State
of

California
and
University
of
California
bonds
bear
interest
rates
far
above
those
of
Treasury
bonds.

Thus
the

appropriate
risk‐free
rate
must
begin
at
the
long‐term
State
of
California
bond
rate,
in
the
6.0%‐6.5%
range,

and
be
further
adjusted
to
reflect
the
substantial
differences
between
pension
benefits
and
real
bonds.


Their
main
arguments,
in
fact,
seem
to
be
based
on
two
extreme
mischaracterizations
of
our
views.

First,
they

ask
if
a
responsible
investment
professional
would
guarantee
a
6%
rate
of
return
over
15
years
without
risk.


We
certainly
agree
that
none
would.

However,
this
is
not
what
UCRP
guarantees,
so
the
analogy
is
incorrect.


Second,
they
ask
if
the
Steering
Committee
should
report
to
The
Regents
that
there
is
no
investment
risk
in

achieving
a
7.5%
return
forever.

Again,
no
one
has
proposed
this.

They
correctly
note
that
UCRP
lost
over
$15

billion
during
the
recent
financial
meltdown.

They
ignore
the
fact
that,
according
to
the
Office
of
the

Treasurer,
UCRP
would
still
be
120%
funded,
had
the
University
not
chosen
to
finance
excessive
growth
for

nearly
two
decades
by
diverting
the
contributions
that
virtually
every
other
public
pension
plan
was
making

into
the
operating
budget.

Taylor/Yeary/Anguiano
note
that
many
of
these
other
plans
are
encountering

various
degrees
of
difficulty.

That
is
certainly
correct,
but
this
fact
bears
little
relevance
to
the
questions

before
us,
and
it
does
not
justify
blaming
risk
for
the
consequences
of
a
contribution
holiday
that
lasted
nearly

two
decades.





                                                      Page 225
TASK FORCE FINAL REPORT July 2010

The
Taylor/Yeary/Anguiano
paper
is
not
based
on
any
accepted
scholarly
or
financial
methodologies,
and

simply
does
not
substitute
for
the
standing
methodology
relied
on
by
the
University
and
presented
to
the

Regents
as
a
sound
approach.


The
Senate’s
Suggested
Alternative


While
the
claim
that
“UCRP
is
just
like
a
government
bond”
is
subject
to
serious
flaws,
the
following
material

attempts
to
work
within
the
structure
suggested
by
Taylor/Yeary/Anguiano
to
outline
an
economist’s

approach
to
such
an
analysis.

Under
this
analysis,
total
remuneration
study
likely
overstates
the
value
to

employees
from
having
a
defined‐benefit
plan
such
as
UCRP.






                                   Comparing
Total
Remuneration
Provided
by



                                Defined
Benefit
and
Defined
Contribution
Plans




                                                 
“Gentlemen
prefer
bonds.”

                                                       ‐‐‐Andrew
Mellon


UCRP
is
a
defined
benefit
plan:
the
payments
due
are
determined
by
a
formula
involving
years
of
service,

HAPC,
and
age
at
retirement.

Taylor/Yeary/Anguiano
have
argued
that
these
benefits
are
therefore
“risk‐
free,”
operating
like
a
government
bond
with
a
known
payout,
and
that
they
should
therefore
be
discounted

in
the
Total
Remuneration
Study
at
the
risk‐free
rate.



A
higher
rate
decreases
the
pension
value
attributed
to

today’s
service,
as
part
of
total
remuneration.

Lowering
the
rate
increases
that
value,
but
also
increases
the

present
value
of
UC’s
future
liabilities.

As
is
the
case
with
a
bond,
the
individual
employee
does
hold
an
asset

that
will
yield
a
stream
of
payments
upon
retirement.

A
few
academics
in
Finance
have
argued
that,
since

pension
benefits
share
certain
characteristics
with
bonds,
they
should
be
valued
like
bonds;
this
is
the

respectable
version
developed
by
Robert
Novy‐Marx
and
Joshua
Rauh
(Novy‐Marx/Rauh)11
of
the
point
of
view

expressed
in
the
Stanford
graduate
student
study
and
by
Taylor/Yeary/Anguiano.

We
agree
that
this
point
of

view
has
some
merit,
but
it
needs
to
be
analyzed
and
applied
carefully,
paying
close
attention
to
the
ways
that

pension
benefits
are
like
bonds,
and
they
ways
they
are
different.


A
central
tenet
of
Finance
is
that
the
valuation
of
a
security
is
determined
solely
by
the
payout
it
provides,
and

in
particular
the
expected
payout
and
the
associated
risk.

Novy‐Marx/Rauh
thus
argue
that
the
method
by

which
a
future
benefit,
whether
a
defined
benefit
pension
or
retiree
health,
is
financed
is
irrelevant
to
the


11
 
R.
Novy‐Marx
and
J.D.
Rauh,
The
Liabilities
and
Risks
of
State‐Sponsored
Pension
Plans,
Journal
of
Economic
Perspectives
4(2009),

191.

                                                               Page 226
TASK FORCE FINAL REPORT July 2010

valuation;
the
valuation
should
depend
only
on
the
benefit
that
will
be
provided.

Thus,
Novy‐Marx/Rauh

argue
that
the
valuation
of
defined
pension
benefits
and
future
contributions
by
the
employer
to
retiree

health
coverage
should
depend
only
on
the
promised
stream
of
payments
and
the
certainty
with
which
they

will
be
paid.


The
goal
of
the
total
remuneration
study
is
to
put
a
value
on
the
benefits
provided
to
employees.

But
that

value
depends
only
on
the
benefits
themselves,
and
the
certainty
(or
lack
of
certainty)
that
UC
will
honor
its

commitments.

In
particular,
it
does
not
depend
on
how
UC
chooses
to
finance
those
benefits,
unless
different

financing
choices
change
the
risk
that
UC
will
fail
to
honor
its
commitments.

Thus,
the
Novy‐Marx/Rauh

viewpoint
is
quite
compatible
with
the
goal
of
the
total
remuneration
study.




The
total
remuneration
study
requires
some
discount
rate
to
determine
the
present
value
to
employees
of

future
benefits.

Hewitt,
in
line
with
industry
standards,
has
chosen
to
use
the
actuarial
assumptions
used
in

determining
the
normal
cost
and
unfunded
liability
of
the
plans.

These
rates—7.5%
for
UCRP
and
5.5%
for

retiree
health—are
determined
under
GASB
rules.

GASB
requires
that
the
discount
rate
on
UCRP
be
the

expected
rate
of
return
on
UCRP
assets,
given
the
current
portfolio
allocation;
since
retiree
health
is
not
pre‐
funded,
GASB
requires
that
a
lower
discount
factor
be
used.


Novy‐Marx/Rauh
argue
that
the
funding
method

is
irrelevant
to
the
valuation
of
the
benefits,
and
the
ideal
goal
in
Total
Remuneration
appears
to
agree,
if
a

valid
methodology
can
be
developed
for
determining
the
appropriate
discount
rates;
that
is
the
challenge
we

face.



To
illustrate
the
distinction
between
employer
costs
and
employee
value,
if
UC
were
to
fully
pre‐fund
the

retiree
health
benefit,
the
discount
rate
for
the
retiree‐health
benefit
would
increase
from
the
current
5.5%
to

7.5%,
reducing
both
normal
cost
and
the
unfunded
liability,
even
though
the
terms
of
the
benefit
itself
did
not

change.

Similarly,
UC
could
decide
to
accept
more
exposure
to
risk
for
the
assets
in
UCRP,
reducing
the
share

of
fixed‐income
securities,
and
anticipate
a
correspondingly
higher
rate
of
return,
reducing
both
normal
cost

and
the
unfunded
liability.

Alternatively,
it
could
choose
to
invest
all
of
the
assets
more
conservatively,
say
by

investing
only
in
Treasury
securities,
but
this
would
substantially
increase
both
normal
cost
and
the
unfunded

liability.

Neither
changes
the
value
of
future
benefits
to
employees,
except
to
the
extent
that
it
alters
the
risk

that
UC
will
fail
to
honor
its
commitments.



We
describe
the
determination
of
the
appropriate
discount
rate,
using
this
framework,
in
several
steps
below.


We
begin
with
a
discussion
of
the
rationale
for
using
a
government
bond
rate,
and
then
turn
to
determining


                                                     Page 227
TASK FORCE FINAL REPORT July 2010

the
appropriate
government
bond
rate.


Then
we
turn
to
the
important
differences
between
defined‐benefit

pensions
and
bonds;
these
differences
require
adjustment
in
the
bond
rate.



Along
with
appropriately

discounting
the
pension
benefit
from
UCRP,
the
method
facilitates
treating
pension
and
retiree‐health

benefits
symmetrically.


   •   The
rationale
behind
discounting
UC
and
other
government
defined
benefit
pensions
at
a
government

       bond
rate:


           o The
underlying
rationale
behind
this
argument
is
based
on
arbitrage,
and
can
be
expressed
as

              follows:
if
two
securities
have
exactly
the
same
payoff,
but
are
priced
differently,
then
there
is

              an
opportunity
for
an
individual
to
make
an
arbitrarily
large
profit
by
selling
short
the
more

              expensive
security
and
using
the
proceeds
to
buy
the
cheaper
security.

Accordingly,
securities

              with
the
same
future
payoffs
must
necessarily
be
priced
identically
today.


Since
government

              pension
benefits
have
equal
priority,
along
with
bond
obligations
and
K‐12
education,
over

              most
other
government
expenditures,
Novy‐Marx/Rauh
argue
that
government
pension

              benefits
must
be
discounted
at
the
interest
rate
on
government
bonds:

we
can
determine
the

              appropriate
discount
rate
for
pension
benefits
in
future
years
using
the
rate
that
applies
to

              government
bonds
of
comparable
maturity,
taking
into
account
the
differences
between

              pensions
and
bonds.


           o Note,
however,
that
there
is
no
market
in
which
an
individual
can
sell
her
UC
retirement

              benefits,
nor
a
market
in
which
one
can
sell
such
benefits
short.

Such
markets
cannot
exist
for

              at
least
two
important
reasons:


                        Federal
law
regulating
pension
plans
protects
an
individual’s
pension
entitlement
from

                         claims
by
creditors.

Thus,
a
contract
in
which
an
individual
promises
to
transfer
her

                         pension
benefits
in
return
for
an
upfront
cash
payment
is
probably
unenforceable.


                        Moral
hazard
and
the
Golden
Handcuff:

The
pension
benefit
earned
to
date
by
a
UC

                         employee
reflects
future
salary
increases,
provided
the
employee
remains
employed
at

                         UC
until
retirement.

If
the
employee
leaves
UC
employment,
the
value
of
the
pension

                         benefits
earned
to
date
plummets.

Because
the
13th
Amendment
to
the
Constitution

                         prohibits
indentured
servitude,
an
employee
cannot
commit
to
remain
employed
at
UC,

                         and
accordingly,
anyone
buying
the
employee’s
accrued
pension
benefits
would
not
be

                                                      Page 228
TASK FORCE FINAL REPORT July 2010

                       willing
to
base
the
payment
on
expected
salary
growth
through
normal
retirement
age.


                       Therefore,
only
employees
intending
to
leave
UC
employment
in
the
immediate
future

                       would
willingly
sell
their
accrued
pension
benefits.

As
a
consequence,
employees

                       planning
to
stay
at
UC
until
normal
retirement
age
cannot
attain
a
fair
payment
for

                       selling
their
pension
entitlement.


         o Thus,
the
underlying
arbitrage
rationale
for
discounting
government
pension
benefits
at
the

             market
interest
rate
on
government
bonds
is
factually
incorrect.

The
two
assets
can
bear
quite

             different
interest
rates
without
creating
an
arbitrage
opportunity.
Thus,
the
strong
assertion,

             made
by
some,
that
the
discount
rate
on
government
pensions
must
be
identical
to
the

             discount
rate
on
government
bonds,
is
wrong.


         o However,
we
acknowledge
that
state
government
defined
pension
plans
bear
significant
risk

             characteristics
in
common
with
state
government
bonds,
and
there
may
be
an
argument
that

             these
common
risk
characteristics
perhaps
should
lead
to
similar
discount
rates.


Even
though

             employees
cannot
sell
their
pension
rights,
we
can
seek
to
determine
a
discount
rate
that
takes

             into
account
the
similarities
and
differences
between
government
pensions
and
government

             bonds.


  •   The
first
step
in
determining
the
appropriate
rate
is
to
note
that
the
government
bond
rate
applicable

      to
UC
defined
benefit
pension
obligations
should
be
the
long‐term
rate
on
State
of
California
bonds:


         o To
the
extent
that
the
UCRP
benefits
are
like
bonds,
they
are
University
of
California
or
State
of

             California
bonds,
not
US
Treasuries.

They
are
not
backed
by
the
full
faith
and
credit
of
the

             United
States
government,
but
by
The
Regents,
with
a
significant
legal
claim
on
the
State
of

             California.

Thus,
the
appropriate
risk‐free
rate
is
the
prevailing
rate
on
long‐term
State
of

             California
bonds,
not
long‐term
US
Treasuries.




         o We
are
addressing
the
Total
Remuneration
study,
which
considers
only
active
employees.


             Active
employees
are,
on
average,
about
15
years
from
attaining
the
normal
retirement
age
of

             65
under
all
the
UCRP
new
tier
plans
under
consideration.

Pension
benefits
are
paid
out
over

             the
period
from
retirement
to
death,
which
occurs
on
average
at
about
80.

Thus,
the
benefits

             considered
under
the
Total
Remuneration
study
are
payable
on
average
about
22.5
years
from

             now;
long
term
bonds
means
20‐30
year
maturity.



                                                    Page 229
TASK FORCE FINAL REPORT July 2010

     • In
addition,
the
government
bond
rate
applicable
to
UC
defined
benefit
obligations
should
be
the
long
‐
        term
rate
on
taxable
State
of
California
bonds.




             o The
Total
Remuneration
study
attempts
to
compare
the
value
provided
in
DB
and
DC
plans.


                 Suppose
we
think
about
an
individual
employee’s
DB
pension
rights
as
if
they
were
to
be

                 funded
by
a
DC
plan.

We
assume
that
the
employee’s
future
career
will
exactly
match
the

                 salary
increases
and
other
actuarial
assumptions
used
in
computing
normal
cost.

Since
we
have

                 agreed
that
the
pension
obligations
are
in
some
ways
like
a
State
of
California
bond,
we

                 imagine
UC
placing
a
State
of
California
bond
equal
in
value
to
the
normal
cost
corresponding

                 to
that
employee,
into
a
hypothetical
DC
plan
each
year.
The
purchase
of
the
bond
would
be

                 funded
by
the
employee’s
contribution
and
an
employer
contribution.

Since
the
hypothetical

                 DC
plan
should
be
treated
as
tax‐deferred,
it
would
not
be
appropriate
for
it
to
hold
tax‐exempt

                 bonds.

Moreover,
pension
benefits
withdrawn
in
retirement
are
taxable,
so
again
tax‐exempt

                 bonds
are
an
inappropriate
analogy.

Thus,
the
appropriate
risk‐free
rate
is
the
rate
on
20‐30

                 year
taxable
State
of
California
bonds,
not
tax‐exempt
bonds,
and
certainly
not
US
Treasuries.




     • The
government
bond
rate
must
be
adjusted
upward
to
compensate
UC
employees
for
UC

        idiosyncratic
risk:


             o Bonds
are
priced
in
a
market
where
investors
are
free
to
buy
a
diversified
portfolio
of
securities,

                 and
in
particular,
they
can
buy
bonds
issued
by
a
variety
of
states.12

UC
bonds
carry
systematic

                 risk
common
to
all
state
government
bonds
issued
in
the
US,
in
the
sense
that
the
fiscal
health

                 of
state
governments
is
correlated
across
states.

UC
bonds
carry
additional
idiosyncratic
risk:


                              California’s
fiscal
circumstances
are
affected
by
factors
specific
to
California,
notably

                               California’s
housing
prices
and
unemployment
rate,
and
political
and
constitutional

                               factors
limiting
California’s
ability
to
raise
revenue
to
match
expenditures.


                              UC
carries
its
own
additional
idiosyncratic
risk,
arising
from
potential
variability
in

                               federal
research
grant
income
and
hospital
net
revenue,
as
well
as
its
position
as
a

                               discretionary
item
in
a
state
budget
which
consists
mostly
of
constitutionally


12
  
While
tax
considerations
may
lead
an
individual
who
desires
tax‐exempt
bonds
to
concentrate
on
bonds
issued
by
her
state
of

residence,
no
such
considerations
affect
the
purchase
of
taxable
bonds.


An
individual
investor
wishing
to
hold
state
bonds
would
be

best
served
by
diversifying
state‐specific
risks,
purchasing
bonds
from
a
number
of
states.



                                                               Page 230
TASK FORCE FINAL REPORT July 2010

                        mandated
programs.

UC’s
failure
to
make
its
Annual
Required
Contribution
to
UCRP

                        makes
it
highly
unusual
among
governmental
pension
plans.

That,
combined
with

                        the
expansion
of
existing
campuses,
and
opening
of
expensive
new
schools
and

                        programs
while
it
is
failing
to
meet
its
obligations
to
UCRP,
creates
substantial

                        concern
about
its
financial
governance.

UC’s
credit
rating
is
currently
higher
than

                        that
of
the
State
of
California,
but
these
factors
create
significant
doubt
about

                        whether
that
rating
is
sustainable.



                       UC’s
idiosyncratic
risk
is
highly
correlated
with
UC
employees’
risk
of
losing

                        employment
income,
either
through
wage
cuts
or
slow
wage
growth,
or
through

                        layoffs.



             o Finance
theory
predicts
that
there
is
a
risk‐reward
trade‐off
for
willingness
to
accept

                 systematic
risk,
but
no
additional
reward
for
accepting
idiosyncratic
risk.

Empirical
work

                 suggests
that
the
conclusions
of
the
theory
need
to
be
tempered,
but
supports
the
view

                 that
idiosyncratic
risk
generally
brings
little
additional
reward.

Thus,
diversification

                 generally
reduces
risk,
while
holding
expected
return
constant.



             o If
the
hypothetical
DC
plan
were
a
real
DC
plan,
the
employee
would
have
the
option
of

                 selling
the
UC
bond
and
using
the
proceeds
to
purchase
a
portfolio
of
the
employee’s

                 choice
which
is
better
diversified
and
better
matched
to
the
employee’s
age,
wealth,
and

                 risk
tolerance.

In
particular,
she
could
replace
the
UC
bond
with
a
broadly
diversified

                 portfolio
of
taxable
state
government
bonds,
resulting
in
a
substantial
reduction
of
risk

                 with
little
or
no
reduction
in
expected
return.

Indeed,
restricting
UC
employees
to
holding

                 UC
bonds
would
clearly
violate
federal
regulations
governing
real
DC
plans.

In
order
to

                 make
the
UC
benefit
comparable
to
that
in
the
real
DC
plan,
there
needs
to
be
an
upward

                 adjustment
in
the
rate
of
return
to
compensate
for
this
idiosyncratic
risk,
especially

                 because
it
is
highly
correlated
with
UC
employees’
employment
income
risk.


  •   The
government
bond
rate
needs
to
be
adjusted
to
take
into
account
the
Golden
Handcuff:


             o If
an
employee
is
laid
off,
or
quits
UC
to
take
another
job,
she
loses
the
benefit
of
future

                 salary
increases
in
the
computation
of
the
UCRP
pension
benefit,
a
dramatic
reduction
in



                                                   Page 231
TASK FORCE FINAL REPORT July 2010

                      the
value
of
the
benefit
attributable
to
service
accrued
at
UC.13

Consider,
for
example,
an

                      employee
who
begins
UC
employment
at
age
30,
whose
pension
is
governed
by
Conclave

                      Options
IIa
or
IIb.14

If
that
employee
leaves
UC
at
age
50,
the
value
of
their
20
years
of

                      service
credit
is
reduced
by
56%,
equivalent
to
2.2
years
of
salary.

For
every
age
between

                      48
and
57,
the
loss
amounts
to
more
than
2
years’
salary;
it
exceeds
one
year’s
salary
at

                      every
age
between
38
and
62.


                  o The
total
remuneration
study
takes
into
account
the
number
of
people
who
are
expected

                      to
leave
UC
employment
at
each
age.




                             However,
it
does
not
take
into
account
the
risk
that
a
given
employee
will
be
one
of

                              the
ones
who
leaves,
because
of
a
layoff,
or
family
circumstances
requiring
a
move,

                              or
a
variety
of
other
reasons;
in
order
to
make
the
UC
benefit
comparable
to
that
in

                              the
real
DC
plan,
there
needs
to
be
an
upward
adjustment
in
the
rate
of
return
to

                              compensate
for
the
lack
of
portability
in
UCRP
and
the
risk
that
an
employee
will

                              need
to
leave
UC
employment.



                             In
addition,
the
Total
Remuneration
Study
does
not
take
into
account
the
number
of

                              people
who
would
prefer
to
leave
to
take
a
better
job,
but
find
they
cannot
afford
to

                              do
so
because
they
would
forfeit
too
much
pension
value.

This
is
a
direct
cost
to

                              those
employees
who
are
forced
to
stay
at
UC
to
preserve
their
pension
rights,
and
a

                              direct
institutional
benefit
to
UC
in
retention.

In
order
to
make
the
UC
benefit

                              comparable
to
that
in
the
real
DC
plan,
there
needs
to
be
an
upward
adjustment
in

                              the
rate
of
return,
recognizing
the
individual
loss
and
institutional
benefit
of
the

                              Golden
Handcuff.


     •   The
total
remuneration
study
does
not
take
into
account
the
Golden
Tennis
Court
provided
to
faculty

         by
DC
plans:




13
   
Current
UCRP
terms
provide
an
Inactive
COLA
equal
to
the
lesser
of
2%
or
inflation
each
year
between
the
time
an
employee

leaves
UC
employment
and
the
time
of
retirement.


The
Inactive
COLA
has
been
removed
from
all
new
Tier
options
being

considered
by
the
PEB
Task
Force.



14
   
These
two
proposed
plans
are
modified
versions
of
the
current
UCRP,
removing
various
options
and
shifting
the
maximum
age

factor
from
60
to
65.

II(a)
has
a
maximum
age
factor
of
2.25%
and
II(b)
has
the
same
maximum
age
factor
as
UCRP,
2.5%.


                                                           Page 232
TASK FORCE FINAL REPORT July 2010

                   o UC
and
its
Comparison
8
comparators
are
all
research
universities.

Faculty
are
expected
to

                        perform
outstanding
research
that
is
highly
acclaimed.

They
are
also
expected
to
be

                        outstanding
teachers,
but
their
teaching
obligations
are
significantly
lower
than
at

                        institutions
focused
primarily
on
teaching.

While
research
productivity
holds
steady
or

                        increases
with
age
in
a
few
disciplines,
and
in
some
individuals
regardless
of
discipline,
by

                        and
large
research
productivity
declines
with
age.

A
faculty
member
whose
research
has

                        slowed
will
receive
at
most
modest
salary
increases.

In
a
DB
plan,
once
the
employee
has

                        attained
the
maximum
age
factor,
working
an
additional
year
results
in
at
most
a
very

                        modest
increase
and
in
some
case
an
actual
decrease
in
the
employee’s
annual
pension

                        payment,
while
the
employee
forfeits
one
year
of
pension
payments:
the
incentive
to

                        retire
is
therefore
quite
strong.

By
contrast,
in
a
DC
plan,
the
time
required
for
teaching

                        alone
leaves
lots
of
time
for
the
tennis
court
and
golf
course;
teaching
an
additional
year

                        draws
a
full
salary,
plus
an
employer
DC
contribution,
and
preserves
the
full
DC

                        accumulation,
plus
any
additional
earnings;
there
is
virtually
no
incentive
to
retire.

Two
of

                        the
Comparison
8
universities
offer
two
years
of
salary
as
an
incentive
to
faculty
to
retire

                        by
age
70;
while
these
incentives
are
funded
on
a
pay‐as‐you
go
basis,
the
normal
cost
if

                        they
were
prefunded
would
be
approximately
3.75%
of
salary.

Other
universities
offer

                        such
buyouts
on
a
case‐by‐case
basis.15

These
buyouts
are
not
considered
in
the
Total

                        Remuneration
study.

Because
it
offers
a
DB
plan,
UC
has
no
need
to
offer
retirement

                        incentives.

The
DB
plan
thus
offers
a
valuable
institutional
benefit
in
inducing
faculty
to

                        retire
when
the
time
is
right.

In
order
to
make
the
UC
benefit
comparable
to
that
in
the

                        real
DC
plan,
there
needs
to
be
an
upward
adjustment
in
the
rate
of
return,
either
by

                        valuing
the
retirement
incentive
plans
offered
by
DC
competitors,
or
by
valuing
the
option

                        that
faculty
in
DC
plans
have
to
keep
drawing
their
fully
salary
even
though
their
research

                        has
slowed,
while
giving
up
none
of
their
DC
pension
accumulation.




15
   Note
that
it
is
irrelevant
for
total
remuneration
whether
all
Stanford
and
Yale
faculty
exercise
the
option
to
retire
with
two
years’

salary,
and
also
whether
all
comparators
offer
this
option.

The
point
is
that
the
option
to
delay
retirement
has
value
to
faculty,
and

the
Stanford/Yale
buyouts
provide
an
indication
of
the
magnitude
of
this
option
value.

The
Stanford
and
Yale
faculty
who
do
not

take
the
buyout
will
presumably
continue
to
draw
salary
until
age
75,
80
or
older,
which
is
even
more
costly
to
Stanford
than
the

buy‐out,
unless
we
believe
all
of
these
faculty
remain
at
top
research
form
throughout
their
eighth
decade.
While
we
are
not
aware

of
buyouts
for
staff,
DB
plans
do
create
the
notion
of
a
targeted
retirement
age.

Some
staff
would
presumably
also
delay
their

retirements,
in
a
DC
environment;
thus,
even
if
the
buyout
does
not
exist,
there
may
be
institutional
benefits
from
UCRP
and
the

incentive
to
retire
that
it
creates.
                                                                Page 233
TASK FORCE FINAL REPORT July 2010

•      The
retiree
health
valuation
must
be
adjusted
to
take
into
account
the
probability
that
UC
will

       terminate
or
further
reduce
those
benefits:


                o If
one
accepts
the
Novy‐Marx/Rauh
point
of
view,
it
follows
that
one
must
also
value

                    retiree
health
by
the
long‐term
California
taxable
bond
rate,
adjusted
to
take
into
account

                    the
fact
that
the
Regents
can
alter
the
terms
of
the
retiree
health
program,
and
likely
could

                    legally
terminate
it
at
any
time.

The
market
value
of
a
bond
in
which
the
issuer
can
legally

                    refuse
to
pay
is
zero.

Thus,
the
Novy‐Marx/Rauh
analysis
indicates
that
UC’s
retiree
health

                    program,
and
similar
nonguaranteed
programs
of
our
competitors,
must
be
valued
at
zero.




                o In
spite
of
this
obvious
symmetry,
Taylor/Yeary/Anguiano
analysis
does
not
propose
any

                    adjustments
to
the
valuation
of
the
retiree‐health
benefits
in
the
Total
Remuneration

                    Study.




                o Any
assessment
of
the
likelihood
that
UC
will
terminate
its
retiree
health
benefits
is

                    speculative
at
best.

Certainly,
pre‐funding
the
benefit
would
increase
the
probability
that

                    the
benefits
would
actually
be
paid.


                o However,
any
reasonable
determination
of
the
discount
rate
for
retiree
health
benefits

                    under
the
Novy‐Marx/Rauh
analysis
must
necessarily
be
substantially
higher
than
the
rate

                    on
long‐term
California
bonds.

Since
retiree
health
is
currently
provided
to
retirees
as
a

                    nontaxable
benefit,
it
would
be
appropriate
to
use
interest
rates
on
long‐term
tax‐exempt

                    California
bonds.



Summary
and
Conclusions


The
PEB
Task
Force
was
not
formed
because
UC’s
benefits
are
too
generous;
UC’s
problem
is
not
normal
cost.


The
Task
Force
was
formed
because
of
large,
unfunded
liabilities
for
both
pensions
and
retiree
health.

It
is
the

failure
to
pre‐fund
retiree
health,
and
the
failure
to
adequately
pre‐fund
UCRP,
that
is
responsible
for
these

liabilities.

In
particular,
the
risk
to
the
employer
inherent
in
a
DB
Plan
is
the
not
reason
for
the
current

unfunded
liability.

As
noted,
the
Office
of
the
Treasurer
has
calculated
that,
had
we
contributed
normal
cost





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TASK FORCE FINAL REPORT July 2010

each
year
rather
than
suspending
contributions
for
nineteen
years,
UCRP
would
have
been
120%
funded
as
of

6/30/09.16


UCRP
has
been
more
than
competitive
only
because
they
have
been
provided
to
employees
for
free,
with
no

employee
contribution.

With
a
5%
employee
contribution,
UCRP
is
slightly
uncompetitive
for
faculty.17


The

proposed
Option
A
is
uncompetitive
for
virtually
every
employee
group,
even
after
closing
the
gap
in
UC’s
cash

compensation,
and
even
if
one
aligns
the
assumptions
of
the
Total
Remuneration
Study
with
the
actuarial

assumptions
used
in
computing
normal
cost.



The
Taylor/Yeary/Anguiano
analysis
is
simply
incorrect
in
stating
that
the
current
defined
benefit
plan
contains

an
uncompensated
risk
to
the
employer,
or
that
the
total
remuneration
study
is
biased
and
inaccurate

because
it
does
not
take
this
risk
into
account.

Our
analysis
demonstrates
the
flaws
in
asserting
that
a
risk‐
free
discount
rate
should
be
used,
by
false
analogy
to
Treasury
bonds.

A
correct
application
of
the
argument

in
Novy‐Marx
and
Rauh,
which
we
provided,
indicates
that
the
appropriate
benchmark
discount
rate
is
the

rate
on
long‐term
taxable
California
bonds,
in
the
range
6.25%
to
6.5%.

This
needs
to
be
adjusted
upward
for

various
factors,
notably
the
Golden
Handcuff
and
(for
faculty)
the
Golden
Tennis
Court,
which
will
produce
a

rate
close
to
or
higher
than
7.5%.



Some
administration
members
of
the
Steering
Committee
apparently
believe
that
anything
less
than
a

Draconian
cut
in
the
normal
cost
of
pensions
from
UCRP
is
a
failure.

We
prefer
to
emphasize
that
abandoning

our
commitment
to
preserving
UC’s
excellence
is
a
failure.

An
alternative
pension
plan,
Conclave
II(b),
was

dismissed
by
the
Steering
Committee
and
omitted
from
the
report
because
it
cuts
normal
cost
only
from

17.9%
to
15.1%,
even
though
the
employer’s
portion
of
normal
cost
is
identical
to
Option
B,
only
9%.

It
is
only

1.7%
higher
than
in
Taylor/Yeary/Anguiano’s
preferred
Option
A.

Focusing
on
total
normal
cost,
rather
than

the
employer’s
share,
simply
limits
employee
options.

UC
should
not
care
if
employees
would
prefer
higher

employee
contributions
and
better
benefits,
if
there
is
no
effect
on
employer
normal
cost.

And
insisting
on

abandoning
the
total
remuneration
study
methodology,
to
defend
an
additional
1.7%
reduction
in
employer

costs,
seems
like
the
very
definition
of
penny
wise
and
pound
foolish:
what
isn’t
paid
out
immediately
in

higher
salaries,
to
compensate
for
uncompetitive
benefits,
will
instead
be
evident
in
UC’s
inability
to
recruit

and
retain
the
best
faculty
and
staff.



16
     UCOP Human Resources and Benefits, Spring 2010 Post-Employment Benefit Forums Materials.
17
 Hewitt Associates and Mercer Human Resources, 2009 Update of UC Total Remuneration Study for Campus and
UCOP and Medical Centers, October 1, 2009.
                                                  Page 235
TASK FORCE FINAL REPORT July 2010




                                                           APPENDIX T
                                        Finance Work Team Materials
     December 9, 2010 – Perspectives on Pension and Retiree Health Obligation Bonds -
      http://universityofcalifornia.edu/sites/ucrpfuture/files/2010/08/peb_ax_t-1_perspectives-pension-obligation-bonds.pdf




                                                                  Page 236