PD Editorial: Learning from UC’s pension reform plan

California’s cities, counties and public schools are struggling with unfunded pension liabilities, in some instances amounting to billions of dollars.

So is the University of California, which may have set the standard for mismanaging a retirement system with a two-decade “holiday” in which neither employees nor the university contributed a single dollar to the pension fund. No wonder the university’s unfunded pension liability is approaching $10 billion.

UC has taken some small steps to address the problem, including scaling back benefits for employees hired since 2013.

Today, the UC Board of Regents has an opportunity to do considerably more.

Under a proposal by UC President Janet Napolitano, employees hired after July 1 would choose between two options - a hybrid plan that combines a defined-benefit pension and a supplemental defined-contribution savings account, or a straight 401(k)-style plan.

We’ve supported hybrid plans in the past, such as the federal model that combines a traditional pension, a defined-contribution savings plan and Social Security. The three-pronged approach ensures retirement security while limiting the risk to taxpayers.

Gov. Jerry Brown suggested a hybrid plan for state workers in 2012, but he ran into stiff opposition from employee unions and their legislative allies.

UC’s proposal emerged from a political battle last year between Brown and Napolitano, a former governor of Arizona. Napolitano wanted more state funding for the university, Brown wanted a freeze on undergraduate tuition. The result was a $1 billion boost in state funding, including $436 million for the UC pension fund, in return for a two-year moratorium on tuition increases and Napolitano’s promise to restructure the university’s generous retirement program, which supports pensions up to $265,000 a year.

Under the hybrid plan being presented to the regents, pension benefits for new university employees would be capped just as they are for state employees hired since 2013. The cap presently is $117,020 a year. With the supplement savings plan, these employees could boost their annual payout up to the limit set by the Internal Revenue Service. That limit currently is $265,000.

UC would contribute an amount equal to 10 percent of an employee’s salary between the pension cap and the IRS limit, and the employee could contribute up to 7 percent.

The vast majority of UC employees earn less than $117,000 a year, so they would see no difference in their retirement benefits.

Under the straight 401(k) plan, the contribution percentages would be the same, but they would apply to all pay up to the IRS limit. Employees would be vested in a single year, instead of five, which is the vesting period for the hybrid plan. If they change jobs, they can take their retirement savings with them.

This is an eminently sensible approach. It would put UC on a path to fully funding its retirement program, and the benefits are generous compared to what most working people - public or private sector - can count on for retirement. But university employees are opposed, just as other state employees objected to Brown’s proposal to introduce a hybrid retirement system.

The Board of Regents should disregard the objections and approve Napolitano’s plan, which could be a model for further restructuring of public employee pension systems in California.