With the nation facing historic stock market declines, and California wrestling with a $10 billion budget deficit, Our University interviewed Katie Lapp, executive vice president for business operations, to find out what these big economic issues mean for UC.
Q: Let’s start with the current stock market situation – just how serious is it and what should employees make of it?
A: It is real, and it is serious. Chief Investment Officer Marie Berggren noted in a recent presentation to the Regents that the fiscal year ending June 2008 was the most turbulent since 2002 for the economy and the financial markets, with global equity markets declining 10-15 percent and emerging markets flattening. Marie will be providing an update to the Regents’ Committee on Investments in a couple of weeks, which will reflect activity of the last few months, and that will give us a specific sense of how the recent market turmoil has impacted our investments. Even though we know we’re being impacted, it’s important to view the current market turmoil with a long-term perspective, because markets are constantly rising and falling. For instance, just 12 months ago, we were reporting more than 19 percent in total investment returns for the 2006-2007 fiscal year. People should also keep in mind that we have a well-diversified investment portfolio, which helps to mitigate the impacts of market volatility, and a strong investment team led by seasoned experts who are in close touch with the president, the Regents and me.
Q: Can you provide some specific examples of how UC is being impacted?
A: We’re still sorting through what the financial crisis means for us specifically, but one area we can already see impacts in is the UC Retirement Plan. Like other pension funds, such as CalPERS, which recently reported a more than 20 percent decline in assets in the last three months, the UCRP investment portfolio has experienced declines. Since June 2007, UCRP investments have declined over 24 percent, which includes an estimated decline of 19.6 percent for the current fiscal year. And the decline in assets, combined with the fact that UC pays out $155 million each month in retirement benefits, means that the plan’s funded status has gone down. As of June 30, 2007, UCRP was estimated to be nearly 105 percent funded, compared to 103 percent on June 30, 2008, and as of October 8, 2008, UCRP’s funded status was estimated to be around 100 percent, using what’s called a “smoothed” valuation. This downward funded status trend is why we need to restart contributions – to help keep UCRP strong. That said, I want to also remind people that UCRP is a defined benefit plan and pension benefits are paid independent of investment performance or funded status.
Q: Shifting to what’s going on here in California, what does the current state deficit and this year’s final state budget mean in terms of cuts and impacts for UC?
A: In pure numbers, it means we – the Office of the President and the campuses – will have to find ways to make about $150 million in cuts in order to cope with the state funding shortfall. Campuses will be doing everything they can to keep cuts away from the instructional program, and we at UCOP are taking reductions to help close the gap as well. The governor has just called a special session to look at potential mid-year budget cuts, in light of the continuing problems with the state budget, so it is possible that we will need to make further cuts this year. The good news is that the state’s leaders continue to place a high importance on higher education. There also is a bigger, longer-term issue here: It’s clear we need to strengthen our sources of revenue in order to continue to grow and deliver quality research, education and patient care, and to compensate our people adequately. President Yudof, the Regents, and the rest of UC’s leaders are going to be looking very closely at these issues in the coming weeks and months. We also will be working very hard to be sure that state leaders, and the general public, understand that UC is not merely an expense – it’s an ongoing investment in the state’s well-being and its future. So much of what makes California great – economically, technologically, medically, culturally, – is either generated by or can be traced to UC. And if California is going to grow its way out of this financial downturn, public higher education is going to have to play a critical role.
Q: Salaries for many employee groups are below market, and staff are disappointed that there won’t be raises this year – what can you say about that?
A: We are disappointed too – this is a critical issue for us, and to keeping UC competitive. UC’s faculty and staff are among the most dedicated and talented, and they are the heart of the institution – they deserve to be compensated appropriately for their contributions. We had begun to make some progress over the last few years, but now the state budget situation has slowed our momentum. I think one thing people don’t realize is just how much money goes into compensation and benefits. UC’s annual payroll is approximately $9 billion, which is roughly half of the university’s total operating budget. And this does not include the more than $2 billion UC spends each year for employee medical and retirement benefits. So while we recognize the critical importance of market-level wages and benefits for all employees, getting there requires significant resources. Just to give people some sense of magnitude, raising employee salaries systemwide by 5 percent would cost $400 million. Fortunately, due to a lot of hard work, we’ve been able to maintain good medical benefits and control health insurance cost increases without cutting benefits – something many other employers have been unable to do. Employees can be assured that President Yudof and the rest of university leadership are very sensitive to the need for adequate compensation for faculty and staff, and we will continue to work hard to try to identify resources to continue to make progress toward that goal.
Q: Any final words?
A: Just to remind people that even though times are difficult financially right now, we will get through them. UC is a strong, resilient institution with a lot of very smart and very talented people. I know that people across the university are continuing to do excellent work in the face of a lot of challenges. That good work is recognized and appreciated – it’s inspiring to me, and I feel very lucky to be working with such dedicated and gifted people.
Visit the UC budget impact site to find out what's at stake.