How to Get Rich by Teaching at UC

By Marc Joffe
January 3, 2017

They may not have won a Nobel Prize, but California taxpayers and students are awarding ten retired University of California professors an attractive consolation prize:  pension benefits amounting to more than $300,000 each per year.

Topping the list of UC pension beneficiaries is Fawzy I. Fawzy, M.D. a Professor of Psychiatry and Biobehavioral Sciences at UCLA. He received over $354,000 in 2014, an amount that will continue to grow each year with cost of living increases. Recently, Dr. Fawzy generously helped his junior colleagues by explaining their compensation and pension benefits in a lecture uploaded to YouTube. His knowledge of the ins and outs of the UC payroll and retirement systems is truly impressive.

UC academic pensions are generous because they are based on high faculty salaries and some unique plan provisions. As we reported earlier this year, many tenured professors receive salaries exceeding $300,000 per year – including some scholars that study income inequality. And, for professors that stay in the UC system long enough, that generous salary can become a lifetime retirement annuity.

The ability to receive a full salary in retirement arises from the UC plan’s higher cap on service credits. Under defined benefit pension plans, employees typically receive a percentage of final salary based on years of service, with the number of service years capped at 30. For example, a nonuniformed city employee might receive 2.5% per year of service, with a maximum of 75% – which is 30 * 2.5%. But in the University of California plan, benefits continue to accrue until the 40th year of service. A professor who retires after age 60 with at least 40 years of service receives 40 * 2.5% or 100% of final compensation.

These generous plan provisions have proven very expensive for students and taxpayers. According to the system’s most recent actuarial valuation, the university’s retirement plan paid $3.11 billion in benefits for the year ending June 30, 2016. These benefit payments were offset by $0.85 billion in employee contributions and $2.52 billion in contributions by the university. With the university reporting total enrollment of 257,000 students, university pension contributions work out to $9800 per student.

This year, the state is contributing $3.51 billion from its General Fund to University of California operations. This taxpayer subsidy could be lowered if the university’s high pensions were capped. Over the long term, there seems to be progress in this direction.

Under a program approved by the Regents in March, University employees hired after July 1, 2016 will only be able to receive defined pension benefits on the portion of their salaries below the state’s PEPRA cap of $117,020.  For the portion of the employee’s salary above this cap, employers and the university will contribute to a percentage of income to a defined contribution plan, like a private 401k plan. The University has implemented this new system for non-union staff but will have to negotiate its terms with represented employees.

If the new benefit system is fully implemented, it may help the university reduce its unfunded pension liability, which has grown to more than $10 billion when measuring plan assets at market value. Between June 30, 2015 and June 30, 2016, the system’s funded ratio fell from 84% to 78%. But it’s probably worse than that, since plan liabilities are likely understated because UC discounts future payments at a rate of 7.25%, its expected rate of return. Actual returns for the 2016 fiscal year were -2.00%.

Finally, even if unions allow the new system to fully take effect, it won’t impact pensions for many years, since it will only affect employees starting this year or after.  Meanwhile, a generation of professors can use Dr. Fawzy’s techniques to maximize their take from UC students and taxpayers.

To find the names of other California public pension beneficiaries receiving $100k or more, please check our new $100k club search engine.

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