Home » Welcome to the Third World » Welcome To The Third World, Part 5: Higher Education Goes Broke

Welcome To The Third World, Part 5: Higher Education Goes Broke

by John Rubino on June 22, 2012 · 24 comments

Not all that long ago, most college campuses were pleasant but somewhat austere places where kids without much free cash learned from modestly-paid (but dedicated and respected) professors. Then came the credit bubble, which allowed universities to put up modern buildings and hike pay and benefits, all paid for with state aid, student loans (which now exceed credit card debt), and unfunded pension promises. Today, a typical high-end state school resembles a futuristic utopia, with a pro-caliber sports stadium, a massive rec center with new exercise gear to the horizon, and professors and administrators who are paid like corporate executives.

Now it’s all falling apart, with California, of course, leading the way:

Soaring UC pension costs raise pressure for more cuts, tuition hikes

SAN FRANCISCO – The cost of pensions and retiree health benefits is soaring at the University of California, increasing pressure to raise tuition and cut academic programs at one of the nation’s leading public college systems.

The 10-campus system is confronting mounting bills for employee retirement benefits even as it grapples with unprecedented cuts in state funding that have led to sharp tuition increases, staff reductions and angry student protests.

The UC system, including medical centers and national laboratories, is scrambling to shore up its pension fund as it prepares for a wave of retirements and tackles a roughly $10 billion unfunded liability.

The UC Retirement Plan’s huge deficit was created by investment losses during the global economic crisis – and the nearly two decades when campuses, employees and the state did not contribute any money toward pensions.

“The regents made a serious error and the Legislature made a serious error by not putting money aside for 19 years while accumulating this obligation,” said Robert Anderson, a UC Berkeley economist who chairs the system’s Academic Senate. “Now we have to pay for it.”

The UC system faces spiraling pension costs for 56,000 current retirees and an additional 116,000 employees nearing retirement.

As of May, there were 2,129 UC retirees drawing annual pensions of more than $100,000, 57 with pensions exceeding $200,000 and three with pensions greater than $300,000, according to data obtained by The Associated Press through a state Public Records Act request.

The number of UC retirees collecting six-figure pensions has increased by 30 percent over the past two years, according to Californians for Fiscal Responsibility, an advocacy group that has analyzed UC pension data.

TOP PENSIONER

Topping the list is Marcus Marvin, a retired professor of dentistry and public health at UCLA, who receives an annual pension of $337,000.

If UC President Mark Yudof, 67, serves for seven years, he would receive an annual pension of $350,000 – in addition to regular benefits he accrues through the UC Retirement Plan, according to university documents.

The university caps employee pensions at the IRS limit of $250,000, but that ceiling does not apply to the “supplemental retirement benefits” promised to Yudof.

In the coming year, the university is expected to contribute about $240 million to its retirement fund from a roughly $6 billion core operating budget. That amount is expected to more than double to about $500 million annually by 2015-16, according to UC officials.

The university also faces skyrocketing costs for its retiree health care benefits.

The unfunded liability for its retiree health program was $14.6 billion in July 2011. UC is expected to spend $270 million on retiree health care this year, and that amount is expected to rise significantly over the next several years, according to UC documents.

While UC seeks to pay its retirement bills, the system is wrestling with the loss of $750 million in state funding this past year. And it could lose an additional $250 million in the coming academic year if voters reject Gov. Jerry Brown’s tax initiative in November.

To offset state cuts over the past three years, UC has repeatedly raised tuition, cut academic programs and student services, reduced its workforce, and increased enrollment of out-of-state students who pay three times more than California residents.

In July, the university’s board is expected to consider another tuition increase for the coming school year. Under one scenario, in-state tuition would increase by 6 percent to $12,923, roughly double what students paid five years ago.

Without a substantial boost in state funding, UC will need to find other ways to raise revenue or cut costs to pay for promised retirement benefits, officials said.

‘SIGNIFICANT CHALLENGE’

“This is a very significant challenge to the UC system,” said UC Executive Vice Chancellor Nathan Brostrom.

UC officials want the state to make pension contributions, as it does for the California State University and California Community Colleges systems. But the state, facing its own financial problems, hasn’t provided money for UC pensions for more than 20 years.

UC Irvine student Traci Ishigo said she also wants the state to help cover the UC’s escalating pension costs.

“Students shouldn’t have to compromise any more on the quality of our education,” Ishigo said. “I don’t want to see the regents make any decisions where they have to place more burden on the backs of students to cover the rising pension costs.”

Similar stories are playing out across the country as public pensions overwhelm the budgets of city, state and federal governments grappling with a surge of retirements, stock-market declines and years of mismanagement and underfunding.

“It’s pretty clear what happens when you don’t pay your bills for a long time. They eventually catch up with you,” said Jeffrey R. Brown, a finance professor at the University of Illinois at Urbana-Champaign who researches pension issues.

For years, the UC system has used its generous retirement benefits to attract and retain talented employees and professors willing to accept lower salaries in exchange for a secure retirement.

Employees can begin collecting pensions at age 50 and receive maximum benefits at age 60. Pensions are based on the average of their three top-earning years, and employees who work 40 years receive annual pensions equal to 100 percent of that amount.

“Maintaining the defined benefit is very important to maintaining the success of the University of California,” said Daniel Simmons, a retired UC Davis law professor who previously chaired the system’s Academic Senate.

SUSPENDED CONTRIBUTIONS

The roots of UC’s pension problems began more than two decades ago when administrators decided to suspend contributions. The pension fund appeared to be overfunded, and the cash-strapped state was cutting UC funding.

University administrators finally took action to address its ballooning retirement obligations in 2010 after stock market losses in 2008-09 left the UC retirement fund dangerously underfunded. UC and its employees resumed making payments to the UC Retirement Plan in 2010, with contribution amounts steadily increasing each year.

The university system is increasing the retirement age for future employees by five years, which will reduce the amount UC subsidiaries will need to contribute for pensions.

UC is also aiming to rein in costs for its retiree health program by raising the eligibility age and reducing the percentage of the insurance premiums it covers.

“If we were to kick the can down the road even further, the problem would get even worse and future generations would have to take even more draconian measures,” Brostrom said.

Some Thoughts
Like (apparently) most public sector pension systems, the University of California’s required decades of delusion and lies to produce today’s disaster. This was not an accident. The people negotiating these deals knew how to read actuarial tables and so had to know that their promises would be broken and the people they were hired to serve would be devastated. What kind of idiot grants open-ended health care benefits to retirees and then doesn’t fund them?

The truly bizarre part of the American higher ed story is that it doesn’t even educate. According to recent studies, the amount of time a typical student spends on class work is falling relative to time spent partying, while achievement — in the form of writing ability and critical thinking — actually diminishes in the final couple of undergraduate years.

In some ways running out of money can be a good thing because it forces the newly-broke individual or institution to see with fresh eyes. Frequently they realize that they’ve been living in a dream world, buying silly things on impulse, and that scaling back to just the essentials actually makes life better. In a family’s case, it might mean ditching extraneous possessions that have to be maintained and paid for, thus freeing up time for human contact. In a university’s case, no longer being able to afford $300,000 pensions and multi-million-dollar rec centers might produce a return to actual teaching.

But of course the pain comes first. In the coming decade fewer kids will be able to attend college, pensions will be cut dramatically, and the easy ride that college has become for both students and employees will end.

  • kopavi

    If one bothers to do a little investigating, you will see that most “state universities” are not state supported. I am most familiar with WSU in eastern Washington State. The state of Washington provides about 5% of the total working budget of the university. I know of several universities which aren’t that lavishly endowed by the state. At least WSU found the money to do a major expansion of their football stadium. Across the nation, state universities are no long “state funded institutions” as much as they are “state located”.
    At least the athletic programs are surviving, after all, what’s more important?
    kopavi

  • eugene12

    Of course, all this is government funded somehow. One can play all the games with numbers they want to but the taxpayer if picking up the fat pensions, the fat benefits and all the rest of the packages being given, and I mean given, to public employees.

    We lost out on education long ago. Sports are the game. No one gives a damn if a graduate can ever write their name. To me, we’re getting exactly what an adolescent, immature and arrogant population deserves. I’m, hopefully, waiting for the day all this simply ends. Whether it ends by choice or catastrophe remains to be seen. My hunch is catastrophe with the spoiled middle class/elite whining all the way.

    • Sue

      Yah, like, several co-ed friends of mine majored in Gender Studies, n’ like, one did a paper on “Gender Norming in the NFL.” It was like, so hard-hitting. The Chinese major in Engineering, etc. We major in “how to be really f’d up and be proud of it.” Its the PhD in “Participating in Our Own Destruction.”

      • Unemployed Engineer

        More Americans would major in engineering if the Federal government would quit flooding the job market with engineers on work visas. Every year for the past 12 years there has been more engineers brought into the country on work visas than new engineering jobs created. The result: many highly skilled, experienced engineers over 40 who, when downsized, are unable to find another engineering position. According to a study published a few months ago, there are 100,000 Americans with engineering degrees currently unemployed and looking for work in their field, another 250,000 Americans with engineering degrees long-term unemployed who quit looking for another engineering position, and 1.4 million Americans with engineering degrees who are working in other fields. Since the 2008 crash, I personally have talked to a dozen people whose sons/daughters who upon graduation with a B.S. degree in engineering could not get one job offer in their field of study. I am one of the many long-term unemployed engineers with a B.S.M.E and an M.S.M.E. – last year a hiring manager at a multinational corporation told me that I should remove my M.S.M.E. degree from my resume if I want to be hired in private industry. There is NO shortage of engineers in the U.S., nor has there been a shortage of engineers in the U.S. since the late 1970s.

  • http://clearbluespace.com Wm of the High Desert

    debt, degreed specialists of the absurd, and expansive gdp’s meet the brick wall of finite resources now or soon; hope it doesn’t kill us off in a grotesque overshot like rats in a feast/famine experiment

    • Sue

      I believe my co-ed friend’s degree she will be able to go to the edges of the universe! (yah, like, so cool)

  • http://www.runtogold.com Trace Mayer

    And you did not even get to the endowment issue. The endowments are littered with overvalued illiquid assets while any assets which are actually worth something are often liquidated to cover the tremendous cash burn rates. Thus, fairly soon, next 3-5 years, I think the institutions are going to experience major cash-flow problems and that will force serious austerity if not outright bankruptcy of many institutions of higher education. Higher education is about to get a complete overhaul as a result of market forces.

  • Jason Carter

    “Maintaining the defined benefit is very important to maintaining the success of the University of California,”

    How about a 401k like the free-market underclass must deal with? Taxpayer backed loans to anyone who wants an education has the unintended consequences of increasing tuition prices and creating fat-cat universities. What high-paying jobs are these students able to land without moving to Singapore to help them pay off their overpriced education? I see the taxpayer covering the future wave of student loan defaults. I worked with a pharmacist who payed for his tuition in full by working during the summer as a technician in the 60′s. Now, not even a summer stint as a pharmacist can pay for pharmacy school but the campuses are more impressive looking.

  • http://ThisBloodlessLiberty.com David M Zuniga, P.E.

    John, what you refer to as UC’s “decades of delusion” have been *centuries* of delusion in academe; in government K-12 as much as private schools — even the toney prep schools — and in higher education.

    The kernel: the Internet has ushered in a new world not only for business (as mega-corporations have discovered, while tiny startups clean their clock and steal their customers) but for education, journalism, music and other entertainment, the travel (and thus hospitality) industry — and as we will increasingly see, for governments. This is a new world; the academy is now wherever an electronic device may be found. This ratchet only works one way, and there is no going back to the hallowed Groves of Academe.

    That business model is dead. This is a new world — and of course this news has been trumpeted in the eLearning departments for well over a decade now.

    Even beyond that megatrend, however: several obvious characteristics of humanity perpetually escape “higher education”, which makes the institution rather ironic.

    First, for at least the past 2,500 years it has been axiomatic that the majority of inhabitants of any society are relatively illiterate and inert. Whether by choice or constitution, they’re incapable of thinking with any regularity above the level of clothed primates. These are the ubiguitous ‘masses’ common to all societies since time-out-of-mind. America is not immune to this reality; most people are not academicians — thus not high school material, much less are they college material. This has been well known since at least Thomas Jefferson’s essays on the subject.

    Second, those who *are* ‘college material’ are disposed to lifelong learning, rather more than to earning degrees or certificates.

    Third, the person today who seeks an undergraduate degree can obtain that degree, usually with the best professors available in a given field, for a tiny fraction of the cost of attending on-campus classes. They pay no fees, no campus housing or food programs, etc; they buy very few materials other than used books online.

    The home-schooling cohort of 2 million plus Americans pioneered this new path to education, but post-secondary students have been catching up quickly. Almost every conceivable undergraduate degree may now be obtained while studying right from home — thus able to hold a job simultaneously — and for a tiny fraction (as little as 2%) of the cost of tuition, housing, and other fees attending on-campus collegiate life.

    Fourth, the list of post-graduate programs available online (with only very minimal, token attendance on campus) is growing daily. Well over 50% of available Masters and Doctoral programs via U.S. universities are available online.

    All of this is very bad news for the college industry and all of its parasitical symbiotes, even as homeschooling bodes ill for K-12 institutions with expensive campuses and staffs.

    Delicious irony, that government institutions so enamored with Mr. Darwin’s theories, are so astoundingly slow to smell the tar oozing about their necks.

  • http://ThisBloodlessLiberty.com David M Zuniga, P.E.

    In other words, John, I disagree with the “Third World” trope as relates to education. In fact, the Internet has rendered an excellent liberal arts education (or any other sort) more available than ever, to more citizens than ever in the United States.

    It should have been self-evident that an economy defined by corporate drone citizens working for multinational corporations, while consuming the wares of foreign producers, would be unsustainable. Americans should not expect to maintain forever our incredibly high average standard of living that we enjoyed for the past century, as long as most of us work in a cubicle, have a mortgaged home, two car notes, credit cards with which we buy more than 50% imported goods, etc… The numbers don’t work; not for long, at any rate.

    I suspect that millions of Americans will advance in their use of technology while retrenching to more ‘closed economy’ models: self-employment and small family businesses, buying locally or U.S.-made goods, far less use of credit, etc.

    Far from being harbingers of the Third World, these would suggest a return to sanity, at last.

  • Andrew Trupin

    I am a full professor of Physics at a state college in Florida and my salary is
    $54,000 per year. I have taught since 1983. Now, what corporate executive makes that salary?

    • http://Thisone OBSERVER

      Now, add in your pension, your health care, your sabatical pay, you paid trips for “continueing education”, free tuition for your children, and all other discounts the college give you.

      Now, what is your total, Mr. Physics?

    • Goldman

      How many days do you work …..your salary doesn’t seem to match up with the Salary information for the Pallm Beach State College where an Andrew Trupin works – lets keep in mind the insanity that teachers and professor whom work 168-185 days of the year expect to be paid the same annual salary as working stiffs who work 300 days / year in private industry. There is no financial feasible way to support this long term,Here is PAy scale for all jobs at at Palm Beach State College……its eye opening http://www.palmbeachstate.edu/documents/Human_Resources/salaryschedule.pdf

  • http://OldHeritageTaxidermy.com Thomas M.

    Funny….Not exactly the hope and change young minds full of mush were looking for. It’s always hordes of progressive attack poodles pissing on the carpets of big oil…or big pharma….or Walmart…..but they never bite the ankles of “big education.” It simply begs the question…why? Answer that and you are on your way to enlightened bliss.

  • Bruce C.

    I don’t know much about the financial details of the educational system here in the US, but just knowing that it is full of “liberals” and is funded or subsidized by the State is really all you need to know.

    Another point I’d like to make is this: I believe the reason so many students are willing to borrow so much and pay so much for a college education is not because they value the knowledge of the curriculum but because they have been told that it is “who you know not what you know” that matters most. They believe that the people they meet and the relationships they forge in school/on-campus will ultimately be the most valuable things for their career prospects. Ironically, all of the corruption and cronyism that exists is a direct result of that mentality and it is self-reinforcing. I believe this is a big reason why on-line educations are perceived to be less valuable than traditional university educations even though they cost less.

    I don’t necessarily agree with this, but I understand it. The truth is that there is always “room at the top” and at least some of the top people in any organization have to be genuinely competent, that true knowledge and competence is always valued even if it is to be manipulated, and in the long run one will do better by relying on his/her own abilities and not favors from others. You can’t fake reality which is why it’s so much more work and so much more fulfilling, and so rare.

    One more thought – related but a bit off topic: One of the most memorable and succinct bits of advice I’ve ever heard from an actual billionaire when asked what he considered to be the surest way to gain wealth was this: Develop your social skills. He didn’t mean learn to BS; he meant manners, honesty, clear communication skills, humor and wit, a sense of ease, confidence, etc. All of those things compose great sales skills which is what ultimately makes the business world go ‘round.

  • Chris M.

    I worked for decades before I cracked the six figure mark in my yearly salary, and this article list just a few of the retired staff who are taking home over $300,000 to NOT WORK. Who negotiated these retirement packages???????

    • http://Thisone OBSERVER

      Unions.

  • http://www.louboutinfrances.com renmendejia ni

    Damier Canvasdu moins il n’en est pas parlé plus tôt dans l’histoire de l’Église. Urbain II, en 1096, donna une Rose d’or au comte d’Anjou. Alexandre III l’envoya

    à Louis-lc Jeune, roi de France, en signe de reconnaissance pour les attentions de ce prince lors du séjour de ce pape en France, ainsi qu’il le dit

    dans la lettre qu’il adressait au roi : « Imitant la coutume de nos ancêtres, de porter dans leurs mains une Rose d’or le dimanche de Lœtare, nous

    avons cru ne pouvoir la présenter à personne qui la méritât mieux que vous, à cause de votre dévotion à l’Église et pour nous-mêmes. »Jean XXIII,

    en 1415, envoya la Rose d’or à l’empereur Sigismond. Martin V, en 1418, adressa cette Rose au même prince. En 1446 elle fut envoyée à Henri YI,

    roi d’Angleterre. Pie II, en 1461, l’envoya à Thomas Paléologue, empereur de Con-stantinople. Henri VIII, roi d’Angleterre, avant(1) Botanique

    historique, p. 164.sa séparation d’avec l’église de Rome, r

    • http://Thisone OBSERVER

      Sounds like French to me……………………..nes pas?

      I hope Ms. Pen cleans up your nation.

  • Gus

    Lots of truth here, but “professors and administrators who are paid like corporate executives.” is more than a little exaggeration. University presidents are, indeed, handsomely compensated, but the annual salary of my alma mater’s president (Big 10 University) wouldn’t is a fraction of the annual bonus of a financial firm’s top salespeople, let alone that of a CEO. Professors in business, medicine and law might make those larger salaries, but its always said about CEOs that you need to offer high salaries as an incentive to draw the best people. Why would it be different for academia? In the humanities, no one makes that kind of money, and in fact, more and more classes are being taught by adjunct faculty who will never be on tenure track and will never sniff $70k, let alone six figures. It’s a different story when you look at coach’s salaries, I’ll give you that.

    • John Rubino

      Gus,

      Yes, another angle of the academia story is the serfdom of a whole generation of post-docs and adjuncts. I wasn’t saying that everyone working at every university is wildly overpaid, but based on the story referenced in this post, it looks like a lot of administrators and tenured profs have cut themselves corporate executive-level deals, and that in the aggregate their six-figure pensions are bankrupting some of their schools and victimizing their students.

      John

  • ja

    Higher Education in CA


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