F9
Office of the PresidentTO MEMBERS OF THE COMMITTEE ON FINANCE: ACTION ITEM For Meeting of September 17, 2015
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN – PROPOSAL TO MODIFY THE EMPLOYER CONTRIBUTION RATE FOR THE LAWRENCE BERKELEY NATIONAL LABORATORY SEGMENT
EXECUTIVE SUMMARY
In light of the significantly higher funded ratio of the Lawrence Berkeley National Laboratory (LBNL) Segment of the UC Retirement Plan (UCRP) in relation to the Campus and Medical Centers Segment, and in order to reduce certain contract risks associated with the University’s Management and Operating Contract with the U.S. Department of Energy (DOE) and ensure that LBNL remains competitive with its sister laboratories throughout the United States, LBNL requests that the methodology for determining its UCRP employer contribution rate be modified so that it is commensurate with the LBNL Segment’s funded status (96 percent as of July 1, 2014 on an actuarial value of assets basis). Currently, the LBNL employer contribution rate is set at the same level as the Campus and Medical Centers Segment rate, which is 79 percent funded as of July 1, 2014 on an actuarial value of assets basis. The proposed LBNL employer contribution methodology is consistent with the Regents policy to achieve full funding, and it is anticipated that it will maintain the trajectory for the LBNL Segment to attain 100 percent funding earlier than the Campus and Medical Centers Segment. The proposal will have no impact on the funded status of the Campus and Medical Centers (C/MC) Segment and minimal impact on the funded status of URCP as a whole, because the LBNL Segment represents only about three percent of the total UCRP Actuarial Accrued Liability ($2 billion vs. $60 billion). If the proposed
modification is approved, the Management and Operating Contract will be modified to reflect the new methodology and associated contract risk reduction.
RECOMMENDATION
The President of the University recommends that the Committee on Finance recommend to the Regents that:
A. During a five-year transition period beginning October 1, 2015, the employer contribution rate to the University of California Retirement Plan for the Lawrence Berkeley National Laboratory (LBNL) Segment be set at a rate proportionate to the funded ratios of the LBNL Segment and the Campus and Medical Centers (C/MC)
Segment, determined on an actuarial value of assets basis as of the previous valuation date (July 1, 2014 for the proposed October 1, 2015 rate) as shown in the table below.
B. The proposed employer LBNL contribution rate be made effective as of October 1, 2015, subject to mutually agreed-upon appropriate modification of the Management and
Operating Contract to implement the new rate that will be negotiated under existing authority of the UC Office of the National Laboratories.
LBNL Funded Ratio > C/MC Funded Ratio LBNL Funded Ratio ≤ C/MC Funded Ratio
LBNL Indexed Rate = 𝐶𝐶/𝑀𝑀𝐶𝐶 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 ∗𝐶𝐶/𝑀𝑀𝐶𝐶 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 Under current conditions, LBNL rate would equal 11.5%
C/MC Rate
Current C/MC rate = 14%
BACKGROUND
While the LBNL Segment is similar to the C/MC Segment in that each has active as well as non-active members, the two segments are accounted for and evaluated separately.1 There is only one pension fund for investment and benefit payment purposes. Pension payouts, however, are tracked and charged against each segment’s assets for accounting purposes. For UCRP funding purposes, no other UC location with active members (campus or medical center) is tracked as a distinct segment.
Under the current Regents policy on UCRP funding and the Management and Operating Contract with the U.S. Department of Energy (DOE) to manage LBNL (DOE Contract), the DOE contributes to UCRP at the same employer contribution rate set by the Regents for the C/MC Segment, which is either the total funding policy rate less member contributions or the flat rate determined from time to time by the Regents, which is currently 14 percent of payroll. Since contributions to UCRP were resumed in 2010, DOE has paid this employer contribution regardless of the actual funded ratio of the LBNL Segment.
As of July 1, 2014, the LBNL Segment had a funded ratio of 96 percent (on an “AVA” basis) and 104 percent (on an “MVA” basis).2 By comparison, the C/MC Segment had funded ratios of 79 percent and 86 percent, respectively. UC’s Consulting Actuary for UCRP, Segal Consulting (Segal), estimates LBNL’s employer contribution rate could be reduced to the proposed
contribution rate effective October 1, 2015, and the LBNL Segment would still maintain a trajectory to reach full funding status (on an AVA basis) in the next several years.3
Since 1991, when UCRP assets were initially allocated to the DOE laboratories based on actuarial accrued liability (AAL) for DOE contract accounting purposes, the active member
1 There are four separate and distinct “segments” that comprise UCRP as a whole: the C/MC Segment, the LBNL Segment and the Lawrence
Livermore National Laboratory and Los Alamos National Laboratory (referred to as “Retained Segments”).
2 AVA, Actuarial Value of Assets, represents the value of assets computed by smoothing: market gains and losses over a five-year period. MVA,
Market Value of Assets, represents the market value of the assets as of a specific date.
3 Based on Segal’s proposed actuarial assumptions which include a 7.25 percent market value return per year and 3 percent annual inflation (See
population at the campuses and medical centers has grown significantly faster than the LBNL population. Differences in demographic experience combined with LBNL’s exclusion from some University-sponsored programs (such as one of the Capital Accumulation Provision (CAP) allocations and Voluntary Early Retirement Incentive Programs (VERIPs) that were offered to members at campuses and medical centers) resulted in the higher funded ratio for the LBNL Segment relative to the C/MC Segment.
DOE SCRUTINY AND LBNL COST COMPETITIVENESS
UC manages LBNL under the DOE Contract, which requires that expenditure of all federal funds must be reasonable and allocable to approved activities at the Laboratory. DOE’s scrutiny of fringe benefits expenses has grown significantly over the past several years. LBNL’s high costs are increasingly disparate in DOE’s most recent study of complex-wide contractor benefit programs (see chart below). The DOE Inspector General is now auditing certain fringe benefits across the DOE labs, which may result in pressure to reduce these costs and expose the
University and the Laboratory to the risk of untimely and highly unpredictable contract direction from DOE regarding the University’s systemwide benefit programs, and specifically UCRP. Modifying the LBNL Segment contribution rate to a rate commensurate with its higher funded ratio will significantly mitigate this contract risk.
Retirement Plan Cost (per Participant) for DOE Labs and Contractors Source: DOE Contractor Benefits Metric Study, January 2014
Figure 1. Plot comparing Defined Benefit (DB) retirement plan costs in Dollars Per Participant Per Year (PPPY) for all DOE National Laboratories, plants and sites. LBNL, highlighted by the red arrow, is the bar labeled “SC-Berkeley.” External benchmark shown as yellow line, DOE weighted average as green line.
The proposed modification would give the Laboratory the ability to increase its competitiveness with other multi-purpose DOE Office of Science National Laboratories by reducing LBNL’s overhead expenses by an estimated $7 million in the first 12-month period. Without the proposed change, LBNL is at risk of losing funding from DOE and other sponsors if it fails to address its competitive position by proactively implementing changes to reduce the growth in its cost of doing research.
PROPOSED MODIFICATION TO EMPLOYER CONTRIBUTION RATE FOR LBNL SEGMENT
LBNL UCRP Segment Employer Contribution Rate
Time Period LBNL Funded Ratio > C/MC Funded Ratio LBNL Funded Ratio ≤ C/MC Funded Ratio
LBNL Indexed Rate = 𝐶𝐶/𝑀𝑀𝐶𝐶 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 ∗𝐶𝐶/𝑀𝑀𝐶𝐶 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅
C/MC Rate Current Rates (as of July 1, 2014):
C/MC Contribution Rate = 14%
AVA Funded Ratios: C/MC = 79%, LBNL = 96% C/MC Ratio / LBNL Ratio = 79% / 96% = 82.3%
10/1/2015 – 6/30/2016 11.5% (= 14% * 82.3%) N/A
7/1/2016 – 6/30/2017 TBD based on formula above as of July 1, 2015 C/MC Rate (Est. 14%) 7/1/2017 – 6/30/2018 TBD based on formula above as of July 1, 2016 C/MC Rate (Est. 14%) 7/1/2018 – 6/30/2019 TBD based on formula above as of July 1, 2017 C/MC Rate (Est. 14%) 7/1/2019 – 6/30/2020 TBD based on formula above as of July 1, 2018 C/MC Rate (Est. 14%)
LBNL proposes that effective October 1, 2015, its UCRP employer contribution rate begin to transition from the C/MC Segment rate to ultimately achieve the LBNL Segment funding policy contribution rate (LBNL Segment ARC rate). The LBNL Segment ARC rate is the rate resulting from applying the Regents Policy for UCRP Funding solely to LBNL Segment liabilities and normal cost, less member contributions as of the previous valuation date.
During an initial five-year transition period, provided the AVA funded ratio of the LBNL Segment as of the previous July 1 exceeds the corresponding ratio of the C/MC Segment, the LBNL Segment employer contribution rate would be indexed to the C/MC employer
contribution rate in direct proportion to the C/MC Segment funded ratio divided by the LBNL Segment funded ratio. In any year during the five-year transition period in which the LBNL Segment funded ratio does not exceed the C/MC Segment funded ratio, the LBNL Segment
employer contribution rate would revert to the C/MC rate (see table above).After the initial
transition period and assuming the LBNL Segment funded status progresses as Segal has projected, LBNL is expected to propose that the LBNL contribution rate would transition to the
LBNL Segment ARC rate, irrespective of the relationship of the LBNL Segment funded ratio to the funded ratio of the C/MC Segment.
Based on the July 1, 2014 funded ratios of the two segments and the C/MC Segment contribution rate for UCRP Plan Year 2014-15, LBNL’s contribution rate would equal 11.5 percent through the end of the Plan Year; the contribution rate would be recomputed and be effective for each of the subsequent four Plan Years.
As shown in the chart below, Segal projects that the proposed LBNL contributions would enable the LBNL Segment to maintain a trajectory to full funding in alignment with the UCRP policy on funding, while not generating the large surplus that would be expected if the current
methodology and employer contribution rate were maintained. This projection includes the impact of proposed assumption changes from the UCRP actuarial experience study. For
illustration purposes, the projection assumes that the LBNL contribution rate becomes the LBNL Segment ARC rate after the initial transition period.
Figure 2. Projected UCRP funded ratio based on proposed contribution rate schedule for LBNL. LBNL will continue to fund existing or future liabilities. There is no change proposed to LBNL
member contribution rates and the provision in the current UCRP Funding Policy that requires
the employer rate to be at least as much as the member rate. LBNL’s proposal will have no impact on the funded status of the C/MC Segment. Prior to the end of the initial five-year
90% 95% 100% 105% 110% 115% 120% 125% 130% 135%
University of California Retirement Plan
Funded Ratio Based on Proposed Contribution Rate Schedule for LBNL Segment Using Proposed Assumptions from UCRP Experience Study
Current - Campus/Medical Center Employer Contribution Rates (14% Maximum) Ratio of Campus/Medical Center to LBNL Funded Ratio multiplied by 14% for 5 years, and then LBNL ARC
Uses estimate of actual market value return of 4.5% for 2014/15 and 7.25% per year beginning July 1, 2015
Funde d Rat io ( A ct u ar ial V alu e Basis)
Plan Year Beginning July 1, LBNL active member population headcount assumed to increase 0.7% per year July 1, 2014 UAAL = $89 Million No UAAL
transition period, LBNL and the UC Office of National Laboratories will evaluate relevant conditions (e.g., the LBNL Segment’s funded status and LBNL’s competitive position) and submit a proposal for Regental approval for an LBNL employer contribution rate going forward based on the guiding principles contained in this item.
PROPOSAL IMPACT
The proposed change in the LBNL Segment employer contribution rate will have an immediate and significant positive impact for the University in relation to the DOE Contract, but will have no impact on the retirement benefits afforded to LBNL’s employees. The funded status of the C/MC Segment will continue to be determined under the current UCRP Funding Policy terms. There should be minimal impact to the entire URCP funded status because the LBNL Segment represents about three percent of the total UCRP AAL ($2 billion vs. $60 billion). The proposed change also assures that LBNL remains firmly within the University benefits program, adheres to the Regents’ UCRP funding principles, and funds the LBNL Segment in a financially responsible manner.
Key To Acronyms
AAL Actuarial Accrued Liability ARC Annual Required Contribution AVA Actuarial Value of Assets CAP Capital Accumulation Provision C/MC Campus and Medical Centers DB Defined Benefit
DOE Department of Energy
LBNL Lawrence Berkeley National Laboratory MVA Market Value of Assets
PPPY Per Participant, Per Year
UAAL Unfunded Actuarial Accrued Liability UCRP University of California Retirement Plan VERIP Voluntary Early Retirement Incentive Program
Attachment: Frequently Asked Questions – Proposal to Modify the UCRP Employer Contribution Rate for the LBNL Segment of UCRP
Proposal to Modify the UCRP Employer Contribution Rate for the LBNL Segment of UCRP Frequently Asked Questions
General Information about Lawrence Berkeley National Laboratory (“Berkeley Lab,” “the Lab” or “LBNL”)
1. What is Berkeley Lab?
Berkeley Lab, founded in 1931, is a member of the national laboratory system supported by the U.S. Department of Energy (DOE) through the DOE Office of Science, conducting only non-classified research in the public interest. The Lab is a Federally Funded Research and Development Center (FFRDC) managed for DOE by the University of California (UC). Berkeley Lab brings together staff scientists, engineers, UC faculty, graduate students, postdoctoral researchers, and operations professionals to pursue highly coordinated team science at great scale, enabling the nation to pursue a vital science-based approach to issues of energy and environment.
2. What is Berkeley Lab’s mission and role in the US innovation ecosystem?
From its five National User Facilities to its interdisciplinary research teams, Berkeley Lab conducts the ground-breaking fundamental science that offers transformational solutions to the world’s most urgent energy and environmental challenges, while creating new advanced tools for scientific discovery. Berkeley Lab is the most open, sharing, and connected of the 17 DOE National Laboratories. With more than 10,000 visiting university and industry researchers each year, Berkeley Lab is the destination for one third of all scientists who access DOE User Facilities each year to expand the frontiers of human knowledge.
3. What makes Berkeley Lab unique among DOE National Laboratories?
Berkeley Lab—home to 13 Nobel prizes—is distinguished from its peers in the national laboratory network because of its close partnership with UC Berkeley and the UC system more broadly. Additionally, LBNL is the originator of “team science,” which drives the breadth and originality of its research, and fuels its creativity, risk-taking and sense of social responsibility.
4. What roles do UC and DOE have in the management and operations of Berkeley Lab?
DOE awarded UC the Management and Operations (M&O) contract to operate Berkeley Lab on DOE’s behalf. The M&O contract includes numerous provisions related to management of Lab costs, including employee benefit costs. For Lab costs to be reimbursed by DOE under the M&O contract, costs must be reasonable and allocable to approved activities at the Lab.
Questions on Berkeley Lab’s Proposal to Modify UCRP Employer Contribution
5. Does LBNL’s proposal impact pension funds available for Campuses and Medical Centers?
No. LBNL and the campus/medical centers are two distinct “segments” of UCRP. LBNL’s proposal has no impact on the Campus and Medical Centers Segment.
6. How are LBNL’s UCRP assets treated with respect to accounting, investment, and pension payouts relative to the Campus and Medical Center Segment?
The two segments are accounted for and evaluated separately (per the DOE reporting need and the requirement that federal and state funds not be comingled). Pension payouts are also tracked and paid separately from each segment's assets. LBNL retirees are paid from the LBNL Segment and
campus/medical center retirees are paid from the Campus and Medical Centers Segment. If an employee moves between segments, assets equivalent to the liability also move between segments. The only aspect for which LBNL and campus/medical center UCRP funds are managed together is investment of funds.
7. What methodology is used to determine LBNL’s UCRP segment is nearing full funding? And is that methodology consistently applied to the Campus and Medical Centers Segment?
"Full funding" is defined as having a "funded ratio" as of the valuation date equal to 100 percent or more. Specifically, Funded Ratio = Assets / Actuarial Accrued Liability (AAL). By definition, this formula
incorporates any ‘legacy’ unfunded liability for each distinct segment.
In the annual actuarial valuation conducted by the Regents consulting actuary, Segal Consulting (Segal), each July 1st, a funded ratio is calculated consistently for each UCRP segment based on the assets allocated to that segment (tracked by UCOP) and the AAL for UCRP members assigned to that segment (calculated by Segal). For the LBNL Segment, those members include: 1) current LBNL employees, 2) inactive vested members who separated from service while an LBNL employee, and 3) retirees and eligible survivors who retired as an LBNL employee or inactive vested member.
As of July 1, 2014 the LBNL Segment had a funded ratio of 96 percent on an actuarial value of assets (AVA) basis and, in fact, had a funded ratio of 104 percent on a market value of assets (MVA) basis. Therefore, the segment was already fully-funded on an MVA basis and at 96 percent AVA, was nearing full funding on an AVA basis.
8. What is the funded ratio of UCRP as a whole (including the Campus/Medical Centers, LBNL and the LLNL and LANL “retained” segments) and of the LBNL Segment as of 7/1/2014?
UCRP as a Whole: 80 percent AVA, 87 percent MVA1 LBNL Segment: 96 percent AVA, 104 percent MVA
9. How significant is LBNL’s segment relative to UCRP as a whole as of 7/1/2014?
LBNL’s AAL is $2.0 billion out of $60.4 billion for UCRP as a whole, or 3.3 percent.
10. How did the LBNL Segment get a higher funded ratio than the Campus and Medical Centers Segment?
The active population of UC’s campuses and medical centers grew by 58 percent after 1991, the year when separate accounting for the DOE labs started and all segments initially had similar funded ratios. The active population of LBNL only grew by 10 percent since that time. This was also when UCRP was in a surplus position and the normal costs of the increased amounts of new members at the campus/medical centers locations reduced the surplus faster than at LBNL. Also, some programs (e.g., VERIP and CAP) were offered to campus/medical center employees but not LBNL employees, reducing the Campus and Medical Centers Segment funded ratio, while leaving that of LBNL unaffected.
11. What are current employer and employee contribution rates for UCRP and LBNL?
For both LBNL and the Campus/Medical Centers:
Pre July 2013 hires: Employer: 14 percent, Employee: approximately 8 percent Post June 2013 hires: Employer 14 percent, Employee: approximately 7 percent
12. What is LBNL’s proposal with regard to segment funding?
LBNL proposes that effective October 1, 2015 and for the next five years, provided the corresponding funded ratio of the LBNL Segment exceeds that of the Campus and Medical Centers Segment, the LBNL Segment UCRP employer contribution rate would be indexed to the UCRP Campus/Medical Center contribution rate in direct proportion to the Campus/Medical Center funded ratio divided by the LBNL Segment funded ratio.2 For any year in which the LBNL Segment funded ratio does not exceed that of the Campus and Medical Centers Segment, the LBNL Segment UCRP employer contribution rate would revert
1 The Campus and Medical Centers Segment funded ratios are within one percent or less of the funded ratios for UCRP as a whole.
to (i.e., be equal to) the Campus and Medical Centers Segment rate. Prior to the end of the initial five-year transition period, LBNL and the UC Office of National Laboratories will evaluate relevant conditions (e.g., the LBNL Segment funded status and competitive position) and submit a new proposal for future LBNL Segment employer contribution rates.
13. Does LBNL’s proposal set a precedent for other campuses?
No. The proposal should not set a precedent because the LBNL Segment is distinctly separate from the Campus and Medical Centers Segment. This is required by virtue of the contract with DOE since the LBNL Segment is considered federal funds. For UCRP purposes, no other UC location (campus or medical center) is tracked as a distinct segment.
14. Do the funds committed by the State of California to fund UCRP (i.e., the $436 million) apply to the LBNL segment?
No. State funds do not apply to the LBNL Segment - they can only be applied to the UAAL of the Campus and Medical Centers Segment.
15. What would be the funding impact of the proposal to LBNL’s segment and to the Campus and Medical Centers Segment?
There would be no funding impact to the Campus and Medical Centers Segment. The designed impact of the proposal on the LBNL Segment is that it would still reach a 100 percent funded ratio within a few years, while preventing a large surplus from accumulating.
16. What is UC policy on employer vs. employee contribution?
The Regents determine the split between employer and employee contribution rates. Employer contribution rates cannot be lower than employee contribution rates in any year.
17. If the LBNL employer contribution rate is reduced, what does LBNL propose for the LBNL
employee contribution rate?
