February 9, 2007

Dear Judy:

We agreed at our meeting on January 29 that you would send CUCFA the agenda materials for the February 9 meeting of the UC Faculty Welfare Committee and ask Chair Susan French’s permission for us to be present as guests. I had the meeting on my calendar for today, and planned to show up. This morning, however, I learned from Linda Glasscock that UCFW is meeting with you in executive session. She could not tell me why, but said that you would like to meet separately with CUCFA on the LANL asset transfer in a few weeks. Two possible explanations come to mind: either today’s executive session is unrelated to the LANL transfer, which (as you told us) might have to be delayed if the DOE did not provide the necessary materials in time; or today’s UCFW meeting might be (as you also told us) the last chance to question the asset transfer before it is finalized at the March Regent’s meeting. In the latter case the UCFW’s decision to close its meeting must be seen as a negative, if indirect, response to our request to hear what questions it asked you, and what answers you gave.

Our discussion on January 29 made it clear that UC has all the data it needs to address the concerns of CUCFA and other employee groups about the asset transfer. Gary Schlimgen told us that UCRS has, since the early 1990s, been keeping separate track of the Funded Ratio (AVA/AAL) for each of the labs. He gave us the Segal Report on the LANL component of UCRS, showing that its funded ratio as of July 2006 is 94.7% as compared to 104.1% for UCRS as a whole, and indicated the comparison with LNL would be similar. Based on this data it should be possible for Segal (or any independent actuary) to calculate the hypothetical Funded Ratio of UCRS net of LANL (and also net of both LANL and LNL). This hypothetical Funded Ratio can be easily compared to the Funded Ratio that would actually result from the final asset transfer that Regents are likely to approve in March. Before concurring with this transfer UCFW should, thus, have asked and have an answer to the following question:

1. Will the proposed UCRS asset transfer to LANL (and subsequently LNL) improve or worsen the hypothetical Funded Ratio of UCRS? Based on the data you have provided, shedding the poorer Funded Ratio of LANL should make UCRS somewhat better off (in the sense of being more overfunded); shedding both labs should make UCRS substantially better off. If the proposed final asset transfer raises UCRS to the hypothetical Funded Ratio described above, no further questions need be raised.

UC could easily demonstrate that the impact of the asset transfer will be actuarially beneficial to UCRS. Unless it does so, we must assume that the actual asset transfer will be harmful in the sense that the resulting Funded Ratio of UCRS would be lower than the hypothetical Funded Ratio described above. It might even be lower than the present Funded Ratio of a UCRS (which includes LANL), or low enough to bring the LANL plan up to full funding if the present “overfunded” component of UCRS were harvested for this purpose. To the extent that the potential benefits of the final asset transfer are foregone by UCRS, we must ask why members in active service should make up the difference.

2. Who should pay for any negative impact of the final asset transfer on UCRS? The timing of the final asset transfer of LANL coincides with the resumption of employee contributions to UCRS. It would be easy for UC to demonstrate that this is a mere coincidence by showing that the asset transfer is beneficial to UCRS. If it is not, we can reasonably ask whether next year’s employee contributions will effectively subsidize the asset transfer while concealing its short-term effects. If the California Legislature believes that UC’s role in the privatized management of the labs is in the public interest, the state—not UC employees—should compensate UCRS for any decline in its present hypothetical Funding Ratio. If DOE believes this, it could be expected to do likewise, and to address separately whatever underfunding remains at LANL. You encouraged me to believe on January 29 that you had requested such an assurance from DOE, and that, without DOE’s unequivocal commitment to fund shortfalls in UCRS, UC might not go forward with the final asset transfer. If DOE has made this commitment, no further questions need be raised.

UC could easily demonstrate whatever commitment it has gotten from DOE and explain why this is sufficient to proceed. Any such commitment would, as you told us, be a valuable precedent for the LNL privatization. If UC has no such commitment, however, the precedent would be negative with respect to LNL. Therefore, a decision by UC willing to push through the LANL asset transfer without a commitment from DOE would justify the inference that it is willing to accept a bad deal for UC employees in order to advance the bid of the LANL partnership to run LNL. To the extent that this seems so, we must ask whose interests UC has been serving in privatizing the labs.

3. Who will benefit from any negative impact of the final asset transfer on UCRS? The final asset transfer from UCRS will determine now much the corporate partners in the LANL LLC must contribute to keep their pension plan viable in the near term. As a partner in the LLC, UC has a presumed business interest in lowering these costs and in closing the LNL deal with DOE. These interests are potentially adverse to UC’s fiduciary responsibility to UCRS. The possibility of conflict arises in three distinct ways:
   1. UC has representatives on the LLC Board. The most important of these is Regent Parsky, who served as Chair of the Regents while also serving as Chair of the LANL LLC—a position he still holds. UC Financial Vice Presidents Mullinex and Darling have, successively, chaired the UCRS Advisory Board while also serving as Directors of the LLC. UCSD Chancellor Fox also serves on the LLC Board, but has no direct responsibility for UCRS. We don’t know how these UC representatives on the LLC Board are expected to handle potential conflicts, because UC has not disclosed the terms of its participation in the LLC. It is possible that UC has used its representation on the LLC Board to insist that its corporate partners pay the full cost of the difference between the UCRS and LANLS Funding Ratios; but it is also possible that UC has tried to avoid obstacles to the LNL negotiations by heading off issues that could increase pension costs for its corporate partners or for DOE. We simply don’t know. But, when UC cites the pendency of the LNL deal as a reason for secrecy in its contractual relation with the LLC, this is also reason for heightened concern that any conflicts of interest arising from UC’s role in the governance of the LLC will also be suppressed for the time being. Until we know what safeguards there are to protect against this, we must presume that there are none.
   2. The UC Regents are themselves a private party to the LLC partnership. Having decided that entering this private partnership is in the best interests of UC, the Regents have chosen to conceal the contractual relationship between the two entities. Thus, it is unclear how far they regard the potential overfunding of UCRS (especially when employee contributions are resumed) as a resource available to subsidize privatized entities such as spun-off national labs. How free is the UC Board of Regents to interpret its fiduciary responsibility to UCRS in a manner that advances the business interests of an LLC in which it has a business interest? Would the Regents be willing to jeopardize their partnership’s bid for LNL by imposing stringent conditions on how the outcome would affect UCRS funding? Once again, we don’t know.
   3. Some individual Regents may have personal business interests in the success of UC’s private partnership to run the LLC. Our knowledge thus far is limited to the two Regents who have chaired the Board while the labs have been privatized. According to press reports, Regent Parsky had longstanding professional relationships with leading figures in Bechtel prior to the formation of the partnership between it and UC. Regent Blum, while still Vice-Chair of the Regents, held a 24% share in URS, a major contractor at LANL, and served as Vice-Chair of the URS Board. We have no information that they, or any other Regent, has recused in any matter pertaining to lab management and/or privatization. When he eventually succeeded Regent Parsky as Chair, Regent Blum relinquished his URS position and sold a substantial number of his shares. Because these actions occurred in late 2005 (around the time that the UC/LANL deal was consummated), they raise as many questions about the underlying conflict as they answer.

UC could easily demonstrate that its officials have fulfilled their fiduciary duty to UCRS by showing that the final asset transfer effectively preserves the present difference in Funding Ratios between the two retirement plans, viewed as hypothetically separate entities. If this were shown, CUCFA and other employee groups would want the final asset transfer to be completed as soon as possible in order to improve the actuarial position of UCRS and mitigate the need for employee contributions. We would also expect the Funding Ratio of UCRS to be restated net of both LANL and LNL (which will certainly be privatized whether or not the UC bid succeeds). The result could turn back the clock on employee contributions without otherwise affecting the rationale for their gradual reinstatement.

Why should CUCFA take the hypothetical Funding Ratios defined by UC’s actuary (Segal) as our baseline for evaluating the final asset transfer? Doesn’t the present overfunding of UCRS provide its managers with some flexibility in financing the spin-off plan? Our answer is that heightened vigilance is required because of the role of UC and its officials on all sides of this transfer.

We understand that if UC had not bid on LANL, or if it had submitted the losing bid, the two pension plans would still have to be separated. In that case, UCRS and the new LANL management would be dealing at arm’s length, and there would be no question of UC subsidizing its competitor with UCRS assets. If UC could be counted on to vigorously defend the assets UCRS against the newly privatized management of LANL, the eventual outcome of a battle of actuaries would be hard for employee groups to challenge. This is not, however, the present situation.

UC won its bid on LANL. It is now a partial owner of the successful bidder with which it has an interlocking directorate and overlapping business interests of various kinds. There is, thus, a legitimate question about whether UC would vigorously defend the assets of UCRS rather than using whatever latitude it has to subsidize its business partners at the expense of its employees. You could put this question to rest by demonstrating that the privatization of two national labs has left the hypothetical funding ratio UCRS undiminished. If this is the case, why not just say so? If it is not the case, for how long can the disparity be concealed? Once the amount of the final asset transfer is disclosed, any actuary can estimate what it should be from the reports prepared by Segal on LANL and UCRS that you have provided to us.

Now that you have met with UCFW, we formally request that you provide us with all the written materials they received on pensions and the LANL transfer, whether in their agenda packet, as handouts at the meeting, and/or in the form of presentation slides, etc. We also here repeat in writing our request of January 29 for the Actuarial Valuation of LNL previously prepared by Segal. I reminded Linda Glasscock of your earlier promise to provide these materials when we spoke this morning, and pointed out that any documents discussed today are readily at hand. There should, thus, be no reason why you cannot respond immediately. Once we have your response, we would like to schedule the earliest possible meeting to discuss what concerns, if any, should be brought before the Regents before they approve the final asset transfer. We have copied this letter to UCFW Chair French and the members of the committee in the hope that they will provide us with direct assurance that our questions have been, or will be, satisfactorily answered in their consultation with you.

Respectfully,

Robert Meister,
President, Council of UC Faculty Associations

Cc: Chair Susan French, UCFW
Vice-Chair James Chalfant, UCFW
Chair Christopher Newfield, UCPB
Chair John Oakley, Academic Council
Vice-Chair Michael Brown, Academic Council
Members of UCFW (list)
Mr. Howard Pripas, Executive Director, HRB Labor Relations
Mr. Gary Schlimgen, Director, HRB Policy and Program Design