Burdened by Pensions, Hebrew University Sees Financial Crunch Worsening

Budget gap for 2014 is $5.1 million after school spent a quarter of its budget on pension payments.

Daniel Bar-On

The financial crisis at the Hebrew University of Jerusalem, which ranks internationally as Israel’s leading academic institution, is destined to worsen as it pension obligations swell over the next several years.

The school is closing out 2014 with a 20-million-shekel ($5.1 million) deficit, after spending 655 million shekels -- about a quarter of its budget -- on so-called defined-benefit pension payments, which are paid directly from an employer’s coffers. The figures also reflect about 90 million shekels in special retirement terms provided to faculty. Those heavy pension payments have forced the university to cut back on its core mission by reducing teaching and research spending.

The extent to which the pension issue is weighing on operations is such that were it not for the defined-benefit pension payments, the university would be finishing 2014 with a surplus of about 300 million shekels. Last year, the school spent 598.6 million shekels in pension payments, a 6% increase from the year before. It spent another 91.4 million shekels on other benefits for staff in the process of retiring, all told adding up to 681 million shekels in 2013 and amounting to 25% of the university’s total spending for the year.

To ease the crunch, Hebrew University has sold some assets. But it’s still sitting on three campuses in Jerusalem, others Rehovot and Rishon Letzion as well as a portfolio of other buildings around the country, land holdings in high-demand areas and a 1.6-billion-shekel ($408 million) investment portfolio.

Streamlining measures

Two years ago the university instituted a system of plans and oversight among streamlining measures, but it cannot cut its pension terms without the Finance Ministry’s agreement, which it is seeking. “We stand no chance of solving this problem without the government’s assistance,” says the school’s finance director, Lior Agai.

Hebrew University is one of Israel’s largest entities and one of Jerusalem’s largest employers, along with the government and Hadassah Medical Center. Comparisons between Hebrew University and Hadassah Hospital, which was rescued from collapse earlier this year, may be tempting. But a look at the two organizations’ financial reports reveals major differences in their situations.

Hadassah suffered from profligate spending and large current deficits. By contrast, Hebrew University’s major obligation is to its staff. Moreover, the university has made major, albeit largely unsuccessful, efforts to balance its budget and has received major assistance from the government amounting to 1.34 billion shekels last year alone.

The university began paying defined-benefit pensions, which did not require any employee contribution, in 1982. Officials point out, however, that it was the first entity in Israel, at the beginning of the new millennium, that agreed to switch from defined-benefit pensions to a defined-contribution system, in which the university contributes to employees’ retirement funds but doesn’t guaranteed a specific amount of benefits. All employees hired since then are on the new system.

“We are not Hadassah and the comparison is not appropriate,” says Agai. “Seventy percent of our debts are to internal recipients. Just this year we have invested 55 million shekels in new academic staff and reversing the brain drain [from Israel]. An entity in collapse would not be able to do that.”

Concerns about quality

The administration of Hebrew University and others in the higher-education sector are not concerned that the university will collapse, but they are worried that spending cutbacks will erode the quality of research and teaching. Because the extent of the government’s funding is based on Hebrew University’s output, the quality of research and the number of students, observers are concerned that a slump in quality could lead the government to cut funding, making the situation worse.

The Hebrew University of Jerusalem was named the best university in Israel in the QS World University Rankings this year, coming in 138th overall, just behind Dartmouth College and just ahead of the University of Virginia.

On an actuarial basis, the university is sitting on a 12.6-billion-shekel future pension obligation. The school’s annual pension-payment expenses are expected to peak in 2019 but will saddle the school with obligation until 2080. Its actuarial obligation is also substantially bigger than that of Israel’s other universities.

The next five years are seen as particularly critical: From now until 2020, Hebrew University will be required to fork over 3.6 billion shekels in ongoing defined-benefit pension expenses. Over the decade after that, the pension bill will reach 6 billion shekels, or between 540 million and 630 million shekels annually. It will trend down to an annual 320 million to 530 million in the decade after that, but only in 2052 will the obligations fall below 10 million shekels a year and only in 2080 will the university have paid out everything it owes, according to an estimate made in 2013.

The university has a host of other funding obligations to staff; among the most controversial is one that is designated to fund the costs of researchers maintaining connections with their peers overseas. The university paid 181.2 million into the fund last year, but the State Comptroller has criticized the fund on several occasions because it’s effectively used to subsidize salaries and buy equipment. Moreover, researchers can continue to take grants from the fund after they retire, although four years ago the school tightened criteria to limit the benefit only to pensions still actively conducting research.

The state funds more than half the university’s budget, but in the current circumstances the university is investing a growing portion of its spending in pensions rather than teaching and research. The pension burden has required budget cuts of tens of millions of shekels over the past five years. In 2012, the university finished the year with an annual deficit of about 150 million shekels. Austerity measures were then expanded and 2013 ended with a balanced budget.

As part of the streamlining efforts, being led by university President Menachem Ben-Sasson and his administration, about 115 million shekels have been cut from the university’s base budget. Staff has been cut and low-demand humanities courses have been eliminated. The school is planning to reduce the number of senior faculty, although a third of them are due to retire relatively soon in any event.

Real-estate holdings

The university has real estate holdings that it could sell to cover part of its actuarial obligations and ease the situation in coming years. The property is valued on the books at 257 million shekels, but its actual value is likely to be substantially higher because the university operates on accounting principles that do not require it to revise the value of such assets.

The university has in fact sold off assets as part of its austerity plan, but it continues to hold sizable other assets. They include land and housing in the center of Israel, citrus groves in the Sharon region and near Hadera and Rishon Letzion as well as the 1.6-billion-shekel investment portfolio, which includes unrestricted funds the administration can put to whatever purposes it chooses.

In recent years the university and the Planning and Budgeting Committee of the Council for Higher Education have tried to resolve the situation. The Finance Ministry, which has also been involved at times, has reportedly demanded that Hebrew University trim back faculty pensions. In fact the ministry has for years conditioned government financial assistance on a cut in pensions, and observers of higher education scene say that any future arrangement will almost certainly include a reduction in senior faculty pensions more broadly. In any case, the Finance Ministry has not recently made any demand for reducing pensions by the university.

Options on the table

For its part, the Finance Ministry said in a statement that it has been working with Planning and Budgeting Committee and the university administration “to develop a plan to solve the university’s financial situation. It said a number of options are on the table, but didn’t specify them.

In 2010, negotiations resumed among the Finance Ministry, the Planning and Budgeting Committee and representatives of senior faculty at Israel’s universities. The faculty agreed to retirement-benefit concessions but demanded government guarantees of their future pensions.

The talks have not been held since, although recently the ministry and the Planning and Budgeting Committee have been looking at restarting separate talks with each university.

Hebrew University operates six campuses on Mount Scopus, at Givat Ram, and the Ein Karem medical school complex, all in Jerusalem; the veterinary school in Rishon Letzion; the agriculture school in Rehovot; and its joint campus with Ben-Gurion University of the Negev in Eilat. And the university has a research station in the Negev, but hasn’t moved aggressively to capitalize on the assets.

One option that has been discussed is moving the Rehovot agricultural school to one of the Jerusalem campuses and selling the land it occupies. But observers said the idea had been dropped after an assessment that the move would cut into the university’s long-term revenues and limit the areas of study available to students in the center of the country.

“The university would be prepared to consider any step without relation to this option or any other that would settle the defined-benefit-pension issue,” one person within Hebrew University said.

Despite its financial woes, the university last year bought the student housing adjacent to its Mount Scopus campus from Africa Israel Investments, the company that had built and operated the dormitories, for 180 million shekels. The university said it acted because students and the administration were unhappy with how Africa Israel managed the facilities.

“Africa Israel that year was encountering financial problems and this created an opportunity for the university to buy it and manage it directly,” the university noted. “Today the student village is fully occupied and profitable.”