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1. The President Proposes and The Regents Respond
2. A Statement to the UC Board of Regents
3. Exposing the Hidden Assets
4. General Plan for an Alternative Budget
5. Alternatives #1, #2, #3
6. Further Options to Consider
7. Objections and Counter Arguments
8. Conclusions

Readers’ Comments

The President Proposes and The Regents Respond

At their meeting on November 19, 2008, the Regents’ Committee on Finance had their first go at the proposed UC budget for next year, 2009-2010. The plan came from the Office of the President (OP) and requested an additional $815 million over the present year’s budget, to come from new state appropriations and higher student fees. (I will provide more details of this $815MM  later on.)

There was much anguish expressed by regents, one calling the proposal “pie in the sky”. The majority followed President Yudof’s advice that, regardless of how poor the state’s financial prospects might be, the University should forcefully lay out what we need to maintain our mission and our status. Finally, the Board approved the proposed budget with a few added statements, primarily that:

My view is that this was all a grand charade. They all know that the state will not be able to provide anything near what they are asking; and then they will turn away some number of new students and raise the fees they charge to the rest of the students. But they will be able to say, ”It is not our fault, we tried.”  (See, Yudof’s press release of 12/12/08: http://www.universityofcalifornia.edu/news/article/19140 )

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A Statement to the UC Board of Regents

At the opening of meetings of The Regents there is some time allotted for Public Comments to the Board. Here is my one-minute statement on November 19, 2008.

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Exposing the Hidden Assets

First, let’s get the accounting rules straight about restricted and unrestricted monies.  This is from the UC Annual Financial Report (2007-08), at page 20:

and further,  on page 58:

Next, look at the UC Campus Financial Schedules, which accounts in detail the annual Expenditures of Current Funds. Table 1 summarizes the various sources of the University’s operating funds, separated into Unrestricted and Restricted Funds.

Table 1: UC Expenditures of Current Funds 2007-08   (in $ Millions)

General Funds means state money. S/S means Sales & Services of.

NOTE:  In Budget documents, “Restricted” may mean something different: namely, all of those Unrestricted Funds seen above that are not under the state’s control.

In the OP Budget, they speak of $5.4 billion in “core funds”, which they define as General Funds plus Student Fees.  But we see that this accounts for less than half of all Unrestricted Funds spent by the University last year!

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General Plan for an Alternative Budget

We are facing an unprecedented fiscal crisis – here at the University of California, throughout all of higher education, and in the global economy. Emergency measures are required to cope with this situation, preserving our highest ideals and established priorities. The Regents have repeatedly set the top priorities of UC with the three words: Quality, Access and Affordability; and I shall follow those principles.

I will start by saying: No increase in undergraduate student fees and No curtailment of undergraduate enrollment. That attends to Access and Affordability. The maintenance of Quality will be achieved, as best one can in the present circumstances, by using the principle of  “shared sacrifice.” This will be the key of my alternative proposals, unlocking the doors on substantial stores of financial resources that have traditionally been kept closed in the budget process.

Let’s look at the  $815 million increase in budget for 2009-2010 that UC is asking for and see how we might be able to manage things assuming the worst – namely, that the state is unable to provide any of this requested increase. (Well, it could be worse if the state actually cuts below this year’s appropriation.) Let’s follow the display on page 12 of OP’s Budget Summary document (found at  http://budget.ucop.edu/pres.html ) which details the Proposed $815 Million.

So, in total, I have identified 393+170.4+69.8 = $633 million to be found in order to meet all the University’s pressing needs, without increasing student fees or sacrificing quality. That $633 million is 12% of the core funds or 5% of all unrestricted funds. Those percentages will be good to keep in mind as we go on.

Three Alternatives will now be sketched, followed by a list of further options worth considering.  Some combination of all these will probably be best. After that I shall acknowledge and respond to some objections that may be raised.

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Alternative #1

In Table 1, one sees the big pot of unrestricted revenues (over $1 billion) from “Sales and Services of Educational Activities,” and most people would have no idea what that is all about. That is almost entirely income from the clinical practice of UC’s five Medical Schools and other Health Science departments. The faculty there teach, conduct research and also see patients. This Clinical Practice is a large financial business carried out by the University and accounted for separately from the Medical Centers. Some of the money taken in is used within the Medical (and other) Schools to pay for the staff and other expenses of the clinical operations and to enrich their academic programs; but the major part is paid out to those faculty members – on top of their regular academic salaries.

If we were to take (or borrow) 15% of that bonus pay, to help preserve the core missions of UC, that would bring something like $100 million to the table.

Alternative #2

Another lovely pot of money (not so easily seen in Table 1) is the Indirect Cost Recovery on Federal and other research contracts and grants.  This amounts to around $600 million per year. Part of that pays for the actual administrative costs of the sponsored research operations and another part of that goes into “UC General Funds” which contributes to the core budget of the University. But a substantial portion, around $200-300 million, ends up as discretionary funds that are used for further enrichment of the faculty research activities.

Again, in these hard times, 15% of that could contribute another $35 million.

Alternative #3

Here I propose a progressive tax on all salaries paid throughout the University. Table 2 shows, in the first three columns, the distribution of compensation among the top one-sixth of all UC employees. The data for pay over $100,000 comes from  http//www.sfgate.com/webdb/ucpay (for 2006-2007); and the first row is estimated.

Table 2. Distribution of UC Employees’ Compensation

The fourth column in Table 2 (headed % Bite) suggests a progressive tax schedule and the last column shows how much money that would yield.

This particular scheme would provide $500 million (6% of the total payroll) to meet the University’s most pressing needs, while sharing the pain in a progressive manner.  All those % numbers can be adjusted; this exercise shows what is possible. See the graph below.

http://www.universityofcalifornia.edu/news/compensation/payroll2006-07/payroll.html tells where to find the source data for the above graph.

In sum, these three Alternatives provide for our target of $633 million.

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Further Options to Consider

If the Alternatives outlined above seem too strenuous, here are some further options to be considered.

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Objections and Counter Arguments

OBJECTION A.

“They earned it; they keep it.” That is a familiar notion that can be used to protect the boatloads of money that the Medical Schools rake in from clinical practice or the recycling of federal money for overhead costs into the hands of the faculty who originally got those research contracts and grants.

COUNTER A.

That attitude sounds like the financial philosophy of Harvard University: “Every tub on its own bottom.” Over a number of years, however, the leaders of the University of California have reaffirmed the philosophy of “One University”, recently emphasized with the slogan, “The Power of Ten.”

A concrete example of this “oneness” is found in the University’s scheme for increasing its debt capacity. Here one sees that student fee revenue is lumped together with the other types of revenue discussed in Alternatives #1 and #2 to build a large asset base upon which UC might borrow for any particular purpose.

Opposed to that history is the recent report that Berkeley’s Chancellor Robert Birgeneau would like the flexibility to raise student fees at his campus significantly higher than those at other UC campuses. That idea appears to follow the formulation by George Orwell, “Some are more equal than others.”

OBJECTION B.

Many, if not all, of these alternative proposals will damage the Quality of UC by reducing the funds available to the best of our research and professional faculty, thus making them more likely to be wooed away by competing universities.

COUNTER B.

Of course, more money can lead to better Quality and less money may diminish Quality. (A standard measure of Quality for a research university is the amount of dollars, or dollars per faculty, that they garner from external research sponsors.) The real question is how UC stands vis-à-vis its competing institutions.  We should focus on the relative Quality of UC compared to Harvard, MIT, et al. The present financial crisis is not just a California problem; it is having severe impacts throughout this nation, and on all of its great universities.  Here is some recent information.

•    In a November 10 open letter, the president of Harvard wrote,

And an online investment journal (Foxfire) reported on November 12,

And on November 25, The Boston Globe reported:

•    In a November 17 open letter, the president of MIT wrote,

•    Stanford University has announced similar budget cuts. (SF Chronicle 12/3/08)

NOTE:  In the discussions above I often used numbers like 5% or 15% to give a portable measure of what I was proposing for UC.  These quotes from Harvard and MIT let you see some other percentages that may be used for comparison.

OBJECTION C.

There are several Alternatives outlined above and some people may feel the bite of more than one of them. That isn’t fair!

COUNTER C.

That is one of many details that need to be worked out, by faculty and administrators negotiating some reasoned combination of these (and perhaps other) ideas on how to share the pain while maintaining the top priorities of the University of California.

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Conclusions

This paper is intended to open up a number of new possibilities to help UC deal with the present extreme financial situation. It is now up to the administration, through consultation with faculty and staff, to devise a more detailed budget plan for next year, incorporating these suggestions. It is up to The Regents, exercising their powers and obligations as trustees for the University and acting in the best interest of the people of California to provide overall direction for that project – and to do that in the full light of public scrutiny, with all the options laid out on the table.

None of this is easy; but here we are all in this economic mess.  The measures I suggest above are only intended to serve in this short term crisis situation. There are also long term financial worries about how the greatest public research university may survive. I do have some thoughts on that topic but those are saved for discussion at a later time.

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Readers’ Comments below