Budget Alternatives for UC

Financing the University – Part 17

by Charles Schwartz

BUDGET ALTERNATIVES for UC

This is no time for the same old approach to the University’s budget since it is most unlikely that the state of California will be able to provide what is being asked. Here we open some closet doors in UC’s big house and show how three alternatives, with several side options, can provide all of the required funding – without raising student fees, limiting enrollment, or harming academic quality.  This approach is based on fiscal honesty and shared sacrifice to get us through these hard times.

  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:

the budget be revised to reflect a request for additional State General Funds to avoid increases in student fees. The State is advised that, absent these additional funds, student fee increases will be required; and
in the event the University does not receive the funding being requested, it is the direction of the Board to curtail freshman enrollment.

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.

In Agenda Item F6 there is an Executive Summary of the Budget for next year. It mentions the University’s “core funds”, coming from State money and Student Fees; and then it mentions “Other sources of funds”, coming from federal research contracts, private gifts, medical and other enterprises run by the University. It then says, “Use of these [Other] funds is restricted.” That is not so. Some of those funds are indeed restricted as to use; but most of them are unrestricted and The Regents may use those funds as they choose.  In times of great financial stress, like right now, you, The Regents, have full authority to take any part of those unrestricted revenues and apply them wherever they are most needed. Don’t let some bureaucrat tell you otherwise.  [“DING. Your time is up. Thank you. Next speaker.”]

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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:

Under generally accepted accounting principles, net assets that are not subject to externally imposed restrictions governing their use must be classified as unrestricted for financial reporting purposes.

and further,  on page 58:

The University’s unrestricted net assets may be designated for specific purposes by management or The Regents.

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)

Fund Source Unrestricted Restricted
General Funds 3,378 0
Tuition & Fees 1,591 0
Federal Government 0 2,200
Special State Appropriations 0 426
Local Government 0 190
Private Gifts, Grants & Contracts 12 1,255
Endowment & Similar Funds 235 167
S/S Educational Activities 1,477 0
S/S Auxiliary Enterprises 785 0
S/S Medical Centers 4,459 0
Other Sources 1,763 0
Reserves 14 0
TOTALS 13,713 4,238

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.

•    First there is a total of $393 million increase requested from State General Funds to cover: Base Budget Adjustment of 4%; Core Academic Support of 1%; Annuitant Health and Retirement Contributions. I shall keep these as necessary new funds.

•    Then there is an additional $122 million listed for Enrollment Growth, both for 2008-09 and for 2009-10. I will disallow those charges on the grounds that undergraduate student fees now cover 100% of the University’s actual cost for undergraduate education, averaged per-student. My calculation is controversial because I separate the cost of faculty research (during the academic year) and related graduate programs from the calculation that UC uses to determine the “Cost of Education” (or the Marginal Cost). That means I am proposing that the added students will be taught mostly by Lecturers rather than by Professors. Those Lecturers currently teach about half of all undergraduate courses at UC and do so maintaining the highest quality that we expect from all teaching faculty.

•    Next, in the list of Proposed Increases in Revenue are $15.5 million from UC General Funds. These pose no problem.

•    Next, are $170.4 million from increases in Student Fees; plus $44.7 million from enrollment growth. There is no problem with the latter; but I propose to avoid the former, i.e., no increase in the rate of student fees.

•    Finally, there is a category of Proposed Revenue Increases amounting to  $69.8 million intended for six different high priority items called “Additional Funding Needed for Initiatives.”  I shall try to cover these as well.

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

Gross Pay Range # Empl. Total $MM % Bite Yield $MM
$80,000-100,000 12,000 1,120 0-10% 56
$100,000-150,000 11,398 1,425 10-15% 178
$150,000-200,000 3,439 602 15-20% 105
$200,000-250,000 1,453 327 20% 65
$250,000-300,000 702 193 20% 39
$300,000-350,000 342 111 20% 22
$350,000-400,000 153 57 20% 11
Over $400,000 228 120 20% 24
Totals 30,000 4,000 500

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.

imagefu17ajpg

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.

•    Postpone the resumption of contributions to the UC pension fund ($228 million); or, maybe, this is the one thing that the state really should pay for, as part of its long term obligation to all of California’s public employees. This option, if adopted, would allow a reduction of the payroll tax (Alternative #3) by one-half.

•    Postpone some or all of the items “Needed for Initiatives” ($69.8 million).

•    Some of the other “self-supporting” enterprises run by UC operate at a substantial net income (revenues minus expenditures).  The Auxiliary Enterprises show about $200 million net; and the Medical Centers show about $400 million net  for the last fiscal year. Some of that net income is required to pay off bond debt; but most of it is available surplus. In normal times that surplus is used to make future improvements in the facilities; but in these hard times it is part of the Regents’ duty to consider taking some of that (unrestricted) money and applying it to more pressing needs at the core of the University.

•    Insist that the Chancellors pay attention to the evidence in earlier papers (Parts 13 & 14 of this series) that describes an apparent bureaucratic bloat throughout the University, estimated to be $600 million of waste each year.

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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,

Moody’s, a leading financial research and ratings service, recently
projected a 30 percent decline in the value of college and university endowments in the current fiscal year. While we can hope that markets will improve, we need to be prepared to absorb unprecedented endowment losses and plan for a period of greater financial constraint.

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

Harvard’s largest faculty, the Faculty of the Arts and Sciences, is facing a loss of roughly $4.5 billion in the market value of its endowment, which would mean a $225 million loss from its budget. [That is around 20% of their total budget.]

And on November 25, The Boston Globe reported:

The dean of Harvard’s Faculty of Arts and Sciences has called for an immediate freeze on staff hiring and strongly encouraged department heads to consider canceling faculty searches.

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

Taking all these factors into account, we can reasonably anticipate the need to decrease spending by about 10-15% over the next two to three years. In the current budget planning cycle for FY10, we will plan for a base budget reduction of 5%. Future years will undoubtedly require additional cuts by all units.

•    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



3 Comments

  1. Latest - Budget Alternatives for UC | forexrecommendation.com said,

    December 16, 2008 @ 11:49 pm

    […] Source […]

  2. Warren M. Gold said,

    December 17, 2008 @ 10:08 am

    Charlie
    We have had this discussion before, in the 90’s when I was Chair of UCORP.
    Your assumption that indirect costs come back to the PI is wrong. At least at UCSF.
    My analysis in 1995 was that less than 3% comes back to the PI; the rest is sucked up by OP, the Chancellor, the Dean, and the Dept Chair or ORU director. They argue, in turn, that their tax on these funds is used to support contracts and grants, or again at UCSF, to pay for research infrastructure like the development of Mission Bay. In fact, when UCORP recommended that 30% of indirect costs go back to the PI, the Academic Council changed the recommendation to 20% back to Dept or ORU. And that change was instituted. But at UCSF, the Chancellor took half of that increased for Mission Bay and continues to do so.
    My guess is that the PI still gets no more than 3% of the total indirect cost returns.

    Warren Gold

  3. charlie schwartz said,

    December 18, 2008 @ 5:45 pm

    Warren;

    Thanks for joining this conversation.

    If you are correct (that most of that Indirect Cost Recovery money goes to top campus administrators rather than to research faculty), then it is even more correct to pinch a portion of those fund to serve the pressing needs of the University’s core priorities.

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