Salary Cuts at UC
Financing the University — Part 19
UC President Yudof’s Nonsensical Plan for Salary Cuts
by Charles Schwartz, UC Berkeley
A dramatic proposal from UCOP (University of California Office of the President) designed to deal with the University’s Financial Emergency doesn’t make sense when you look into the numbers. Happily, we are able to show how one can achieve the same goal while saving all employees a lot of money.
Introducing the Plan
As reported by InsideHigherEd.com on 6/18/2009:
The June 16, 2009, letter from President Yudof to Mary Croughan, Chair of the Academic Council, was made available at the June 17 meeting of the Assembly of the Academic Senate, which I attended as an observer. The “Furlough/Salary Reduction Plan Options”, which Yudof presented and then discussed at the meeting, is in the form of a formal “Declaration of Financial Emergency”; this is a new concept offered by the President only two months ago as a potential budgeting tool, now being implemented in reality (assuming approval by the Regents). The crisis arises from the severe budget deficit of the State of California.
This is a systemwide Plan, which starts with the following statement:
This feature of the Plans, which I shall refer to as the Principle of Equity in Sacrifice, can be criticized by some; but I think it is reasonable and will not question it here. My focus is on the numbers that follow. There seems to be a major blunder in the planning.
Follow the Numbers
Here is the crux of President Yudof’s plan. The full documents can be found at http://atyourservice.ucop.edu/news/general/0906-reduction_info.pdf.
Plan: Salaries for all faculty and staff be reduced by 8%. Salaries for faculty and staff earning less than $46,000 per year be reduced by 4%.
Duration: August 1, 2009 through July 31, 2010 unless extended by subsequent Regental action. …
Projected UC General Fund Savings: It is anticipated that this Option would generate $193.5 million in UC General fund savings.
Options II and III involve using Furloughs to replace all or part of the Salary Cuts. The numbers are just about the same. In my analysis below I shall approximate Plan I by using an average 7% Reduction in all salaries.
Data on the total UC payroll for calendar year 2008 has been posted by UCOP at http://www.universityofcalifornia.edu/news/compensation/payroll2008/welcome.html and Table 2 – Breakdown of 2008 compensation by fund source – provides the information we need to follow Yudof’s Plan.
TOTAL PAY for 2008 was $9,559,120,183. and 7% of that is just about $670 million. To see how we get from that amount of money, $670 million, to the $194 million savings that Yudof says will result from his plan, we need to use the further data in Table 2 that show the percentage of total pay coming from various sources. We start with:
Student Fees (Ed. Fees + Reg. Fees + Prof. Fees) 6.9%
(These student fees are usually seen as a replacement for diminished state funding.)
Adding these, we get 28.4%; and that portion of the $670 million is $190 million.
OK. This is Yudof’s target for the “UC General fund savings.” So far, so good.
But what about the other $480 million ($670-$190 = $480) that will be saved by cutting everyone’s salary? In speaking to the Academic Senate group on June 17, President Yudof said that the money saved by cutting salaries of employees working under externally funded research contracts and grants would be reinvested in those same research programs going forward. That makes sense because those are truly restricted funds, which UC cannot legally use for purposes other than those originally intended. Table 2 shows the following percentages of restricted research funds going into UC’s Total Pay:
Private Gifts, Grants and Contracts 5.9%
Local Government appropriations, contracts, and grants 1.4%
State special appropriations, contracts, and grants 1.4%
Subtotal = 18.5%
That accounts for $124 million. There is also 1.2% from Endowment funds, which are likely to be restricted; that gives another $8 million, for a subtotal of $132 million.
So, we still have $348 million ($480 – $132 = $348) to consider. The sources of all the other salary monies are:
Medical Compensation Plan 9.6%
Federal overhead, etc. 7.8%
Auxiliary Enterprises, etc. 6.4%
University General Funds 3.8%
Other student fees 2.3%
Subtotal = 51.8%
This $348 million in “savings” achieved by applying the uniform salary cuts to all employees, comes from funding sources that are unrestricted. Unlike the contracts and grants monies, there are no external or legal controls on how that money may be spent; it is entirely within the authority of The Regents. President Yudof has said nothing about what he plans to do with this $348 million in additional funds.
At the meeting of the Assembly of the Academic Senate I had the opportunity to ask President Yudof directly about this inconsistency. I found his answer most confusing; and I hope he will take the trouble to explain his reasoning publicly.
Follow Some Logic
Earlier statements issued by the Office of the President stated that all non-state funding sources were restricted. I challenged that characterization in my writings and public statements; and in a subsequent letter from Yudof’s office my criticisms were validated. See the letter from Vice President Patrick Lenz, dated May 12, 2009, which is posted along with my paper, “Financing the University – Part 18” at http://socrates.berkeley.edu/~schwrtz . Vice President Lenz wrote,
Let’s get the logic of this situation clear. In normal budgetary conditions, it is the standard procedure to say that all money taken in by the hospitals and the clinics, by the dormitories and dining rooms, etc. (all the various “sales and services” of UC-run business enterprises) should stay with those entities. (“They earned it; they keep it.”)
But this is not a normal budget situation; President Yudof has asked for a formal Declaration of Financial Emergency; and he has established the Principle of Equity in Sacrifice. So there is every reason to put all unrestricted money on the table for open analysis and debate. Then let The Regents decide.
To do otherwise leads us into a strange and twisted world. Suppose you say you will treat the teaching hospitals as you treat the external research contracts and grants. That is, the 21.9% of $670 million ($147 million) which those Medical Center Directors will collect by docking the pay of all their employees by 8% will be used … How? Will it be used to buy expensive new equipment, to pay off some debts for new buildings or to refurbish some old buildings? Certainly it would not be used to pay bonuses to any of the staff or management.
This money is a windfall for those institutions, brought about by the State’s budget woes and the University’s Principle of Equity in Sacrifice. The employees of the hospitals are told that they are sharing the pain of fellow employees throughout the University, but their contributions are not being used for the general benefit of the University. The same strange situation would occur at the Auxiliary Enterprises (dormitories, dining and parking facilities) on each campus.
WHAT A NONSENSICAL SITUATION!
The Sensible Way Out
If you follow the Principle of Equity in Sacrifice more sensibly, by allocating all of the unrestricted savings from the salary cuts to meet the budget shortfall from state funding, then you find a pleasant surprise. Let’s say that we take all of the $538 million ($670-$132 = $538) in savings from the unrestricted 8% salary cuts and use this to replace the shortfall in state funding. But that $538 million is far more than the $194 million that President Yudof set as the target for this emergency plan. That means that a much lower percentage in the salary cut can do the job. I estimate that it can be around 3% instead of 8% (with a corresponding reduction in the low salary region.) This is good news for everybody!
Catter Aobe said,
June 23, 2009 @ 12:32 pm
You need to also consider overhead. Salary paid out of Federal funds or contract funds is taxed by the university at 50%. So if salaries paid out of Federal funds are cut by $100 M then the university saves none of that money and actually loses $50 M. That’s really nonsensical! The same overhead is taxed on contract funds also.
Gift funds are not charged overhead but they are also taxed for “administrative costs” at 15%. So cutting those salaries will also cost the university money.
Also, the state earns income tax from all salaries. I don’t know what the average tax rate is for UC but I’d figure 15% is a reasonable average. By cutting salaries that don’t save UC money the state loses tax earnings. Also those people then will stop buying goods which slows the economy. It’s the exact opposite of a stimulus plan.
Clearly some people who actually understand economics need to have a say in what UC is doing. The current plan is a disaster.
O. Kay said,
June 23, 2009 @ 12:47 pm
Fantastic and lucid analysis by the esteemed professor.
Thank you so much for your good works sir.
I look forward to seeing your due diligence on behalf of staff, students and the University-at-large continue…
Best,
~ok~
Sprouler said,
June 24, 2009 @ 3:58 pm
Very good questions asked above… 1)Did your analysis, Prof. Schwartz, include overhead? and 2)Will the State in the end lose because of the income tax not paid by all the non-UC-funded salaries cut? I suppose 3)will Yudof use all the funds freed up in his plan to cut all (including non-UC) salary costs to shore up the UC pension?
Mariam Grodzins said,
June 28, 2009 @ 10:37 am
Your article tells us that Yudof’s proposal will be presented to the Regents as a formal “Declaration of Financial Emergency,” which if approved will allow him to do more or less anything he wants. It seems highly unlikely (assuming your numbers are correct) that Yudof was unaware that his plan would yield the results you describe. Taken together with the Declaration of Financial Emergency, it looks like his numbers are not the result of an honest mistake, but a power grab with the specific goal of leaving him with a big pile of money to spend as he wishes, at the expense of UC employees.
At the Budget Town Hall at UCLA on June 24, 2009, Steve Olsen, Vice Chancellor for Finance, Budget and Capital Programs, apparently confirmed this when he said: “If you calculate the salary savings, it adds up to far more money than is needed for the budgetary savings. . . . The reason is that the University of California is a very financially diverse organization, has lots of different funding sources of which only a portion represents the General Fund, which is the state part of it. So, the savings that are needed for the budget are around $195 million. The reason that the savings are actually greater than that is . . . the equity principle.”
The equity principle, which you call in your paper the “Principle of Equity in Sacrifice,” appears to be designed to obscure the real purpose of the plan, which is that Yudof wants the 8 percent cut because he has things he wants to do with the extra saved money. Is there a reason why he hasn’t mentioned what those things are? It seems unlikely that the plan is the result of his personal dedication to the Principle of Equity in Sacrifice.
A J Cascardi said,
June 30, 2009 @ 7:56 pm
It seems that the UCOP decides how strict or lax it wants to be about the use of “restricted” funds. In times of budget difficulty it wants to be lax, though it wants to be strict in times of surplus. The problem is that, without legal challenge, the policy fluctuations will continue to be set by UCOP.
AJ Cascardi,
Professor, US Berkeley
Mariam Grodzins said,
July 23, 2009 @ 6:35 pm
I received a press release from UPTE (University Professional and Technical Employees) today (July 23) headlined “UC Regents award huge pay increases to execs while furloughing staff.” The press release includes over four pages of specific examples, and can be found at:
http://www.upte.org/about/press/2009-07-23.pdf
Anyone wondering about President Yudof’s personal commitment to shared sacrifice might be interested to learn that he was awarded $3,548 to cover costs of shipping vehicles from Austin Texas . . . in addition to [his] annual car allowance of $8,916.”
Check out the press release. There’s lots more.