In the ongoing controversy over how the University of California uses student fees and other monies to back up the bonds it sells for construction projects – a new letter from UC’s Chief Financial Officer answers one question and exposes severe shortcomings in executive oversight.
Department of Physics
University of California, Berkeley
December 11, 2009
Executive Vice President Peter Taylor
Office of the President
University of California
I have received your letter of December 7, responding to my inquiry of November 1, 2009. This provides some definite progress in bringing clarity to the controversy over the University’s program of General Revenue Bonds; but some important corrective measures await action. [I have posted a copy of your letter at http://UniversityProbe.org/wp-content/Taylor12-7-09.html ]
Let me follow your format, treating the two questions (A and B) that I had posed.
A. Since The Regents created the General Revenue arrangement in 2003, has there been any occasion when a particular capital project was unable to meet its scheduled debt service obligations from the originally specified revenue source and thus funds were needed to be used from the General Revenue pool? If the answer is Yes, please provide details.
You reply definitively: “To the best of our knowledge, since the Regents created the GRB credit vehicle in 2003, there has never been an occasion when an individual project was unable to meet its scheduled debt service obligations, thereby necessitating a process of obtaining permission to use other funds.”
This is, at last, the authoritative answer to the question that has been hanging in the air following Bob Meister’s article, published two months ago, and his subsequent call for some kind of audit. What is bothersome is why it took so long for you to issue this clear and simple answer. Perhaps what follows will indicate the explanation for that tardiness.
B. If such a situation were to occur in the future, what is the established process by which this substitution of funds would be managed and what reporting mechanism, within the University, would be entailed?
Your reply here is quite different in character: “Charlie, it’s hard to speculate about a speculative question. Suffice it to say that we would work with the individual campus in question to identify where the shortfall exists, in the exact amount, and then lead a process to rectify the situation including if necessary identifying a specific replacement source of repayment. One can create all kinds of imagined situations where bad things like this might happen, …”
The rest of your letter rambles over abstract concepts without ever addressing the precise questions asked in B. The unavoidable implication is that the University does not have any established procedure for dealing with a default situation and, furthermore, there is no existing requirement for reporting of such occurrences to the governing authorities of the University.
This is quite shocking!
In my first letter on this topic (October 15, addressed to Regents Ruiz and Lozano) I wrote: “It is unclear, at this point, whether this situation might be a lapse in the exercise of fiduciary oversight by The Regents or merely a failure to provide the Accountability and Transparency that has been promised by the President.” Now, you show us that it is the former, and much more serious, failure.
You are the Chief Financial Officer of the University of California, and so I feel somewhat embarrassed to be the one who must tell you that your immediate duty is to rectify this shortcoming in the functioning of your office. I suggest that you implement the following steps without undue delay:
1. Recommend to The Regents that they instruct the President to establish appropriate procedures to be followed in the eventuality that any debt service obligations connected to the General Revenue pool come into default.
2. Recommend to The Regents that they instruct the President to establish appropriate reporting requirements, related to the General Revenue pool, that not only convey prompt information about the actual occurrence of any default situation but also give advanced warning of any such likelihood.
This last concept (a “watch list”) might easily be achieved with an addendum to the annual Debt Capital Report to The Regents, which lists the current debt service coverage ratio for each project connected to the General Revenue pool.
I look forward to hearing your response to these suggestions.
Cc: Regents Gould, Ruiz, Lozano, Bernal