UC 101: Educating Our New President
Lesson #3 – Bad Financial Bookkeeping – August 12, 2013
by Charles Schwartz, Professor Emeritus, UC Berkeley
Posted at http://UniversityProbe.org
[Introduction, July 22; Lesson #1, July 29; Lesson #2, August 5]
What could be more boring than bookkeeping? We all have our own checkbooks and credit cards and household accounts to keep track of; and the Internet lets us play with our bank accounts in a familiar way.
Of course, a big university has a lot of money flows and will need a substantial system of budgeting and accounting to keep track of all that. It can get complicated; but it should be understandable and credible. There is already an official commitment to “transparency and accountability.” We should explore that with a critical eye.
Back almost a century ago, there was a Professor of Accountancy at the University of Illinois who developed a particular system of accounting for his university. That scheme has been maintained and promulgated to this day by NACUBO – the National Association of College and University Business Officers. Table 1, below, shows the standard categories of Operating Expenses by Function, and the dollar amounts for all of the University of California in 2011-12.
Uniform Classification Category $ Millions
Public Service 591
Academic Support 1,910
Student Services 780
Institutional Support 1,118
Operation and Maintenance of Plant 587
Student Financial Aid 601
Medical Centers 6,691
Auxiliary Enterprises 1,089
DOE Laboratories 1,008
Source: UC Annual Financial Report 11/12, page 8
The intellectual challenge of Accounting is to inquire about what the words really mean. We, professors and students, may think that we understand what is Instruction and what is Research and what is Student Services, etc. But when we look into the details of the actual accounting system there are surprises. Most importantly, the definition of “Instruction” includes a lot of expenditures for faculty research activities; and this needs to be questioned.
The following picture gives a visual representation of what any professor will recognize as their main academic activities and how they are funded. The labels [I] and [R] indicate which money flows are recorded in the official accounting system as expenditures for “Instruction” and “Research”, respectively.
Basic Financial Picture of the Research University
Work of Work of
Regular Faculty Sources of Money Other Academics
Here is the story behind this picture. I am a Professor at a major research university (public or private). I am hired primarily for my research abilities and I am also expected to teach both undergraduate and graduate students in my discipline. The university pays me an Academic Year (9-months) salary that covers all of my work. I may also have an externally funded research contract or grant. That pays for any post docs and graduate students and other supporting staff that I may hire to assist me in carrying out my research program, along with the costs of research equipment and supplies and travel expenses. Those research funds may also be used to pay me additional salary during the summer months (and also during a sabbatical leave) when I am free of any teaching responsibilities; but my base academic salary is my only income throughout the academic year. Is there any difference between the research work that I do when paid by university funds (as seen in the upper-left hand box above) and when I am paid by the sponsored research funds (as seen in the lower-left hand box above)? No.
Why is the payment for one category of research activity recorded in the university bookkeeping system as an expenditure for Instruction while the other is recorded as an expenditure for Research? It just is. That is the way the system (the nationwide system of research universities) works. There is a special name given here: “Departmental Research” is defined to cover all research work that is not paid for by an external funding source or an explicit program in the university’s budget; and it is counted as an expenditure for Instruction.
So, there is something amiss in the standard accounting system, a system used by all research universities, not just by UC. Is this a small thing or a big thing? Is it merely an abstract inconsistency or does it have serious consequences?
Here is more of the story. You may have heard the term, “teaching load”. This is the standard number of courses that a professor is expected to teach in an average academic year. This number varies considerably among the academic disciplines. In the Humanities and some Social Sciences, it may be as big as 5 or 6 quarter-courses per year. (The Berkeley campus happens to be on the semester system; one can convert the count of semester-courses per year to quarter-courses per year by applying a factor of 3/2.) In most of the STEM fields (Science, Technology, Engineering and Mathematics), the teaching loads are around 3 or 4 quarter-courses per year. In the Biological Sciences, it is barely 2 quarter-courses per year. These large variances are said to allow for the greater amount of time that professors in those latter disciplines must spend on their research, whether that research is externally sponsored or not. That schedule of priorities explains why we use the term “teaching load.” Research is the primary task of professors at a research university and anything that takes their time away from that endeavor may be seen as a burden.
This indicates that, once you accept the facts about the bad bookkeeping that counts Departmental Research as an expenditure for Instruction, it is not a small error; it may be a very large error. And this error may have significant consequences.
A most natural question is this: What does it cost the University to provide undergraduate education, apart from the cost of providing graduate education and supporting unsponsored research? Those are all important missions of the research university and there are interrelations among them; but their costs may be charged to distinct clienteles and so the costs need to be separated. To answer this question, one would first have to disaggregate the bundle of expenditures for Instruction shown in the upper-left hand box of the picture above. That would give the direct cost of undergraduate instruction. Then, one would add in appropriate supporting costs from Academic Support and Student Services (see Table 1); and finally one would add in appropriate shares of overhead costs from Institutional Support and Operation & Maintenance of Plant.
I am the one person who has done such a calculation, relying on a variety of official data sources for the University of California. The crucial input comes from a Faculty Time-Use Survey conducted by the University some 30 years ago: roughly summarized, this says that UC professors, on average, spend about ½ of their time at research and ½ at teaching and the teaching is equally divided between undergraduate and graduate courses.
My latest calculation may be found at http://socrates.berkeley.edu/~schwrtz/Part_22.html and the conclusion there is that the current level of tuition and fees charged to undergraduate students at UC covers significantly more than 100% of the University’s actual cost for providing undergraduate education. This is (or should be) shocking!
This result is in stark contrast with the official pronouncement by UC officials that student tuition and fees (net of financial aid) cover 49% of the “Per-Student Average Expenditure for Education”. (Quote from page S-14 of the UC Budget for Current Operations, approved by The Regents in November 2012.)
The difference in the numerical outcomes is clearly due to the fact that UC starts its calculation with the entire contents of that upper-left hand box in the picture above. What they are actually calculating is the cost of undergraduate education plus graduate education plus Departmental Research. But they call this the Cost of Education; and this, I assert, is very misleading. And it does real harm.
For example, the head of the Howard Jarvis Taxpayers Association noted (in 2010) that “taxpayers pay 60-70% of the cost of … UC students’ education, without even counting financial aid” and that argued for increasing student fees. He got those numbers from UC’s distorted calculation that, at that time, student fees covered only 30-40% of the Cost of Education.
I have tried to get top UC officials to acknowledge the falsity of their calculation and published statements about the Cost of Education; but they reply that their method of calculation follows the standard established by NACUBO and followed by the entire higher education community. Indeed, in a 2002 report from a special commission, NACUBO stated that in calculating the Cost of Undergraduate Education, universities should include all of the cost of Departmental Research inside the Instructional expenditures. I have tried repeatedly to get responsible officials to justify that extreme claim, but none have even tried.
But things seem to be changing now. A recent report from a special panel of the National Academy of Sciences (“Improving Measurement of Productivity in Higher Education”) suggests that it is time to revise that NACUBO methodology and figure out a better way to account for Departmental Research. Most immediately, the California State Legislature has passed a bill (AB 94), attached to the latest state budget, requiring the University of California to report the separate “costs of undergraduate education, graduate academic education, graduate professional education, and research activities.”
I suggest that the new President of this University would be wise to engage that new state law positively, emphasizing the University’s commitment to be open and honest with the citizens of California, and thus set a nationwide precedent for cleaning up the bad financial practices of the nation’s other research universities.
There are further implications of such a reform in bookkeeping. There will undoubtedly be a necessary adjustment (downward) in undergraduate student tuition charges. There must also be a new and strenuous push to restore adequate public funding for the basic academic research mission. This requires a newly enlightened leadership at UCOP (University of California Office of the President) and the audience for that advocacy is all citizens as well as state and federal government officials.