Peter Schrag’s profile of UC president Mark Yudof in San Francisco Modern Luxury deserves an A grade for keeping Yudof happy.  This article could have benefited from enhanced reporting.

First, the Regents never “came calling” to Yudof in Texas.  It is solely UC Regents Chairman Blum who did so.  Blum essentially imposed Yudof on the Board.  Blum meant well, but a number of Regents resented this imposition.  And Yudof made little attempt to overcome this resentment.  Some very powerful Regents were offended that Yudof did not reach out to introduce himself to them.  (In contrast, when Robert Dynes became UC President he made a point to meet and learn the concerns of every Regent on his/her home turf, showing up for lunch with me at the Hollywood Roosevelt Hotel even though I had only about a year left in my term).  And now that Blum is no longer Chairman, some Regents admit they were unwilling to confront Blum’s method or choice of Yudof because they wished to remain in the good graces of Blum’s U.S. Senator wife.

Second, there’s lots of contrary evidence that Yudof left Minnesota and Texas universities “bigger and grander than when he came.”  In particular, Minnesotans were happy that Yudof’s leavetaking meant they could finally find a university president who would consider building them a football stadium, and a quick search of University of Texas professors’ association sites offers myriad reasons why they were happy to see Yudof go.  The Texas professors’ sites also predicted a lot of Yudof’s managerial problems at UC.  In other words, evidence here is mixed.

Third, after Dynes was sidelined, UC Provost Wyatt R. Hume served as Acting UC President for almost a year.  It is Hume who led and managed the downsizing of 450-plus people in the UC Office of the President.  Hume made a number of presentations to the Regents during that period about how he was downsizing UCOP.   Indeed, Yudof currently is being criticized for adding back a number of high-paid positions to UCOP.

Fourth, how can Schrag label critics of UC administrators as populist opportunists?   I believe UC Berkeley professor-emeritus Charles Schwartz is sincere in his claims that undergraduate student fees cover undergraduate student education, although I disagree with his finding and methodology.  And UC Santa Cruz Professor and President of the Council of UC Faculty Associations Robert Meister is absolutely correct in reporting that UC has pledged student fees in the repayment of construction bonds.  Whether this is proper or not, I do not know.  UC administrators stonewalled Meister before presenting him with limited answers concerning this practice.

Fifth, I disagree that Yudof inherited an UC administration that was disengaged from the process in Sacramento.  In the opinion of many Regents, UC President Atkinson, External Affairs Vice President Darling and UC Sacramento Office Director Arditti were overly solicitous to Legislative requests.  Apparently Yudof and Schrag are ignorant of the Latino legislators’ leverage over numerous changes in UC admissions policies over the past decade.

Sixth, Yudof’s current push for the federal government to save public research universities is contrary to Yudof’s published statements attributing diminished state support, first, to the aging of the U.S. population, as resources are shifted from education to senior citizens’ other areas of interest, such as health care and security, and, second, to globalization, as multi-national corporations become less tied to specific geographic locations and thus less interested in developing well-educated, local workforces.[1] These arguments explain why UC’s advocacy requests for increased funding from the California Legislature yield limited results.

Finally, like Schrag I find Yudof personally engaging and smart.  And, like Schrag, I question whether UC — and society — can afford a law school at UC Irvine.

[1] Mark Yudof, “Higher Tuitions:  Harbinger of a Hybrid University?,” Change Magazine, March/April 2002.

Charles Schwartz, UC Berkeley

Rather than just waiting for delivery of the Governor’s proposed increase in funding for higher education, the University should engage in some needed fiscal reforms to convince the rest of the state that their reinvestment will be well spent. Foremost is a need to clean up some bad habits of the UC administration; and such reform is unlikely to come from the top. So here is a worthy campaign for the faculty to take on.

The new (January 6, 2010) educational initiative announced by California Governor Arnold Schwarzenegger – to put funding for higher education above funding for prisons – surprised many of us. (Not all were surprised, since we also saw a rapid deluge of favorable press releases coming from the leaders of UC.)

The Governor has proposed a Constitutional Amendment that would set state funding for UC (University of California) and CSU (California State Universities) at a minimum of 10 percent of the state General Fund budget while limiting the state’s prison budget to a maximum of 7% of that General Fund. (In recent years the funding of those two sectors has been roughly in the reverse proportions.)

What does this mean for those of us who have been engaged in the ongoing struggle to save UC from the twin perils (Scylla and Charybdis) of mediocrity and privatization?

First we note the letter issued by Berkeley’s Chancellor Robert Birgeneau, in which he claims credit for this bonanza:

But it is also worth noting this report (in The New York Times, January 7, 2010)

And most of us on this campus know what a distance there has been between the Chancellor and the protestors.

So, now, what do we think of this? Do we just sit back and wait for new money to flow in, solving all our troubles?  Or is there some clear direction that we may undertake to help assure that desirable outcome?

None of us knows the future but we can use our minds to try to glimpse alternative possibilities.  Below are my own thoughts.

In the short term, I see Schwarzenegger’s initiative as helpful in avoiding the rush to decision-making.  The Regents’ Commission on the Future seemed to me as nothing more than a fig leaf to cover the push for faster privatization of UC. The discourse at the regents meeting in July 2009 seemed to say: One Year is all the time we have to solve the problem of unreliable state funding, before top quality research faculty abandon UC for greener (academic) pastures. Now the Governor has placed a new option on the table that allows us all to say, Wait, Let’s try to make this work.

What are the likely oppositions to Schwarzenegger’s plan?

To answer that, we can start by acknowledging some other plans that have attracted much attention throughout the University. There is George Lakoff’s plan, an initiative for the November 2010 ballot that seeks to restore “majority rule” in California by eliminating the requirement of 2/3 vote in the Legislature for any tax or budget measures (See http://www.californiansfordemocracy.com/ ). There is also Stan Glantz’s calculation that it will require only $4.6 Billion in additional annual funding to restore UC and CSU to their good level of state funding as last seen in 2001 (See http://keepcaliforniaspromise.org/?p=553 ). Both of those proposals, as well as the Governor’s will face opposition from that sector of the California population (and their elected officials) who have a strong aversion to more taxes, more state spending, especially when they see that spending as wasteful in one way or another.

What is significant about all three proposals mentioned above (Schwarzenegger, Lakoff, Glantz) is that each one of them simply asks for more public money to be given to the University without requiring anything in return, other than more of the same.

Now, California’s system of higher education has done a wonderful job of serving California citizens since the inauguration of the Master Plan in 1960. So, “more of the same” has a lot going for it. But we are also well aware that there have been substantial problems (bad management and bad public relations) in the way that UC has handled its financial matters.

Mark Baldassare, President of the Public Policy Institute of California made a presentation to the regents’ Commission on the Future on November 12 in which he reported on their recent survey of public opinion regarding higher education in this state. (See http://ucfuture.universityofcalifornia.edu/presentations/ ) When asked to summarize his findings and give his advice to the Commission, Baldassare said,

That leads me to suggest this general plan:

We, the UC Faculty, should undertake a bold initiative to reform the mistaken financial priorities and practices of our own University administration – and this effort should be part of any campaign to restore adequate state funding for our multiple missions of teaching, research and public service.

Here is a tentative list of specific critiques and proposed remedies.

Changes for the UC Administration

I. Cap executive compensation as recommended by the Berkeley Division in 1992.

II. Justify or remove excess management that has been documented.

III. Tell the truth about UC’s average cost for providing undergraduate education.

IV. Provide transparent accounting for how student fees are spent.

V. Provide annual disclosure of how all discretionary funds are allocated.

Changes for the Board of Regents

I. Recognize and repair the harm done by excessive intrusion of big business values into the academic community.

II. Consider some basic democratization, in order to make The Regents more accountable to the California public, whose university this is.

(For some background on these issues, see my recent posting, http://socrates.berkeley.edu/~schwrtz/ToTheCommission.pdf ).

This list is not meant to be definitive but only an opening suggestion. Let all interested faculty members engage in open debate about what to add, what to change, how best to formulate this set of proposals and how best to assemble a large consensus of faculty support for this plan.

As for process, I would not advocate asking the Academic Senate to undertake this study and debate. That institution, especially at its higher levels, is closely tied in with the existing administrative apparatus; and so it is unlikely that they would have the freedom to be as critical of those same top executives as may need to be done.  When this work is completed, as an independent, grassroots faculty initiative, it may then be brought forward to the Academic Senate asking for a formal endorsement by the full membership.

Department of Physics
University of California, Berkeley
December 11, 2009

Executive Vice President Peter Taylor
Office of the President
University of California
Peter.Taylor@ucop.edu

Dear Peter;

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.

Sincerely,

Charles Schwartz
Professor Emeritus

Cc: Regents Gould, Ruiz, Lozano, Bernal
President Yudof
Professor Meister

For Your Consideration, I submit the enclosed proposal:

A BETTER PLAN FOR THE FUTURE OF THE UNIVERSITY OF CALIFORNIA

3 pages summarizing this comprehensive PLAN, followed by 20 pages of relevant background material from my recent seminar on this topic.

In submitting this proposal, I request a thoroughgoing review that will produce a critical response: first identifying any faults you may find in my assertions of fact or logic; then offering whatever opinions you may develop about the feasibility and desirability of the changes that are proposed. That is the caliber of work we expect in the University.

The overall concept of this PLAN is to seek a partial renewal of state funding for the University of California together with substantial changes in the way that UC handles the money it receives. This approach (“walking on two legs”) should be the best way to bring the University and California together again and thus avoid the perils of UC either decaying from its preeminent academic standing or abandoning its invaluable public character.

To be perfectly frank, these proposals do step on the toes of certain factions of the University, namely, the Board of Regents and their chosen executives. But, please remember, our primary goal is to preserve the University, this center of great learning in the service of the public good.

I will be happy to provide an electronic copy of this presentation, so that it can be posted on the central website of the Commission for any interested persons to access.

Thank you,

Charles Schwartz

The PLAN is also posted at  http://socrates.berkeley.edu/~schwrtz

meeting in Oakland, CA, November 12, 2009

by Charles Schwartz

Having sat through two of your public Commission meetings, the most interesting thing I have heard was the presentation at the beginning [today] by Mr. Baldassare [Mark Baldassare, President of the Public Policy Institute of California], who connects to the world of the people of California.  And his most interesting comment was his response to a question from Mr. Pulaski.  I hope I am quoting him correctly.  Baldassare described the people as having mixed views about higher education and the University. He said: what the people want from higher education is efficiency, responsiveness and accountability.

Now I know the President’s Office uses those words a lot. They have a program for accountability.  I have looked at a lot of the stuff that they have put out there. And I judge it to be primarily a public relations job; and I think most people see it as that. And therefore it fails to provide the people with what they say they want.

Let me give you a few examples. A familiar cliché: student fees go up; and the educational services that we provide to the students go down.  Standard excuse: It’s Sacramento’s fault.  No, that doesn’t wash.  We take in a billion and a half dollars this year and two billion dollars next year of Educational Fees.  How are you spending those monies?  Nobody can find out.

There is a lively controversy between Professor Meister and Vice President Taylor.  There is no transparency there. It is a PR game.  You can’t win friends that way!

Another example, from my own research:   The fantastic growth rate of administrative bureaucracy throughout this university. It’s been ignored, ignored, ignored for a long time. Well, maybe there will be some progress made on that now.

I think it would have been a wonderful thing if there were a Working Group appointed whose job was to bring forward specific critiques aimed at the top administrative structure, and that would include the Board of Regents, the President and the Chancellors and that whole non-academic activity; how is it funded; where is the money going; what’s going on?

Now, of course, since you are the people who created this structure, it wasn’t likely that you would appoint such a working group. But there is an idea.

Thank you.

Department of Physics
University of California, Berkeley
Berkeley, CA 94720
October 15, 2009

Regent Fred Ruiz, Chair, Committee on Compliance and Audit
Regent Monica Lozano, Chair, Committee on Finance

Dear Regents Ruiz and Lozano;

I write to convey a concern, which is shared by a number of my faculty colleagues, regarding a lack of information about the relationship between student fee revenues and the University’s debt service activities. 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.

In 2003 The Regents adopted a new arrangement for increasing its overall debt capacity. A General Revenue pool was established for financing most of the campus-based capital projects and a separate Medical Centers pool was established for that set of enterprises. A particularly novel feature was that student fee revenue was to be included in the General Revenue pool – in fact it is the largest component therein.

As I understand the University’s policy, each campus-based capital project that requires external borrowing, via loans or bonds, must plan on providing the necessary debt service through the specific revenue stream that the individual project is intended to provide. The bulk of the General Revenue pool is “pledged” as a backup source of debt service, for use only in case of default by that primary cashflow. [See, for reference, the “Annual Debt Capital Report to The Regents”, Fiscal Year 2007-08, at the bottom of page 7.]

The question that has arisen is whether student fee money is being used or may be used as a primary source of debt payment on some construction projects (other than certain capital projects that are explicitly to be funded by the student Registration Fees.)  The immediately troubling situation is that I have been unable to find an answer to that question for campus-based projects.

By contrast, I have looked at the last annual Financial Reports of the University’s five Medical Centers; and there I find, for each entity, a table of annual values for their “Debt Service Coverage Ratio.” This is a most instructive datum: the net operating revenues divided by the scheduled payments of interest and principal on outstanding long-term debt. The numbers published for FY 2008 are, 2.5, 6.3, 2.2, 7.8, and 4.2  – showing a very healthy financial condition with each medical center easily handling its own debt service obligations without having to be bailed out by the other members of that pool.

Is there any such data to be found for the campus-based capital projects?  I have looked at several published reports and made specific inquiry to a knowledgeable person at UCOP; and the answer appears to be, No.

I find this shocking; and I therefore write to you for resolution of this problem.

Sincerely yours,

Charles Schwartz
Professor Emeritus
schwartz@physics.berkeley.edu

CC:
Regent Russell Gould, Chair of the Board
Student Regent Jesse Bernal
President Mark Yudof
Senior Vice President Sheryl Vacca

Persistent Dishonesty from the UC Office of the President

by Charles Schwartz, UC Berkeley

• In November 2008, UCOP (University of California Office of the President) made its formal presentation for The Regents’ Budget for the fiscal year 2009-10.  It was clear that a difficult time was ahead in terms of the state’s ability to provide funding that the University felt it needed. The Executive Summary of the Budget, as presented, spoke of the University’s “core funds” coming from State money and Student Fees; and then it mentioned “Other sources of funds”, coming from federal research contracts, private gifts, medical and other enterprises run by the University. It then said, “Use of these [Other] funds is restricted.”

In a paper written and distributed widely on December 15, 2008,  I said that the UCOP  statement about restricted funds was incorrect; and I presented data, from the University’s official financial reports, which showed that the total of UC’s Unrestricted funds (aside from those “core funds”) was twice as large as the Restricted funds. [See “Financing the University – Part 17” posted at http://UniversityProbe.org ] In that paper I also outlined several budget alternatives that were feasible under a correct understanding about what funds are restricted and what are unrestricted.

•• In April 2009, UCOP sent out a glossy document entitled “The UC Budget: Myths & Facts”, which, among other things, said:

That prompted me to write a letter directly to UC’s President Mark Yudof, referring to that document and asking, “Are you the person responsible for that load of lies and half-truths?” [See the full letter, dated April 11,  at  http://UniversityProbe.org ]

I received a response, dated May 12, from Patrick J. Lenz, UC’s Vice President for Budget, who said that he was responding, on behalf of President Yudof,  to my April 11 letter. He acknowledged that I was correct in my criticism, since those other funds “may not be restricted in the legal sense.” [See the full letter from Lenz and my discussion of it at http://socrates.berkeley.edu/~schwrtz “Financing the University – Part 18”.]  Thus it appeared that we had finally cleaned up that old lie; but I was mistaken.

••• In the July 14 issue of the San Francisco Chronicle there was an op-ed piece by Russell Gould, Chair of the Board of Regents, and President Mark Yudof : “UC budget cuts attempt to share the pain fairly.”  In that we read,

The lie that won’t die.

•••• Now we skip to Yudof’s remarks at the September 16 meeting of the Regents. These are available on Youtube and there is also a transcript available.  Here is a slice.

Here he avoids the word “restricted” but he is playing the same old game of misrepresenting the options available to UC.  If you look at my December 2008 paper, I proposed taking a modest portion of the excess revenues that the medical centers enjoy (about $400 million for the last fiscal year) and applying that unrestricted money to the immediate financial crisis on the campuses. I also suggested taking a modest portion of the physician practice income, which is paid out to Medical School faculty on top of their academic salaries, and doing the same. (I estimated that a 15% cut of that bonus pay would yield $100 million.) My suggestions were simply ignored; and instead Yudof and his team concoct extreme fantasies which they can knock down.

But it is actually worse than that. When Yudof brought his final paycut/furlough plan to the Regents in July, there was special beneficence to those most highly paid Medical School people. While Yudof bragged about the fairness of his plan – everybody sharing the pain – he chose not to mention that all the bonus income from the physician practice enterprise would be exempt from the paycuts. (To
know that little detail you had to find one sentence on page 20 of the 28-page item J2, which the regents were given to approve at that July meeting.)

••••• At the September 16 meeting of The Regents, Vice President Lenz made a detailed presentation of the budget situation for this year and for the next year. [This may be seen at http://budget.ucop.edu/pres.html ]  Here we find a change of tactic: they now use the word “committed” instead of the word “restricted.” Here it is from VP Lenz’s Display 21:

That is the same old lie presented with a new twist. The truth is that UC does have billions of dollars in unrestricted funds – that means funds over which the UC Regents and their administrators have full legal authority to allocate –  and they could, if they wished, use some of those funds to make up for reductions in  state support. What does the word “committed” mean? It means only that under normal budgetary circumstances various pots of money would be used for previously assumed purposes. But these are not normal budgetary circumstances: President Yudof has asked for, and The Regents have approved, a Declaration of Financial Emergency.  Money that was previously “committed” to one purpose can be re-assigned to another purpose.

It is all about priorities; and all those options ought to be placed “on the table” rather than hidden behind the dishonest game being played.

In his Display 23, VP Lenz gives a tantalizing table of “Unrestricted Net Assets” . estimated for the end of the last fiscal year, as follows.

It may be that Capital Projects have to be left alone; but some of that extra money at the Medical Centers should be on the table. And, most of all, I am curious to know what is contained in that biggest item of unrestricted Endowment Income (FFEs stands for Funds Functioning as Endowments.)

I have a hunch that we can do a better job of budget management than just ramping up the student fees. What we need is a full and honest look at all available funds.

I’ll send a personal note to Mark Yudof inviting his response to all this.

Financing the University – Part 20

by Charles Schwartz, Professor Emeritus, UC Berkeley

FOLLOW THE STUDENT FEE MONEY

Here is the latest official tabulation of the various kinds of Student Fee revenues for the University of California.  This comes from the “2009-10 Budget for Current Operations, Budget Detail” (henceforward, the “Budget”), published November 2008 and available at http://budget.ucop.edu/pubs.html.  The table on page 174, titled “Income and  Funds Available,” gives this data as Proposed for 2009-10.

Table 1. UC Student Fee Revenues for 2009-10

As it turned out, the General Fund (state appropriation) portion listed above did not materialize and so that amount was added to other student fee categories.  The total amount of student revenue for this year is $2.7 billion.  Perhaps the University Extension Fees should not be counted in this total, since that is a self-supporting business (similar to the Auxiliary Enterprises.) So, maybe a better result is this:

Total Student Fee Revenues = $2.5 billion.

Now let us ask how much the State of California, through its General Fund Appropriation, is contributing to UC’s Budget for Current Operations this year. That number may be found in the report by Patrick Lenz, UC’s Vice President for Budget, Item F1 Attachment at the Regents’ meeting on July 15, 2009.

Total State General Fund Appropriation = $2.6 billion.

This is an unprecedented situation. We are on the brink of a transformation from a state-funded university to a student-funded university. (President Yudof has suggested that fees may be raised again in the middle of this academic year, so the crossover point may come very soon.)

There are a number of provocative ideas that follow from this recognition. Since the Students’ financial input to UC’s core operating budget matches that of the State, then it seems logical and fair to claim that Student interests, Student priorities, Student leverage to negotiate with the UC administration – should all be as potent as the State’s.

The most far-reaching version of this principle concerns the composition of the governing Board of Regents. Of the present 26 voting members of that Board, four are elected state officials and 18 are individuals appointed by and approved by elected state officials.  Thus, 22 Regents’ seats have traditionally been allocated to people who are there to represent the public interest in the University of California, which Article IX Section 9 of the California Constitution defines as a “public trust.” However, if a large portion of the public (taxpayer) investment in UC’s operation has been cut away and replaced by Student Fees, then it seems proper to ask for a proportional replacement of those “public” regents by regents who are chosen to represent Student interests. By Student interests I imply equally the interests of those students’ families who usually carry most of the financial burden for paying those student fees.

To achieve that result – fulfilling the old axiom, “no taxation without representation” – will probably require amending the state Constitution and that will take some time and effort. Yet this idea is not unique to UC; it applies as well to the CSU system in California and to other public universities across the country. [An article on this topic was published in the May 22, 2009, issue of the Chronicle of Higher Education.]

Short of that large goal, there are a number of more limited and specific claims that Students can and should make upon the budget priorities of the UC administration, in light of the massive revenues which they bring to the institution.

At the July meeting of the regents, there was a parade of the Chancellors of the ten campuses, who recited a dreary list of the painful measures that they had to institute because of the severe cutback in state funding.  One item I noticed being mentioned by several Chancellors was that they had to cut back on the number of Teaching Assistants (Graduate Student Instructors)  and also the cancellation of a number of courses that students would need in order to graduate in time.   That response to a budget crisis would be reasonable in the old circumstances where the state funding paid for all of that educational program expense. But how does it fit in this new environment, where the students themselves are paying for much of the overall program?

Let’s go back to the numbers. Table 1 shows that the largest student fee revenue is from the Educational Fee, about $1.5 billion in income to the University. This is mostly fees paid by undergraduate students. And the stated purpose of this fee is to support the educational program, which the state has not been fully funding.  So, what are the priorities at work here? How do the chief administrators at the University decide which programs should be cut and which should be protected from cuts?

More numbers are needed to answer this question. They are cutting Teaching Assistants, who are graduate students employed as the first line in serving the educational needs of undergraduate students. What is the total cost to UC for all TA’s?  Depending on what resource you choose to rely on, the answer is between $100 million and $200 million per year.  But those numbers are peanuts compared to the total $1.5 billion that undergraduate students are paying in Educational Fees.  Something is terribly wrong here.

The President of the University and all the campus Chancellors need to be told that their priorities are out of whack.  That $1.5 billion in money that they get from undergraduate students paying their Educational Fees should be used – as a first priority – to provide the quality undergraduate education that UC has been famous for.  If there is a dire shortage in state funding, that may certainly have some painful consequences; but since students are paying so much for their own education, that money must be used to supply them that education.

It can only be assumed that the President and the Chancellors have fallen into an old way of thinking about how to budget. They must be told to WAKE UP and provide students with the full educational service that they have paid for!!

The recognition that student fees have now matched state funding for UC’s operating budget has implications for a number of more obscure financial issues.

A. Nonresident Tuition is a charge added onto the bills of any student who does not qualify as a California resident. From Table 1 we see that that extra revenue amounts to $265 million. The rationale for this charge is given as being “in lieu of State support for the cost of education” [the Budget, page 117];  and therefore this income is credited to the state and counted as “UC General Funds”. But since it is now student fees that replace most of state funding for the UC core budget, part of this income “belongs” to Students and not just to the state.

B. Indirect Cost Recovery (ICR) is a large windfall to the University. It comes along with federal research contracts and grants in recognition of the fact that the performance of research projects funded by federal grants also incurs substantial costs to the University for overhead expenses – libraries, administration and facilities management that the specific research activities rely on. The dollar amount of this money may also be seen in the Budget document cited earlier.  It is listed in three separate parts (which may seem obscure to the uninitiated) as follows for 2009-10:

Off The Top Overhead…….. ….$117 million

UC General Funds portion……..$259 million

University Opportunity Fund ..…$211 million

TOTAL…………………$587 million

Since this money was previously collected in recognition of state funding used to provide the institutional support for research work, the fact that student fees now supplant much of that state funding means that Student interests should now govern how a portion of this money is to be spent.

C. The Short Term Investment Pool (STIP) is a $7 billion collection of money received by many different parts of the University that is not needed for immediate expenditure. The Treasurer is able to invest this large pool of money and earn a higher rate of interest than if the individual funds were just put in some bank accounts.  The recent rate of return has been a bit over 3% per year, while the last reported ten-year average rate was 4.63% per year. This interest is generally given back to the parties that provided the original cash: hospital revenues to the Medical Center Directors, research contract and grant funds to the faculty Principal Investigators, etc. So, now we should ask about the Student Fees – that $2.5 billion collected by UC this year. Who gets to use the interest on that part of the STIP?  It seems to me that the Student Representative has a legitimate claim on the allocation of that money.

D. University Debt Capacity. In recent years The Regents have reorganized the way in which they seek external funding (through bonds, loans and other means of borrowing). Instead of each project being financed on its own merits, a large General Revenue base has been defined as a way to achieve better credit ratings and thereby lower interest charges. A major component of this General Revenue base is the University’s steady stream of income from Student Fees.  This fact suggests that Student interests should thus have a say in the authorization of any such external financing plans (since it is Student Fee money that is being put up as collateral for the bonds or loans); and, additionally, Student interests should share in the allocation of any savings that the University realizes from such debt restructuring as has been recently reported.

In general one should ask, Where does Student Fee money actually get spent? My continuing studies lead to the opinion that much better accountability and transparency is needed on this topic.

by Charles Schwartz, UC Berkeley

• One University or None (July 9)

• Yudof Makes Some Changes (July 12)

• Looking Ahead (July 12)

ONE UNIVERSITY or NONE (July 9)

Tomorrow morning Mark Yudof, the President of the University of California, will publicly announce his decisions on how to administer salary cuts throughout UC in order to meet the steep budget deficit in State funding for the coming year.

His original proposal was based upon a principle of “equity”, namely that all University employees should share the same burden (he proposed an 8% cut in pay) regardless of whether their salaries came from state funding, external research contracts, medical or other enterprises run by the University.  He invited all faculty and staff to respond with their opinions about this plan.

He has gotten plenty of feedback. I haven’t seen it all, but a sample of responses from the faculty, now published online from the Academic Senate divisions on some campuses, gives a sharp picture of opposition to that idea of “equity.”

From a Medical School one sees the claim that most of their money comes from other than State sources (federal research grants, the practice of medicine at the hospitals and clinics) and therefore they should not have to pay into this hole in the State budget. Elsewhere, faculty with large external research contracts and grants similarly claim that the budget burden should not fall upon those sources of funding.

It should also be acknowledged that, amidst this apparently self-centered focus, one also finds the generous critique that Yudof’s original plan should be made more progressive, bearing more lightly on lower income employees and more heavily on those at higher levels of compensation. There are also tensions between the choice of a simple pay cut or a furlough (unpaid days of no work): different employees understandably have different preferences.  And there are other detailed issues, like how this affects retirement benefits, etc.

But the central contest, as I see it, is over this principle of “equity,” a sharing of the financial pain throughout all of the University.

Will President Yudof stand by his initial philosophy or will he cave in to the pressure of a large portion of the faculty?  And, if he does stand with that principle (and assuming the Board of Regents supports that stance), will the faculty accept that or will they rebel and/or depart in large numbers?

We shall see what happens.  I believe that this is a crucial watermark in the history of the University of California, with implications for much of higher education throughout the country.

If the principle of “One University” is maintained, then there is hope that the long term financial problems can be worked out and there will be a positive future for this wonderful public institution, something of great quality and democratic purpose in America.

If not, then we shall degenerate into a squabbling series of fiefdoms, copying the narcissistic ways of private universities: priding themselves of the exclusiveness of their student enrollments rather their inclusiveness.

Stay tuned.

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YUDOF MAKES SOME CHANGES (July 12)

On July 10, President Yudof released his final Plan for Pay Reductions/Furloughs http://universityofcalifornia.edu/regents/regmeet/jul09/j2.pdf , which he will take to the Board of Regents on July 15 for their approval.

He writes (on page 9):
“For fairness and equity, the Plan applies to as many University faculty and staff as is legally permissible and operationally feasible. As described in detail below, certain categories of staff and faculty will be exempted from the Plan.”

Let us see how fair and equitable it is. Here are the major changes.

I. Steps Forward:
(a) Graduated pay reductions – from 4% for those earning less than $40,000 to 10% for those earning over $240,000;
(b) Some flexibility on furloughs;
(c) Retirement plan credits will not suffer due to the salary reductions;
(d) The plan will go into effect September 1 instead of August 1.

II. Steps Sideways:
(a) Exempting all employees paid entirely from federal and other external research funds;
(b) Similarly exempting employees at Lawrence Berkeley Laboratory.
(These are all restricted funds that could not be used for other purposes.)

III. Steps Backward:
(a) Basing pay reductions on “Base Pay” only, not Gross Earnings.
(b) Exempting income from clinical practice. (These are unrestricted funds that are under the Regents’ authority to designate.)

The changes I, were called for by many faculty and staff and Yudof responded positively.

The changes II and III were strongly advocated by a number of faculty, and Yudof acquiesced even though he had to substantially abandon his earlier call for “equity” without exemptions.

Change III(a) means that a number of the most highly compensated people throughout the university will be provided a big loophole through which they can avoid a full “sharing of the pain”.

Change III(b) is a major concession to the very richest group among us: those faculty members at the Medical Schools who take home much more than their academic salaries through the Health Science Compensation Plans. (I estimate that this is a giveaway amounting to around $60 million.)

I have a concern that the particular interests of the top ranking people who advised President Yudof in shaping this plan may have unduly influenced this generosity toward faculty at the Medical Schools. The Chair and the Vice-Chair of the Academic Senate are both Medical School faculty members, and so is UC’s Executive Vice President for Academic Affairs.

With these modifications, Yudof says, “The proposed Plan is expected to generate an estimated $184.1 million in General Funds ($515.5 million in total from all fund sources) to assist in absorbing the State budget reduction.”

This brings us back to my original critique: How will all that other money ($515 million – $184 million = $331 million) be used, and who will decide that?

Yudof discusses this question briefly on page 9 of his document.

First, he mentions that the savings from externally funded research contracts and grants must stay with those projects; that is nothing new and it amounts to a smaller figure after change II(a).

Next, he says some of that extra money coming from campus auxiliary enterprises can be used to supplement campus general fund budgets. Good, but there are no numbers and no assurances.

Finally, he has a discussion about money collected from employee paychecks at the University’s five Medical Centers. Everything there is unrestricted money. Yudof does not say how much of that money they will get; but I estimate that they will take in about $150 million from employee pay reductions and their expected General Funds deficit is only about $10 million.  Now you need to read what Yudof says about this $140 million windfall.  This is amazing stuff!

“The savings generated by the medical centers will allow them to address the need to fund the recent collective bargaining agreements, which are not paid for by the State and must be paid for from operating income. In addition, the savings will assist the medical centers in preparing to fund their share of the contributions to the UC Retirement Plan commencing in April, 2010. For the medical centers alone, this expense will be well over $200 million per year, is not state funded, and must be paid from medical center revenue, and would completely erase the current year’s projected margin. In addition to these cost pressures, the University’s medical centers will be facing potential revenue shortfalls due to the economy and changes in the state and federal budget landscapes. Notably, the Medical Centers are concerned about adverse impacts from the suggested changes in the Medi-Cal program being discussed by the State ($20 million was cut in FY 2008-09 alone) and the proposed health care reform efforts being discussed at the national level. “

All that money, collected under the Extreme Financial Emergency predicated upon the deficit in the state budget, will be used by the Medical Center management to meet business challenges that have little or no connection to the state budget crisis. They make concessions to raises for employees under collective bargaining agreements and then they turn around and cut all employees’ pay in order to meet that obligation!  The management has an up-coming obligation to pay employer contributions into the pension fund and so they dock employees’ pay to meet that obligation! (The employees will, of course, have to pay their own share of contributions to the pension fund on top of this.) There are clouds on the horizon concerning federal and state money for health care, and so the Medical Center executives will squeeze their own employees (under cover of a University budget crisis) to meet that financial challenge. And if that double cross, triple cross operation is carried out successfully, the top managers of the Medical Centers will be rewarded with salary bonuses, on top of their huge salaries, for their outstanding leadership.

Putting aside that focused look at the Medical Centers, there remains something approaching $200 million in windfall cash, which is taken from the non-state-funded paychecks of employees and ends up in the hands of the University President and Chancellors.  There are no guidelines on how that money is to be used.  It is a big slush fund.

On the web site of the University of California Office of the President, one finds this:  “Budget cuts will exact a toll on students, faculty and staff. But great leadership being provided.”

Great leadership, indeed! It looks to me like Mark Yudof took a lesson in financial management from Bernie Madoff.

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LOOKING AHEAD (July 12)

In the first part of this post (One University or None) I pointed out the conflict between many faculty members’ focus on their narrow financial/professional interests and the overall well being of the University of California. President Yudof has found a compromise position, which only postpones the resolution of that conflict.

He has made major concessions on the faculty’s noisiest issues – exempting the money in research grants and in medical practice – while maintaining a semblance of “equity”. By doing so, however, he has established a precedent-setting fracture in the ideal of One University, a split mapped along certain professional lines.

There are other noteworthy lines along which there are seismic pressures. A letter from some prominent faculty members at the San Diego campus promotes the idea of abandoning the 10 campus system, keeping only a few as leading research campuses with the rest of them abandoned to some dismal future.

The immediate focus will be on the Regents’ meeting on July 15. It is hard to imagine that they will not approve Yudof’s plan (with appropriate crocodile tears); but it will also be interesting to observe the breadth and depth of the protests from many quarters.

Also announced in Yudof’s paper is ”the creation of a Regental Task Force to review some of the fundamental questions facing the University, including the educational delivery model, the University’s student fee and financial aid policies and the expectations of the Master Plan.” They have done that a few times before, trying to make sensible plans for the long-range financial future of the University of California.  A handful of big shots, going off to a series of private meetings, blah, blah, blah, achieving nothing.

My own best idea is that all concerned people in and around the University need to convene their own public forums for ongoing study and debate of this same question.  The drama of this Pay Reduction proposal has at least gotten many people awake and agitated. Let’s see if there is a way to make some real educational hay out of this mess.

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.

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:

(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:

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:

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!