Financing the University – Part 17
by Charles Schwartz, Professor Emeritus, University of California,
Berkeley
schwartz@physics.berkeley.edu
December 15, 2008
>> This series is available on the internet at http://ocf.berkeley.edu/~schwrtz
and also see the blog http://UniversityProbe.org
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.
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
)
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.”]
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!
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.
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.
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.
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.
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.
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.