Financing the University – Part 21

by Charles Schwartz, Professor Emeritus, University of California, Berkeley

Schwartz@physics.berkeley.edu                                January 26, 2011  

 http://ocf.berkeley.edu/~schwrtz  and   http://UniversityProbe.org

ALTERNATIVES IN THE PRESENT BUDGET CRISIS

While is it proper and necessary for the leadership of the University of California to protest the Governor’s budget cuts and to remind the citizenry of the important public services that UC provides, it is also doubtless that we will have to tighten our belts and deal with this pain.  There are choices for how we do that; and the purpose of this paper is to explore some choices that may not be offered by the president and the regents.

I. Introduction

     Here is the key paragraph from Governor Brown’s budget proposal issued January 10, 2011, for the University of California (page 150 of Governor’s Budget Summary):

The significant General Fund Solution is:

Targeted Reductions – A decrease of $500 million in 2011-12 to reflect necessary funding reductions to help resolve the budget deficit. These reductions are intended to minimize fee and enrollment impacts on students by targeting actions that lower the costs of instruction and administration. The Administration will work with the Office of the President and the Regents, as well as stakeholders (including representatives of students and employees), to determine the specific mix of measures that can best accomplish these objectives.

     Our objective here is to identify some unconventional alternatives for the University to take that big cut and still survive in the best possible shape. This is an intellectual challenge; and we start by identifying three broad classes of University revenues.

1. Core Funds – State and UC General Funds plus Student Tuition and Fees – which are used to provide for the central academic missions of teaching, research and public service. These funds provide salaries for Faculty and departmental staff, with related academic support and overhead expenses. (About $6 Billion).

2.  Restricted Funds. Most of the money that comes from outside sources for Research is Restricted to its intended purpose and may not (legally) be used for other purposes. Most income from Endowment Funds is also Restricted. (About $5 Billion)

3. Other Unrestricted Funds that are commonly ascribed to “self-supporting” business activities, such as hospitals and clinics and Auxiliary Enterprises. These monies are legally under the full control of The Regents, but are usually “Designated” for use by the enterprises that “earned” those revenues. (About $8 Billion)

II. Wrong-Way Yudof

     During the budget crisis in 2009, UC President Mark Yudof and his staff repeatedly made assertions that “UC’s budget is made up of many different fund sources, but most of them are restricted to specific uses and cannot be used for other purposes.”  That statement is false and only serves to cloak a hidden set of priorities – i.e., keeping certain select piles of money “off the table.”  We denounce that dishonesty.  We also note that when President Yudof finalized his Emergency Financial plan in July 2009, the most money-rich sectors of the University got favored treatment: the Medical Centers got to keep all of the paycuts for their own use and the Clinical Practice plans at the Medical Schools were exempted from the paycuts.  (For more details, see UniversityProbe.org  7/12/2009 and 9/19/2009.)

     First, we reaffirm the triplet of Quality, Access and Affordability as primary goals for the University of California, which have been repeatedly enunciated by the Regents. But now we must move beyond those platitudes and become more specific.

A. There should be no further increase in Student Fees at this time. [This follows the Governor’s statement.]

B. There should be no exclusion of qualified undergraduate enrollments on budgetary grounds. [This follows the Governor’s statement but is more forceful. We assert that undergraduate student fees and tuition now cover fully, if not overly, the entire cost for UC to provide undergraduate education. This topic is controversial and needs further exploration and debate.]

C. UC should not further expand its enrollment of nonresident undergraduate students. [This follows from what we have said in B, above, and it is important in restoring confidence in UC on the part of California’s citizens.]

D. The state must provide adequate funding for need-based financial aid (Cal Grants), not just for UC students but for all segments of higher education in this state.

     First we shall look at the basic financial data for UC’s operations. Then we shall consider two broad options: reallocation of funds within the Core Funds identified earlier; and reallocation of funds from the Unrestricted Designated category to meet the Core needs. These two are not mutually exclusive; some combination may be best.

IV. The Financial Data

Table 1. Details on Core Funds, from the Governor’s Budget Proposal for UC, page EDU 14

http://www.ebudget.ca.gov/pdf/GovernorsBudget/6000/6440.pdf
* After $500 Million Budget Reduction

DEFINITIONS

• State General Funds are appropriated by the Legislature and approved by the Governor.

• ARRA Reimbursements are Federal “stimulus” funds, sent to the states.

• UC General Funds are monies collected by UC but acknowledged as “belonging to” the state: the largest components are nonresident tuition and 44% of indirect cost recovery on Federal research contracts and grants.

• Student Fees, in this context, means revenue from the Educational Fee (now called Tuition), the Registration Fee (now called Student Services Fee) and Professional School Fees. The amounts of these three estimated for 2011-12 are $2,307 Million, $222 Million, and $248 Million, respectively. (See page 154 of the UC Budget for Current Operations, approved by The Regents in November 2010. http://budget.ucop.edu/pubs.html )

     To see how UC actually spends money, we look at the accounting records rather than budget records. In Table 2, below, we show selected data from “UC Campus Financial Schedules“ (CFS), an addendum to the University’s Annual Financial Report, for the fiscal year 2009-10.

 Table 2. Current Funds Expenditures by Function* by Fund Source (in $ Millions)

UC Campus Financial Schedules 2009-10 (12-D)  http://www.ucop.edu/corpacct/finschd/

* Function = “Uniform Classification Category”, which is the higher education industry standard for budgeting and accounting. (Institutional Support means high level administration; Auxiliary Enterprises means dormitories, dining facilities, intercollegiate athletics, bookstores, etc.  We shall discuss later what “Instruction” covers.)

1: General Funds here means State General Funds plus UC General Funds plus ARRA.

2: Tuition and Fees here include University Extension ($212 MM) and Summer Session ($10 MM), which were not counted in Core Funds revenues. There is also an amount of $330 MM in “Other Fees”, which I believe are mostly campus specific fees and may not be counted in either scheme, although they are significant in funding for Student Services.

     The reader may notice a substantial discrepancy between the numbers for 2009-10 in Table 1 compared to those in Table 2 – just looking at the sum of General Funds and putting aside Student Fees for the moment. I have not been able to understand that discrepancy myself and have written to officials at UCOP asking for an explanation. That certainly exemplifies a lack of “transparency” in the University’s finances. While waiting for that clarification we may, nevertheless, proceed to look at options for re-allocation of funds, starting with the accounting data presented in Table 2.

     We want to look at the major allocations of Core Funds seen in Table 2 and ask if they might be re-distributed in some way to meet the current budget emergency.  We are looking to save $500 million, or about 10%.

Institutional Support and Operation & Maintenance of Plant.  Here is $900 Million in Core expenditures for those overhead services of administration and facilities. The Core spending here accounts for a surprising 53% of all spending for these services; but the total of all Core spending is only 23% of the total of all funds.  That appears to be way out of balance, as if the Core funds are being used to subsidize the overhead costs of many other functions of the University. I believe a better analysis would have to include consideration of Transfers (recharges) that provide a lot of money flowing into IS and OMP from other operations, both core and non-core. Nevertheless, it appears that there may easily be something of the order of $200 Million that can be saved for Core functions by rebalancing these overhead cost allocations.

Academic Support: $484 Million in expenditures of Core Funds.  Here one needs to do some closer studying of the Campus Financial Schedules and learn where this money goes. Just under half of this goes for Libraries; but a portion goes for “Ancillary Support”, that is largely serving research and medical enterprises; and another $200 Million goes for “Academic Administration” (Dean’s Offices), with perhaps half of that in the health sciences and other professional schools. I think it plausible that something of the order of $100 Million can be moved for higher priority use in the core missions of the University.

Instruction: This is by far the largest use of Core Funds.  Let us clearly understand what it pays for.  Here is how the Governor’s budget breaks this down (figures for 2011-12, before the big reduction, on page EDU 9)

Table 3. Core Components of Instruction in Governor’s Budget for 2011-12

     Where can one cut?  That large amount for Instructional Support is (I think) departmental staff and supplies all needed to support the faculty in their work.  I doubt that there is much room left to squeeze this sector more than has been done in the last couple of years of budget crunch. What is Equipment Replacement?  (I once thought that this was a euphemism for start-up funds, money used to buy new research laboratories for new faculty in the experimental sciences and engineering.)

     The most troublesome issue here is that the Faculty Salaries cover all of the professors’ academic work throughout the academic year: teaching and research and service.  All of that is called expenditure for Instruction; and this can be quite misleading to those uninitiated into the bizarre world of university accounting. “Departmental Research” is the name given by the University’s accounting manual to all the research work conducted by faculty, and the corresponding support from their departments, which is not paid for by an external contract or grant or some other specific budget allocation. And all of Departmental Research is counted, in Budgets and in Accounting reports, as a cost for “Instruction.” (Research that is paid for by an external source or a specific internal allocation is recorded as money for “Research.”) Elsewhere (http://ocf.berkeley.edu/~schwrtz/TopicCost.html ) I have made a detailed separation of the expenditures for those missions; and my conclusion is that undergraduate student fees/tuition more than fully covers the cost to UC for providing undergraduate education. The details of this calculation are open for debate; but it is clear that the university’s present bookkeeping system is grossly misleading.

     The long-range solution is for University leaders to acknowledge this error, cap undergraduate fees, and insist that the state bear the full burden of funding the research program, which is unarguably a public good. 

     In the short-term budget crisis, however, it may be fitting to ask that faculty move some of their time and efforts away from research and toward teaching.

     If such a shift is contemplated, it must be presented as nothing that can be long sustained but only an emergency measure. The state would have to make credible commitments to future restoration of the funding necessary to restore the full Quality of UC’s research mission. It is also essential that any such shift in faculty work be negotiated with the Academic Senate and not simply imposed by the top administration. In addition, there is an important issue of equity: faculty in the humanities now teach about twice as much as do faculty in the physical sciences; and some faculty, the biological sciences being an example, have even much smaller “teaching loads.” (See the article in the 1/14/11 issue of Science Magazine where a group of biological scientists suggest more emphasis on teaching rather than research in our universities.)

VI. OPTION #2: Re-allocate Money from Designated Funds to Core Funds

     We start this by looking at the medical enterprises at UC and their enormous cash flows. From the accounting reports (CFS) for 2009-10 we find this data:

• Medical Centers (5 of them)

Revenues =$5,882 Million   Expenditures = $5,019 Million*

* According to the annual reports of the Medical Centers (for year 2010) they collectively operated with a profit (revenues minus expenditures) of $577 Million; and their bond debt service required only a small portion (18%) of this.

• Clinical Practice (“Sales and Services of Educational Activities”)

Revenues =$1,562 Million    Expenditures = $1,598 Million*

* 59% of this was spent for “Instruction”, which means it was added to salaries of faculty in the Medical Schools and other Health Sciences. 33% was spent for “Academic Support”, which means it was for staff and other expenses of operating the Clinics.

Table 4. Financial data on UC’s 5 Medical Centers for FY 2010

Medical Center Financial Reports: http://www.universityofcalifornia.edu/reportingtransparency/

     Clearly, a few hundred millions of dollars could be reallocated from this huge medical enterprise to help the Core funding crisis of the University, That would conform to the philosophy of One University, which has been so vocally endorsed at the top.

VII. Push-back and Push-forward

     Of course, the heads of the Medical Centers will say that they need all of that surplus to keep their hospitals at the forefront of a competitive market.  The Deans at the Medical Schools will say that if you invade the clinical income now going to their faculty (on top of their academic salaries), the best of them will leave UC and go elsewhere.

     Of course, when we suggested earlier that faculty throughout the University might be asked to shift some of their work away from research and toward undergraduate teaching, that is expected to be met with warnings that some of our best research professors will leave UC and go elsewhere.

     This is an awful situation. We are seeking a way forward that can preserve the best of this great public university; and that means we must ask for substantial sacrifice and pain. We are trying to push that effort up to the higher ranks of position and compensation and not just let it fall on those below. And we are also ordering our priorities to acknowledge our public responsibilities to the people of California.

     Along with that budget advice we can also offer a general cure for the endless scandals over excessive executive compensation that have so damaged this public university.  In 1992 the Faculty Senate at Berkeley adopted a Resolution that stated:

It should be the policy at any institution of higher learning that the total compensation paid to any executive officer should not exceed twice the average amount paid to its Full Professors.

And we can offer nothing more salubrious than to insist that The Regents adopt this policy. For more on this topic, see the Appendix.

Appendix: On Regents’ (Misplaced) Values

• From meeting of The Regents 7/15/2009

Regent Richard Blum: “What we need to do with this university, and you heard the story from Chancellor after Chancellor is doing whatever we can to preserve the best people. And in fact the best people are taking the highest cuts.  The Chancellors alone, and God bless them, three years ago we knew their compensation was 35 or 40 % below market. For three years in a row I talked to them. I said, Do you want me to walk the plank? I’ll get you an increase. And every time they said, No, we’ll stay where we are; we are team players. So I think that’s all right for a year and maybe you’ll get a lot of your good people to sit still for a year. But you are already hearing about people leaving, starting to look the other way. But I think we have one year to really figure out who, in each part of this institution we need to embrace and keep; and what we need to build on. Because the idea of just cutting from the top is absolutely the way to kill this institution.”

• From the S.F. Chronicle, 12/30/10: UC Executives demanding more pension benefits.

Regent Dick Blum … said he understands both sides. He said the regents need to study what legal obligations they may have to the executives, and take into consideration the fact that without higher pensions, UC could lose good people.

“You can’t do better than the team we’ve got working there now,” he said. “I would hope that saner heads would prevail, and we can find a compromise rather than wind up with a lawsuit with some of the university’s most valuable employees.”

  Whatever happens, Blum said, “This situation doesn’t make anyone look good.”

     These quotes give us a nice clear picture of the philosophy that rules on the Board of Regents. Richard Blum may be one of the more “liberal” members, in conventional political terms; yet he is certainly of the classic mold of successful capitalists, who see any organization as being valued from the top down – in terms of authority, importance and compensation.

     A university, especially a first class university like UC, is something very different. The important decisions are all made by the individual and collective minds of the faculty members: what to teach and how to do that; what to research and how to do that. The administrators and executives are there to manage the work environment and the bank accounts that allow the faculty and the staff and the students to carry out their tasks effectively. It is also nice when they can communicate effectively to the public. But corporate-market compensation packages are out of place here.

     It seems that most everyone else around UC, and throughout California, understands those priorities. If the Regents can’t get their misaligned heads straightened out, maybe they need to be replaced.