LOOKING INTO THE UC BUDGET -- Report #7a (e-mail version) by Charles Schwartz, Department of Physics, University of California Berkeley, CA 94720. 510-642-4427 January 26, 1994 SUMMARY The UC administration has now given a detailed restatement of President Peltason's claim, made last year, that the budgets for administration had already been cut by about 20%. My Report #7, based upon UC's latest available budget and accounting documents, showed a 7% increase in spending for administration throughout the university. The new letter from UC's Office of the President, which is reproduced and analysed here, concludes that overall spending for administration was reduced by 2.75% over the last three fiscal years. Thus, it is proven true - although not formally acknowledged - that the President and his staff have been grossly exaggerating the extent of budget cuts applied to the UC administration. A closer examination of the letter reveals further inconsistencies and contradictions, which, when corrected, lead to the conclusion that total administrative expenditures have not been cut at all over this period, but have actually increased by a few percent. The explanation is offered that the larger cuts in administration (20% or more) have been assigned for the future but have not yet been implemented. Available data, however, fail to support even this weaker premise. The official contradictions and dishonesty documented here further undermine the credibility of UC's leadership, which is so vital in this period of financial crisis. Some pertinent suggestions are offered to President Peltason for the task of rebuilding that trust. LETTER FROM UC's OFFICE OF THE PRESIDENT ------------------------------------------------------------------- January 14, 1994 Dear Professor Schwartz: I write with reference to your October 7 letter to President Peltason as well as your November 28 "Report #7," both of which concern the University's administrative budget. Let me point out, first, that the figures you cite include three major expenditure categories that we do not believe are appropriate to include in any analysis of "administration" as commonly understood. These Institutional Support expenditures total $36.6 million in 1992-93 and are discussed below. An attached table displays annual expenditures in each category for the period 1989-90 to 1992-93. o Payments to inventors under the University's patent program totaled $15.1 million in 1992-93. These payments were previously recorded as an offset to income (and were so recorded in 1989-90). They were shown as an expense in 1992-93, however, in order to streamline the recording of payments. These funds do not belong to the University and are merely passed on to inventors through the University's records. o Liability insurance accounted for $12 million of expenditures in 1992-93, representing the systemwide cost for coverage above the University's self-insured limit. This cost might more appropriately be assigned on a pro-rata basis to every activity within the University including instruction, research, and public service. We are, in fact, considering changes in the way this expenditure is reflected in the financial schedules. o In 1983-84 and again in 1989-90, the State of California deferred payments to the University for current-year employer contributions to the University of California Retirement Program (UCRP) and requested that the UCRP lend itself the funds due. At the same time, the State agreed to repay the loans over a 30-year period with interest. The interest payments, amounting to $9.5 million in 1992-93, are provided through a yearly appropriation of State funds and paid into the UCRP. Clearly, these payments do not relate to the University's administrative expenditures. The above three expenditure categories are included under Institutional Support in conformance with national accounting classification standards for universities. They are not, however, relevant to a discussion of "administration." Adjusting for these expenditure categories presents a different picture of University administrative expenditures than the one portrayed in your "Report #7." Looking at all fund sources combined, the same Financial Schedules utilized in your analysis show that administrative expenditures for the total University have not increased and, in fact, dropped by 2.75% between 1989-90 and 1992-93; a comparison of 1992-93 with 1991-92 shows a decrease of 7.26%. These reductions have been achieved even after funding increases were provided for salary cost-of-living and merit increases and price increases. We disagree with your representation in other respects as well. For example, the cost of academic administration (such as costs related to Deans' offices) is directly related to and essentially inseparable from academic programs. In accordance with nationally prescribed accounting standards, the University appropriately classifies academic administration as Academic Support and not Institutional Support. More generally, let me note that your data end with the 1992-93 fiscal year and, therefore, do not reflect decisions being made in the current year--and decisions that will have to be made next year --as campuses struggle to cope with the cumulative burden of budget cuts that will total about 20% or $433 million by 1994-95. There is typically a lag time between assignment of a budget cut and clear evidence of its impact on expenditure patterns as shown in the Financial Schedules. This is particularly true with respect to recent reductions in the University's budget which were deeper and continued longer than anyone foresaw at the beginning. We attempted, at first, to solve the problem with short-term temporary measures in the hope and expectation that the situation would improve. Later, we utilized one-time measures such as the salary reduction in 1993-94 to give us time to identify permanent measures. We are, of course, well aware that our losses will generally not be recouped and we are in the process of phasing in permanent solutions to the problem of a reduced resource base. We do not expect the budget cuts to be fully implemented until 1994-95. All of the campuses report that administration has received disproportionately heavy cuts, and this is true for the Office of the President as well. The real issue is whether administration is reduced as a percentage of total expenditures. We have previously pointed out to you that administrative expenditures, as a percentage of total expenditures, have held steady at around 11 percent for many years and based upon the actions taken, will be declining in future years. Sincerely, Larry Hershman Associate Vice President and Director of the Budget Attachment UNIVERSITY OF CALIFORNIA INSTITUTIONAL SUPPORT EXPENDITURES FOUR-YEAR COMPARISON [$ in Thousands] CATEGORY 1989-90 1990-91 1991-92 1992-93 Patent Expense -- -- -- 15,125 Liability Insurance $6,714 $9,077 $9,338 $11,985 UCRP Interest Expense 5,024 9,791 9,672 9,543 TOTAL $11,738 $18,868 $19,010 $36,653 INSTITUTIONAL SUPPORT EXPENDITURES: UC System Total $369,665 $393,877 $394,345 $384,722 Less: Above 11,738 18,868 19,010 36,653 Adjusted Total $357,927 $375,009 $375,335 $348,069 PERCENT CHANGE: 1989-90 to 1992-93 -2.75% 1991-92 to 1992-93 -7.26% PATENT EXPENSE for years 1989-90 through 1991-92, included only the legal expenses incurred on behalf of the UC patent program; for 1992-93, payments to inventors totaling $15,125,000 were also recorded in this account. LIABILITY INSURANCE represents premium costs for the entire UC system. UCRP INTEREST EXPENSE represents interest charges incurred as the result of two deferred contributions by the State to UCRP in 1983-84 and again in 1989-90. NOTE: None of the above expenses are recharged to the campuses. -------------------------------------------------------------------- ANALYSIS I Associate Vice President Hershman concludes in his letter that the change in UC's expenditures for administration over the three- year period 1989-90 to 1992-93 amounts to a decrease of 2.75%. By contrast, the previous statement by President Peltason claimed a total cut of some 20% for this same period: * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * "As a result of recent budget cuts, campus and Office of the * * President budgets for administration were cut by 5 percent * * in 1990-91 and again in 1991-92, for a total cut of 10 * * percent or $25 million. An additional cut of 10 percent, or * * nearly $20 million, has been made in 1992-93; further cuts * * will be made in 1993-94." - J. W. Peltason, 3/18/93 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * This claim was what I questioned in my October 7 letter to President Peltason and what I examined further in my Report #7. This is no small quarrel; rather, it is key to the credibility of the President's declared principle of "sharing the pain" in these financially difficult times for the University of California. Now, even accepting all the numbers in Hershman's letter, we see that there is a huge discrepancy - between the 20% advertised by Peltason and the 2.75% given by his Budget Director. The Office of the President thereby tacitly admits that they have exaggerated the cuts in administration by a factor of 7 ! Perhaps Hershman's goal was merely to establish that administrative spending was reduced and not increased, as I concluded in my Report #7. A closer study of the matter, however, reveals that even this narrow conclusion is spurious. ANALYSIS II The criticisms Hershman raises concerning my Report #7 have to do with choosing a definition of what ought to be covered by the term "administration." I have no interest here in arguing with Hershman over what is the "correct" definition; I only asked (in my October 7 letter to President Peltason) that he define and justify the claim he made in the boxed quote above. Hershman has now provided a definition that is based upon expenditures for Institutional Support as given in the UC accounting document "Campus Financial Schedules." This was one of the several options which I had laid out in my Report #7 and thus we have a firm starting point of agreement. Now we proceed to debate the details. Hershman says one should not include "academic administration" (Deans' Offices). I think one ought to include this in "administration"; but I'll go along with Hershman on this - after all, it is his task to explain and justify the boxed claim by President Peltason. Hershman says that three categories of expenditure included in Institutional Support should be subtracted out. I accept his point concerning patent expense, where there was a change in bookkeeping rules during this three-year period. I am doubtful about his points concerning liability insurance and UCRP interest expense, since I think he should follow consistently the bookkeeping rules that UC has set up. Nevertheless, I shall, for now, allow Hershman all these corrections. Now we come to a key issue of definition which Hershman does not discuss explicitly in his letter: Should one include or exclude the numbers for recharges (transfers of funds) when counting the expenditures for administration? This makes a big difference. The data given by Hershman are the figures without recharges. Fortunately, there is no need for me to engage in an argument here with Hershman, since higher UC officials have already given this question a definitive answer. Vice President William Baker (Hershman's immediate superior), in his February 14, 1993, report to the Board of Regents, stated authoritatively that one should include recharges in counting overall UC expenditures for administration. And that report by Baker also contained the first statement of the claim, displayed in the box above, regarding administrative cuts over the past three years. [See my Report #2b for the full text of Baker's document.] Furthermore, Baker's definition is implicitly reaffirmed in Hershman's current letter when he states, in his last paragraph, "We have previously pointed out to you that administrative expenditures, as a percentage of total expenditures, have held steady at around 11% for many years..." There is no way to arrive at that figure of 11% without including recharges in Institutional Support. Thus, I generously allow all three of Hershman's specific subtractions; but I insist that he remain consistent with the previous definition given by Office of the President for what constitutes expenditure for administration. Here, in Table 1, are the figures for UC expenditures for Institutional Support, including recharges, for each year in question, (see Table 2 in my Report #7) along with the corrections given by Hershman. Table 1. UC Institutional Support Expenditures - Including Recharges ($ in Millions) 1989-90 1990-91 1991-92 1992-93 UC System Total $758.2 $793.1 $810.8 $809.3 Less: Corrections 11.7 18.9 19.0 36.7 Adjusted Total $746.5 $774.2 $791.8 $772.6 From Table 1, we see that the three-year change in the adjusted total is an increase amounting to 3.5%. Before Hershman's corrections, these figures showed an increase of 6.7%. Hershman, in his letter, makes the point that there is a 7.26% decrease in administrative expenditure if one looks only at his data for the last year, comparing 1992-93 to 1991-92. Using the data in Table 1, however, this select comparison yields a mere 2.4% decrease. Thus, no matter how you slice it, the conclusion is the same: President Peltason's claim of a 20% cut in administration is completely contradicted by the data. I should add the following note. In my Report #7 I also looked at the data on administrative expenditures for each individual UC campus. Hershman's corrections apply only to the data for UCOP and do not change the results for any of the nine campuses. The campuses showed three-year changes in administrative expenditures ranging from a decrease of 3% to an increase of 24%. Thus, I must express the greatest skepticism about the statement in Hershman's letter (last paragraph): "All of the campuses report that administration has received disproportionately heavy cuts, ..." ANALYSIS III Hershman, in his letter, tries to find an escape route around the contradictions pointed out above: "More generally, let me note that your data end with the 1992-93 fiscal year and, therefore, do not reflect decisions being made in the current year--and decisions that will have to be made next year...There is typically a lag time between assignment of a budget cut and clear evidence of its impact on expenditure patterns as shown in the Financial Schedules." In my Report #7 I considered this hypothesis of a delayed action [see pages 4-5] but found that the data still could not be made consistent with President Peltason's claim. The inclusion of Hershman's corrections does not substantially alter that result; nor does Hershman offer any data in support of his suggestion that the 20% cuts promised will be effective this year or next year. Indeed, the official UC document "1993-94 Departmental Allocations" shows prospective budgets for the current fiscal year in which allocations for administration (categories 66 plus 72, with recharges) drop by a mere 1.4% from those of last year. The real issue goes beyond numbers and has to do with the clear meaning of words and the honest conveyance of facts. My query and study were focused on President Peltason's statement quoted in the box. That statement is clearly about decisions made and actions taken in the years up to and including 1992-93. For Hershman to now start talking about "decisions being made in the current year--and decisions that will have to be made next year," is pure obfuscation; and this only serves to further undermine the credibility of the Office of the President. CONCLUSION There appears to be no reasonable alternative to the conclusion that the UC President and his top staff have been employing a strategy of disinformation, hiding their true budget priorities for the University while attempting to placate students, faculty and staff, who have been bearing the brunt of the budget cuts. I would therefore recommend that the UC President take the following steps to repair the damage done to his credibility and to the University's esteem. 1. Extend a full apology to the UC community and to the public for this disinformation. 2. Take corrective measures to insure that further disinformation will not be tolerated. 3. Make good on his promise to cut back administrative spending, within one year, by at least 20% of the amount shown in Table 1: $150,000,000. That is a lot of money to be saved, yet it amounts to only one-half of my previous estimate of the total excess and waste in the University's administrative bureaucracy.