Mark Yudof and the Measure of Worth

In recent weeks, University of California President Mark Yudof has been questioned for handing out executive raises, while most other employees in the UC system will have their salaries decreased. Yudof’s main response to this criticism is to state that the university needs to retain its best people, and if the UC does not offer its top administrators competitive pay, they will take better offers. This defense then represents several hidden assumptions: 1) only high level administrators are worthy of retention efforts; 2) the vast majority of employees are not as valuable as the top executives; 3) everyone should sacrifice except for the highest paid employees; 4) the highest paid employees have no loyalty to the UC system and are always on the look out for a better deal; and 5) the UC is being held hostage to people who are constantly threatening to leave.

If we look deeper into these hidden assumptions, we see how the university has followed Wall Street’s lead, and that no matter how badly top executives perform or how badly the financial institution is doing, the highest earners will be rewarded with increased compensation (see below for a list of recent increases). Moreover, since all the other workers in the UC system are actually getting pay cuts, it must mean that the pay for the wealthiest is being subsidized by everyone else. The UC’s compensation structure then reflects the general movement of the U.S. economy: the rich get richer, the poor get poorer, and the middle-class gets left with nothing. However, this economic system is not the result of some inevitable set of laws; instead, each economic structure is determined by priorities and choices.

In his short time at UC, Yudof has made it clear that his priority is to support the “top people,” but who exactly are these leaders, and are they really worthy of their compensation? To answer this question, let us first look at Yudof himself. Since one of his main tasks is to make sure the university remains financially able to perform its core mission, how is he doing on this task? For example, has he done a good job working with the state to ensure that the UC budget remains intact? As far as I can tell, he has completely failed on this account, and while he has criticized the state for reducing the university’s funding, it seems that he has done little to prevent this budget loss. After all, he unveiled his “fiscal emergency” and furlough plan months before the state budget was resolved, and this move showed that the UC had accepted the cut before it was enacted. Furthermore, there has been no mention of him trying to make a deal with the governor or some plan about future funding. In fact, Yudof is already going around the state telling people that the budget will be worse next year. So on his interactions with the state, I would give him an F.

Now let’s look at the UC’s general finances, and here things appear to be more mixed. In terms of the overall revenue brought in by the university, this year appears to be a winner because the total operating budget has gone up. Thus, even though Yudof has declared a fiscal emergency, the university as a whole is in relative good shape and external sources for funding have gone up. However, his leadership must be called into question on this front because he does not seem to understand how the UC operating budget works. For example, he first tried to reduce the pay of employees funded out of external grants, and then he said, the university could not do this. Moreover, he started out the furlough plan by announcing that all pay would be reduced, but he later reversed course, and said that for many top earners, only some of the pay would be reduced. He also has claimed that the furlough plan would save $180 million, but in reality the number is closer to $600 million. When he was confronted with this discrepancy, he simply said that most of the savings would be returned to the units. In other words, the salary savings plan is actually a salary redistribution plan, and no one knows how this money will be allocated.

Perhaps Yudof’s biggest problem area in relation to UC’s internal budget is the way he constantly repeats that certain funds are legally restricted. Although it has been pointed out that on the university’s own audited financial forms, 70% of the UC revenue is unrestricted, Yudof has said that it would be illegal for the university to use money from external sources in order to help supplement the loss of state funds. After all, who is paying for all of the executive raises? It turns out that most external grants that are awarded to the university require the payment of indirect costs to the school, and this money goes to very general things like central administration, general utility costs, staff, and facilities. There is therefore no direct relation between the specific costs of a particular grant and the specific expenses of the university. For example, if a professor gets a $100,000 grant to develop a laser technology from the federal government, an additional $50,000 is then given to the university to pay for overhead, there is no law requiring that most of that $50,000 is spent on anything directly associated to the project; instead a general rate is applied to the grant and money gets redistributed in a very mysterious way. In fact, all of the grant money goes to the Office of the President, and UCOP skims off a certain amount before it is sent back to the campuses. Therefore, while it looks like the money coming in from external grants is dedicated to very specific projects, much of it is very flexible. Yudof then is not telling the truth when he says that this money is all restricted by law.

This same question of restricted funds relates to all of the revenue-generating sectors of the UC system. For instance, the medical centers clear hundreds of millions of dollars of profit each year, but Yudof claims that this money cannot be used to make up for the loss of general funds. However, this is exactly what the UC did in 1993, and there is no law preventing the university to do it again. In fact, Yudof’s furlough plan is reducing the salaries of many of the people employed in the medical field, so it appears to be highly contradictory for him to insist that they cannot do it. It is also strange that these medical centers have declared that they have no financial relation to the university, but they use the university’s name and pension plan to attract workers and patients. These centers also hide behind the university to maintain their non-profit status, and this brings us to the question of what they do with their annual profits. It seems that in order to remain not-for-profit, the medical centers have to funnel most of their extra money back into pay and construction, and this is one reason why the compensation for the medical faculty is so high. Furthermore, due to their wealth, which translates into power in the UC system, the medical professors and administrators have successfully petitioned Yudof to not cut their extra compensation.

The medical centers combined with extension, summer programs, and housing and parking make up over 40% of the UC operating budget, and all of these sectors profit from the UC name and often share faculty, buildings, and administration with the general campus. There is thus no reason why these revenue-generating units cannot come up with funds to make up for the loss of state support. There is also no reason why the employees in these units should not have participated in the general furlough plan, and it seems that the only reason they have been spared is that the university considers money-making centers to be worthy of protection, but activities like teaching students must be cut.

The next biggest area of contention is the endowment, which does have some restrictions placed on it, but many of these restrictions are vague and the non vague ones usually direct the money to fund aspects of the general fund. For instance, many gifts are dedicated to funding financial aid, undergraduate education, or specific departments. Moreover, it seems strange that Yudof says he cannot spend this endowment money because it is restricted, but the university can invest it and lose it.

This question of investments brings us to the final part of the UC budget, which shows Yudof at his worse. It is important to note that at the same time, Yudof was claiming that the state budget reduction of $812 would cause a fiscal emergency, the UC lost $23 billion in its investment funds. While we cannot blame Yudof for losing this money, we can blame him for not dealing with these losses or even mentioning them in public. Instead, he used the state reduction to focus all attention on an external enemy as he deflected attention away from the real source of UC’s problems, which is the handling of its own money. While many institutions lost a lot of money during the global financial meltdown, UC’s pension and endowment investments have been underperforming ever since their management began to be outsourced in 2000. By hiring external money managers, the UC not only increased the cost of doing business, but it also ended up investing in highly risky financial instruments. The UC, under the leadership of regent chair and investment banker Richard Blum, also picked the worse time to transfer money from relatively stable bonds to real estate, and due in part to this change in its investment strategies, the regents and the president have gambled away the future financial health of the university.

Since the UC lost so much money in its pension fund, it will be forced to require substantial employee and employer contributions. Fundamentally, the increases in employee contributions will represent a permanent pay cut for the workers, while the need for the university to fund the pension plan will create a permanent fiscal crisis for the university unless something major is done on this front. Unfortunately, Yudof has not talked about the UC’s pension losses, and so no one knows about the true fiscal problem facing the university. What Yudof and others have also failed to discuss is the fact that by constantly giving the “market worthy” people higher salaries and special retirement deals, the pension problem only gets worse.

The solutions to the UC’s financial difficulties will have to do with reining in compensation, sharing revenue between units, establishing budgetary transparency, expanding the number of mid-level earners (so they can pay into the pension plan), and re-establishing education as a priority. Since Yudof has not shown himself to be interested in any of these tasks, I say to him: You are not worthy.

Bob Samuels, UC-AFT

For a list of Executive Deals Approved of during the Fiscal Emergency, see
http://www.upte.org/about/press/2009-07-23.pdf