Sunday, December 27, 2009

A Recap for 2009

Perhaps the biggest story of 2009 for the UC system is the way a fake fiscal crisis has been used to consolidate the president's powers and impose austerity plans worthy of an IMF or World Bank takeover. Using the state reduction of $600 million (out of an operating budget of over $20 billion), the Office of the President has suspended most forms of shared governance and has a spent a great deal of money and time on circulating false and misleading budgetary information. This lack of transparency coupled with an authoritarian imposition of furloughs and fee increase has led to a new protest movement composed of students, faculty, workers, and unions.

President Yudof has already signaled that more of the same is coming in our future. By asking the state to come up with an additional $913 million in funding for the UC system, Yudof has guaranteed that the state will not deliver. Once the state fails to give the UC system the university’s requested amount, Yudof will feel justified to impose further draconian cuts to workers' salaries and vital educational services. Instead of looking at how the university can save money by reducing its ever-expanding administrative class, Yudof seems intent on making students pay more for less.

While students, faculty, and unions will be striking and protesting on March 4th to protect public education in the state of California, we will also be working on our local campuses to hold our schools accountable to their public mission. Thus, after students return back to the campuses and find that their increased fees have resulted in an expansion of class sizes and a reduction of class offerings, there will be a renewed spirit of protest.

We should also expect further discussions of how the police acting during the protests of 2009, and the use of tasers, pepper spray, and batons will be investigated and protested. The fact that the university can only run its operations by relying on violence and propaganda shows that the current administration is morally bankrupt and only represents the interests of the people at the top of the system. If the majority of students, faculty, and workers ban together and demand a more just and equitable university, we can defend high quality public higher education in the state of California.

Monday, December 21, 2009

The New UC Mega Scandal? The U.S. Senate Investigates the UC Budget

In 2007, David Kessler, the Dean of the UCSF Medical School was fired after he complained that the campuses had provided him with false and misleading information concerning the state of its budget. According to the documents sent by the UC to senate investigators Kessler did not understand that many of UC’s budget documents are crafted for particular audiences, and the only legally accountable budgetary figures are found in the audited annual statements (attachment B, page 5). In other words, UC admits that the budgetary figures it releases to its employees and the public are often at odds with its own financial statements.

At the heart of the dispute between Kessler and UCSF is the question of indirect funds for external grants and the use of endowment funds. Kessler contends that he was promised access to over $46 million in funds that he could use at his discretion, while the university argues that the dean did not understand the nature of endowments and grants. According to the official UC response to the federal investigators, while endowment money is usually dedicated to specific purposes, many different administrators have discretion over the actual use of the funds. Likewise, external grants often come with indirect funds that are sent to the Office of the President and then redistributed back to the local programs. According to the UC’s legal representation, indirect funds associated with external grants are stored in a Facilities and Administrative “cost pool,” and these funds may be “spent by the University in its discretion” (Attachment A, page 7). The translation of this statement is that the campus has great deal of flexibility in regards to how it uses the large sum of money gathered by the indirect costs of grants (a total of $1 billion in 2009).

The university claims that for each federal grant, it receives an additional 26% for indirect costs, and the real cost should be closer to 29-30% (page 8). Here is where a major accounting conflict ensues. I have been arguing with several UC faculty members about how indirect costs are distributed and accumulated, and I have argued the following: There is no way of knowing if grants individually or on the whole make or lose money. Since most grants give the same generalized percentage to administration, staff, utilities, and maintenance, it is impossible to track the flow of money pertaining to any particular grant. For instance, if my grant to develop a new drug pays $10,000 into general administration, how could anyone tell if I paid enough of many different administrators' salaries.

When you get into the actual details of a grant, you discover, like every other part of the university, that money from many different sources gets mixed together. For example, if I am a dean, I am being paid out of state funds, student fees, grant overhead, some endowment money, etc. This mixing of funds is precisely what the U.S. Senate is investigating in relation to federal NIH grants - the feds have told me that they cannot track the flow of money because it all gets sent to UCOP and then redistributed back to the campus. Also, a question that I was asked by a senate staffer was "how do you put the price on a grant using a particular facility; after all, UC does not appreciate its assets and lists each building based on its original value" (which is also a fiscal fiction). We would all like to believe that this system is rational, but it is not.

This same problem of accounting for grant money is also causing problems for the U.S. Senate’s investigation of the use of endowment funds. After Kessler made his original allegations, the UC embarked on three separate reviews of their accounting processes, and they found no malfesiance. However, UCSF has just signed on for another expensive audit with Pricewaterhouse Coopers, and this time, they promise to look at the actual financial statements regarding the grants and endowment funds. One of the issues in the Kessler case is the question of how much discretion a dean has in relation to an endowment gift. The UC’s lawyers argue that in the case of a grant given for cancer research, the dean may have tremendous latitude in deciding how the endowed funds are used, and the central argument of the administration is that most endowments give a fair amount of discretion to the administration (page 11). What is troubling is that the UC falsely testified to the
state senate that an external audit showed that the tracking of endowments and grants could be verified by the audited financial statements. It turns out, that the outside consultants never tried to match these different records, and they were never given the proper documentation to audit the UC’s financial statements.

To be continued.

Monday, December 14, 2009

Only 3.5% of the UCLA Budget is Spent on Undergraduates: Where Does the Rest Go?

According to Steve Olson, the UCLA budget director, 12% of the UCLA budget in 2008-2009 came from the state, but over 50% of the core budget (instruction, research, and administration) was state funded. While the total UCLA budget was $4.7 billion, I calculate that only about $160 million, or just under 3.5%, was spent on undergraduate education. Furthermore, state funds and student fees brought over $1 billion to the campus, but only a small fraction of this amount was spent on instruction-related activities. If budgets are really a set of priorities, it becomes obvious why undergraduate education is often downsized.

Looking at the UCLA College of Letters and Sciences, the total budget was $234 million in 2008-2009, and 44% of the spending went to fund ladder faculty salaries, 3% to temporary faculty salaries, 9% to operating costs, 14% to benefits, 15% to staff, 9% to graduate assistants, and 6% to other academic titles. During the year, there were 22,000 undergraduates in the College, and I calculate that if we remove the costs associated with graduate education, (50% of the senate faculty courses were graduate courses), it cost the school $6,363 to educate each student for the year (this figure includes funds for salaries, benefits, staff, administration, utilities, and maintenance). While UC got $8,309 in student fees per student and $18,00 in state funds per student, the university still declared that they were losing money on each student, but my calculation shows that UCLA pocketed at least $20,000 on every undergraduate student. As I have pointed out before, the UC asserts that the state only gave $7,400 dollars for each student in 2008-2009, but this number is based on what they call “real dollars,” which includes some undeclared inflation adjustment.

It has been recently revealed that all student fees and state funds are collected by the Office of the President, and then redistributed to the campus according to some secret formula (for a spreadsheet on how much each campus is funded, see here). While the state supports each student at the same level, regardless if the student is a graduate or undergraduate or if the student is from Santa Barbara or Los Angeles, UCOP funds each student on a different basis. For example, in 2008-2009, each student at UCSC received $7,568 in state funding from UCOP, but students at UCLA got $18,745. Apparently, what is happening is that UCOP re-allocates funds students based on their type of education. In fact, each student at UCSF got funded by the state at a rate of $71,000. Here we se direct evidence that not only are undergraduate students subsidizing graduate students, but campuses without professional schools are subsidizing the campuses with professional programs.

In the case of UCLA, the wealthiest campus and the one with the lowest dependence on state funding, we have seen the most draconian cuts to undergraduate programs. There is thus little relation between the recent state budget cuts and the downsizing of undergraduate programs; instead, the more students pay and the more the state gives, the more UCLA increases compensation and funding to people who have little if any connection to academic instruction or research. In fact, the state budget cuts are used to reduce the number of undergraduate courses and to expand undergraduate class sizes.

In a recent provocative statement on the PBS News Hour, President Yudof revealed the inner-logic of the UC funding priorities: "Many of our, if I can put it this way, businesses are in good shape. We’re doing very well there. Our hospitals are full, our medical business, our medical research, the patient care?-so we have this core problem, who’s gonna pay the salary of the English Department? We have to have it. Who’s gonna pay it, and Sociology, and the humanities, and that’s where we’re running into trouble.” From Yudof’s business perspective, the medical centers and research sectors are doing great, but they are being brought down by the needy programs in the humanities and the social sciences. Yet, as I have shown, the opposite is the case; undergraduate programs in the humanities and the social sciences are generating huge profits that are then used to pay for the staff, administration, and faculty that have no relation to the core programs. In this system, the wealthy get wealthier and the poor get starved.

Thursday, December 10, 2009

UC Pays Big Bucks for Fake Compensation Study

The UC has spent a great deal of money on hiring a consulting firm, Mercer, to analyze their compensation, and not only is the study completely flawed and incomplete, but a more effective study could have been done by anyone for free by just using the salary data available on the web. The study (available here) tries to show that the high-paid administrators and star faculty are actually underpaid, while the low-paid unionized workers are above the market rate. Here are the major claims according to the UC:

• On average, cash compensation for UC faculty is 10 percent below market, and total compensation (cash plus benefits) is 4 percent behind comparable institutions.

• Union-represented service workers are closer to the market average than all other categories of employees in the UC system, and their total compensation (cash plus benefits) is 18 percent higher than their counterparts at other institutions.

• The largest compensation gap affects senior management group members (e.g., president, chancellors, deans, vice presidents, chief financial officers) whose cash compensation, on average, was 22 percent lower than their counterparts. Total compensation for top administrators, including university chancellors, was 14 percent below their counterparts at comparable institutions.

• Cash compensation for Managers, senior professionals and professionals and support staff – both union- represented and non-represented – lags behind their counterparts as well. On average, the gap for all of those categories ranges from 13 percent to 19 percent.

• For UC medical centers, results show that cash compensation for most UC medical center employees is near or slightly above market, except for staff physicians whose pay is 18 percent below market.

• In total compensation, all medical center employee groups, except staff physicians, were above market by 4 to 17 percent.

The study comes with a major disclaimer: “The 2009 study followed established industry practices. Consistent with industry practices, cash compensation was defined as base salary, excluding forms of rewards that generally are not a part of ongoing compensation, such as one-time relocation allowances, stipends for assuming additional temporary responsibilities, summer salaries for faculty, one-time bonuses and the like.” The study thus only looks at base pay, while as I have shown, more than 36% of the pay of the 3,600 people making over $200,000 in the UC system comes from non-base pay compensation (and this does not include benefits). The total gross pay of the over $200,000 earners in 2008 was $1 billion and the base pay was $640,000 million (here is the spread sheet:). (I detail, who earned this money, and how it went up 40% from 2006 to 2008 here ). The base pay of the remaining, 147,000 people, half of them unionized, while none of the top are unionized, was $7.3 billion and their gross pay was $7.9 billion (here is the spreadsheet: ).

Another giant flaw in the Mercer study is that their sample is unscientific. They readily admit that they only looked at the salaries of half of the employees (page 9) even though all of the salaries are in the pubic domain. They also excluded whole categories of employees, and as I have shown in my study of senate faculty salaries, due to the incredible imbalance of compensation, with most of the raises going to the people at the top, you cannot simply look at the average salary.

This kind of study and this type of waste of funds is why the workers and the unions and the state do not trust the UC administration. They will pay large sums of money to circulate false information

Tuesday, December 8, 2009

The True Fiscal State of the UC System

If you want to know the truth about the University of California’s finances, there is no better document than the recently released (11/19/2009) Moody’s bond rating for the UC system. First of all, it must be pointed out that this report was released on the same day that the Regents voted to increase student fees 32%, and as the UC Santa Cruz Professor Bob Meister has shown, there is a direct connection between increased fees and decreased interest rates for construction projects. Simply put, the bond raters gave UC a high bond rating-which translates into a low interest rate--because the raters like seeing that the UC has a large pool of unrestricted funds and the system is willing to keep raising fees on its students. Moody’s way of signaling this need to increase student fees and other revenue streams is presented in the following passage: “We expect that combinations of tuition and other revenue increases, expense controls and other operating efficiency initiatives will allow the University to sustain healthy operating performance. Over the long-term, we expect direct funding from the State to continue shrinking as a share of operating revenues, and for the University to leverage its strong market presence in education, patient care and research to provide for revenue growth.” In other words, we should expect the decrease in state funding to be replaced by increases in student fees, diverse revenue streams, and cost-cutting measures.

While the bond raters do realize that unstable funding from the state could limit the UC’s access to unrestricted funds, they highlight the high level of available cash: “The University does face some liquidity pressure due to State funding delays and the potential for more serious disruption to State cash flow. However, with over $6.9 billion in the short-term investment pool and $1.4 billion in the total return investment pool (at the end of FY2009) compared with $2.6 billion of state appropriations in FY2009, the University can likely weather any potential period of disruption in state funding.” Thus, even though the UC claims that it is broke, and it has to resort to drastic cost-cutting measures, the university has access to $8.3 billion in its investment accounts (this is not including its pension fund).

Moody’s points out that the university also has a high level of debt, but most of the servicing is paid for by the state ( and as Professor Meister has shown the student fees serve as collateral): “Although the debt service on the University's State Public Works Board Bonds (SPWBB) have been and are expected to continue to be paid by appropriations from the State, due to the legal obligation of the bonds being supported by an "available funds" pledge of the University, we do not expect the rating on these bonds to fall to levels near the State's other public works board bonds.” Student fees represent a major part of the “available funds” that the UC has pledged as collateral.

In its description of the UC’s fiscal strengths, Moody’s stresses the high level of medical profits and research grants: “The University of California is one of the premier higher education systems in the world, serving over 220,000 students, conducting over $3.7 billion of research annually, and generating in excess of $5 billion of net patient revenue at its five academic medical centers.” We should point out that “net revenue” means profit that could be used for any purpose; however, the UC has decided to funnel much of this money into medical faculty and administrative compensation packages as well as future construction projects. Thus, while UC President Mark Yudof constantly claims that UC does not have access to unrestricted funds, the bond raters tell a different story: “Sizeable balance sheet that remains highly liquid, with $3.5 billion of unrestricted financial resources ($5.9 billion excluding post-retirement health liabilities) and active treasury management monitoring a short-term investment pool approaching $7 billion.” In other words, the UC has at its disposal $12.9 billion, but on its balance sheet, it looks that the UC has less money because a new federal law requires all institutions to account for their future post-retirement health costs. Thus, even though the UC is not actually spending $2.4 billion this year for healthcare for retirees, it has to declare its total liability for all present and future employees. One of the effects of this accounting rule is that the UC can hide billions of dollars of profits.

Supporting the rapid revenue expansion of the university is an equally rapid augmentation of debt: “The University as a whole faces significant capital needs that are likely to result in rising borrowing levels; debt outstanding has grown from $8.3 billion in FY2006 to nearly $13 billion in FY2009 and including new borrowings since the end of the fiscal year, a 56% increase.” Like a hedge fund, UC uses its diverse revenue streams to lower its interest rate in order to borrow more money. What remains to be understood is why the university must continue to take on so much debt as it enhances its profits.

Not only is the UC increasing its revenue through medical profits and higher student fees, but it also augmenting its external research funding : “The UC system collectively represents a vital part of the nation's research infrastructure, as evidenced by its status as the largest university recipient of federal R&D spending in the country. Total grants and contract revenue in FY2009 exceeded $4.5 billion, with research expenditures exceeding $3.7 billion. Grant and contract revenue has grown consistently in recent years, and given the University's prominent research position we expect it to benefit from a spike in federal research funding provided by the federal stimulus bill.” Not only did the UC receive over $716 million in direct aid from the feds for its educational mission, but the UC is currently experiencing a record year in external grant funds, much of it coming in the form of federal stimulus money. In this mode of corporate welfare, professors and facilties supported by the state, student dollars, and federal grants are used to generate huge profits that are then siphoned into unrestricted pools of cash, which later can be redistributed to pay for the growing costs of high-earning administrators, staff, and star faculty.

As I have previously shown , the expansion of the top earners in the UC system has been supported by the combination of increased student fees and the diversification of revenue streams. In 2008, there were over 3,600 people in the system that made over $200,000, and the total compensation for the people earning above 200K increased 80% in just two years (from $640 million to $1 billion). Although Moody’s does not touch on the topic of compensation in its report, it does reveal how the UC produces and hides its profits: “We expect the University to sustain favorable operating performance across the System, driven by highly diversified revenues and a focus on operational efficiencies. UC had generated an average operating margin exceeding 4% through FY2007. Beginning in FY2008, the University was required to report expenses associated with its post-retirement healthcare benefit plans leading to rising operating deficits based on Moody's approach to calculating public university operating margins. In FY2008, the margin was negative 3.1% with the deficit rising to 6.1% in FY2009. Operating cash flow margin, adjusting for the non-cash portion of the post-retirement health expenses, was 11% and 9% respectively.” The translation of this statement is that while on the books it looks like the UC is losing money, once we exclude the retiree healthcare accounting requirement, the UC has been averaging a 10% profit margin. I would add that in 2008, the top 2% of the UC earners made 10% of the total compensation.

With this clean bill of fiscal health, we see why the UC does not have a budget crisis, and how it has used the general economic downturn as an excuse to funnel money into the profit-making sectors, which results in the increased compensation of a small minority of workers at the expense of everyone else. We also see here why the UC wants to increase student fees in order to take on more debt so it can continue to expand and grow. The combination of increased profits and augmented debt turns the UC into a giant hedge fund that reduces the pay for the majority of the employees as it pushes money to the top. I am sorry to say it, but more state money will not fix this problem.