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.

17 comments:

  1. Thanks for continuing to air out the facts, before we're all hypnotized by UC's mantra that culpability for this debacle rests solely with the state.

    UC has to clean house and should start with trimming down the layers of management you mention. UC's employee-to-management ratio is worse than Apple Inc in '96. Whether Bain will have the heart to tell the whole truth on this at UCB remains to be seen.

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  2. Hello, I'm a student at High Tech High in San Diego.
    I'm doing a debate project on the recent tuition hike, and we're required to contact an adult who's familiar with the subject. I was wondering if you could take the time to briefly give me your opinion on the subject and how you think it will affect students, faculty, and the schools in general. (Although I'm sure you're very busy!)

    If you could email me at sarasimowicz@hightechhigh.org, that would be really great!

    Thank you so much,

    Simone

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  3. WOW. The whole situation is incredible--not in the sense students use it (to mean "fantastic" or "wonderful"), but as in "Holy crap, I simply cannot believe the gall these administrators have."

    Last week, I read on the WPA Listserv that UCLA had laid off all its writing lecturers...and the sad thing is that the admin yahoos don't realize how counterproductive it is to do so. (Because, ya know, like, critical thinking and writing well doesn't really matter. Students just need to know how to give motivational speeches, and fleece other people out of their money. It worked for Wall Street, why not in academia?!?)

    Thanks for posting about this--keep up the good work. Your colleagues here in Georgia have their fingers crossed for you.

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  4. No one is mentioning the criminality and breach of trust and contracts that is occurring as a result of this "funneling" decision by CEO type managers who have taken over in "Invasion of the BodySnatchers" style (to reiterate the mesmerizing effect of Big Brother discourse).

    There should be a massive labor lawsuit: where are all the young idealistic lawyers being trained on UC campuses!?

    savingUCSB

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  5. Not much room to be idealistic if you're paying $44K/yr for law school.

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  6. WE CAN CONTROL THE REGENTS FOLLOWING A NEW PARADIGM:
    Thanks for your efforts and accomplishments, Bob. I'd like you and your readers to take a glance at http://oxtogrind.org/archive/364 (TOSCA). We have the imprimaturs of Howard Zinn and a host of high profile figures worldwide (See http://oxtogrind.org/archive/336 for a short list) in our effort to BECOME THE REGENTS for the UC system. Among other things... which should please "Zen" (who was on the same DNow! episode which featured you. I expect to meet with the UC-Berkeley Coordinating Committee on the 10th... and I'd like feedback from one and all prior to that. Blessings in solidarity, The Ox at tosca.2010@yahoo.com

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  7. This whole thing is appalling. The UC should not be so focused on bonds and raising student fees. Instead, they should wait to go forward with this construction (even if it is painful for individuals who want it) until they have all the funds necessary to pay for it. This is the only way I see to reduce construction costs and student fees.

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