In notes from the Regents Committee on Finance meeting from Nov. 18 2009 , one sees how the UC is able to bring in a record level of revenue but still claim that it has no money. During Assistant Vice President Plotts presentation of the Annual Financial Report, we are told that, “The University’s total assets were $42 billion, an increase of approximately $74 million over the previous year. Total liabilities were somewhat over $22 billion. Liabilities increased by $2.3 billion over the same period. Net assets were slightly under $20 billion and declined by $2.25 billion.” This combination of good and bad news is highly confusing, but the first thing to stress is that the main reason that the liabilities have increased by $2.25 billion is that due to a recent accounting law change, the UC is declaring on its books over $1.5 billion in future healthcare costs for retirees. As the report later notes, the UC is not actually spending this money or saving it up; instead it is merely listing the projected future costs on its ledger, and this move allows it to hide a large chunk of its unrestricted funds. In Plotts’ own word, “The obligation for retiree health, mentioned above, is $1.5 billion; but the University has funded only $279 million of this expense. The difference is recorded on the balance sheet as a liability.” Through this accounting move, $1.2 billion that could be used for any purpose, like closing the UC budget gap, simply goes away, but in reality, it does not go anywhere.
The use of the unfunded healthcare liability to hide the true state of the UC’s finances is revisited later on in the report: “Mr. Taylor responded that the decline in unrestricted net assets is due to a variety of causes. The increasing cost of the retiree health program is probably the largest single factor. Campuses are drawing on different sources of revenue to bridge over difficult financial times, and spending down unexpended plant funds on construction projects.” In this statement, the budget director claims that the biggest reason for the loss of unrestricted funds, which could have been used to close the budget gap, is the retiree healthcare liability, but we have to remember that the UC is not actually spending this money. It is therefore unclear why he connects the healthcare of retirees with the fact that the campuses are spending down their reserves.
In a very telling moment, Plotts declares, “There is no free-floating reserve that can be applied to UC financial problems.” I think he protests too much in this report because he spends an extensive amount of time justifying the lack of unrestricted funds, while he also reveals an increase in revenue. Not only is the UC hiding its money through its unfunded retiree healhtcare liability, but it is clear that the system pools money from many different sources, and then invests it through its endowment and short term investment pool. Moreover, since these investments lost a lot of money in the fiscal year ending July 1, 2009, Plotts is able to declare that the UC has lost most if its unrestricted funds: “These assets have sometimes been mistakenly thought of as a free-floating reserve. These funds are allocated in advance to a wide variety of academic and student programs. Mr. Taylor emphasized that, on June 30, 2007, the University’s unrestricted net assets were $6.5 billion; now, two years later, on June 30, 2009, unrestricted reserves were at $3.54 billion, a decline of $3 billion. He projected that, by June 30, 2010, these reserves will be below $1 billion.” According to this statement, there are no unrestricted funds because all of the money is dedicated to academic and student programs; however, these funds have gone down over $5 billion in the last two years, and they will go down even more this year. The first thing to point out is that these funds have recently gone up quite a bit, so does that mean that several billion dollars are now accessible? Or does this mean that when the investments lose money, everything has to be cut, but when the investments gain, none of the money can be used?
This report indicates that the UC did have a lot of unrestricted funds, but this money has been lost by the poor return in its investments: “unrestricted net assets, not restricted by an external party but committed internally, declined by almost $1.8 billion.” As the unions have been arguing for a long time, most of the UC’s money is only restricted by its own priorities, and this statement admits that these funds are not restricted by law or some external authority; however, the new claim is that these funds have now been mostly lost.
Another way that the university hides its revenue and available funds is by simply misreporting funding its gets from different sources. While its own audited financial statements show that the UC received an increase in state funding for the year ending in July 2009, this report claims a massive loss: “The University will always show an operating loss, because State educational appropriations are required to be reported as non-operating revenues, which declined by about $1.75 billion this year. The decline in non-operating revenues reflects reduced State educational appropriations and a decline in the fair value of investments.” Since state appropriations actually went up during this period, it must be that these state funds were lost by being invested.
What I suspect is going on is that the UC is placing funds from many different sources, including student fees and state funds, into its investment accounts. By using this structure, the system is able to hide its unrestricted funds and to redirect money from its investment accounts into its chosen priorities, which is often increasing the compensation of the star administrators, faculty, and coaches. The end result of this process is that the UC declares that it is broke, while it raises record revenue and redistributes income from the poorest students and workers to the wealthiest employees