Tuesday, April 27, 2010

A Bond Rater Gives UC Its Marching Orders

Moody’s has rated the University of California’s bonds as aA1, and the university’s finances have been defined as stable. However, the high rating comes with the following warning: “The broadest pledge of revenues backing the University's various debt securities, General Revenues include tuition and other student generated fees, indirect cost recoveries, investment income and other revenues excluding state appropriations and gross revenues of the Medical Centers. The security features of the General Revenue Bonds is fairly weak, with no reserve fund, a rate covenant that requires revenues sufficient to pay debt service, the ability to issue senior debt, and the ability of the University to add and remove revenues as long as an event of default has not occurred. However, we expect the University to closely protect its market access and the strength of its broadest and highest rated security pledge.” According to this assessment, the UC can spend student fees, indirect costs from grants, and investment profits, but it cannot use state funds or revenues from the medical centers to back its debt. The raters also point out that the bonds do not have sufficient funds to service the debt, but they are confident that the university can protect its market access.

Part of the UC’s market access concerns the use of credit default swaps and other complicated financial derivatives: “The University has two swaps related to two series of variable rate bonds under its Medical Center Pooled Revenue Bond pledge, both of which are floating to fixed rate agreements. Only one of the swaps requires the University to post collateral under certain circumstances. The fair value of the agreements was negative $48 million at the end of FY2009.” While the UC is losing money on its swap, it is unclear how many other similar arrangements it is currently holding.

One of the main strengths of the UC’s finances continues to be its access to unrestricted funds that can be used for any purpose: “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 exceeding $10 billion.” As I have previously stressed, while the university likes to claim that it has limited access to unrestricted funds, it is clear that it can use close to $6 billion according to its own purposes. Moreover, the retiree healthcare liability now moves $2.4 billion from unrestricted funds to restricted funds, but the university is really only spending a tenth of that amount on retiree healthcare, and there is no sign that they are actually saving $2.4 billion in a separate account dedicated to the healthcare of retirees.

One concern that Moody’s signals is the high rate of debt the university has taken on: “Significant capital needs likely to result in rising borrowing levels; debt outstanding has grown from $8.3 billion in FY2006 to over $13.2 billion in FY2009 and including new borrowings since the end of the fiscal year, a 56% increase.” This debt requires a huge amount of funds to service, and it unclear why the university finds it necessary to borrow so much money. Furthermore, the more the UC borrows, the more it has to make its decisions based on what the bond raters tell them since a high bond rating results in a lower interest rate, which reduces the cost of borrowing money.

Like the IMF, the bond raters hint to the UC that a source of financial weakness is their reliance on the state and the high level of unionized labor: “high susceptibility to regulatory and government pay or changes, coupled with unique stresses on California healthcare, including unionized labor.” In this seemingly neutral economic assessment, we find a bias against state regulation, unions, healthcare, and state funding.

Moody’s also slips into their analysis the idea that the university should increase the number of students coming from outside of the state: “In-state demand is so strong that UC does little recruiting of freshman from out-of-state. Moody's views this as an untapped strategic asset because UC could easily increase its student demand further if it followed national recruiting practices similar to most peer universities.” Not only does Moody’s think that the university should accept more out-of-state students, but it should spend more money marketing and recruiting them.

It is interesting to note that while the bond raters indicate that the UC needs to wean itself off of the unstable support for instruction from the state, they believe the UC will continue to profit from the money it gets from the federal government to do research: “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.” According to this analysis, research grants brought in an $800 million profit last year, and this amount may go up due to the federal stimulus. Hidden in this analysis is the idea that state-funded instruction is unstable, but federally funded grants are a growth market. The reality of the situation is that we do not know if grants make or lose money, and they are an even more unstable source of funding than state support.

Another major threat to the financial health of the university that is highlighted by the bond raters is the pension and retiree healthcare liabilities. These future projections make it look like the university is currently running a deficit when it is still showing a healthy surplus: “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 deficits reflect $1.35 billion and $1.50 billion in expenses for retiree health benefits respectively in each year compared to less than $300 million of actual cash contributions to the plan. The University's retirement health and pension plans represent a significant and growing liability and expense of the System. We believe the University will need to take significant steps to either curtail the benefits or improve ongoing funding of the costs in order to sustain its long-term credit quality.” This complicated passage means that on paper it looks like the UC has a deficit, but that is because they are declaring a $2.85 billion pension and retiree healthcare liability, while they are actually only spending $300 million. Also, Moody’s is pushing the university to either curtail benefits and/or increase the funding for the pension and retiree healthcare, and if the university does not do this, the UC is threatened with a lower credit rating.

While it is necessary for the university to fund the cost of its pension and healthcare for retirees, the question is how much is needed and how does the projected liability affect current operations and the campaign to downsize benefits. Also, instead of simply reducing its profits by declaring a huge liability, shouldn’t the UC use some of its net revenue for future benefits?

Moody’s not only tells the UC, in subtle and not so subtle ways, how to spend its money, but it also pushes a risky mode of investment: “The long-term targets for the endowment pool would bring alternative assets (including hedge funds, real estate and private equity) to 35% of the total, with domestic and international equity accounting for another 45% of total assets.” While the move to increase investments in hedge funds, real estate, and private equity could result in a major reduction of endowment wealth, Moody’s often shows a preference for this type of investment strategy.

Not only do the bond raters want the UC to invest in volatile assets, but they also encourage the university to take on even more debt: “With expendable financial resources covering pro-forma debt by 0.8 times (resources as of end of FY2009 and debt as of current issue), and debt service consuming 4.1% of operating expenses, we believe the University retains additional debt capacity at the current rating level.” Like a pusher telling a junkie that he should increase his dosage, Moody’s neutral report appears to promote the very things that helped to cause the global fiscal meltdown: high debt, easy credit, and creative accounting.

Monday, April 19, 2010

On The Use and Abuse of Graduate Students in the Humanities

In a recent New York Times article, “The Long Haul Degree,” Patricia Cohen outlines many of the hard realities facing graduate students in Humanities programs at American research universities. She begins by pointing to the huge amount of time it takes doctoral students to complete their degrees: “Medical students receive an M.D. in four. But for graduate students in the humanities, it takes, on average, more than nine years to complete a degree.” Not only does it take these students a very long time to complete their studies, but Cohen adds that, “they could spend another nine years, or more, looking for a tenure-track teaching job at a college or university — without ever finding one.”

This is what we call the job crisis in the humanities: it takes students along time to get their degrees, and when they do earn their doctorates, the reward is often unemployment or underemployment. Some of the causes for this sorry state are discussed by Cohen: “Doctoral students are expected not only to master a wide swath of material to pass general and oral exams, but to produce a nearly book-length dissertation of original research that, depending on the subject, may ultimately sit on a shelf as undisturbed as the Epsom salts at the back of the medicine chest. These students must earn their keep by patching together a mix of grants and wages for helping to teach undergraduate courses — a job that eats into research time.” In other words, students are not only supposed to produce original work, but they also have to support their studies by teaching undergrad courses.

One of the results of the system that forces grad students to spend most of their time instructing undergraduates is that many doctoral students never actually complete their degrees, and the ones who do finish often end up with large loans and no job prospects: “About half who enter a humanities doctoral program drop out along the way. The average student receiving a Ph.D. today is 35 years old, $23,000 in debt and facing a historically bad job market. Adjunct jobs — with year-to-year contracts, no benefits and no security — may be the only option.”

One thing that Cohen does not examine is the fact that because so many grad students are teaching undergraduate courses, there is not reason to hire professors with doctorates to teach undergrad classes. In other terms, grad students unknowingly produce their own future unemployment.

One would think that universities would realize that the current system exploits grad students and trains them for jobs that don’t exist, but instead of reducing the number of doctoral students and increasing the number of professors with PhDs, universities are continuing to hire people off of the tenure track as they accept more graduate students into their doctoral programs.

Making matters worse is the fact that the high-enrollment classes taught in humanities programs are often staffed by part-time faculty and graduate students, and so while the number of students in these courses continues to increase, the large number of enrollees does not result in a need to hire more professors: “At the same time, the practice of hiring off-tenure teachers is growing. According to a new survey of humanities departments by the American Academy of Arts and Sciences, half of the faculty members in English and foreign languages — more than any other department — are not on a tenure track. Part of the reason for the large number is that freshman composition classes, which are often required, are taught by those departments, and adjuncts.” Since non-tenured faculty and grad students are teaching the required courses with the highest student demand, it is clear that the same universities that are training doctoral students are engaging in hiring practices designed to reduce the need to hire people with doctorates.

As absurd as it seems, the institutions that are in charge of credentialing new Ph.Ds argue on a daily basis that these degrees are not needed. Since universities continue to place in the classroom people without degrees, expertise, or experience, they send a clear message to students, administrators, and stakeholders that one of the central products of a research university, doctoral degrees, is worthless.

It is also important to stress that it costs at least four times more to educate a graduate student than an undergraduate student because grad students are taught in small classes staffed by the highest-paid professors. Moreover, the use of grad students to teach the small sections attached to large lecture classes actually inflates the cost of undergraduate instruction. In short, grad students are very costly to universities, and yet, these institutions continue to fight for more graduate students. We must ask why universities appear to be working against the best interests of their students and their own bottom-line.

One answer that Cohen provides for the continued desire to recruit more grad students in the humanities is that these students allow professors to concentrate on their favorite areas of research: “If enrollment drops too low, there may not be enough students to justify courses in specialized areas.” According to this logic, if humanities programs reduce their number of doctoral students, there will not be enough students for the graduate faculty to teach. For example, if you do not continue to bring in more doctoral students interested in studying Chaucer, the Chaucer specialist will have nothing to do.
Of course, the Chaucer specialist could teach an undergrad writing course or general literature course, but then the professor would not be concentrating on his or her area of research. Universities thus have to accept people into their graduate programs in order to give the research professors students to teach.

Cohen argues that the other major reason for universities desiring to bring in more graduate students in fields that provide a clear path to underemployment is that doctoral students bring prestige: “Doctoral programs bring prestige to a university and help retain faculty members who want to mentor the next generation of scholars. They also provide the staff for courses offered to first- and second-year undergraduates — a task many tenured faculty members resist.” It turns out that the education of graduate students has virtually nothing to do with the students or their education; instead, departments want to increase their prestige by accepting students with high GRE scores and stellar past academic records. Furthermore, professors need the grad students to teach the undergrad courses the professors do not want to teach.

It should be clear at this point that this system is totally messed up, but how can we fix this complicated problem? One possible solution is to restrict the number of courses graduate students can teach, while we fund students out of grants. This regulation might not only improve the quality of undergraduate instruction, but it also could help to provide jobs for students once they earn their doctorates.

Another way of saving money and improving the quality of instruction is to accept more undergraduates and reduce the number of new graduate students. Since it costs so much more to educate grad students compared to undergrads, it makes sense to reverse this current tendency of replacing undergrad enrollments with graduate enrollments.

To make these graduate programs more accountable and transparent, they should be ranked on how many of their students complete their degrees and how long it takes to earn their doctorates. Ranking agencies and guide books should also look at how many doctoral students get jobs in their chosen field and how much debt that have when they graduate.

Tuesday, April 13, 2010

Why UC has Huge Legal Bills

While the University of California is a huge system, and many things can go wrong and right, there does appear to be an anti-employee culture that is evident in the large legal bills that the UC funds each month. Not only does the UC system has its own army of lawyers, but it also contracts out a great deal of legal work, and during these times of fiscal “crisis,” we must look at how the university spends its money.

In the minutes to the January 2010 Regents Meeting, you find the following listings of NEW LITIGATION AND ARBITRATION PROCEEDINGS for the two-moth period of 10/13/09 – 12/14/09:

Nature of Dispute Alleged by Plaintiff Employment Cases

Discrimination (sexual orientation), harassment, and retaliation
Discrimination (age), wrongful termination, and retaliation, withholding of wages
Retaliation, violation of due process and negligence
Breach of contract
Discrimination (sex), harassment, retaliation and constructive termination
Wrongful termination in violation of public policy
Violations of whistleblower protection act, Labor Code, and due process rights
Discrimination (age), wrongful termination, retaliation
Wrongful termination, whistleblower, health and safety violation

Professional Liability Cases

Medical malpractice, loss of consortium
Wrongful death, medical negligence, elder abuse
Medical malpractice, wrongful death Medical malpractice
Medical negligence Medical malpractice
Medical malpractice, general negligence, intentional tort, and loss of consortium
Medical malpractice
Medical negligence and loss of consortium Professional and general negligence
Negligence and battery
Personal injury, medical malpractice
Medical negligence, lack of informed consent
Professional and medical negligence
Medical malpractice
Personal injury, general negligence
Medical malpractice, negligent hiring supervision and retention
Medical malpractice and loss of consortium

Other Cases
Dangerous property liability, negligence
Violation of due process under Fifth and Fourteenth Amendments
Class action for alleged disclosure of confidential medical information
Negligence, violations of statute and right to privacy, battery, emotional distress
Breach of agreement, unjust enrichment, and recovery of money paid (lawsuit filed on behalf of the Regents against Angelika Dimoka and Paul Pavlou)
Breach of contract, conversion, money had and received

Public Employment Relations Board (“PERB”) Unfair Practices Alleged by Charging Party
University engaged in bad faith bargaining regarding temporary layoffs. Santa Cruz Office of Labor Relations indicates the issues have been resolved and the temporary layoffs rescinded, and dismissal is pending.

University retaliated against a Clerical and Allied Services Bargaining Unit employee for exercising her Weingarten Rights and failed to provide notice of placement of the employee on investigatory leave.

University enacted unilateral changes to the binding terms of its agreement with the union and engaged in direct dealing with represented employees prior to the adoption
of the Regents’ furlough/salary reduction plan.

University engaged in bad faith bargaining - union to enter into the furlough program agreement. University failed to give union notice prior to laying off represented employee and also failed to discuss layoff alternatives.

University engaged in direct dealing with represented employees prior to its adoption of the Regents’ furlough/salary reduction plan. Also, the University unilaterally and in bad
faith imposed unilateral changes that constituted a retaliatory rolling lockout and failed as required by the terms of its contract with the union, to mitigate or explore alternatives to the Plan prior to implementation.

University unilaterally changed its contract with the union by assigning unit work performed by an Administrative Analyst III in the clerical services unit to an employee
outside the unit. The University also retaliated against the same employee for performing union duties and attempted to interfere with the employee’s union rights through coercion of other union members.

University laid off a Computer Resource Specialist I in the technical services unit, in direct retaliation for his participation in protected union activities and altered the
status quo of the contract by attempting to reorganize the Information Technology Department without negotiating the changes prior to implementation.

University failed and refused to bargain specific aspects of the Regents’ furlough/salary reduction plan.

University violated the status quo by not providing notice or bargaining the involuntary
transfer of an administrative assistant to a newly-created position and retaliated against the employee for exercising his union rights.

UCB Supervisor refused to remove references to a senior museum scientist’s use of union
representation in a resolved grievance from the employee’s performance evaluation.

Friday, April 9, 2010

Reasons Why UC Faculty Should Not Buy into the Pension Scare

The main reason why UC faculty and employees should question the current claims concerning the underfunding of the pension plan and retiree healthcare is that these accounting predictions are based on a whole series of economic guesses. In order to determine the future funding and liability of the plan, the accountants have to look into the future and estimate how well the UC’s investments will do, who is going to retire, what salaries will look like down the road, the number of employees getting benefits, and the cost of healthcare premiums, among other major variables. In the recent past, the actuaries have been wrong on predicting most of these variables, and so while we should restart contributions, we should not be scared into accepting a high level of employee contributions, and we should stop the process of changing the benefits for present and future employees.

Currently, UC has over $35 billion in the pension plan, and last year, it paid out $1.5 billion. It was a huge mistake to stop contributions in 1990, and so it is good to go with the current policy of 4% from the employer and 2% from the employee; however, it is unclear if we need to contribute much more, and dire predictions based on projected liabilities do not help anyone. What we should be arguing for is shared governance over the investments.

In response to the recent study done by a couple of Stanford grad students about CalPERS, CalSTIRS, and UCRP, CalPERS has made the following observations: 1) even with the recent stock losses, over the long haul, the plans have all averaged higher than the 7.5% rate of return, and the Stanford model uses a very low rate of 4.4%; 2) all of the future predictions are tainted by the current low interest rate that is sure to go up, which would help increase income from the bonds that are in UCRP; 3) most pension plans remain healthy by being funded at 80%; UCRP is still at 95%.

As Dean Baker has written, people are simply exaggerating the bad health of the Californian pension plans in order call for their abolition. In this context, it is strange than no one in the UC is calling for the capping of special executive pension payouts. Did you know that if Yudof stays for at least 4 years, he is guaranteed a yearly pension of over $250,000. Capping pension payouts at some level, like $125,000, as many other plans do, would save a ton of money.

In an article for the Huffington Post, I show that a new accounting rule from 2004 might have been a Republican ploy to bust unions, pensions, and public institutions by having them declare on their books, all of their future healthcare liability. The UC faculty and staff should not buy into this conservative attempt to undermine our interests.

Monday, April 5, 2010

Warning: Tricky Accounting is Threatening Our Benefits

The UC system has embarked in the process of downsizing retiree benefits, and it looks like their manipulative campaign is working. Last week, The Council of UC Faculty Associations made the following statement: "UCRP is badly underfunded in terms of its liability for future benefits that employees began accruing after June 30, 2008. Moreover, the unfunded future liabilities are increasing very rapidly. In 2009, UCOP and TFIR estimated that if contributions were not immediately restarted, the percentage of funded liabilities would fall to 61% and the dollar amount of the unfunded liability would increase to $18 billion by 2013 – 3 years from now!" This focus on unfunded liability for the pension plan is in part a scare tactic to force the older faculty to push for higher employee contributions and may help the administration gut the plan for new hires.

Like the Commission on the Future of the University, the faculty association is buying all of the administration’s questionable accounting moves. First of all, as I discussed in relation to the Executive Summary of the Commission’s initial recommendations, due to an accounting change from 2006, the UC has been forced to declare as a liability on its books all of the future costs for pension and retiree healthcare. This means that while the UC is still funding the healthcare for retirees on a “pay as you go” basis, they are declaring a multi-billion dollar liability. Thus last year, as they spent $279 million on healthcare for retirees, they declared a $1.5 billion liability, which helped them to claim a budget deficit as they moved funds from unrestricted to restricted accounts. Once again, it is important to stress, the UC did not actually spend $1.5 billion, it only moved the money on its books. The UC currently has over $6 billion of retiree healthcare liability on its book, which means that the university looks a lot poorer than it actually is.

The council’s claim that the UC faces an $18 billion liability echoes the Commission’s claim that an $18 billion liability will threaten the basic mission of the university: “The funding gap is exacerbated by a significant unfunded post-retirement benefit liability, which is currently $1.9 billion and expected to reach $18 billion by 2013. Similarly, the University’s unfunded post-retirement healthcare liability is projected to grow from $13 billion today to $18 billion by 2013 . . . Because the PEB Task Force is scheduled to finalize recommendations by this summer, we do not address PEB issues in this report, but recognize that more than any financial challenge facing the University, the cost of providing these benefits has the potential to overwhelm our ability to continue our tripartite mission of teaching, research, and public service.” In other words, the crisis in the university is being driven by the university’s commitment to pension and retiree healthcare.

Moreover, the Council has also accepted the administration’s argument that the underfunding of the pension plan has nothing to do with the bad management of the UC’s investments: “Although the 2007-09 stock market crash was responsible for some of this unfunded liability, most of it results from the fact that no employee or employer contributions have been made for nearly 20 years. While the recent rise in the financial markets has eased the problem, the gap is still enormous.” The truth is that the UC’s pension investment record went from being one of the best to being one of the worst after the management of the funds was outsourced in 2000. Moreover, in the middle of the global financial meltdown, UC increased its holdings in real estate and mortgage-backed securities, and these moves may have been motivated by several regents who have strong investments in real estate and securities. It is irresponsible for the council to not call for direct employee oversight over the UC’s pension investments.

Since our university is full of famous economists and accountants, it should be possible for someone to challenge the university’s accounting mechanisms. If we do not question their assumptions, we will all see our benefits and compensation go down, as the core mission is threatened. While it is necessary to protect our pension plan and healthcare for retirees, we need to know the truth about the UC’s finances.