Wednesday, July 13, 2011

A Tale of Two UCs

As we get ready for another large tuition increase, and we read about the elimination of several UC degree programs, the bond rating agency, Fitch, has re-affirmed the university’s strong fiscal standing. While the bond raters have been wrong in the past, we can still read the latest analysis of UC’s fiscal health as indicating the real priorities of the administration.

Since the UC has decided to help reduce its pension liability by selling about $1 billion of commercial paper (debt), it has asked to have its financial status rated. As I have argued in the past, due to the UCs high level of debt, it is dependent on getting a high rating from the bond raters so that it can receive a low interest rate, and one result of this dependency on debt is that the bond raters can tell the university how they think the system should structure its finances. Moreover, even though the bond raters pretend to be neutral and free of any ideology, they covertly push the same agenda that we find in the World Bank and the International Monetary fund. This agenda pushes for the privatization of public entities, a taking on of huge debts, and the deregulation of markets. The plan for the UC set out by Fitch is thus in many ways the global plan being pushed by conservatives and bond raters.

In reading the summary of Fitch’s report, we learn that the university has received a high rating because of, “UC's substantial level of balance sheet resources and liquidity; diverse revenue base, which enables the system to weather temporary weakness in any one funding source; and manageable debt burden, despite the expansive, capital intensive nature of its operations.” In other words, UC has many different revenue streams, and although it has a high level of debt, over $14 billion, it has the resources to take care of its financial obligations.

According to Fitch, one of the main signs of UC’s fiscal health is its ability to constantly raise tuition: “Recent reductions in state appropriations, and the potential for additional cuts through the intermediate term, are partially mitigated by the university's still considerable, though now more limited, ability to raise tuition and fees, and its overall limited reliance on state operating support.” In other words, the UC should not worry too much about losing state funds because it has shown a willingness to raise tuition. In fact, this same logic of privatization is driving the state’s reduction of funding for the UC; since the Democrats believe they cannot raise taxes, they cut the UC, which they know will turn around and raise tuition.

Not only does the state feel comfortable reducing the university’s funding, but they are planning to borrow another $1 billion from the UC system, and the reason why the administration will accept this deal is that the university will turn a profit by lending money to the state. This deal make sense on paper because due to UC’s high bond rating and the state’s low rating, the state has to pay a higher interest rate to borrow money, and if the UC lends money, the state can improve its bond rating, and the UC can profit from the difference between its low interest rate and the state’s high interest rate.

What is left out of this equation is that students are paying 6.8% to take out their loans, and these loans not only allow the UC to raise tuition, but the money generated from tuition can be leant to the state at something like 5%, which is better than the 2-3% the UC gets from putting tuition dollars into its Short Term Investment Pool. If we connect the dots, we see that students are lending money to the state, so that the university can bring in more money, but the end result is that the students will have to pay for this interest deal.

Perhaps the biggest casualty of this constant escalation of tuition is the middle class. While students whose parents make below $50,000 will have their tuition covered by financial aid, other students who are not rich and do not qualify for aid will end up paying more and taking out huge loans. In fact, over the period of 1999 to 2009, the percentage of UC students whose parents combined income is between $50,000 and $150,000 has gone from 50% to 40%.

As I have stressed before, almost everything the UC does loses money, and so the only stable source of income is student tuition dollars. Ultimately, the state and the bond raters are telling the UC to screw the middle class, and the UC is obliging on a regular basis.

5 comments:

  1. Bronwen RowlandsJuly 14, 2011 at 9:26 AM

    Bob:
    TILT! The Sacto Bee story linked in the first paragraph contains a bald-faced lie: Latin and Greek degree programs are NOT being cut at UC Berkeley. No degree programs are being cut in the Dept of Classics. This is a dangerous lie spread by UC's PR machine. They seem to be on a campaign to manipulate public opinion so that cuts become more acceptable. Please don't spread the lie.

    Anytime you see a quote from Dan Mogulof or Steve Montiel, please be skeptical.

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  2. Lie #2: Undergrad degrees HAVE been awarded in Greek and Latin in recent years.

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  3. man... i just paid $1600 for one online summer class at berkley a few months ago. working full time my paycheck for a month is only like 1000-1100. after paying rent and everything i barely have any left.

    im not looking forward to the tuition of my next semesters, and i wonder how its acceptable for this to happen. without educating our population how are we going to meet the goals that our country is setting out for itself? the whole country (and possibly the world) benefits from educating people, why would anyone think that its a good idea to make it more difficult to get an education - its already difficult enough without all your time being sapped by jobs and the stress associated with debt accumulation. educating people (especially in a democracy like we live in) education is very important, it should be getting easier, not harder.

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  4. Good for them. Maybe now more individuals considering college will be motivated to do a serious cost-benefit analysis of degree fields and the institutions that provide them. Maybe go to a junior college for a few years at a fraction of the cost to clear out the basics that are taught by TA's anyways at the larger universities.

    I have always thought that federal loan dollars should be prioritized and capped based on the perceived demonstrated national need and the ability of graduates from a field to pay back the loans. There is absolutely no reason for tax dollars to be used to the tune of $200,000 for someone pursuing a degree in history, art, or some other equally low paying degree.

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    ReplyDelete