The Big Audit Question

While the UC administration has tried to portray the state audit as a wasteful use of taxpayer dollars that came up with nothing important, the university will not be able to just walk away from some of the auditor’s finding. In fact, UC is required to report on their compliance with the audit’s recommendations, and one of the biggest issues still remains how the system redistributes tuition dollars and state funds to the campus. As the audit explains, “Because the Office of the President does not provide all money in the general funds and tuition budget to the campuses on a per-student basis (for example, it provides funding for specific research and public service programs to individual campuses), we understand that differences likely will exist. However, we would also expect that the university would be able to identify the reasons for any differences in the per-student base budgets provided to the campuses. The Office of the President stated that variation in base budgets is the cumulative result of decades of budget decisions by the regents and past presidents to achieve the university’s mission of teaching, research, and public service, and that quantifying the impact of these decisions would require an extraordinary amount of analysis by budget staff. The Office of the President believes that such an analysis would not be a good use of limited administrative resources.” Perhaps it would be difficult to document the history behind the redistribution of funds, but it should not be hard to simply explain the current method.

After all, the UC now claims that it will allow the campuses to keep all of the funds they generate on their own, and what they are working on is how to distribute state funds. Yet, in my analysis of several documents generated by the Academic Council and various Senate committees, I have discovered that a battle is being fought between the wealthy and the poorer campuses, and there are many loopholes to the redistribution of state funds and tuition dollars. Even though the campuses will keep their tuition revenue, the new system is supposed to be “revenue neutral,” which means that the current system of covert redistribution will remain.

As the audit indicates, the wealthier campuses are resisting any move to fund the campuses on an equal basis: “The Office of the President further stated that it is a goal of the university that all campuses achieve the level of excellence in teaching, research, and public service achieved by the Berkeley and Los Angeles campuses, although each in its own unique areas, and that while other campuses receive a lower amount of funding per student due to the factors discussed previously, without a significant increase in investment from the State, it would be problematic to equalize funding. It further stated that the university does not wish to jeopardize the achievements of the Berkeley and Los Angeles campuses by shifting funds away to other campuses in an effort to provide an equal amount of the general funds and tuition budget per student.” I quote this passage at length because it reveals the current battle being waged among the different campuses. After all, the UC has always been divided internally between the quest to allow some campuses to be superstars and the countering desire to make sure all campuses flourish. Obviously, the UC cannot have it both ways, and so the tradition is to muddle through and keep everything hidden and non-transparent.

Funding Streams
If we now turn to UCOP’s new policy on funding streams, we learn that, “Beginning in 2011-12, all campus-generated funds will be retained or returned to the source campus. Current policies and practices that distribute a share of fee funds, indirect cost recovery funds, patent revenues, Short-Term Investment Pool earnings, and application fee revenues to the systemwide budget and/or other campuses will be eliminated. Implementation of this principle will require “un-pooling” of General Funds revenues, which will be conducted in a manner that is largely revenue-neutral to campuses upon implementation.” Once again, it is hard to imagine how the new policy will allow the campuses to keep all of their funds, while it remains “largely revenue-neutral.” Perhaps the idea is that the wealthy campuses will make up for any losses by increasing their number of high paying nonresident students and professional students.

The new UCOP policy also indicates that some type of redistribution will still occur through financial aid: “Funding of the undergraduate University Student Aid Program (USAP) will be handled separately and will be an exception to the overarching principle. Each year, campuses will be directed to allocate a specified share of fee revenues to USAP. As needed, campuses may be assessed a specific amount for redistribution to other campuses in order to achieve the Education Financing Model goal of equal loan/work levels across the system.” Thus to pay for the financial aid on the campuses with a high level of aid-eligible students, the campuses with a lower percentage of lower-income students will have to transfer funds to the low-income campuses. It is hard to predict what kind of perverse incentives this new system will produce.

It is important to stress that while UCOP objected to the auditor’s implication that the current system subsidizes wealthier campuses by taking funds away from the campuses with more under-represented students, the new policy report does justify the practice of cross-subsidization: “The high tuition charged to nonresident undergraduates may help fund fellowships for graduate students. Student fee revenue derived from lower-cost disciplines may subsidize instructional equipment purchases in other areas. Student fees for general campus instruction may subsidize the health sciences, while indirect cost recovery on health science research provides a complementary subsidy for general campus activities.” Of course it would be impossible to eliminate the tradition of cross-subsidization, but the question remains whether the university can actually account for who is sending money to whom.

In one of the most clarifying passages, UCOP actually admits that subsidization is occurring between campuses: “When student fees were modest, this consequence was not a major concern. Over the last decade, with student fees rising to levels approaching the level of per-student support from the State, concern has been expressed about the fairness and appropriateness of using student fees derived at one campus to fund increases in faculty salaries and other costs at another campus.” As I have been arguing now for a few years, this type of covert subsidization is the central problem: undergraduate students are subsidizing research faculty on other campuses and parents, students, and taxpayers were never told about this practice.

UCOP can now claim that it is changing this covert funding system, but there are so many loopholes in their new policy that I fear very little will change. Not only has the system failed to determine how to distribute state funds, but it looks like it will be allowing campuses to set their own revenue and enrollment targets: “While these adjustments are intended to be revenue-­‐neutral upon implementation, campuses will experience budget increases if revenues rise. Likewise, campuses will be responsible for addressing budget shortfalls if revenues decline.” This final sentence begs the question of what does a campus do if it cannot attract more high-paying nonresident students or professional students.

Ultimately, it appears that very little will change, and the highest-ranked campuses will continue to receive more funding, while the poor campuses will become poorer. This sounds a lot like America writ large.