The University as Investment Bank and Questions about State Funding

In response to my last blog entry on President Yudof and the current financing of the UC system, and anonymous commenter wrote the following: “This post is highly misleading. You are implying that UC takes contracts and grants, puts the money in STIP, then spends it elsewhere. This is simply not accurate. STIP interest, not the original funds, can be spent elsewhere. What would you have them do with a year of funding---keep it under the mattress until it is spent?” In response to this response, I would like to show how the UC and other universities have become investment banks.

I myself did not understand this system until I met with a high-ranking UC official to try to figure out how the UC was able to transfer $1 billion from the Short-Term Investment Pool (STIP) to the retirement system (UCRS). When I asked if the administration had borrowed the money from the different accounts that hold grant funds, operating cash, state funds, and tuition dollars, I was informed that I am looking at it in the wrong way. I was told that I should think of the university as a bank, and just like once you deposit money in a savings account, it does not just sit there, but it is invested in different things. This explanation reminded me of the famous scene from It’s a Wonderful Life, where Jimmy Stewart’s character tells the people trying to withdraw their money that their funds are not there because they have been lent out to help build their neighbor’s homes and businesses.

I am not implying here that the UC is doing something illegal; rather, my point is that the university has much more flexibility with its funds than it likes to admit. For example, last summer, the university suggested to the Regents the following financial strategies:
“• Transfer an additional $1 billion from the systemwide Short Term Investment Pool (STIP) into the Total Return Investment Pool (TRIP) to increase investment earnings;
• Distribute a two percent extraordinary payout on eligible year-end 2010-11 balances of funds functioning as endowments (FFEs);
• Distribute a two percent extraordinary payout on eligible year-end 2010-11 balances of true endowments; and
• Draw down as needed from the University’s employee/retiree healthcare reserve.”

The first strategy is to move $1 billion of funds from low-risk securities to higher risk investments. Once again, individual accounts are not reached into and taxed; instead, a portion of the pooled assets are transferred. The second two strategies do the same thing with the pooled endowments and other funds that function as endowments. Finally, the fourth strategy is to take money that is being held for retiree healthcare and use it for other purposes. (This final move should raise some concerns since retiree healthcare is not a vested right, and the UC plans to reduce the amount of healthcare it covers for retirees by making former employees pay more for their healthcare.)

What is so interesting about these financial transactions is that they do support my contention that the university could use grant money or medical revenue to support things like instruction if it saw this as a priority. However, from the university’s perspective, spending money on instruction means that the funds just disappear, but if money is used for other purposes, they could bring in more money in the future.

This financialized model has been hastened by the recent state reductions of UC funding. In fact, I believe that the governor’s latest budget plan is the worst one ever for the UC because not only does it lock in a long-term reduction of state funding, but it also gives the UC administration more leeway to use state funds in any way that they want. While some at UCOP have actually applauded this new budget as a positive gesture, the possible $300 million increase, which would be reduced by $200 million if the governor’s tax initiative does not pass, does nothing to return funding to the 2007-8 level of $3.2 billion. Instead, the UC would get $2.5 billion, in the best-case scenario, but would have to take on millions of dollars of debt financing.

While the UC claims that the new budget increases state funding by 4%, it really should be considered to be a 20% reduction from the past high. So why has UCOP reversed course and applauded something that they always in the past have attacked? Moreover, if the state increase is considered to be 4%, does that mean that tuition will have to go up 12% under the plan discussed last September? Also, since the state does suggest using $90 million to fund the retirement of state-supported employees, does this mean that the UC will have to follow any new state pension restrictions? Stay tuned.