Since the regents are supposed to be discussing the Commission on the Future’s recommendations at their November 16-18 meeting, it is important to look at their final report. Following the trend of most recent UC documents, the Commission begins by claiming a dire fiscal crisis: “state funding has not kept pace with inflation and enrollment growth, particularly over the last decade. Since 1990-91, average inflation-adjusted state support for educating UC students declined 54 percent. Student fee increases have addressed only about two-fifths (40%) of this decrease. Other actions to reduce costs have resulted in reduction in staff and instructional offerings, faculty and staff salary lags and reductions in funding for instructional equipment, library materials, and facilities maintenance.” As I have argued before, these statistics are misleading because they neglect to add that since 1990, UC has reduced its instructional costs by increasing the size of classes and relying on inexpensive non-tenured faculty to teach the majority of the courses. Moreover, while the report claims that UC now only gets $7,570 per student from the state, the real figure is closer to $10,000, and on some campuses, the amount goes up to $18,000. In fact, according to the Commission’s own numbers, in 2009-10, there were 214,000 resident students, and since the university got over $2.5 billion in funding from the state, the average student subsidy was $11,687.
Processing Students at a Faster Rate
Since the university claims that it is not getting enough money from the state, and it cannot support increased enrollments, the only thing that can be done is to do more with less. In fact, many of the commission’s recommendations are shaped by this logic, which is itself based on a false understanding of how the university actually spends its money. For example, Recommendation 1, Adopt Strategies for Reducing Time to Degree, argues that the university can save money by pushing undergraduate students through the system at a faster rate: “Implementing formal programs that encourage and facilitate a shorter time to degree, such as “packaged” options for three-year degrees with pathways that make full use of advanced placement credits and summer terms. Such pathways could include joint bachelor’s/master’s degree programs.” While three-year degrees would lower the quality of a UC degree, they would do nothing to improve the fiscal health of the system.
Not only does the Commission want to decrease the time it takes to get a degree, but it also wants to increase the number of transfer students and reduce the number of traditional freshman enrollments. Recommendation 4: Reaffirm the University’s Commitment to Achieving Master Plan Targets for Freshman and Transfer Students looks a good idea on the surface, but it does not take into account the economic realities of accepting more transfer students. By calling for a 60:40 ratio between upper- and lower-division students, the university will cut into its profit margin generated by large enrollment, low-cost, lower-division courses.
Due to the way courses are currently structured in the UC system, lower-division undergraduate courses produce a profit, while upper-division classes break even, and graduate education loses money. This economic analysis is not meant to undermine graduate education, but it is essential for us to recognize that we need to honestly see where money comes in and where it goes. Once we know how we gain and spend money, we can determine how to support the programs we want to protect. In fact, the final report does at one point recognize this funding structure, “Admittedly, the education of upper-division students is more expensive because of smaller classes and necessary specialization and facilities. As implemented, the resource consequences must be monitored. From an aggregate perspective, however, transfer students require only two years of UC resources in order to graduate with a UC bachelor’s degree. Serving transfer students increases the number of degrees the UC can confer with any given level of instructional resources.” While the first part of this argument acknowledges the financial need for more lower-division courses, the final part ignores this financial reality and simply returns to the desire to increase degrees by increasing transfer enrollments.
In fact, by calling for a 60:40 ratio between upper- and lower-division students, the university will commit economic suicide. Not only are upper-division students more expensive, but transfer students limit the ability of the university to accept out-of-state students who pay a high tuition without financial aid.
The Online Solution
Another result of the commission’s failure to grasp that undergraduate students subsidize the rest of the university is their call for online classes. The very title of Recommendation 5, “Continue Timely Exploration of Fully Online Instruction for Undergraduates, as well as for Self-Supporting Programs and in University Extension” makes one think that self-supporting programs actually provide needed dollars to the general fund. Moreover, the commission makes the following dubious claim: “Within the general realm of our current on-campus programs, and in the near-to- mid term, increased online instruction may . . . reduce course impaction, reduce scheduling conflicts, and increase summer session enrollments by enabling students to earn credits without being on campus, thus reducing students’ average time to degree.” What this analysis does not state is that online courses are likely to cost more money, decrease the quality of UC courses, require more faculty work, and draw funding away from the core mission.
While there are some words of caution in the Commission’s discussion of online courses, the final report calls for a major extension of digital education: “The Commission believes that the Pilot Project currently being coordinated by the Office of the President, with the endorsement and participation of the Senate, may clarify the desirability of substantially increasing the use of fully online instruction for degree credit, beginning with lower division and UC Extension courses.” Once again, the problem is that if the UC farms out its lower-division courses, departments might lose one of their central sources for funding.
External Grants and Endowments Lose Money
One positive part of the final report is the acknowledgement that external research grants cost the university several hundred million dollars a year: “Externally funded research in the University of California is supposed to be conducted under the accounting principle of total cost recovery, including indirect costs. The indirect costs are intended to recover the facilities and administrative costs attributable to research. However, Indirect Cost Recovery (ICR) rates on federally funded research at UC campuses do not fully recover the costs of research, falling 5-10 percentage points behind some of our comparator institutions and on average 25 percent short of full recovery. For a variety of historical reasons and local campus practices, UC also does not fully recover the costs of research for non-federally funded research projects – those projects funded by the State of California, foundations, gifts, and corporations.” It turns out that while most people think external grants and endowment gifts bring money to universities, these external funds can actually cost schools large sums because they fail to cover the indirect costs associated with buildings, benefits, labs, staff, administration, and equipment.
The Costly Problem of Graduate Education
If we acknowledge that external funding can actually hurt the financial health of an institution, we realize that the only real source of income for the university is undergraduate tuition and related state funding. Yet, Recommendation 12 calls for, “Increase Graduate Student Enrollment to Meet Long Range Planning Goals and Research Mission Prescribed in the Master Plan.” Although the UC system needs to continue to support graduate education, it is unclear how this can be accomplished. For example, the Commission recommends a shift in the ratio between graduate and undergraduate enrollments: “To be excellent in national and global terms, however, the proportion of graduate enrollments relative to undergraduate enrollment must be adequate to support the research and instructional mission.” It is unclear whether this statement means that the university needs graduate students to teach undergraduates, or the university needs to increase graduate students to retain its prestige and to support the research mission.
What is clear is that a change in the ratio of graduate-to-undergraduate students would require either an abandonment of the Master Plan or a new funding model: “The education of graduate students is more expensive than undergraduate students, both in instructional costs and student financial support. Therefore, under current and the baseline fiscal projections, funding for graduate enrollment growth would require that campuses reduce undergraduate enrollment—an unacceptable result in light of our access mission and commitment to the Master Plan enrollment goals.” Given this awareness of the high cost of graduate education, it becomes hard to rationalize the following recommendation of the Commission: “Recognizing UC’s role in the Master Plan as the state’s primary research and doctoral-granting institution, the Commission recommends that the University increase the proportion of graduate enrollments from 22 percent of total enrollments to 26 percent by 2020-21, with individual targets set by each campus.” From a strictly budgetary perspective, it makes no sense to replace the profit-generating undergraduate students with costly graduate programs. In fact, due to the often low levels of support for graduate students in the UC system, it would be much more cost effective and fair if the university reduced the number of graduate students and increased their funding.
The Failure to Grasp the Budget as a Whole
It should be clear at this point that the Commission’s recommendations do not fit together and suffer from an integrated understanding of how money flows in the UC system. In fact, even the good suggestion of reducing administrative costs is undermined by the methods for achieving the savings. While recommendation 14 calls for the system to, “Expedite Implementation of UC’s Initiative on System-Wide Administrative Reforms, with the Goal of $500 Million in Annual,” the way the reductions are being resented represent a major increase in power for the Office of the President. In fact, after a period of reducing the UCOP budget by farming positions out to the campus, we are now witnessing a major increase in UCOP positions.
Since no one is looking at how the different parts of the university budget interact, many of the proposed ways of saving money will actually cost the university funds in the long run. For example, the call to derive $250 million from self-supporting programs, like extension, fails to recognize how these programs often turn a profit by not paying their fair share for buildings, administration, staff, benefits, and maintenance. In other words, self-sustaining units are not actually self-sustaining, and they rely on using UC facilities and faculty even though they claim to be separate and private. Moreover, as the report posits, most of the profits of these self-sustaining units come from one source: “Current UC self-supporting programs generate about $100 million annually, about $25 million per year above program costs. However, most of that revenue comes from the high- cost, self-supporting executive MBA programs. To date, most other self-supporting programs are relatively small and generate modest amounts above programs costs.” Unless, we want to shut down most of the privatized programs and increase the production of executive MBAs, we will need to find another source for revenue.
Even Private Gifts Lose Money
Another proposed area for future revenue is private fundraising, but as recommendation 16 notes, the way these funds are donated often restricts their use and prevents them from contributing to the common good: “The University’s history of fundraising, however, is marked by a high level of restriction on the funds raised. Approximately 95 percent of UC’s overall endowment payout is restricted, contrasted with 80 percent for most public institutions and 55 percent for private institutions. Only two percent of all gift support in recent years is unrestricted, even less for endowment. To put this in context, of the $1.3 billion in funds raised in FY 2008-09, just over $25 million could be characterized as unrestricted.” Not only are most of these endowment funds dedicated to specific projects, but they often fail to cover the full costs of the programs and positions they support. Furthermore, the university spends huge sums of money trying to raise more endowment funds.
When All Else Fails, Raise Tuition
The final recommendation calls for exploring differential tuition by campus, and it is clear from the Commission’s final report that they see this as a very attractive proposition: “Although tuition cannot singlehandedly solve UC’s budgetary challenges, it is a key component of any funding strategy and one of the only revenue sources that UC can effect to replace other funding shortfalls. There still exists substantial headroom on each campus for across-the-board tuition increases without impacting enrollments.” In other words, campuses can raise tuition and still attract high enrollments, and so each campus should be able to set their own price. Of course, this recommendation completely negates the previous defense of the Master Plan and the very essence of a public university.
The Real Recommendations
At the end of this mixed bag of recommendations, the Commission adds a curious section under the heading of “Contingency Recommendations”: “In addition to the recommendations endorsed, the Commission also deliberated several ideas that are worthy of additional study but need not be advanced at this time. Should the fiscal crisis deepen and state and other funding sources continue to decline to a point where the University can no longer sustain its longstanding commitment to academic quality and increasing access, The Regents, President, Chancellors, and Academic Senate may need to consider some or all of the following contingency measures.” By starting with the rhetoric of crisis, the Commission opens the door to a whole host of problematic suggestions: “Curtail student enrollment, potentially falling short of achieving the Master Plan ratios recommended by the Commission (see Recommendation 4) and restricting access at both the undergraduate (freshmen and transfers) and graduate levels: Re-examine UC’s financial aid strategies, also recommended by the Commission (see Recommendation 6), including reducing the portion of new undergraduate tuition revenue that is set aside (currently 33%) to fund financial aid for needy students; Raise or eliminate the systemwide limit on the proportion of nonresident undergraduate students admitted and enrolled (the Commission recommends a 10 percent systemwide cap in Recommendation 7): Substantially increase tuition and fees, including charging differential tuition by campus (see Recommendation 17), as part of a broad based program to sustain the University; Downsize the University’s faculty and staff workforce, including limiting the replacement of faculty lost due to retirements, terminations, and other separations. This recommendation came to the Commission from the Academic Council: Forego new building and capital projects that are not absolutely essential for safety. “
I believe that these final suggestions actually represent the real recommendations of the Commission. In this neoliberal vision, the few students who are lucky to get into the UC system will pay much more, receive less financial aid, and will be taught be fewer faculty members. This is the ultimate vision of downsized version of public higher education. Let us hope that the Regents have the insight to see that not only do these plans fail to make educational sense, but they also do not make fiscal sense.
Monday, October 25, 2010
Monday, October 18, 2010
Why Options A, B, and C are Bad
While it looks like some senate faculty leaders and members are planning to support the new proposed Option C for the future pension plan, it should be stressed that none of the proposed plans are good and none of them deal with the essential problem facing the university. As everyone agrees, the plans proposed by the PEB Task Froce, including Option C, do not deal with the current underfunding of UCRP or the unfunded liability. In fact, most unions and faculty committees argue that what needs to be done is to move quickly to fully funding the current normal cost, while starting to pay down the liability. Unfortunately, the new proposed plans serve as a misdirection to shield people from the truth, which is that everyone has to chip in now to save the current plan, and by creating a new tier, you only dilute the current system. In short, we need more people paying more not fewer people paying less.
When I have talked to senate leaders they tell me that they are supporting Option C because it is a lesser of evils, and they really don’t want A or B. However, I have argued that the senate committees should simply reject all of the task forces’ recommendations and instead simply support a way of funding the current system. For example, if the university moved now to having the employees pay 5% of salary and the employer paying 12% of covered compensation, we could quickly move to full funding of the normal cost. Moreover, by borrowing from the Short Term Investment Pool, the university could also begin the process of paying down the liability. This simple plan would require no reductions in benefits and would begin to tackle the central issue.
I have been told that the two main reasons why the Office of the President did not follow the advice of the Academic Senate to move right away to full funding is that the medical centers do not want to pay their fair share and the state has still not committed to paying its part. While it may be difficult to get the state to come up with the money now, in the past, the state has agreed to owe the money to the university, and we can take out a bond to cover the current state costs. Furthermore, it is absurd for the medical centers to cry poverty when they brought in billions of dollars of profit last year.
To the supporters of Option C, it must be stressed that by pushing back the retirement age to 65, you will do great harm to staff and manual workers who retire in their mid-50s. Moreover, the unions, who represent most of these employees, will reject Option C, and so the whole plan will be dead on arrival.
The dissenting opinion from the PEB task force clearly states that Option C should only be supported if it comes with a credible process to protect total remuneration. In other words, the deal on the table is to accept benefit cuts and contribution increases for future employees in order to guarantee an increase in salary for current faculty and staff. Not only will this create a generational conflict, but it relies on a vague promise of salary increases that the university has a habit of breaking.
Another concern is that the new proposed tier would extend extra retirement packages for the Senior Management Group. Once again, Option C does not prevent this type of movement of wealth to the top, and the reliance on salary increases to make up for lost benefits will most likely follow the current path of rewarding the people at the top. Also, since the Cost of Living Adjustments are limited to 2%,the result is that medium- and low-wage workers will see a dramatic decline in their retirement income as the costs of retiree healthcare escalates.
Another problem with Option C and the other plans is that they call for current employees to pay at least 7% of income in order to stay in the current system. In other words, to motivate low- and medium-wage workers to choose a cheaper benefit, employees contributions will be inflated above historical levels.
Please write your senate friends and leaders and tell them to vote “No” on A, B, and C.
When I have talked to senate leaders they tell me that they are supporting Option C because it is a lesser of evils, and they really don’t want A or B. However, I have argued that the senate committees should simply reject all of the task forces’ recommendations and instead simply support a way of funding the current system. For example, if the university moved now to having the employees pay 5% of salary and the employer paying 12% of covered compensation, we could quickly move to full funding of the normal cost. Moreover, by borrowing from the Short Term Investment Pool, the university could also begin the process of paying down the liability. This simple plan would require no reductions in benefits and would begin to tackle the central issue.
I have been told that the two main reasons why the Office of the President did not follow the advice of the Academic Senate to move right away to full funding is that the medical centers do not want to pay their fair share and the state has still not committed to paying its part. While it may be difficult to get the state to come up with the money now, in the past, the state has agreed to owe the money to the university, and we can take out a bond to cover the current state costs. Furthermore, it is absurd for the medical centers to cry poverty when they brought in billions of dollars of profit last year.
To the supporters of Option C, it must be stressed that by pushing back the retirement age to 65, you will do great harm to staff and manual workers who retire in their mid-50s. Moreover, the unions, who represent most of these employees, will reject Option C, and so the whole plan will be dead on arrival.
The dissenting opinion from the PEB task force clearly states that Option C should only be supported if it comes with a credible process to protect total remuneration. In other words, the deal on the table is to accept benefit cuts and contribution increases for future employees in order to guarantee an increase in salary for current faculty and staff. Not only will this create a generational conflict, but it relies on a vague promise of salary increases that the university has a habit of breaking.
Another concern is that the new proposed tier would extend extra retirement packages for the Senior Management Group. Once again, Option C does not prevent this type of movement of wealth to the top, and the reliance on salary increases to make up for lost benefits will most likely follow the current path of rewarding the people at the top. Also, since the Cost of Living Adjustments are limited to 2%,the result is that medium- and low-wage workers will see a dramatic decline in their retirement income as the costs of retiree healthcare escalates.
Another problem with Option C and the other plans is that they call for current employees to pay at least 7% of income in order to stay in the current system. In other words, to motivate low- and medium-wage workers to choose a cheaper benefit, employees contributions will be inflated above historical levels.
Please write your senate friends and leaders and tell them to vote “No” on A, B, and C.
Monday, October 11, 2010
Unions Respond to Proposed Pension Changes
A coalition of UC unions has put together a set of shared principles regarding the UC pension system (UCRP). We plan to present the following at the next Regents meeting November 16-18:
1. Since unions represent 45% of the employees currently covered by UCRP, any changes to our pension plans will have to be accepted by represented workers. Collective bargaining on proposed benefit changes must precede, not follow, such changes for unrepresented workers.
2. The Union Coalition of the University of California (UCUC) is united in our rejection of the proposed pension benefit cuts: the second tier and UCRP opt-out/DC plan choice. The proposed pension changes do not improve the fiscal health of UCRP, are divisive and unfair, and target low- and middle-income workers disproportionately. Similarly, we reject the eligibility and cost-shifting changes to the retiree health benefit as premature because plans to pre-funding the benefit have not been fully explored.
3. We are willing to consider a plan that would make UCRP more secure and continue its tradition of fair treatment. We are also willing to consider a plan to prefund the retiree health benefit to maintain the current level of benefits and the current eligibility criteria.
4. Keeping the UCRP adequately funded is the key issue. We suggest that the university moves quickly to fully funding the normal cost of UCRP in 2011, using employer and employee contributions. Restarting a higher level of contributions earlier will keep future costs down and capture available funding from the medical centers and contracts and grants. Total contributions must then gradually increase at levels needed to keep the plan healthy. Because of currently underfunding, we realize the plan can not to go to 100% funding in the near future, so the goal should be to keep it at healthy funding levels. Since none of the proposed plans by the task force will reach 100% funding in the next ten years, we believe the university should change its funding policy to reflect this reality. We support borrowing from STIP if necessary to fund the normal cost in 2011 and beyond. We request an adjustment of several of the actuary assumptions to more accurately reflect current and future employment statistics (i.e. the predicted salary increases, inflation rate).
5. How much of the total contribution is borne by the employee is the subject of collective bargaining. However, we believe the university should return to the historical ratio between employer and employee contributions (5:1). Further, any increase in employee contributions should be coupled with salary increases.
6. If the Unions are fully involved partners in shaping funding plans and preserving benefits, we would commit to partnering with UC in Sacramento to secure state funds for the UCRP.
7. We demand joint governance for the pension plan through the creation of a pension board of trustees with equal numbers of current and retired plan participants and Regents or their appointees. Placing a union representative on the Investment Advisory Board only deals with one, albeit very important, arena of concern. The Union Representative to the IAB and an alternate must be chosen by the UCUC.
8. To cut costs and promote fairness, the university must eliminate all supplemental retirement for highly compensated UC employees, including the following: The Senior Management Supplemental Retirement Program that puts an extra 5% into retirement savings accounts, along with any plan that would replace it; the 415(m) “restoration” plan that increases retirement income for employees whose UCRP income exceeds $195,000; and 401(a)(17) “restoration” plan that increases retirement income for 200 employees whose salaries are greater than $245,000.
It is clear from these principles that the unions are not just saying no to any new pension changes; rather, we are providing a more effective and fair solution. The simple fact of the matter is that the proposed changes by the PEB Task force do not address the central problem of funding the shared pension system.
On another front, several unions (AFT, AFSCME, UPTE, CNA) in consultation with CUCFA and members of the senate faculty welfare committees have put together an additional joint set of principles regarding possible pension changes:
1. We need to move to a full funding of the normal cost of UCRP. The suggested new tiers do not address this issue.
2. There has to be a credible plan for total remuneration approved by the regents.
3. We must begin paying down the UCRP liability now. This can be done in part from borrowing from STIP or Pension Obligation Bonds.
4.We need more people paying more into UCRP and not fewer people paying less.
5. There should be a full discussion of alternative plans with the inclusion of faculty, unions, and staff at all levels of the process.
6. We need a plan to pre-fund retiree healthcare.
7. We will work together to get the state to pay its share of the employer contributions.
8. The university should end supplemental retirement packages for Senior Managers.
9. Any changes to the pension plan and retiree health should not discriminate against low- and medium-wage employees.
10. We oppose raising the employee contributions to a high level in order to induce current employees to opt into a new system.
Please let me (bobsamuels_us@yahoo.com) know if you would like to sign on to these principles. We need to submit our documents to President Yudof by Oct. 13th.
1. Since unions represent 45% of the employees currently covered by UCRP, any changes to our pension plans will have to be accepted by represented workers. Collective bargaining on proposed benefit changes must precede, not follow, such changes for unrepresented workers.
2. The Union Coalition of the University of California (UCUC) is united in our rejection of the proposed pension benefit cuts: the second tier and UCRP opt-out/DC plan choice. The proposed pension changes do not improve the fiscal health of UCRP, are divisive and unfair, and target low- and middle-income workers disproportionately. Similarly, we reject the eligibility and cost-shifting changes to the retiree health benefit as premature because plans to pre-funding the benefit have not been fully explored.
3. We are willing to consider a plan that would make UCRP more secure and continue its tradition of fair treatment. We are also willing to consider a plan to prefund the retiree health benefit to maintain the current level of benefits and the current eligibility criteria.
4. Keeping the UCRP adequately funded is the key issue. We suggest that the university moves quickly to fully funding the normal cost of UCRP in 2011, using employer and employee contributions. Restarting a higher level of contributions earlier will keep future costs down and capture available funding from the medical centers and contracts and grants. Total contributions must then gradually increase at levels needed to keep the plan healthy. Because of currently underfunding, we realize the plan can not to go to 100% funding in the near future, so the goal should be to keep it at healthy funding levels. Since none of the proposed plans by the task force will reach 100% funding in the next ten years, we believe the university should change its funding policy to reflect this reality. We support borrowing from STIP if necessary to fund the normal cost in 2011 and beyond. We request an adjustment of several of the actuary assumptions to more accurately reflect current and future employment statistics (i.e. the predicted salary increases, inflation rate).
5. How much of the total contribution is borne by the employee is the subject of collective bargaining. However, we believe the university should return to the historical ratio between employer and employee contributions (5:1). Further, any increase in employee contributions should be coupled with salary increases.
6. If the Unions are fully involved partners in shaping funding plans and preserving benefits, we would commit to partnering with UC in Sacramento to secure state funds for the UCRP.
7. We demand joint governance for the pension plan through the creation of a pension board of trustees with equal numbers of current and retired plan participants and Regents or their appointees. Placing a union representative on the Investment Advisory Board only deals with one, albeit very important, arena of concern. The Union Representative to the IAB and an alternate must be chosen by the UCUC.
8. To cut costs and promote fairness, the university must eliminate all supplemental retirement for highly compensated UC employees, including the following: The Senior Management Supplemental Retirement Program that puts an extra 5% into retirement savings accounts, along with any plan that would replace it; the 415(m) “restoration” plan that increases retirement income for employees whose UCRP income exceeds $195,000; and 401(a)(17) “restoration” plan that increases retirement income for 200 employees whose salaries are greater than $245,000.
It is clear from these principles that the unions are not just saying no to any new pension changes; rather, we are providing a more effective and fair solution. The simple fact of the matter is that the proposed changes by the PEB Task force do not address the central problem of funding the shared pension system.
On another front, several unions (AFT, AFSCME, UPTE, CNA) in consultation with CUCFA and members of the senate faculty welfare committees have put together an additional joint set of principles regarding possible pension changes:
1. We need to move to a full funding of the normal cost of UCRP. The suggested new tiers do not address this issue.
2. There has to be a credible plan for total remuneration approved by the regents.
3. We must begin paying down the UCRP liability now. This can be done in part from borrowing from STIP or Pension Obligation Bonds.
4.We need more people paying more into UCRP and not fewer people paying less.
5. There should be a full discussion of alternative plans with the inclusion of faculty, unions, and staff at all levels of the process.
6. We need a plan to pre-fund retiree healthcare.
7. We will work together to get the state to pay its share of the employer contributions.
8. The university should end supplemental retirement packages for Senior Managers.
9. Any changes to the pension plan and retiree health should not discriminate against low- and medium-wage employees.
10. We oppose raising the employee contributions to a high level in order to induce current employees to opt into a new system.
Please let me (bobsamuels_us@yahoo.com) know if you would like to sign on to these principles. We need to submit our documents to President Yudof by Oct. 13th.
Wednesday, October 6, 2010
October 7th: Get Out the Vote and Support Higher Education
Throughout the country on October 7th, people will be demonstrating to support public education. This date also marks one of the last days people can register to vote for the November election, and so many groups are calling for joint activities to support officials who will defend public education.
This defense of public education comes at a time when privatization is gaining power in multiple ways. Not only are private citizens being asked to pay for increasing tuition costs at our public universities, but parts of the University of California are considering breaking all ties with the state. For instance, the Anderson School of Management at UCLA has announced that it would like to stop all state support in order to raise tuition and have more private control. In response to this privatization, we should ask if the business school will pay for the buildings it uses, which were built by the state. Moreover, will Anderson pay a tax to support the central administration and shared staff and maintenance? Also, should Anderson pay a high franchise tax in order to use the UCLA name?
As I have pointed out before, once a part of the university is considered to be self-sustaining, it usually means that it refuses to share its profits and contribute to the common good. For instance, most of the self-sustaining units were exempt from the furloughs and the departmental budget cuts. According to the logic of the Office of the President, the money-making sectors should keep their profits, but the state-supported areas have to suffer deep cuts.
The move to defend public higher education against privatization means that not only should we push for more state and federal funding, but we also have to fight against the myth of self-sustaining units. While some people think the university should be run more like a business, we have to realize that many large corporations only succeed because they live off of corporate welfare. Not only do companies receive huge tax breaks and subsidies, but they also profit from outsourcing their research and development to public universities. Just as the Anderson School wants to go private as it uses public facilities, free market businesses call for tax cuts, while they lobby for more governmental bailouts and handouts.
Let’s all rally together on October 7th to say no to privatization and yes to public education.
This defense of public education comes at a time when privatization is gaining power in multiple ways. Not only are private citizens being asked to pay for increasing tuition costs at our public universities, but parts of the University of California are considering breaking all ties with the state. For instance, the Anderson School of Management at UCLA has announced that it would like to stop all state support in order to raise tuition and have more private control. In response to this privatization, we should ask if the business school will pay for the buildings it uses, which were built by the state. Moreover, will Anderson pay a tax to support the central administration and shared staff and maintenance? Also, should Anderson pay a high franchise tax in order to use the UCLA name?
As I have pointed out before, once a part of the university is considered to be self-sustaining, it usually means that it refuses to share its profits and contribute to the common good. For instance, most of the self-sustaining units were exempt from the furloughs and the departmental budget cuts. According to the logic of the Office of the President, the money-making sectors should keep their profits, but the state-supported areas have to suffer deep cuts.
The move to defend public higher education against privatization means that not only should we push for more state and federal funding, but we also have to fight against the myth of self-sustaining units. While some people think the university should be run more like a business, we have to realize that many large corporations only succeed because they live off of corporate welfare. Not only do companies receive huge tax breaks and subsidies, but they also profit from outsourcing their research and development to public universities. Just as the Anderson School wants to go private as it uses public facilities, free market businesses call for tax cuts, while they lobby for more governmental bailouts and handouts.
Let’s all rally together on October 7th to say no to privatization and yes to public education.
Monday, September 27, 2010
Pensions, Lies, and Videotape: An Employee's Guide to UC's Propaganda
I write this post with great urgency. The University of California is about to decide on a path that will determine its future, and if the university's employees don't wake up and do some math, there may be no turning back. The basic truth is that the UC administration is misinforming its employees in order to get them to accept a reduction of pay and benefits; however to understand how the university is misleading its workers, one must first comprehend how the system is financed.
In its effort to convince employees that they should either choose a permanent 7% pay reduction or see their retirement benefits be reduced by close to 50%, the UC administration is simply misrepresenting the following issues: 1) why a high level of contributions is currently needed; 2) how the UC has historically funded retirement; 3) what are the most effective ways of dealing with the problem; and 4) how the problem will affect the future of the university. To respond to these issues, we can simply go to the videotape and look at the recent Post-Employment Benefits Town Hall (click here to see the video ).
The first major area of contention is the question of how we got into this mess. The university's simple response is that we were all on a contribution holiday for the last twenty years, and now we are paying the price. It is interesting that by using the term “holiday,” it sounds like we have all been partying, and now not only do we have hangovers, but we have to pay for the damage we all have done to ourselves and those around us. In response to this depiction, we must remember that it is the regents who have ultimate authority over UCRP, and so it is the regents, and not the employees or the state, who are responsible. Moreover, in Nathan Brostrom's Town Hall response to what happened to the pension fund, he does not even mention that the university lost $16 billion in its retirement investments during 2008-09, and he also does not state that it is the regents who have responsibility for these investments. And of course, the administration is turning to the regents to correct the problem after they have caused it.
To counter the fact that investment losses are in part driving the pension’s growing unfunded liability, the university argues that if we never stopped contributing, we would be over-funded. My response to this defense is that, yes, the regents were wrong to stop contributions, but we have to ask, where did the money go that the UC once put into our retirement system? Moreover, even if we did continue our contributions, the regents might have lost funds through high-risk investments.
As a recent study of the UC regents shows, the UC has placed much of its retirement investments in high-risk areas because the regents themselves stand to profit from certain types of investment. Thus, the move to private equity, hedge funds, and real estate was pushed by regents who have strong stakes in these areas. If this true, and no one has been able to disprove it, it is a very scary thought that the same regents will decide the fate of not only our retirement system but the entire UC budget.
Due to the massive investment losses and the failure to continue contributions, the university now faces the strong possibility of having to contribute over 20% of its budget to the pension for the next twenty years. This means that the pension problem is not just a retirement issue, but it is a system-wide problem. We are talking here about a permanent crisis coupled with permanent furloughs. After all, when the UC lost just 1% of its funding during the last two years, the administration imposed layoffs, furloughs, departmental reductions, and a major reduction of spending on instruction. Imagine what will happen when the UC has to put 20% of its budget into the pension program.
This frightening scenario doesn't have to become reality. The UC does not have to reduce its budget, and we can force the regents to do the right thing, but first we must counter several misrepresentations, including how the UC really spends its money.
In terms of pension contributions, we need to remember that only a third of the employer costs comes from the core budget, and the university itself argues that the state is obligated to pay that part. Since only one third of the UC employees covered by UCRP are state funded, the other two thirds of the employer contributions should be paid by the medical centers, external research grants, and other services. This means that even if the employer had to contribute 20% of covered compensation to the plan, it would only really be less than 7% out of the general budget, and if the state paid its share, we would lose nothing from our core budget.
It is also essential to point out that the administration misrepresented the facts during its Town Hall when Duaine Duckett argued that the UC would try to keep the historical contribution split of the employer paying twice as much as the employee. In fact, during the last decade of contributions (the 1980s), the employer contributed an average of 12% and the employees averaged 2.4% (a 5:1 ratio). This division is obviously nowhere near a two-to-one ratio, and so I must declare that the university is intent on lying about the past.
So as many people have asked me, why would the UC lie about this? The simple answer is that they want the employees to feel that they must pay a much higher part of their salary into the system to keep it healthy. However, the more complicated response returns us to how the UC budget works. Currently, most of the budget comes from the medical centers and external grants, and as we have discovered this year, the grants on the whole lose hundreds of million dollars each year , and the medical services make billions of dollars of profits annually. However, as we learned from the furlough fiasco, the medical centers do not want to pay their fair share, and the people being paid from external grants are afraid that if they ask the grant-giving agencies, primarily the federal government, to pay their fair share, the UC will lose many of its grants.
While for the last few years, the university has justified not starting contributions on the grounds that the state has to pay its part in order for the grants and services to pay their share, now we hear that the medical centers do not think they can pay their part even though they had over $5 billion of net profit last year. Due to their enormous wealth, the medical services are not only delaying the employer contributions, but they are calling for a defined contribution plan that the university is now considering.
As several faculty senate committees have argued and some of the unions now support, the first thing that has to be done to stabilize the retirement plan is to fund the full normal cost, which is about 17% of covered compensation. Moreover, we have to start paying down the unfunded liability, and by a total contribution of about 23% for the next several years, we could accomplish both of these goals. If we maintain the historical division of contributions, the university should contribute 19% (roughly a third from the state, a third from medical centers, and a third from grants and other services); meanwhile, the employees should contribute 4% of their salary. If we moved this year to this type of funding level, we would not have to change the retirement calculations or offer a new tier or a defined contribution plan.
Instead of accepting this type of rational funding plan, the UC administration is intent on creating a new system that redistributes wealth to the top, and if employees think that it is only the new employees who will be screwed, please think again. In order to motivate people to opt into the plan in 2013, the university plans to increase the employee contributions to at least 7%, while the new plan will offer a cheaper benefit for a lower contribution level. It is therefore untrue when university officials insist that the new changes will not affect current employees. Furthermore, by creating new plans, you pull people out of the current system, when what we need is more people paying into the common fund.
According to the university’s own account, the new tiers will not reduce the unfunded liability for the next twenty years, and the plan will only become fully funded in thirty years. Their suggested solutions are not only morally unfair, but they do not make financial sense. In one of the typical university misrepresentations, Brostrom simply says “When we look at the next 30 to 40 years, we have too few assets.” The real truth is that no one can predict what will happen with the financial markets in thirty years, and therefore we must have a system where we continue to monitor our investments so that we can readjust our contribution levels. Of course, we also have to make sure we are making the best investment decisions, and this is why the unions have argued for shared governance over the pension plan.
In response to the union coalition’s request for employee representation on the pension investment board, President Yudof wrote that it is unnecessary because the UC has been outperforming its competitors by averaging an 8.9% rate of return during the last twenty years. However, Charles Schwartz has shown that the UC has been underperforming since 2000 when it started to outsource the management of many of its investments. While it may not be a lie to proclaim that the UC has outperformed its “benchmarks,” the question remains concerning the value of the benchmarks UC continues to use for comparison. Moreover, while many large investment funds lost 30% of their value during the global fiscal meltdown, most of these funds used the same questionable practice of moving funds into high-risks assets. What we need for the university to do is to at least acknowledge that their investment policies may have contributed to the under-funding status of the pension plan because without this acknowledgment, it will be impossible to make better decisions in the future.
One possible hope from the PEB Town Hall is that the university promises to listen to the faculty senates, and so it is necessary for faculty to make their voices heard on their local campuses. Faculty have to clearly reject the new proposed plans, and they have to push for a more equitable and effective funding policy. Unfortunately, things are moving fast, and the administration plans to discuss the new changes at the next regents meeting in November and then possibly vote on them in December. If staff, faculty, and unions work together to fight for a better plan, we can reverse the administration’s intended changes.
In its effort to convince employees that they should either choose a permanent 7% pay reduction or see their retirement benefits be reduced by close to 50%, the UC administration is simply misrepresenting the following issues: 1) why a high level of contributions is currently needed; 2) how the UC has historically funded retirement; 3) what are the most effective ways of dealing with the problem; and 4) how the problem will affect the future of the university. To respond to these issues, we can simply go to the videotape and look at the recent Post-Employment Benefits Town Hall (click here to see the video ).
The first major area of contention is the question of how we got into this mess. The university's simple response is that we were all on a contribution holiday for the last twenty years, and now we are paying the price. It is interesting that by using the term “holiday,” it sounds like we have all been partying, and now not only do we have hangovers, but we have to pay for the damage we all have done to ourselves and those around us. In response to this depiction, we must remember that it is the regents who have ultimate authority over UCRP, and so it is the regents, and not the employees or the state, who are responsible. Moreover, in Nathan Brostrom's Town Hall response to what happened to the pension fund, he does not even mention that the university lost $16 billion in its retirement investments during 2008-09, and he also does not state that it is the regents who have responsibility for these investments. And of course, the administration is turning to the regents to correct the problem after they have caused it.
To counter the fact that investment losses are in part driving the pension’s growing unfunded liability, the university argues that if we never stopped contributing, we would be over-funded. My response to this defense is that, yes, the regents were wrong to stop contributions, but we have to ask, where did the money go that the UC once put into our retirement system? Moreover, even if we did continue our contributions, the regents might have lost funds through high-risk investments.
As a recent study of the UC regents shows, the UC has placed much of its retirement investments in high-risk areas because the regents themselves stand to profit from certain types of investment. Thus, the move to private equity, hedge funds, and real estate was pushed by regents who have strong stakes in these areas. If this true, and no one has been able to disprove it, it is a very scary thought that the same regents will decide the fate of not only our retirement system but the entire UC budget.
Due to the massive investment losses and the failure to continue contributions, the university now faces the strong possibility of having to contribute over 20% of its budget to the pension for the next twenty years. This means that the pension problem is not just a retirement issue, but it is a system-wide problem. We are talking here about a permanent crisis coupled with permanent furloughs. After all, when the UC lost just 1% of its funding during the last two years, the administration imposed layoffs, furloughs, departmental reductions, and a major reduction of spending on instruction. Imagine what will happen when the UC has to put 20% of its budget into the pension program.
This frightening scenario doesn't have to become reality. The UC does not have to reduce its budget, and we can force the regents to do the right thing, but first we must counter several misrepresentations, including how the UC really spends its money.
In terms of pension contributions, we need to remember that only a third of the employer costs comes from the core budget, and the university itself argues that the state is obligated to pay that part. Since only one third of the UC employees covered by UCRP are state funded, the other two thirds of the employer contributions should be paid by the medical centers, external research grants, and other services. This means that even if the employer had to contribute 20% of covered compensation to the plan, it would only really be less than 7% out of the general budget, and if the state paid its share, we would lose nothing from our core budget.
It is also essential to point out that the administration misrepresented the facts during its Town Hall when Duaine Duckett argued that the UC would try to keep the historical contribution split of the employer paying twice as much as the employee. In fact, during the last decade of contributions (the 1980s), the employer contributed an average of 12% and the employees averaged 2.4% (a 5:1 ratio). This division is obviously nowhere near a two-to-one ratio, and so I must declare that the university is intent on lying about the past.
So as many people have asked me, why would the UC lie about this? The simple answer is that they want the employees to feel that they must pay a much higher part of their salary into the system to keep it healthy. However, the more complicated response returns us to how the UC budget works. Currently, most of the budget comes from the medical centers and external grants, and as we have discovered this year, the grants on the whole lose hundreds of million dollars each year , and the medical services make billions of dollars of profits annually. However, as we learned from the furlough fiasco, the medical centers do not want to pay their fair share, and the people being paid from external grants are afraid that if they ask the grant-giving agencies, primarily the federal government, to pay their fair share, the UC will lose many of its grants.
While for the last few years, the university has justified not starting contributions on the grounds that the state has to pay its part in order for the grants and services to pay their share, now we hear that the medical centers do not think they can pay their part even though they had over $5 billion of net profit last year. Due to their enormous wealth, the medical services are not only delaying the employer contributions, but they are calling for a defined contribution plan that the university is now considering.
As several faculty senate committees have argued and some of the unions now support, the first thing that has to be done to stabilize the retirement plan is to fund the full normal cost, which is about 17% of covered compensation. Moreover, we have to start paying down the unfunded liability, and by a total contribution of about 23% for the next several years, we could accomplish both of these goals. If we maintain the historical division of contributions, the university should contribute 19% (roughly a third from the state, a third from medical centers, and a third from grants and other services); meanwhile, the employees should contribute 4% of their salary. If we moved this year to this type of funding level, we would not have to change the retirement calculations or offer a new tier or a defined contribution plan.
Instead of accepting this type of rational funding plan, the UC administration is intent on creating a new system that redistributes wealth to the top, and if employees think that it is only the new employees who will be screwed, please think again. In order to motivate people to opt into the plan in 2013, the university plans to increase the employee contributions to at least 7%, while the new plan will offer a cheaper benefit for a lower contribution level. It is therefore untrue when university officials insist that the new changes will not affect current employees. Furthermore, by creating new plans, you pull people out of the current system, when what we need is more people paying into the common fund.
According to the university’s own account, the new tiers will not reduce the unfunded liability for the next twenty years, and the plan will only become fully funded in thirty years. Their suggested solutions are not only morally unfair, but they do not make financial sense. In one of the typical university misrepresentations, Brostrom simply says “When we look at the next 30 to 40 years, we have too few assets.” The real truth is that no one can predict what will happen with the financial markets in thirty years, and therefore we must have a system where we continue to monitor our investments so that we can readjust our contribution levels. Of course, we also have to make sure we are making the best investment decisions, and this is why the unions have argued for shared governance over the pension plan.
In response to the union coalition’s request for employee representation on the pension investment board, President Yudof wrote that it is unnecessary because the UC has been outperforming its competitors by averaging an 8.9% rate of return during the last twenty years. However, Charles Schwartz has shown that the UC has been underperforming since 2000 when it started to outsource the management of many of its investments. While it may not be a lie to proclaim that the UC has outperformed its “benchmarks,” the question remains concerning the value of the benchmarks UC continues to use for comparison. Moreover, while many large investment funds lost 30% of their value during the global fiscal meltdown, most of these funds used the same questionable practice of moving funds into high-risks assets. What we need for the university to do is to at least acknowledge that their investment policies may have contributed to the under-funding status of the pension plan because without this acknowledgment, it will be impossible to make better decisions in the future.
One possible hope from the PEB Town Hall is that the university promises to listen to the faculty senates, and so it is necessary for faculty to make their voices heard on their local campuses. Faculty have to clearly reject the new proposed plans, and they have to push for a more equitable and effective funding policy. Unfortunately, things are moving fast, and the administration plans to discuss the new changes at the next regents meeting in November and then possibly vote on them in December. If staff, faculty, and unions work together to fight for a better plan, we can reverse the administration’s intended changes.
Monday, September 20, 2010
Moody’s Resets the UC Agenda
During a recent press conference discussing the changes in the UC post-retirement benefits, one of the university budget officers declared that the efforts to reshape the pension plan have already been applauded by Moody’s in their latest bond ratings. Looking at the investors’ service report dated (Sept. 9 2010) “MOODY'S ASSIGNS Aa2 RATING TO UNIVERSITY OF CALIFORNIA'S, LIMITED PROJECT REVENUE BONDS 2010 SERIES E AND F; UNIVERSITY'S OTHER RATINGS AFFIRMED WITH STABLE OUTLOOK,” we find the following: “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. However, the University has been pro-active, creating a taskforce dedicated to provide recommendations to modify the current benefit design that should result in a reduction in the liability.” Here the bond raters clearly indicate that if the university wants to maintain its high long-term credit rating, it must show that it is willing to “curtail” or “modify” retirement benefits.
The push to drive down the costs and value of the UC retirement plan is coupled with the claim that the university is still in a healthy fiscal state because it remains, “one of the premier higher education systems in the world, serving over 220,000 students, conducting over $3.7 billion of research annually, and generating in excess of $5 billion of net patient revenue in fiscal year (FY) 2009 at its five academic medical centers.” It is important to note that while the medical centers continue to rake in huge profits, they are now apparently resisting contributing their full share of the employer pension contributions. The PEP Task force hints at this point by stating that, “if the University funds the State share of PEB costs immediately, it cannot be assumed that other fund sources will be able to afford their share without some time to revise their operating models and assess the impact of faculty, students and staff.” The “other fund sources” mentioned in this report are the medical centers and research grants that should cover 67% of the employer contributions.
Of course, Moody’s does not mention that the medical centers do not want to share their profits, and the research grants may already be costing the UC money; instead, the bond raters stress how the UC is currently rolling in unrestricted funds: “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.” Since the UC is only paying its retiree healthcare costs on a “pay-as-you-go” basis, the university currently has close to a combined $16 billion in its unrestricted funds and short-term investment accounts, which is not bad for an institution that is supposedly facing a fiscal crisis.
One of the things that is helping the university to increase its revenue as it cuts costs and benefits for workers is its ability to use low interest rates to take on a huge amount of debt: “Significant capital needs likely to result in rising borrowing levels; debt outstanding has grown from $8.3 billion in FY2006 to over $13.3 billion in FY2009 and including new borrowings since the end of the fiscal year, a 61% increase; however we believe management and the board will remain prudent and focus on utilizing debt strategically in a challenging economic environment.” Like the rest of America, the UC is addicted to debt and continues to increase both its financial holdings and its need for credit.
While the university appears to have unlimited access to cash, the bond raters once again warn that the system is plagued by unionized workers, governmental regulations, and high healthcare costs: “Substantial exposure to healthcare sector (29% of operating revenues) and associated credit challenges, including generally more volatile operating performance, high susceptibility to regulatory and government payor changes, coupled with unique stresses on California healthcare, including unionized labor, and seismic requirements.” Here we see the underlying neoliberal agenda of the bond raters surface; according to this logic, the only thing holding the university back from making more profit and taking on more debt is the fact that there are regulations, unions, and employee benefits. If only the university didn’t have to worry about pesky things, like its employees, even more credit would be available.
One area where Moody’s thinks the university can improve is in its ability to extract more money from students: “The University has implemented significant tuition increases in the last year and is likely to continue to implement substantial increases. We believe constraints on future growth in this area will largely be mission-based and politically driven as market drivers would likely allow the University to grow tuition revenues at high rates, especially if the University was willing to seek out a greater proportion of out-of-state students.” According to this neoliberal logic, the only thing preventing the university from charging more is politics. While we might expect bond rates to make this type of political anti-political statement, it is important to stress that the more the university relies on debt and high finance, the more it has to follow the will of the raters.
One of the central demands of Moody’s, which is matched by the UC administration, is the need to wean the university off if its reliance on public funds. This move for privatization is related to an updated accounting of the lack of state funding: “Funding from the State of California (debt rated A1) is likely to remain very challenging for the next several years. The State's support accounted for 14% of operating revenues during FY2009, reflecting a decline in state appropriation revenue of $561 million or 18%. In FY2010, the reduction is estimated to be an additional $637 million.” While it looks like the university lost $1.2 billion dollars during the last two fiscal years, it is important to stress that much of this money was replaced by federal recovery money: “As of May 26th, management reports that the system has received $837.8 million in ARRA funding.” I want to emphasize that this ARRA money is not federal grant money; rather, these funds were used to reduce the overall state reduction for the last two years to under $400 million. In other words, during each year of its fiscal crisis, the UC lost about 1% of its total $20 billion budget. However, it is virtually impossible to account for how much money the UC receives each year from the state because of the way California has been paying its bills: “In FY2010, the State deferred $250 million from July until October and an additional $750 million was deferred until the end of the fiscal year. The University has used its own liquidity and borrowings under taxable commercial paper to bridge this funding gap.” In other words, UC is not able to account for how much money it gets from the state each year because it is involved in a complicated system of lending and borrowing state funds.
While we still do not know exactly how much money the university has lost from the state, we do know that even during the fiscal crisis, which justified furloughs and layoffs, the UC continued to increase its revenue and profits: “Moody's believes that the University's demonstrated ability to grow financial resources through operating performance, investment returns, and philanthropy should support planned strategic capital investments and additional leverage. UC's financial resources have grown from approximately $11 billion in FY2002 to nearly $13 billion in FY2009, including the recognition of over $2.3 billion of post-retirement health obligations.” Due to the diversified nature of its funding streams, the UC is able to claim poverty, while it brings in record profits.
One place where the university has performed well is in its ability to stay highly liquid: “The University's policy is to not allow more than $200 million of CP [commercial paper] to mature on any given day, therefore limiting maturities within a given week to $1 billion. The University retains significant liquid investment holdings, including $630 million of U.S. Treasury and Agency securities not on loan as of June 30, 2010. The University also holds additional U.S. Treasuries and Agency securities on loan ($2.0 billion). In addition, the University holds over $6 billion in corporate commercial paper and other investment grade fixed income securities that could be liquidated within a week.” The university thus has a high level of debt but also a high level of assets it can cash in at a relatively short notice.
While the university clearly does not face a fiscal crisis, it does have a very high level of debt due mostly to ongoing construction projects, and while the bond raters are pushing the UC to reduce its retiree liabilities by reducing benefits, this report also shows that the unfunded liabilities are mostly an accounting figure used to justify further reductions in employee costs. If the university wants to reduce its debt and its reliance on the neoliberal investment services, it is clear that it has to change its focus from construction to instruction.
The push to drive down the costs and value of the UC retirement plan is coupled with the claim that the university is still in a healthy fiscal state because it remains, “one of the premier higher education systems in the world, serving over 220,000 students, conducting over $3.7 billion of research annually, and generating in excess of $5 billion of net patient revenue in fiscal year (FY) 2009 at its five academic medical centers.” It is important to note that while the medical centers continue to rake in huge profits, they are now apparently resisting contributing their full share of the employer pension contributions. The PEP Task force hints at this point by stating that, “if the University funds the State share of PEB costs immediately, it cannot be assumed that other fund sources will be able to afford their share without some time to revise their operating models and assess the impact of faculty, students and staff.” The “other fund sources” mentioned in this report are the medical centers and research grants that should cover 67% of the employer contributions.
Of course, Moody’s does not mention that the medical centers do not want to share their profits, and the research grants may already be costing the UC money; instead, the bond raters stress how the UC is currently rolling in unrestricted funds: “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.” Since the UC is only paying its retiree healthcare costs on a “pay-as-you-go” basis, the university currently has close to a combined $16 billion in its unrestricted funds and short-term investment accounts, which is not bad for an institution that is supposedly facing a fiscal crisis.
One of the things that is helping the university to increase its revenue as it cuts costs and benefits for workers is its ability to use low interest rates to take on a huge amount of debt: “Significant capital needs likely to result in rising borrowing levels; debt outstanding has grown from $8.3 billion in FY2006 to over $13.3 billion in FY2009 and including new borrowings since the end of the fiscal year, a 61% increase; however we believe management and the board will remain prudent and focus on utilizing debt strategically in a challenging economic environment.” Like the rest of America, the UC is addicted to debt and continues to increase both its financial holdings and its need for credit.
While the university appears to have unlimited access to cash, the bond raters once again warn that the system is plagued by unionized workers, governmental regulations, and high healthcare costs: “Substantial exposure to healthcare sector (29% of operating revenues) and associated credit challenges, including generally more volatile operating performance, high susceptibility to regulatory and government payor changes, coupled with unique stresses on California healthcare, including unionized labor, and seismic requirements.” Here we see the underlying neoliberal agenda of the bond raters surface; according to this logic, the only thing holding the university back from making more profit and taking on more debt is the fact that there are regulations, unions, and employee benefits. If only the university didn’t have to worry about pesky things, like its employees, even more credit would be available.
One area where Moody’s thinks the university can improve is in its ability to extract more money from students: “The University has implemented significant tuition increases in the last year and is likely to continue to implement substantial increases. We believe constraints on future growth in this area will largely be mission-based and politically driven as market drivers would likely allow the University to grow tuition revenues at high rates, especially if the University was willing to seek out a greater proportion of out-of-state students.” According to this neoliberal logic, the only thing preventing the university from charging more is politics. While we might expect bond rates to make this type of political anti-political statement, it is important to stress that the more the university relies on debt and high finance, the more it has to follow the will of the raters.
One of the central demands of Moody’s, which is matched by the UC administration, is the need to wean the university off if its reliance on public funds. This move for privatization is related to an updated accounting of the lack of state funding: “Funding from the State of California (debt rated A1) is likely to remain very challenging for the next several years. The State's support accounted for 14% of operating revenues during FY2009, reflecting a decline in state appropriation revenue of $561 million or 18%. In FY2010, the reduction is estimated to be an additional $637 million.” While it looks like the university lost $1.2 billion dollars during the last two fiscal years, it is important to stress that much of this money was replaced by federal recovery money: “As of May 26th, management reports that the system has received $837.8 million in ARRA funding.” I want to emphasize that this ARRA money is not federal grant money; rather, these funds were used to reduce the overall state reduction for the last two years to under $400 million. In other words, during each year of its fiscal crisis, the UC lost about 1% of its total $20 billion budget. However, it is virtually impossible to account for how much money the UC receives each year from the state because of the way California has been paying its bills: “In FY2010, the State deferred $250 million from July until October and an additional $750 million was deferred until the end of the fiscal year. The University has used its own liquidity and borrowings under taxable commercial paper to bridge this funding gap.” In other words, UC is not able to account for how much money it gets from the state each year because it is involved in a complicated system of lending and borrowing state funds.
While we still do not know exactly how much money the university has lost from the state, we do know that even during the fiscal crisis, which justified furloughs and layoffs, the UC continued to increase its revenue and profits: “Moody's believes that the University's demonstrated ability to grow financial resources through operating performance, investment returns, and philanthropy should support planned strategic capital investments and additional leverage. UC's financial resources have grown from approximately $11 billion in FY2002 to nearly $13 billion in FY2009, including the recognition of over $2.3 billion of post-retirement health obligations.” Due to the diversified nature of its funding streams, the UC is able to claim poverty, while it brings in record profits.
One place where the university has performed well is in its ability to stay highly liquid: “The University's policy is to not allow more than $200 million of CP [commercial paper] to mature on any given day, therefore limiting maturities within a given week to $1 billion. The University retains significant liquid investment holdings, including $630 million of U.S. Treasury and Agency securities not on loan as of June 30, 2010. The University also holds additional U.S. Treasuries and Agency securities on loan ($2.0 billion). In addition, the University holds over $6 billion in corporate commercial paper and other investment grade fixed income securities that could be liquidated within a week.” The university thus has a high level of debt but also a high level of assets it can cash in at a relatively short notice.
While the university clearly does not face a fiscal crisis, it does have a very high level of debt due mostly to ongoing construction projects, and while the bond raters are pushing the UC to reduce its retiree liabilities by reducing benefits, this report also shows that the unfunded liabilities are mostly an accounting figure used to justify further reductions in employee costs. If the university wants to reduce its debt and its reliance on the neoliberal investment services, it is clear that it has to change its focus from construction to instruction.
Friday, September 17, 2010
The Regents Must Have Two Heads
After the UC Regents voted to increase employee contributions to the pension plan, they quickly moved to the next important business, which was to vote for special compensation packages for some of the highest paid people in the system. As State Senator Leland Lee wrote in a press release, the regents voted for executive salary increases totaling $6 million, and they also approved the plan to hire more administrators for a an additional $2.4 million annually. My favorite example of executive excess is UCLA Medical Center CEO David Feinberg who got a $400,000 raise and will now make $1,330,000 per year.
So after another budget presentation about the huge UC deficit, which may require another round of student fee increases, the regents and senior management must have gone to their second brains in order to approve a series of obscene compensation packages. I simply do not understand how they can justify cutting the benefits and total compensation of most of the employees, while they immediately move to increase the pay and benefits of the highest earners.
As I told President Yudof during my public comment minute, not only does it look like the university is intent on robbing the poor to give to the rich, but they cover this reverse income distribution with a rhetoric of fairness and equity. I also said that if he wants to put together a task force to reshape benefits, it makes no sense to have zero union representation on the task force. After all, 45% of the people in the pension plan are unionized, and any new deal will have to go through the unions, so why does Yudof continue to form tasks forces and commissions that exclude almost half of the employees?
On a brighter note Bob Anderson and Dan Simmons from the Academic Council asked some tough questions and made some positive statements. Perhaps we now have an academic council that will hold the regents and senior management accountable.
So after another budget presentation about the huge UC deficit, which may require another round of student fee increases, the regents and senior management must have gone to their second brains in order to approve a series of obscene compensation packages. I simply do not understand how they can justify cutting the benefits and total compensation of most of the employees, while they immediately move to increase the pay and benefits of the highest earners.
As I told President Yudof during my public comment minute, not only does it look like the university is intent on robbing the poor to give to the rich, but they cover this reverse income distribution with a rhetoric of fairness and equity. I also said that if he wants to put together a task force to reshape benefits, it makes no sense to have zero union representation on the task force. After all, 45% of the people in the pension plan are unionized, and any new deal will have to go through the unions, so why does Yudof continue to form tasks forces and commissions that exclude almost half of the employees?
On a brighter note Bob Anderson and Dan Simmons from the Academic Council asked some tough questions and made some positive statements. Perhaps we now have an academic council that will hold the regents and senior management accountable.
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