Tuesday, July 28, 2009

UCs High Bond Ratings

Here are excerpts from the latest Bond Rating for UC. (MOODY'S AFFIRMS UNIVERSITY OF CALIFORNIA'S Aa1 GENERAL REVENUE BOND RATING; OUTLOOK IS STABLE). Notice how they stress the amount of resources and unrestricted funds available to the university.

“The University does face some liquidity pressure due to State funding delays and the potential for more serious disruption to State cash flow. However, with over $6 billion in the short-term investment pool and $1.4 billion in the total return investment pool compared with $3.1 billion of state appropriations in FY2008, the University can likely weather any potential period of disruption in state funding.” (These funds are inrestricted)

*The University of California is one of the premier higher education systems in the world, serving over 200,000 students, conducting over $3 billion of research annually (excluding its role in managing several national laboratories), and generating in excess of $4 billion of net patient revenue at its five academic medical centers;
*Healthy and highly consistent operating performance, with operating cash flow of approximately $2 billion (adjusting for non-cash expenses) driven by a highly diversified revenue stream with no single revenue source exceeding 27% of total revenues; however, with the State's budget under considerable strain, operating appropriations may come under pressure in the next few years;

*Sizeable balance sheet that remains highly liquid, with $5.4 billion of unrestricted financial resources ($6.5 billion excluding post-retirement health liabilities) and active treasury management monitoring a short-term investment pool exceeding $6 billion;
Although the debt service on the University's State Public Works Board Bonds (SPWBB) has been and is expected to continue to be paid by appropriations from the State, due to the legal obligation of the bonds being supported by an "available funds" pledge of the University, we do not expect the rating on these bonds to fall to levels near the State's other public works board bonds (currently rated Baa2 on Watchlist for downgrade, see most recent report dated July 14, 2009).”

Bob Samuels, UC-AFT

Is the University of California Well Endowed?: A Look Inside the UC Endowments

The University of California has argued that it cannot spend its endowment money on helping to close its budget hole because the funds in the endowment are all restricted and dedicated to specific purposes. This paper will disprove the UC’s claim by examining the content and the uses of the UC endowments.

According to the 2009 “University of California Annual Accountability Report” (http://www.universityofcalifornia.edu/accountability/documents/accountabilityreport09_finance.pdf), “About 20 percent of UC’s endowment payout is directed for specific departments, 14 percent for research, 20 percent for instruction (including endowed chairs and professorships) and 25 percent for student financial support” (232). Since 45% of the endowment is dedicated to student financial aid and instruction, it is clear that these funds should supplement the general funds, and therefore, even though this money is sometimes tied to specific programs, it could still be used to support the instructional mission. For example, when an outside donor funds a position in the English department, money is saved by the general fund. Moreover, contributions earmarked for financial aid should be helping to make up for the cuts from state funds; however, the UC usually does not discuss how they are using this part of the endowment.

The same report states that “In 2007-08, UC received $376 million in new endowment gifts” and “In 2007-08, payouts of about $350 million from UC’s endowments provided support to UC campus programs. For example, over $90 million was distributed to students from privately funded scholarships” (234). It looks like the UC endowments have very little money to distribute to the campuses, yet, a note on the same page informs us that, “In addition to the funds listed above, UC manages an additional $400 million in general endowment pool assets for a total endowment portfolio of about $9.6 billion as of June 30, 2008.” It turns out that in 2008, there was actually $9.6 billion in the general endowment, so what happens with this enormous pile of money?

Most of the endowment funds are invested in stocks, bonds, real estate, and other investments, and as of May 2009, the endowment fund (GEP) was listed at $4.6 billion (http://www.ucop.edu/treasurer/invinfo/COI_IAG_Perf_Summary_3-09.pdf). In December 2007, the same fund was at 6.7 billion. Some of the endowment money is also in the short term investment fund (STIP), which in March 09 had 7.2 billion, but had 8.7 billion in December 2007. These statistics show that while the UC claims it cannot spend the endowment money to make up for the reduction in state funds, it can invest and lose a large part of the endowment at its discretion.

By engaging in highly risky investments, the UC has literally gambled away its current and future economic stability. Of course, UC officials will argue that everyone has been losing money recently, but Charles Schwartz and others have shown that the UC has been underperforming almost all comparable institutions since the management of the UC investments was outsourced in 2000 (For more on the history of this change, see “Parsky’s Party” at: http://www.eastbayexpress.com/news/parsky_s_party/Content?oid=426427).