The UC Commission is Asking the Wrong Questions and Giving Bad Answers

The key to the future of the University of California relies on our ability to answer several major questions: 1) How much does it cost to educate each graduate and undergraduate student each year?; 2) How much money is lost or gained by externally funded research; 3) How much will it cost to fund the pension and retiree healthcare?; 4) How much revenue is unrestricted and can be shared between units?; 5) How much waste is there in the system?; 6) Is there a way of improving educational quality and decreasing costs?; and 7) Can the UC pursue a more stable and effective investment strategy? While some of these questions are touched on by the Commission on the Future of the University, most of these essential issues are ignored or misrepresented.

On the positive side, the university has opened up the question of cutting waste and excess by proposing to save $500 million through some vague process of centralization and cost reduction. However, these proposals do not directly address the question of the increased number of administrators and the rapid rise in their compensation packages. In fact, during the time of our “fiscal crisis,” people at the top have increased their earnings, while everyone else lost money.

A hopeful move by the Commission is to look at the rate the university charges external research grants for indirect costs. The commission claims that many of these grants are losing money and that the university should be more aggressive in bargaining for a higher rate of support from external sources. What no one knows is which grants make money and which ones lose; moreover, due to the abstract way of calculating indirect costs, it may be impossible to determine the profitability of most research projects. There is also the question of whether the university wants to base its research decisions on economic criteria.

One reason why this issue of grants is so important is that many faculty members in the humanities and social sciences feel that their budgets are being robbed to pay for expensive scientific research projects. One again, due to the decentralized nature of the UC budget, no one knows if externally funded research is being subsidized by high-enrollment undergraduate courses. Yet, what we do know is that money generated by undergraduate instruction is going somewhere other than instructional budgets.

This question of undergraduate instruction brings us to the unanswered question of how much does it actually cost to educate undergraduate and graduate students. Since there has been no effort made to answer this question, many of the Commission’s recommendation are based on unclear assumptions. For instance, the UCOP appears to be pushing for a decrease in undergrad enrollment and an increase in graduate enrollment, but they have never studied what this change would cost. The Commission has also pushed for more transfer students and three-year degrees, but it is unclear if these programs will save or cost money.

According to my studies of UC salaries, class sizes, and course loads, the university makes a large profit on each undergraduate student and loses money on each graduate student, and thus it would be economic suicide to decrease undergraduates, while increasing the number of graduates. Even if one believes that the key to the future of the UC is to focus on graduate education, one should have some idea about the costs of this move, and yet no one is basing their recommendations on actual numbers or facts.

The speculative nature of the Commission and the Office of the President tells us that we are a long way from budgetary transparency, and the main reason for this lack of transparency is that the university has to simultaneously tell its bond raters that it is in great fiscal health, while it tells everyone else that it is deep in a fiscal crisis. By claiming a large budgetary hole, the university can impose drastic cost-cutting measures, like furloughs, layoffs, and increased class sizes; meanwhile, it increases its assets by diversifying its revenue streams.

Like most research universities in America, since 1980, the UC has made up for its loss of state funding by increasing tuition and bringing in more funds from research, services, and investments. One of the problems with this transformation is that universities claim that they cannot share the profits of the non-state-funded units with the state- and tuition- funded instructional budgets. The result of this budgetary system is that money is drained from educating undergraduates in order to support supposedly profitable units, and making matters even more complicated, is the fact the universities often invest their endowments, pensions, and operating cash in risky investment vehicles.

If we look at the amount of debt the UC has recently taken on ($13.2 billion) and if we account for all of the UC’s investments in the stock market, hedge funds, real estate, private equity, and securities ($65 billion as of March 2010), we see that its yearly budget of $20 billion is dwarfed by its financial stakes of $78 billion, yet none of these statistics have been presented to the working groups of the Commission. Instead, the university has reiterated dire predictions concerning the cost of the pension plan and retiree healthcare. In one of the their graphs presented to the Commission, they estimate how much it would cost the university to increase its current pension contributions of 4% of salary to 22% by the year 2019. This increase could overwhelm the entire system, so the UC has added that it plans to save $310 million a year by restructuring post-retirement benefits; as far as I can tell, this is the first mention of estimating the costs of changing retiree healthcare.

Since all of the members of the Commission’s working groups were given presentations on the UC budget by the Office of the President, we can be sure that driving the Commission’s recommendations is the idea that the university has to cut educational costs to make up for the decrease in state support and the increase in retirement costs. At no point were the Commission members briefed on the UC’s investments, debt, or actual instructional costs. As Aristotle argued, if you start off with faulty premises, there is no way you can arrive at correct conclusions.

The UC Gets Mixed News from the Legislature

The state assembly and senate have responded to the governor’s request to increase the funding for the UC system by $305 million. While the assembly supports the increase, the senate has stated that they will only endorse the augmentation if the state brings in at least $2 billion in new General Fund revenues above the May Revise level. In other words, unless the state has a major increase in revenue, the senate will try to block the new money.

The assembly has also supported additional funding for the UC system so that the scheduled student fee increase of 15% can be brought down to 5%. So far, the senate has not decided on this fee decrease, which would cost the state $200 million.

Finally, in response to the UC’s request that the state fund the employer contributions for the pension, the assembly supports the governor’s idea that general fund allocations can be used for the pension. However, the senate decided to reject this new language. It looks like we are in for a long summer battle over the state budget.

Does UC Want to Invest Like Harvard?

I have a Huffington Post article on how several schools in New England have followed the same high-risk investment strategy that the UC has pursued for the last several years. According to the Tellus Institute’s study of Haravard, Dartmouth, Brandeis, MIT, Boston University, and Boston College, by moving their investments from more stable assets to volatile gambles (private equity, real estate, and hedge funds), these universities have produced a growing income inequality at their campuses. Moreover, since they have now been forced to stop ambitious expansion projects, the surrounding communities have been devastated.

An important lesson that the University of California should learn from this analysis is that the investment strategies of hired traders should be closely monitored; this study also shows that the trustees and regents of these wealthy institutions often have a huge conflict of interest. Since many of the people overseeing universities now come from the world of speculative finance, they are unlikely to shift money into more stable forms of investments. Moreover, due to the tax-exempt status of these schools, they are more prone to engage in high-risk trading.

Another issue discussed by the Tellus report is that since these schools pay very little taxes on their huge real estate holdings, they end up impoverishing their home towns and cities. Furthermore, all of these schools continue to increase their huge income disparities as money flows to the top, and low-paid workers see their salaries stagnate.

While this study does not look at pension investments, most of their finding can be applied to the UC retirement situation, and the central lesson is that there needs to be more faculty and employee oversight over risky investment strategies that cater to the interests of wealthy trustees and regents. As the stock market continues its rollercoaster ride, universities are motivated to seek out high-risk investments in order to make up for past losses; this is truly a recipe for disaster.

New Salary Data Released by the UC:

Using Jeffrey Bergamini’s excellent compensation database, we can examine salary information just released by the UC system. Between Jan. 1 2009 and Dec. 31 2009, the total number of employees listed as having regular employment (excluding graduate and undergraduate student workers and other casual employees) went down by 1,180, but the total gross pay for the system went up $257 million. If we include student employees and other “casual employees” into the mix, in 2009 we saw 3,822 fewer jobs. However, the number of people making over $200,000 went up by 200, and the 3,843 people making over 200K had a collective gross pay of $1.088 billion for an increase of $63 million over the previous year.

This initial reading of the compensation information tells us that during the UC “Budget fiscal crisis,” the university did reduce the number of low-wage employees, as well as cut their total compensation, while the number of high earners actually went up. This growing income inequality has now been coupled with a decrease in work for the lowest-paid employees. Moreover, the imposition of the furlough/salary reduction program did not reduce the total budget; instead it shifted wealth to the wealthiest.

The U.S. Department of Education Responds to Our Complaint

Last summer, I wrote to the federal government to file a complaint regarding how the state of California was using federal stimulus dollars. My concern was that federal recovery money (ARRA) dedicated to higher education was being spent by the state for other purposes. Moreover, I argued that the state was failing to follow the federal mandate of protecting jobs.

On May 27th, I received the following response from the feds:
“This is in response to the complaint that you submitted to the U.S. Department of Education’s (Department) Office of the Inspector General’s Hotline on July 11, 2009. Your complaint indicated that California reduced its support for higher education upon receiving Federal stimulus funds. You further indicated that the University of California used the State’s reduction in support to justify a “fiscal emergency” that would “allow the UC President to impose furloughs, salary reductions, and layoffs.” The Department encourages public universities to use funds awarded under the State Fiscal Stabilization Fund (SFSF) program to avert layoffs and maintain essential educational services. We recognize that some States are reducing their support for education after receiving SFSF funds. Please be assured that the Department is thoroughly reviewing State financial data to ensure that each State meets the statutory maintenance-of-effort provisions. We will continue to monitor California’s support for education to ensure that the State is complying with those provisions. While we appreciate the concerns that you have expressed, the information you provided does not indicate any violation of the applicable statutory requirements.”

I guess I should be happy that I got a response to my inquiry, but the larger question remains of what the state and the UC did with the ARRA money. It still remains unclear how much ARRA money actually made it to the campuses, and I have asked the state auditor to follow the money trail. To be continued . . .