Wednesday, June 23, 2010

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.


  1. "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."

    But Bob, knowing what you know, why do you assume that this "vague process of centralization and cost reduction" will be good, or true? As one of those dept staff members who are about to be centralized & reduced, I suggest you note this excerpt from notes on "Commission on Future" mtg June 14, recorded by Suzanne Guerlac. Yudof's comments are particularly startling:

    "Item #2 Administrative Efficiencies (streamlining administrative operations, already discussed at May Regents meeting), presented by Peter Taylor.
    Necessary to add investment for system-wide capabilities. Taylor stressed the importance of reducing administrative costs at the department level – the bulk of the costs exist at this level. Need to “rework the way our business processes work.” Specific emphasis on procurement issues.

    Yudof: This has been discussed with Regents, needs to be routed through OP in order to get this done, need for a more “totalitarian regime” on this. Need to earn trust because the track record is not very good, services have been centralized and then not worked very well."

    Here are Suzanne's complete notes on the mtg:

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  4. i read your post "why uc has huge legal bills"

    and recently came across this old SF Chron article

    do you happen to know if UC policy at UC now requires disclosure of settlements?

    previously "university officials considered it to be a separation agreement -- not a legal settlement covered by the policy." so disclosure to the regents was not required.

    do you happen to know if that is still the same policy today -- or is it different?

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