Tuesday, February 15, 2011

Understanding the History and Structure of the UC Budget

Virtually every representation of the UC budget is either misguided or misinformed because people do not understand the history and structure of this complicated funding system. The first thing to stress is that as the state has reduced its commitment to the university, the system has sought multiple sources of revenue, which, in turn, have expanded the missions of the campuses. On a most basic level, the reduction of state funding has resulted in an increase in tuition and a growing emphasis on externally funded research and auxiliaries like housing, dining, parking, extension, summer, and medical services. Thus, when the administration states that student fees are now threatening to surpass state funding, one can read this as either indicating a loss of state funding or as an increase in non-state funding, like tuition.

One of the central problems with this system is that it is impossible to have any type of budget transparency because money moves in and out of different systems. For instance, the state pays the salary of a research professor, but then the professor gets a grant that buys him out of his teaching duties. At this point, the external research budget becomes co-mingled with the state-funded instructional budget, and so the clear line between state-funded and non-state-funded positions breaks down.

It is also important to stress that no one can say if research grants make or lose money because each grant is supposed to pay indirect costs to support administration, equipment, staff, facilities, libraries, and maintenance. While President Yudof likes to say that a grant to research laser technologies cannot fund a professor in the English department, what he does not say is that money from the English department and the laser grant do get mixed together to pay his salary. In other words, administrators are paid out of multiple sources, and this means that it is impossible to trace all of the money or to see if a particular grant is paying its fair share. Furthermore, while we know that some other schools do charge a higher indirect cost for grants, we do not know where this money goes and how it is spent.

What we do know is that money coming in from students and the state to support instruction and departmental research far exceeds the amount of money the campuses spend on these activities. Therefore, undergraduates are subsidizing something, but, it is hard to say exactly what. For example, we have recently discovered that most NCAA athletic departments in the country lose money, and UC Berkeley has been using general funds to subsidize its athletic program for years. We also know that parking on some campuses brings in much more money than it spends (see here for proof). However, all of these profits are hard to trace because UC is a non-profit institution that has to hide its extra revenue.

As I have pointed out in the past, the main way that the UC conceals its unrestricted funds is by declaring a multi-billion dollar retiree healthcare liability, while only paying a couple of hundred million dollars a year to cover these costs. Yet, UC is doing nothing wrong here because it is required by law to declare this liability; however, it does hide money by not telling its employees the real reason why its unrestricted funds are so low.

The UC also pools much of its operating cash and funds from diverse sources in order to invest the money together to receive higher rates of return. These pooled assets allow the university to get better bond ratings and thus lower interest rates for borrowing. Once again, while this structure may make fiscal sense, it creates budgetary opacity.

This short budget primer tells us certain important facts: 1) no one knows where the money is going or how it is being spent; 2) if someone tells you that they know how the university spends its money, they are misrepresenting the facts; 3) since money flows in and out of the different revenue streams, there is no such thing as a self-sustaining unit; 4) some parts of the system are covertly subsidizing other parts; and 5), it is untrue to state that a decrease in state funds means that state-funded positions have to be reduced. Everything in the budget is determined by priorities, and it our role to change these priorities.


  1. I'm with you on this (as with most things). A question and a comment.
    Does declaring the retiree healthcare liability conceal surpluses in other areas by yielding a bottom-line zero (i.e. non-profit)? Couldn't deferred maintenance serve the same purpose? Or how does that work?
    And in conclusion 3, wouldn't "autonomous" (instead of self-sustaining) be more accurate? Clearly some units make more than they cost, others cost more, and some might be revenue-neutral (even if it is hard to figure what they make or cost).
    In any case, your larger point is right on.

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  3. Data speaks more than narrative. Perhaps you can post a chart of tuition prices going back to day 1 for UC. Also, and more importantly charting the data of student numbers and federal and state funding amounts for the same period.

    With that data in front of us we have something to talk about. Otherwise it's he said/she said.

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