Wednesday, March 30, 2011

A Progressive Tax to Save California: How Unions Can Push Governor Brown to do the Right Thing

California has the largest economy of any state in America with a gross product of just over 1.9 trillion dollars. However, next year, Californians are going to spend less than $85 billion on the state budget, and there is still a $12 billion deficit. These statistics mean that the total state budget is less than 5% of the state economy, and the deficit is less than 1%, yet California is considered to be a high-spending, high-taxing state. Nothing could be further than the truth; rather, California is a very wealthy state where many wealthy individuals and corporations pay little if any taxes.

Rich State, Poor Government
The cause of the state deficit is then clearly not the pensions and benefits of unionized workers. While on paper, the California has a relatively high corporate tax rate, very few large corporations pay anything near the official rate. Due to many tax breaks and loopholes, some of the richest corporations in California pay little or no state taxes. Likewise, many of the richest people in the world live in California, but most only pay a small fraction of the already low state income tax rate. And of course, due to Proposition 13 and the fact that the value of homes are not reassessed, people living in multi-million-dollar homes are often paying only a few thousand dollars in property taxes each year.

What is so shocking is that even with this low tax burden, the one and only plank of the Californian Republican party is a strict stance against any tax increases. In fact, each year, due to the need for tax changes to pass by a two-thirds vote in the state legislature, the Republican minority forces the Democrats to come up with more tax breaks for wealthy individuals and businesses. The end result is that the wealthiest state has one of the poorest governments, and this means that as large multi-national corporations flourish, the vast majority of Californians are forced to pay for the increased costs of education, healthcare, and housing. For instance, each time, the state cuts the University of California’s budget, the world’s greatest public university system simply turns around and increases the tuition for the students.

A Progressive Tax for California
Luckily, all is not doom and gloom in California, and there is a possible solution that could provide a positive example for other states. Since it appears that Governor Jerry Brown will not be able to get any Republicans to agree to his plan to put tax extensions on the ballot in June, he has to change his strategy. His Plan B is to try to get tax initiatives on the ballot for a November election, and to do this, he will most likely need to work with outside groups to collect signatures for a ballot proposition. Since organized labor is the only progressive group large enough to fund a signature collecting campaign, the governor will be forced to work with unions to come up with new tax solutions. This turn of events may mean that out of a fiscal crisis, a real progressive choice could be made.

The unions should only agree to support Governor Brown, if he endorses the following tax solutions:
1. Allow a simple majority of votes in the legislature to pass any new taxes.
2. Increase the top tax rate from 9.3% to 11%. This change would bring in more than $5 billion per year in state revenues, allowing the state to provide desperately needed education, health, and safety services to its population.
3. Close corporate tax loopholes, which according to the California Tax Reform Association would raise an estimated $6 billion per year or more.
4. Tax oil extraction at 9.9% and dedicate the revenue of $1.2 Billion to support higher education.
These four progressive solutions would balance the California budget without resorting to drastic cuts in needed services. Moreover, by fighting for progressive tax solutions, unions could show that they are still a vital force in our political system.

Of course some politicians will state that polls do not support these initiatives, but we need to work together to show the public that these policies are fair and productive. Instead of simply defending against the Right’s assault on unions, public employees, and needed social services, we should promote a positive vision for California and the rest of the nation.

Monday, March 21, 2011

A Letter to the Regents

Here is a letter that I plan to send to the members of the UC Board of Regents:

While I am happy that I have been appointed to the Investment Advisory Group, I am concerned that the Regents are making important budgetary decisions based on inaccurate information. After meeting with Governor Brown and the Department of Finance in an effort to increase the state's support for the University of California, it became clear that one of the biggest areas of misunderstanding concerns state support for the UC system. The Office of the President continues to tell the Regents that since 1990, state support has been reduced by over 50%, and the state only gives $7,230 per student. These numbers are highly misleading: for the 2011-12 year, the UC is budgeted to receive $2.5 billion from the state, and there are currently under 200,000 resident undergraduate and graduate students (UC now has over 23,00 nonresident and international students). In other words, the UC is receiving $13,000 from the state for each resident student, but UCOP applies an inflation adjustment to decrease the real amount by 40%; moreover, the UC does not apply the same inflation adjustment to student fees or general funds. The end result of this misinformation is that it looks like we can simply stop relying on state funding. It also should be pointed out that the state supports UC with over $500 million in Cal Grants.

Another related issue is the marginal cost of instruction for each additional student. While the state has recently stopped using this calculation, salary and class size data shows that the direct instructional cost for each student is under $8,000 (this calculation includes the salaries and benefits for all employees currently teaching undergraduate students and the parts of professor’s salaries supporting departmental research). Since currently, UC receives close to $23,000 from tuition and state funds per student (after subtracting financial aid), undergraduates bring in a huge surplus ($15,000 per student) that is used to pay for administration, research, and other related and unrelated university activities. One of the results of this budgetary reality is that it makes no sense to consider reducing undergraduate enrollments; moreover, the only real financial solution is for the campuses to increase undergraduate admissions.

It is also important to stress that the “core budget” only concerns about 29% of the total UC budget, but core funds are asked to support all aspects of the university. For instance, faculty and staff supported by core funds perform the vast majority of the research supported by external grants. Moreover, many of the employees in the medical centers are at least in part state-funded, and state funds have financed the buildings for auxiliaries and services, and these “self-sustaining” units rely on the system’s bond ratings, central administration, shared benefits, and debt capacity. In other words, there is no such thing as a self-sustaining unit, and these profit-making sectors should be asked to share their revenue with the “state-funded” units.

The bottom line is that the UC’s total revenue continues to increase, and what is needed is a more effective system for sharing funds. While it is often said that a grant for laser research cannot fund the salary of an English professor, it turns out that inexpensive English classes do help to fund expensive scientific research. Moreover, state-funded professors regularly use external grants to buy themselves out of their teaching duties, and so there is no fixed border between the state-funded instructional budget and the grant-funded research budget. Furthermore, the UC is now investing its research money, operating cash, and general funds through STIP and TRIP, which means that there is a whole pot of money being generated out of the co-mingling of funds.

If the Regents are relying on faulty and inaccurate information, there is no way you can make effective decisions. To improve this situation, the Regents should fight for more state support and ask UCOP to report on actual enrollment numbers for resident students, the direct cost of undergraduate instruction, and the actual state support per undergraduate resident student. Please let me know if you would like to discuss this information in more detail. Sincerely, Bob Samuels, President, UC-AFT

Thursday, March 10, 2011

UC and the State: Sacramento Update

During the last couple of weeks, I have spent a lot time in the state capital with three goals in mind: reduce the budget cuts for the UC system, block the confirmation of the new regent David Crane, and clarify the state’s obligation to the UC pension plan. After a long talk with Governor Brown, I thought that all of these goals were achievable, but currently, due to the budget stalemate, my optimism has been reduced.

On the positive side, I met with Senator Steinberg’s staff, and I told them that the governor does not support Crane, and it appears that Steinberg also does not want him confirmed. There are then three possibilities: the governor can withdraw the appointment now, Steinberg can call for a confirmation hearing, or we could just wait for a year, do nothing, and have the appointment expire. I think we all agreed that a hearing would be the best path, but no one wants to do anything until after a budget deal is made.

In terms of the pension, the governor has agreed to set up a meeting with union representatives, people from Office of the President, and the governor’s labor people to discuss UCRS. While Brown did not commit to the state contributing to the plan now, he did say he would approach the subject with an open mind. However, we also discussed the possibility of a Republican-sponsored proposition going on the ballot that would limit the yearly pension payout to the social security wage rate, which is currently $106,000. It was unclear if this initiative would apply to UC employees, but my fear is that if the UC gets money from the state for the pension, it would have to play by the state’s rules.

On the final topic of the budget cuts, no one wanted to add any language or make any changes that would stall the very fragile budget negotiations. While many people agreed that the state should protect the core mission of the UC, it looks like the language in the budget will be vague and open to interpretation. Still, I was told by the governor’s finance team that if a budget passes next week, they will start working on the next budget, and we might be able to add some stronger protections then.

You can read my Huffington Post article on Pensions, Unions, and the Media here.

Tuesday, March 1, 2011

Understanding the UC Budget Part II

In a response to AFSCME’s suggestions of how to reduce the University of California’s spending, UCOP has written a detailed discussion of the way the UC budget really works. This explanation is instructive because it trots out the usual half-truths, but with many “facts” that are easy to refute.

The Office of the President's first major claim is that reducing funding for athletics or special retirement packages for senior managers will not help the budget situation because state funds do not support either of these expenses. The first part of this argument rests on the idea that self-sustaining units like collegiate sports pay for themselves. However, we know what several of the campuses regularly subsidize their athletic programs; in fact, the Berkeley faculty senate voted last year to stop the practice of shifting millions of dollars a year to the athletic department to cover the internal deficit. We also know that all self-sustaining units use UC buildings that have been built out of state funds and are financed through the shared UC bond rating. Once again, the problem is that the self-sustaining units want everyone else to pay for their losses, while they keep their profits.

In terms of special retirement deals for administrators, we learned from the state audit of UC executive pay that compensation for management comes from multiple sources, including state funds and student fees, and so it is hard to believe that state funds are not supporting special retirement perks. Actually, UCOP does affirm that “management positions are funded out of numerous sources and on average only 28 percent of the savings come from state General Funds.” In other words, close to a third of executive compensation is paid by state general funds.

As I have recently pointed out, all of these budget statistics are suspect because the UC pools its money in several areas. For instance, in a recent Regents investment meeting, we find the following discussion of how the UC invests its operating cash and grant funds on a regular basis: “Mr. Anderson noted that some of the funds would include federal grants and contracts; for example, if the National Science Foundation were to give $500,000 at the beginning of the year to be expended over the course of the year. He cautioned that, in his example, the National Science Foundation would not be pleased if three percent of their grant were lost. Mr. Anderson asked who would be responsible should investment losses occur. Mr. Taylor responded that the campuses would be responsible for any losses.” Here we not only learn that money from grants is regularly pooled with other funds in investment accounts, but more importantly, if losses occur, the campuses have to use their general funds to cover the grants. Moreover, what this discussion does not say is who gets to keep the profits from the investments.

It appears that the general philosophy of the campus is that the self-sustaining units retain their profits, but the general fund has to bail out anyone who loses money. This structure may help to explain Charles Schwartz’s recent investigation into how billions of dollars coming from the state and student tuition for instruction appear to be unaccounted for in UC’s own budget documents.

Like the rest of the country, the poor and the almost poor have to subsidize the wealthy when profits are privatized and risks are socialized. In the case of the UC, the rich medical centers and housing, parking, and dining services declare that because they are non-profit, any of their excess revenue goes back into their own enterprise, or as UCOP explains, there are no reserves because money has to be saved in case “cost estimates are not achieved.”

At the end of the letter, UCOP explains that no state funds go to support the supplemental retirement plans for senior managers, but then he adds that the cost of these programs are subsidized by an “assessment” to each campus. In other words, state funds go to the campuses, and then the campuses are taxed to pay for the special perks to the highest-paid employees, so while state funds are not supposed to pay for supplemental retirement, campuses use state funds to pay for their share of executive compensation.

The only solid rule of the UC budget is that there are no solid rules, and if the rich want to get richer, they will surely find a way.