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Future of UC: Funding Options for a Permanent Crisis

The Commission on the Future of the University’s Funding Strategies working group of has put together a document listing their initial proposals, and near the start of their report, we find the following ominous claim: “The funding gap is exacerbated by a significant unfunded post-retirement benefit liability, which is currently $1.9 billion and expected to reach $18 billion by 2013. Similarly, the University’s unfunded post-retirement healthcare liability is projected to grow from $13 billion today to $18 billion by 2013 . . . Because the PEB Task Force is scheduled to finalize recommendations by this summer, we do not address PEB issues in this report, but recognize that more than any financial challenge facing the University, the cost of providing these benefits has the potential to overwhelm our ability to continue our tripartite mission of teaching, research, and public service.” While these statistics are presented as neutral facts, they are in reality very complicated assumptions that require a deeper analysis. On face value, it looks like the UC faces an enormous fiscal crisis that will not go away, and so the future of the university entails a permanent budget crisis. However, we must understand that the pension and retiree healthcare liabilities are mostly accounting mechanisms that were developed under the George W. Bush administration as an attempt to undermine unions and pension plans. 

According to new accounting requirements, institutions have to declare on their books all of the future payments that they will have to make to their retirees. In other words, in 2010, we have to calculate what would happen if everyone in the UC system retired today, yet, we do not have to actually put money into an account to fund this huge liability; rather, we have to make sure that in our audited financial statements, we declare the huge liability and subtract it from our total revenue. 

In the case of the UC system, this accounting requirement has allowed the system to move billions of dollars from the unrestricted to the restricted category; in other words, UC has a way of declaring that it has no money to spend on things like instruction or employee salaries because it has shifted money from a usable pile to a non-usable pile. But, and this is a huge but, the UC has actually moved very little money; what they have done is just changed where the money is listed in their financial statements. For some strange reason, no one in the financial working group knows about this accounting move, or at least no one is admitting that they know it, and instead, they are using the post-retirement liability to call for a change in retirement benefits, while they declare a permanent fiscal crisis for the UC system. 

I am not arguing that the UC should not fund the pension plan or the healthcare of retirees; what I am arguing is that the university should not use a new accounting requirement to manipulate the budget. After all, the UC has for the last two years declared a several billion dollar liability, while they have only shifted a couple of hundred million in to the retiree accounts. Moreover, this working group does not comment on any of the UC's questionable investment strategies that have resulted in billions of dollars of losses. 

Another set of assumptions that this working group has accepted concerns the level of state funding and the amount of money the UC needs from the state: “The University of California Office of the President currently estimates that UC’s core funding from state funds, student fees, and other sources has fallen $1.2 billion below UC’s current needs. At current levels of state support, this funding gap is estimated to grow to $3.5 billion by the 2015-16 fiscal year. . . ” What this statement of fiscal decline does not show is how the UC has calculated what they need from the state or what they will get from the state in the future. While it is important to push for more state funding, it is difficult to ask the legislature to back the UC’s funding requests when the university is always using questionable numbers and trumped up statistics. For instance, the following statement is simply false: “State funding per student has declined by 54% since 1990-91.” As I have pointed out on several occasions, state funding per student has gone up since 1990; what the UC should say is that state funding has not kept up with inflation, but they would have to define the inflation rate and why the costs of a UC education have gone up; unfortunately, they never do this, and so they upset the legislatures who have fought for increased UC funding in the past. 

Even with these major accounting issues, the report does make a few important recommendations that should be followed. One vital suggestion is to reduce the cost of administration related to the core mission: “Costs not directly related to research and teaching (herein called administrative costs) are estimated to be as large as 25-30% of that which is funded by UC core funds. While recent actions have been made to reduce these costs, they remain substantial.” The working group points to several recent efforts to decrease the cost of staff and administration to accomplish the goal of saving money: “When the University of Texas System enacted a shared-services model to improve administrative efficiencies, $250 million in value was added to system operations. The “Carolina Counts” program at UNC, focused on operational efficiencies, expects to deliver $90 - $160 million dollars of ongoing operational savings within five years. Most recently, UC Berkeley expects to generate tens of millions of dollars in annual savings as a result of administrative improvements suggested by external consultants Bain & Co. There is no reason to expect that similar results, scaled to the UC system, could not be delivered as well through the pursuit of an administrative efficiency framework.” We should applaud this effort to lower the administrative costs of the university.

Another very positive recommendation concerns the questions of research grants losing money: “For a variety of historical reasons and local campus practices, indirect costs charged to non-federally funded research projects – those funded by the State of California, foundations, gifts, and corporations – do not fully recover the costs of research conducted for these agencies. Hence, the university subsidizes this research with core funds. This can be rationalized in times of ample budget in fulfilling one of our primary missions – research. It cannot be rationalized in times of insufficient core budget to fulfill one of our other primary missions – teaching.” Here we find a clear recognition that funds that are supposed to be dedicated to instruction are being used to subsidize grants that do not come with enough indirect funding: “Preliminary estimates are that current policies and practices of recovering indirect costs on non- federally funded research throughout the University of California are currently leading to the use of core-funds to subsidize this research in the range of more than $300 million per year.” In order to rectify this situation, the working group suggests that “Preliminary estimates are that we are 5-10 percentage points behind our comparator institutions in ICR rates, and recover 75% of facilities and administrative costs attributable to federally- funded research. Increasing ICR rates by just 5% across UC could generate more than $150 million per year.” By increasing our indirect cost recovery for federal and state funds, the UC could turn a research deficit into a research surplus.

Another set of recommendations concerns student fees, and the movement here is towards privatization. Not only do they want to replace the term “student fees” with “tuition, but they call for a continual increase in the sticker price: “Notwithstanding recent major increases in student fees, the University of California remains a significant value within the marketplace of leading universities. At least in the short run, there is significant room to increase tuition levels without significant negative impacts on projected enrollment or access for students from low-income families.” From a purely free market perspective, the UC could get away with major increases in student fees; however, this proposal does not look at the effect on middle-class students and first-generation students who do not understand how financial aid works. This recommendation also fails to realize that a pre-planned, multi-year set of tuition increases will only make it easier for the state to cut its funding for the UC system. 

The final recommendation is perhaps the most dangerous and likely the most attractive to some faculty and administrators. This suggestion is to allow professors to be partially compensated through non-state funds: “There are already examples in the UC system of faculty salaries being covered in part by fees (professional schools), or by a combination of income from clinical practice and research (medical school). There have been a number of suggestions of ways to extend similar or derivative practices to other faculty: Compensation plans similar to the medical schools for faculty in the biological sciences; the use of non-core funding (e.g., contract and grant money, or other external sources of revenue) to pay some portion of the off-scale component of faculty salaries, where feasible; More extensive use of contract and grant funds to support some fraction of faculty salary during their regular nine-month appointment.” At first glance, these look like great ideas, but they would function to undermine the humanities and the social sciences that do not receive large sums of money from external grants, patents, or services. This type of compensation system would also turn public employees into privatized entrepreneurs. 

It is surprising that none of these commission members even considered increasing enrollments and holding fees at the present level. It is also alarming that this financial committee did not address the university’s questionable investment practices and secret compensation deals. By repeating the university’s standard budget propaganda, the commission reveals that its main function is to support the administration’s desire to privatize the world’s greatest public university system.

Bob Samuels