Financing the University – Part 22

Charles Schwartz, Professor Emeritus, UC Berkeley, February 27, 2013

Schwartz@physics.berkeley.edu    http://ocf.berkeley.edu/~schwrtz

COST ACCOUNTING at a RESEARCH UNIVERSITY

My previous study on this topic, with the title, “The Cost of Undergraduate Education at the University of California – Improved Calculation”, was posted in late 2007 at http://ocf.berkeley.edu/~schwrtz/recost.html. It concluded that the current level of mandatory fees for resident undergraduate students is very close to 100% of the University’s actual expenditure for undergraduate education, averaged per student.  In contrast, University officials said that student fees covered 30% of the cost of education.

New results reported here, for the year 2011-12, show University expenditures of:

$1.296 Billion for Undergraduate Education = $6,910 average cost per student; and

$2.117 Billion for Faculty Research (unsponsored) and related Graduate Programs.

The mandatory fee level for resident undergraduate students was $13,181, which is nearly twice what it cost the University to provide their education.  In this paper, I shall review the method used before, then go through the steps with the latest input data. At the end is a critical discussion of the implications of these financial facts, including an indictment of the University leadership for their dishonesty.

I. Introduction

     The University of California (UC) is engaged in many activities, with an annual operating budget of around $23 Billion, funded by a variety of sources. Table 1, below, displays a standard breakdown of UC’s Operating Expenses by Function.

Table 1. UC Operating Expenses by Function for FY 2012 ( in $Millions)

Notes to Table 1. The Nominal Expenditures can be found in the UC Annual Financial Report 2011-12, page 8, under “Operating Expenses by Function.” The Actual Expenditures differ by not adding the “Retiree Health Benefit and Pension Accrual,” which are not real expenditures but a required bookkeeping of future obligations (totaling $2,449 Million), and by not subtracting the “Expense Capitalized” items (totaling $748 Million), which cover just about half of the Depreciation and Amortization amount seen in the first column. One may find both the Nominal and the Actual Expenditures data (without the full DA) in the UC Campus Financial Schedules (CFS), Schedule 12-H. All of those official accounting reports are available at http://www.ucop.edu/financial-accounting/financial-reports/index.html

     The first question we want to address is: How well (or poorly) does this classification scheme tell about the expenditures in terms of familiar missions of the University and its several clienteles. The question, “Who pays for what?” will come later; and I am especially interested at getting down to details about student fees and state appropriations.

     Some items seen in Table 1 really mean what they say, in a fully exclusive way (financially speaking). Thus, the DOE laboratories are fully funded by the U.S. Department of Energy to perform certain functions and all that money is spent for the laboratories.  One may note that there is substantial interaction between Lawrence Berkeley National Laboratory and the UC Berkeley campus: some 200 UCB faculty members hold joint appointments at the lab and many of their graduate students also work on the lab payroll. This “synergy” is beneficial to both the lab and the campus; but there is no question about their distinctly separate financial accounts.

     Another clean example is the Auxiliary Enterprises: dormitories, dining halls, parking lots, etc. on each of UC’s ten campuses. These are described as “self-supporting” since they are paid for by fees charged directly to the individuals who use those facilities. (There are some debates about the finances of Intercollegiate Athletics, which comes under this category; but I will not pursue that issue here.)

     The Medical Centers (sometimes called Teaching Hospitals) are also described as self-supporting business enterprises, although there is substantial flow of personnel and funds between the hospitals and clinics and the Medical Schools on the campuses. It is customary for the official UC budget to have distinct sections about Health Sciences (HS) Instruction and General Campus (GC) Instruction. This separateness, between the HS and GC sectors, has been memorably identified by the UC Office of the President (UCOP) in responding to suggestions for meeting the University’s budget crises: “A federal grant for laser beam research can’t be used to fund a deficit in the English Department. A payment for a surgery in a UC hospital can’t be redirected to fund graduate students.” [UCOP, “The UC Budget: Myths & Facts,” April 2009].

     The category of Research expenditures, shown in Table 1, covers work sponsored by external agencies and some internal budget funds dedicated for specific research projects; 87% of those funds are Restricted, meaning that they cannot legally be used for purposes other than originally intended.

     It turns out that the most complex category is Instruction; and so I start by taking this apart into several specific sub-categories.  To do this, I rely on the extensive set of accounting reports called “UC Campus Financial Schedules” (CFS), which may be found at http://www.ucop.edu/financial-accounting/financial-reports/index.html.  This shows us expenditures, campus by campus, and even department by department, where each of the categories shown in Table 1 are broken down into further details.

II. Review of the Method

     That expenditure category called “Instruction” contains several things that one would want to separate out if the object of your study is to find out how much the institution actually spends for undergraduate instruction. It includes all salaries and benefits paid out to all regular faculty members throughout the academic year, plus the cost of supporting staff in the academic departments.  This bundle of costs used to be called the I&R (for “Instruction & Research") budget. This accounting category called “Instruction” even includes an enormous amount of money taken in by the clinical practice of medicine and paid out to the faculty at the Medical Schools.  So, our first step will be to put aside all the expenditures for all the Health Sciences (which do involve graduate student programs, but not undergraduate programs); and then we also put aside the largest of the other graduate Professional Schools – those in Law and Business/Management.

      This leaves us with the wide array of academic departments that have both undergraduate programs and graduate programs. But there is still one major problem: the accounting habits of research universities obscure the fact that professors are hired to perform research as well as teaching and simply record the totality of their academic year salaries as expenditures for “Instruction.” (The phrase “Departmental Research” is used to cover that deceptive practice.)

     My approach, following the classical method called Activity Based Costing, relies on a Faculty Time Use Survey conducted by UC a number of years ago.  As described in detail in the previous paper, that analysis leads to the result that 21% of professors’ work time, on average, may be fairly allocated to the mission of undergraduate instruction; the rest is apportioned to research, graduate instruction, and some professional service activities (which are mostly tied to the research endeavor.)

     In what follows, I will first dissect the expenditures for Instruction (to get the direct cost of undergraduate instruction), then dissect the category Academic Support and add in Student Services as supporting costs for undergraduate education; and then finally I add in overhead costs from IS and OMP. For more details on these calculational procedures, see the previous paper from 2007.

III. The Updated Calculation

 Instruction.     The total UC expenditure for Instruction, in fiscal year 2011-12, is  $4,571 Million. From this we subtract: $298 Million for University Extension and Summer Session; $1,853 Million for Health Sciences; $301 Million for Schools of Law and Business/Management; and $144 Million for other expenditures of Restricted funds.  This leaves us with an Adjusted Cost for Instruction of $1,975 Million.

     To get the Undergraduate Instruction part of this we first separate out the amounts spent on Lecturers (1857 FTE @$75,000, 81% for undergraduates) and Graduate Student Instructors ($156 Million, 87% for undergraduates). The remainder is then multiplied by the factor 0.21 and we arrive at,

• Direct Cost of Undergraduate Instruction = $ 602 Million.
• Residual Adjusted Cost for Instruction = $1,373 Million.

Academic Support.      Expenditures for Academic Support: Libraries ($260 Million - $32 Million Restricted); Other Academic Support ($1,552 Million  - $1,018 Million  for Health Sciences, $56 Million for Law and Business and $40 Million Restricted = Adjusted $438 Million). Allotting ½ of the former and ¼ of the latter to undergraduates, 

• Academic Support for Undergraduate Instruction = $223 Million.
• Residual Adjusted Academic Support = $443 Million.

Student Services.     From the total expenditure for Student Services ($710 million), I subtract the $231 Million spent for Student Health Services (paid for by other fees) and another $45 Million of Restricted funds, giving us, 

• Adjusted expenditure for Student Services = $434 Million.

Overhead.    Total expenditures for Institutional Support plus Operation and Maintenance of Plant amount to $775 Million + $540 Million = $1,315 Million.  If I spread this cost evenly over all UC expenditures, I get an effective overhead rate of 1315/22142  = 6%. In the previous calculation, I reduced the denominator of this fraction by the amount spent by the Medical Centers, assuming that they paid for their own “overhead” services: that gives an effective overhead rate of 1315/(22142 – 6366) = 8%. I am not sure which method is correct, so I’ll use the figure 7%.

     To this I might add the capital cost, estimated from the reported amount of Depreciation and Amortization, $1,477 Million, less the amount already counted by keeping in Expense Capitalized, $748 Million.  If I allocate this cost uniformly over all expense categories, it amounts to another 3% to 5% overhead.

• Combining these, I get an estimated overhead cost rate of 11%.

IV. Final Numerical Cost Results for FY 2011-12

     Adding the contributions from Instruction, Academic Support and Student Services (79% for undergraduates), then adding 11% of that sum for overhead, we arrive at,

• Total Annual UC Expenditure for Undergraduate Education = $ 1,296 Million

     In addition, we can do something that was simply ignored in the previous study: identify the residual portions of the costs from the I&R bundle. That would represent the total UC cost for faculty research (unsponsored) plus graduate student programs that are closely tied to that research mission.

• Total Annual UC Expenditure for Faculty Research (unsponsored) plus related Graduate Programs = $ 2,117 Million.

     If we combine these two separate costs and add in the costs noted earlier for Law Schools and Business Schools (with appropriate overhead), we come to a total GC cost of $3,809 Million. Dividing this by the total GC enrollment for 2011-12 we get an average per student cost for the whole GC I&R bundle at about $17,100 per student. This figure is very close to what UCOP published as the Average Per-Student Cost of Education for 2011-12, about $17,400. This close agreement is reassuring. However, we note how misleading UC’s number can be - exaggerated by a factor of three -  if people think that their “Cost of Education” represents the cost for undergraduate education, rather than the cost of that much bigger bundle of activities.

Note.  In these calculation, neither UC nor I include any expenditure of student financial aid as a part of the cost of education. The data for SFA shown in Table 1 represent funds provided by external agencies (81% from the Federal government); and most of those are Restricted funds and thus represent no operating cost to UC. A closer look at fees and financial aid comes next.

V.  Per-Student Costs compared to Student Fees

     On the basis of their Education cost figure, UCOP says that student fees (net of financial aid) now cover 49% of the cost of education.  Dividing my Undergraduate Education cost figure by the number of undergraduates enrolled (187,566), we find,

• Average Cost for Providing Undergraduate Education = $6,910 per-student. 

Since the average mandatory fees for resident undergraduate students in 2011-12 was $13,181, I would say that resident undergrads were being charged 191% of the average actual cost for UC to provide their education!  However, this is not a correct comparison because UC uses net student fees (after deducting a portion for financial aid) and I use gross student fee levels. One can (roughly) convert from gross to net by using a factor 2/3, and this gives us a choice of two fair comparisons:

• From the perspective of UCOP’s Budget Office, looking at the cost to UC:

UCOP says Student Fees (net) cover 49% of their cost and I say it is 127%.

• From the perspective of students and their families, looking at the sticker price:

UCOP says Student Fees (gross) cover 74% of their cost and I say it is 191%.

     Either way, there is a huge discrepancy, due to our different methods for calculating the Cost of (Undergraduate) Education: my method is reasoned and fair (while details are subject to debate) while UC’s method is manifestly false and misleading.

     Another way of putting this result: Undergraduate students now pay (even more than) the full cost for undergraduate education provided by UC. The State of California now pays for no part of undergraduate education at UC and it pays for only a portion of the cost of faculty (unsponsored) research and related graduate programs.

VI. Discussion of the Implications of these Results

     A few years ago I filed a formal whistleblower complaint with the University’s Office of Ethics, Compliance and Audit Services, alleging that top UC executives were issuing false and misleading information – specifically on this question of the cost of undergraduate education – and that this constituted fraud under laws prohibiting improper governmental activity. In response, I was told that their method of calculating the per-student cost of education is promulgated by the National Association of College and University Business Officers (NACUBO) and has been endorsed by the higher education community.

     I charge that the practice of research universities hiding the true cost of faculty research under the rubric of undergraduate instruction is false and misleading; and the official response is that everyone else does it, so therefore it is ok.

     That organization NACUBO convened a special committee some years ago to decide how best to calculate the institutional Cost of Undergraduate Instruction and communicate that to the public. Their 2002 report contains an explicit discussion of this very issue: “NACUBO concluded that all departmental research costs should remain within instruction.” That accounting rule makes sense at any college where the sole mission is undergraduate education, but I challenge anyone to justify that for a research university today.

     There was a time when that bundling of costs could be justified as causing no harm. When the state paid for the entire cost of the core budget (covering I&R), one could say that both teaching and research were seen as “public goods” and paid for by public money; so there was no harm in bundling them all together.  Over the last two decades, however, there has been a fundamental shift in how our public universities are funded: there has been marked decrease in state funding and marked increase in student fees (tuition) – most of which is paid by undergraduate students. This shift has been accepted with a change in philosophy that says undergraduate education is a “private good” since it leads to economic benefits for those students. That shift ought to call forth a change in the accounting habits; but no such thing has occurred. Isn’t academic research still a “public good”?

     Consider this statement from the head of the Howard Jarvis Taxpayers Association, published July 5, 2010: "As California faces an unprecedented budget crisis, students at California colleges have been asked to pay a greater share of the total cost of their education, most of which is still borne by taxpayers. ...[T]axpayers pay 60-70% of the cost of ... UC students' education, without even counting financial aid." They got their 60-70% number from UC officials saying that student fees covered 30-40% of the cost of education. This is evidence of the harm caused by that bad accounting habit.

     This is not just a California problem. That bad old accounting habit of hiding the cost of core research, and thus misstating the true cost of undergraduate education, infects every research university, both public and private, throughout the country. It is a huge failure of leadership in higher education not to acknowledge and correct this problem.

     The most obvious harm is that it invites continuing escalation of tuition and the consequences in terms of hindered access and mountainous student debt.  One can also see sad distortions in the way that our leaders address their financial problems.

     Coming out of the year-long study by the UC Commission on the Future was a set of recommendations to decrease the cost of undergraduate education; they never even mentioned that the cost of research was the larger problem.

     We have heard lots about the call for increased online education as a way to decrease the cost of undergraduate instruction; but that is not UC’s main cost problem.

     We have heard a lot about increasing enrollment of nonresident undergraduate students (which brings in more money). This tick’s off California taxpayers who feel that their own children’s access to UC is being closed. UC officials reply that they only admit nonresidents to fill “unfunded” seats. But since every undergraduate student now pays more in tuition than it costs UC to provide them a seat, there are no “unfunded” seats.

     So this is a big mess. Who is responsible?  At the top of any great university’s governance there is a Board of Regents/Trustees/Governors.  It is likely that many of those people are just incompetent – although the reason those people [usually big successful business magnates] are there is to provide sensible business guidance to the academic world. It is more fitting to blame the top level of academic administrators – Presidents and Vice-Presidents, Chancellors and most Vice-Chancellors – who know very well about the lies and distortions and the funny-money games that are being exposed here.

_ _ _ _ _

In recent years UCOP has promoted the concept of “Core Funds” in its budget documents.  These are defined as revenues from State General Funds (37%; state appropriations) and UC General Funds (13%: mostly Nonresident Supplemental Tuition + a portion of Federal Indirect Cost Recovery) and Student Tuition and Fees (50%:  gross revenues from Tuition + Student Services Fees + Professional Degree Supplemental Tuition). 

This is from page S-15 of the latest Regents’ Budget:

the University’s core instructional and research programs still rely primarily on the combination of State funds and tuition and fees. These core funds remain the foundation of UC’s academic program. Fully 97% of ladder-rank and equivalent faculty, for example, are paid on core funds.

Using the methods described in this paper, I have constructed the following (approximate) picture of how those Core Funds were spent in FY 2011-12.  This sort of information has never been published before.

INVITATION

I sent a draft of this paper to a number of colleagues, asking for their comments and criticisms. The responses led me to decide that a follow-up paper will be needed to explore a number of important issues. So, Dear Reader, since you have read this far, please accept my invitation to send me your own questions and challenges.