by Charles Schwartz, Professor Emeritus, University of California, Berkeley                           September 1, 2003

>> This series is available on the Internet at

UC's Budget Crisis -- Some Unconventional Ideas

As California's financial situation worsens, the University's leaders are pressed to accommodate large budget cuts. While they claim to be looking at all options, in fact they simply take the easy road: slash peripheral programs, freeze salaries, fire low-caste employees, raise student fees, and threaten to limit enrollments. Here are five alternative ideas, in brief, that are based on real numbers and uncompromised by bureaucratic inertia.


1. Enrollment Caps
2. General Revenue
3. A  $B Slush Fund?
4. Cuts in Administration
5. Faculty Work - Teaching v. Research


     Suppose you are a member of the UC Board of Regents. You have the responsibility to make the hard decisions about how the University will cope with the severe budget shortage from the state. You listen to students and staff who come to the public microphone to plead their case of hardship; you offer words of condolence but you follow the advice laid out by the President and his staff. "We have no choice," is your familiar song. The prime directive, maintain quality and access, is now giving way to, we must sacrifice access in order to maintain quality. That sounds like an excuse to privatize this great public university.

     Here are some substantial alternatives. These ideas will not be popular with UC officials because they step on the toes of some high-caste people. The Regents have a moral and fiduciary duty, however, to see that all credible alternatives are honestly explored, not just pushed aside. You should direct the President and his staff to prepare detailed responses to each of the five pages that follow.

     Earlier papers on my website are referenced for further details on these ideas.

1. Avoid Future Cost Increases by Limiting Enrollments

     As proposed by UCOP* (see page 5 of COF** Item 503 at 7/16/03 meeting):

"The State currently provides about $9,000 for each new student. Phasing in a restriction of 12,000 enrollments over the rest of the decade could ultimately save $108 million a year in State funds.
"This could be accomplished in a number of ways. For example, UC-eligible students could be admitted by a specific campus but asked to attend the Community Colleges for their first two years of college, ..."
     That figure of $9,000 for each new student covers a broad set of UC expenses: the hiring of tenure-track faculty (at a standard student/faculty ratio) plus all the support staff and infrastructure apportioned for the multiple missions of professors at a research university.

     Disaggregating this bundle, I have previously calculated that the actual cost to UC for undergraduate instruction is around $3,000 per student per year. [See my paper, "Financing the University -- Part 5"] If you look at the first two years only, the cost will be significantly less.

     This plan for Enrollment Caps is economic idiocy: trading $9,000 in income for a saving of $3,000 (or less) in expenses, for each new student turned away.

     This plan also raises profound issues of public policy.

RECOMMENDATION: UC should abandon the "bundled" approach of costing and develop a disaggregated accounting of the actual operating expenditures for the major missions of the university. I suggest the following basic categories (after separation of expenditures for Health Sciences, extramurally funded research, Auxiliary Enterprises, etc.):

This will present a more honest financial picture to the state and the public. It will also let UC's policymakers be better informed in setting budget priorities.

* UCOP = University of California Office of the President
** COF = The UC Regents' Committee on Finance

2. Establish an Indenture for General Revenue Bonds

     This UCOP proposal (COF item 504 at the 7/16/03 Regents meeting) was approved without any attention to its implications for budget policy. It appears as a merely technical rearrangement of how UC finances its many capital (construction) projects. By gathering into a common pool many revenue streams that were previously treated as separate, it is expected to increase the University's debt capacity. Here is the scheme.
Table 1.  Proposed General Revenues  (in thousands of dollars; data for FY 2002)
Student tuition and fees, net $ 1,014,124
Scholarship allowances $    285,250
Indirect Cost Recovery from Contracts & Grants
   Federal $    416,693
   State $      15,639
   Private $      83,855
   Local $        2,545
Sales and services:
   Educatioonal activities $    849,446
   Auxiliary enterprises, net $    686,961
   Other operating revenues, net $    335,637
Total Operating Revenues $ 3,690,150
Total Nonoperating Revenues $    287,002
Total General Revenues $ 3,977,152

     This $4 billion pool is to be used to establish a new indenture to refinance existing debt of the University and to finance debt for new projects -- at a lower cost than with the former method, which used different revenues for different types of debt.

A PROBLEM: This use of Student Tuition and Fees is contrary to existing UC policy and practice. It also contradicts UC's public rationale for steep fee increases.

A NEW OPENING: If all these revenue sources are now a common UC fund (replacing the former concept of separate, self-supporting, activities), this allows consideration of new budget maneuvers, especially in the present crisis.

     Look at the second largest entry on the list: $849 million from Sales and Services of Educational Activities. Most of this (close to $500 million per year) is revenue from clinical practice in the medical schools, which is paid out to those faculty members on top of their regular academic salaries. The old rule was, "They earned it, they keep it." Now, the establishment of a General Revenue pool and the urgency of the University's budget crisis suggest a new kind of borrowing. For example, 10% of that $500 million could be used to restore most of the lag in all UC faculty salaries, which is cited as the greatest imminent threat to preserving the "quality" of the University.

3. Is There a $Billion Slush Fund?

     A couple of years ago, the clerical workers' union (CUE = Coalition of University Employees) hired an independent expert to examine the UC financial records and see if there were any hidden assets which might be put on the table for their discussion of wage levels. Peter Donohue, an economist, found some very interesting data, which CUE started circulating in late 2001. His most striking claim was that, over the past decade, UC had been accumulating a large cash balance of unrestricted funds, which now amounted to over $2 billion. ("Unrestricted" is precisely defined as money "which may be used in achieving any purpose of the University.")

     At the regents' meeting on November 15, 2001, one member of the board asked some administrators whether it was true that there is such an unrestricted pool of money. Vice-President Hershman replied, "It doesn't exist." Vice-President Broome "noted that over one-third of the current fund is legally restricted as to use" (quoting from the official minutes of that COF session.) In the University's Annual Financial Report for 2000-2001, on page 28, we find that the Current Funds account has an end-of-year balance of $3.242 billion, of which $2.100 billion is Unrestricted and $1.142 billion is Restricted. This shows that Hershman is wrong and that Broome, while truthful, is avoiding the question asked.

     The Annual Financial Report (same page) also shows Transfers Among Funds during that fiscal year. These are classified as "Mandatory" - showing $338 million of Current Funds going into Retirement of Indebtedness - and "Nonmandatory (discretionary allocations)" - showing $494 million in Unrestricted Current Funds going into various other funds, the largest amount to "Unexpended Plant Funds." The COF minutes add this from V-P Broome, "A significant amount of unrestricted funds are used to pay the University's debt service." This is accurate in describing the mandatory transfers, but again it avoids the question about a lot of other unrestricted money in discretionary transfers (for what purpose?) out of the Current Funds surplus.

     The Annual Financial Report for the following year, 2001-2002, uses a different accounting scheme, following new federal guidelines. Mr. Donohue has reported, after a study of that document, that UC's unrestricted net assets were $4.45 billion, $238 million more than 2000-2001's $4.2 billion, while those associated with UC "core activities" (education, research, public service) grew by $42 million over 2000-2001's $2.1 billion. (see for more info.) The UCOP position has remained that "all UC funds are 100% committed each year to its vast array of ... programs." (October 2002 HR Fact Sheet). I find UC's use of that word "committed" marvelously ambiguous.

RECOMMENDATION: The University should publish a detailed accounting of those fund balances and the transfers between them, showing the amounts of money "committed": when, for what purposes, and by whom.

4. Cuts in Administration

     During the difficult time of the early 1990s UC officials said, as they say today, that the pain of budget cuts was being widely shared throughout the University, with administration being cut most of all. Over several years I wrote about the fact that those promised cuts in administration did not appear in the published accounting reports of UC expenditures. At first I was told to be patient, the cuts were being phased in gradually. Eventually, however, it turned out that there had been little actual cutting of administrative spending (in the "Institutional Support" category that covers high level administration on the campuses and systemwide); there had merely been a switch in the revenue source used to fund that activity, replacing state funds with student fees.

     This old dispute is chronicled in, "Looking into the UC Budget -- Report #19", posted on my website. There one can also read (Report #19a) the debate over this subject with UC's top budget official. However, my analysis looks only at gross expenditures for administration and is not able to locate where there may be trimmable fat.

RECOMMENDATION: UC should bring in some independent business efficiency experts to look critically at administration spending and identlify possible savings.

      As a further stimulus for this recommendation I present the following table, which shows the lopsided growth in certain UC positions over the past six years.
Table 2.   Total University FTE of Employees (by categories) and Students
 10/1996  10/2002  % Change
Management (SMG & MSP)   3,380   5,713  +69% **
Academic Staff (top 5 categories):
   Regular Teaching Faculty - Ladder Ranks   6,778   7,743  +14%
   Lecturers   1,157   1,647  +42%
   Other Teaching Faculty   3,002   3,905  +30%
   Student Assistants   9,810 12,019  +23%
   Research   5,789   7,601  +31%
   Total Academic Staff 28,356 34,988  +23%
Professional & Support Staff (top 5 categories):
   Clerical & Allied Svcs 23,092 22,523   -  2%
   Fiscal, Management & Staff Svcs   8,750 14,706  +68% **
   Health Care & Allied Svcs 13,850 18,020  +30%
   Maintenance, Fabrication & Operations   6,094   6,723  +10%
   Sciences, Laboratory & Allied Svcs   5,642   6,589  +17%
   Total PSS 64,508 77,786  +21%
Total Student Enrollment (Year Average) 155,387 189,628  +22%

** These two categories of employment show much greater than average increase.

5. Faculty Work -- Teaching v. Research

     This is the most sensitive topic, one which faculty members react to in a visceral, rather than intellectual, way. The balance between research and teaching in the work of faculty members has enormous implications for the University budget; but it is mostly a topic outside the realm of discussion. The standard theory says that if the budget is cut too much and we are forced to increase faculty teaching loads, then our best (research) professors will leave UC for greener pastures. In my paper, "A Critique of UC's Planning for Tidal Wave II -- The Question of Cost" (posted as Part 1 of the series "Financing the University" on my website), I discussed this issue of "quality" in some depth. One myth that needs continually to be exposed is the significance of the "student/faculty ratio". Another one of the findings there was that UC's faculty teaching loads (in policy) are about 20% lower than those at our comparison institutions. Here is an update on that provocative issue.

     From the U. S. Department of Education, Office of Educational Research and Improvement, National Center for Educational Statistics, comes the report NCES 2002-209, "Teaching Undergraduates in U.S. Postsecondary Institutions: Fall 1998; Statistical Analysis Report," dated August 2002. That data may be compared with the University of California's April 2001 report, "Undergraduate Instruction and Faculty Teaching Activities," but only after some detailed adjustments and corrections are made to the published data. Following a lengthy correspondence with the people who had done the data analysis for NCES, I reached the following conclusion:
According to the best available data, faculty at the University of California teach undergraduate courses at an average rate which is lower than that at comparable institutions across the country, by around 30%.

     I wrote a detailed letter on this matter, at the beginning of this year, to UC's Senior Vice President for Academic Affairs, encouraging him to look into this data closely. It should be clear that the disparity in faculty teaching loads, shown by this new data, may have considerable budgetary consequences for UC. That letter got a polite acknowledgment, but nothing more.

     My earlier study showed how a modest shift in faculty effort to teaching could save billions of dollars in state appropriations over this decade - while still accommodating the expected enrollment growth and preserving the essential quality of the University. There is a cost to this: some reduction in overall research productivity; but that can be minimized. What is most important is how such a shift is carried out. Here it is paramount that it come, in an enlightened manner, from within the institution rather than being forced by crude economic/political forces from without. Leadership is the key.