LOOKING INTO THE UC BUDGET -- Report #13 (e-mail version) by Charles Schwartz, Department of Physics, University of California Berkeley, CA 94720. 510-642-4427 September 11, 1994 SUMMARY A familiar adage of politics says that if you want to know the true priorities of the people in charge of some institution, disregard what they say but look closely at how they actually spend the money under their control. In this Report I examine principal features of the spending habits of the University of California. This study covers a period of fifteen years, with particular attention to the impact of the budget crisis over the last few years. In Part I the University's fiscal operation is divided into three sectors: the medical schools and teaching hospitals; all other academic functions; all administration and support services. The data presented here - all of it derived from official UC documents - shows that the pain of the current budget crisis has been carried most severely by the academic sector, while the medical sector has barely been scratched at all. This finding stands in contradiction to repeated statements by UC's leaders, who claim that administration has been cut the most while academic activities have been protected. The potential for re-allocation of the University's internal funds is huge: differentials between these sectors amounting to several hundred millions of dollars have developed during the last few years. In Part II the focus is narrowed to three core elements of the budget: Instruction, again separated into the health sciences and general academic portions; and Institutional Support, the central administration on each campus and systemwide. Here we see the same pattern of preference, with non-medical academic spending suffering the biggest cuts and administration being cut only slightly. In addition, we find a surprising pattern of discrepancies between the amounts of money budgeted for each category and the amounts actually spent by the end of each fiscal year. The medical sector and the administration always get a bonus while academic instruction gets cut; and this pattern of "adjustments" to the budget has become intensified during the recent difficult years. In summary, it looks like the real priorities of the Regents, who have full authority for the internal distribution of funds, fit the rule, "the rich get richer." A full public debate about the University's budget priorities is long overdue. INTRODUCTION How does one make a budget? The answer depends upon who you are. Individuals, families, small businesses, large corporations, governments and independent public institutions all have their own styles of finance management. For the University of California, and many other public institutions, it seems that each yearly budget is fashioned according to an incremental model. That means: look at last year's budget and apply a set of formulas that are supposed to lead, "rationally," to this year's budget. The increments are built upon three concepts: adjust the current costs of what you were doing last year (inflation); adjust for increased number of students, etc., according to some agreed-upon formula (workload increases); and ask for an augmentation to handle some new demands or initiatives. This is the bureaucratic model of budget-making. It is a "safe" model, by which I mean that its proponents do not have to answer hard questions: they do not have to justify the dollars that were appropriated in previous years. It is a model that invites the canonization of privilege and waste. This budget process has worked very well for the University of California during the past decades when state money was plentiful. But in the present and likely continuing climate of fiscal austerity one must question this simplistic habit and explore more thoughtful modes of budget planning. The purpose of this report is to build a new approach to the University's budgeting. While not working from scratch, this effort will: a) Examine the current pattern of expenditures in some detail; b) Look at the historical development of these patterns; and c) Seek to open up a full debate about priorities within the institution. This formulation of the budget- making process strongly challenges the traditional bureaucratic model. There will be conflict, and one can rightly call it political conflict, but it is time for this debate to come out into the open. PART I First, I separate UC expenditures into two primary components: Academic Functions - those directly performed by and managed by faculty and other academic staff, including support staff and services within the University's academic departments, libraries and research units; and Administration & Support Services - those performed by and managed by the campus or systemwide administrators and their staffs. This is analogous to the separation between direct expenses (production costs) and indirect expenses (overhead costs) in business accounting. Next, within the Academic Functions, I separate out the University's five Medical Schools and their associated Teaching Hospitals from all the rest. This is done because of the unique financial characteristics of this medical sector: the enormous amount of money that flows into the University's hospitals and clinics from the business of medical practice. (In its budgets and management practices the University regularly separates the Health Sciences from other sectors of academic functions. This larger definition also includes the departments of Dentistry, Nursing, Pharmacy, Veterinary Medicine, Optometry and Public Health and also the Neuropsychiatric Institutes. These other departments had $324 Million in expenditures for 1992-93; but I have kept them grouped with the Other Academic Functions in the tables below.) Table 1a gives the data I have collected for this study of the University's spending pattern over the past fifteen years. Note that the first three columns give data at five-year intervals, while the later columns are at one-year intervals. This allows us to see in greater detail what has happened during these recent years of California's budget crisis. For details about the sources, definitions and methods used in extracting this data, see Notes #1, #2 and #3 in the Appendix. Table 1a. UC Current Funds Expenditures - All Funds ($ Millions) 1978 1983 1988 1989 1990 1991 1992 1993 Med. Schools & Hospitals.... 603 1,080 1,794 1,981 2,239 2,523 2,677 2,822 All Other Acad. Fcns..... 797 1,279 2,040 2,166 2,377 2,495 2,551 2,602 Admin. & Support Svcs... 525 992 1,567 1,740 1,919 2,001 2,046 2,056 Ratio: Med/Other......0.76 0.84 0.88 0.91 0.94 1.01 1.05 1.08 The first thing one sees from Table 1a is that the expenditures in these three sectors of the University are of roughly equal magnitude - $2 to $3 billion for each of them in 1992-93. UC's five medical schools and their associated teaching hospitals have only 5 percent of all UC students, but they spend more money each year than all the rest of UC's academic enterprises combined. Furthermore, the last row of this table shows that this medical preponderance has been increasing over the years. Before proceeding with a further discussion of UC's budget priorities, we must note that this form of the data is not really what we want. The reason is that the data in Table 1a include a lot of "Restricted Funds", whose allocation is fixed by external entities and cannot be moved about by the University. Therefore, I have subtracted out all the Restricted funds; and in Table 1b are the Expenditures of Unrestricted Funds only. See Notes #4 and #5 in the Appendix for further details. Table 1b. UC Current Funds Expenditures - Unrestricted Funds ($ Millions) 1978 1983 1988 1989 1990 1991 1992 1993 Med. Schools & Hospitals.... 471 869 1,440 1,577 1,794 2,043 2,168 2,279 All Other Acad. Fcns..... 560 917 1,507 1,597 1,757 1,816 1,802 1,793 Admin. & Support Svcs... 512 971 1,544 1,715 1,888 1,964 2,012 2,022 Ratio: Med/Other......0.84 0.95 0.96 0.99 1.02 1.13 1.20 1.27 The general features noted in Table 1a are even more pronounced in Table 1b. The predominance of the medical sector and its rapid growth vis-a-vis the other academic functions is even stronger than before. The data from Table 1b is shown graphically in Figure 1, and here we can see most clearly what has been going on over these years. Figure 1. U. C. EXPENDITURES OF UNRESTRICTED FUNDS m = Medical Schools & Teaching Hospitals o = All Other Academic Functions s = Administration & Support Services $Millions 2300 m 2200 m 2100 2000 ms s s 1900 s 1800 mo o o o 1700 s 1600 om 1500 so 1400 m 1300 1200 1100 1000 s 900 om 800 700 600 o 500 sm 400________________________________________________________________ 78 83 88 89 90 91 92 93 FISCAL YEAR In Figure 1 we see that over the earlier 10-year period, fiscal years 1978 to 1988, all three sectors had expenditures of unrestricted funds of nearly equal magnitudes and they all grew at nearly the same rate - about 11% per year. (I regard the closeness of these three curves during that early period to be no more than a coincidence, which, however, provides a useful benchmark for measuring the later developments.) The most interesting part of Figure 1 is what has happened during the last few years, under the impact of California's budget crisis. The medical sector has just kept galloping ahead, its expenditures seem almost unaffected by the budget crisis. The administrative sector has leveled off, but still comes in second in this "horse race". The clear loser among these three sectors of the University is all the rest of the academic enterprise, which alone shows an actual drop in expenditures. These are very large dollar amounts when we measure the gaps between the three lines in Figure 1 at the latest year shown, 1992- 93. The administration sector got $229 million more than the non-medical academic sector; and the medical sector got $486 million more than the non-medical academic sector. Thus, over the last five years shown here, the non-medical academic sector has lost out to the rest of the University by an annual amount of over $700 Million. This data, showing the apportionment of unrestricted funds, is a clear manifestation of the actual priorities of the University's leaders. We can compare these facts with the proclamations frequently made by UC's President and his staff. They have repeatedly claimed that all sectors of the University share the pain of budget cuts, that administration has been cut the most, and that core academic operations have been protected the most. The data presented above contradict every one of those claims. PART II Now I turn to a more focused look at UC's finances. Instead of looking at all academic functions, I select only Instruction, leaving off Research, Public Service, Academic Support and Teaching Hospitals. This category covers more than just teaching: it is the very heart of the whole academic enterprise, including all of the salary for regular faculty members as well as their departmental support. This will again be separated into two portions: Health Sciences Instruction (medical schools plus the other departments listed earlier) and General Campus Instruction, which is all the rest (excluding University Extension and Summer Session.) Also, instead of all the support services covered in Part I, I now select only the category named Institutional Support, which covers the central administration on each campus and systemwide. Here, again, I take only the expenditures of unrestricted funds; but this time I do not include any Transfers of funds. With these definitions I can compare the expenditures data for these three selected categories from UC's accounting documents with the same categories of data given in UC's annual budget document ("The Regents' Budget"). I take the budget figures not as prospective budget proposals, but as already-approved budgets, following appropriation by the State Legislature and formal adoption of the current year's budget by the Board of Regents. This new data is presented in Table 2 and is also displayed in graphical form in Figures 2, 3 and 4 to facilitate analysis and interpretation. Table 2. Comparison of Budgeted Amounts & Actual Expenditures of Unrestricted Funds for Three Principal Categories ($ Millions) Fiscal GEN'L CAMPUS INSTR. HEALTH SCI'S INSTR. INSTIT. SUPPORT Year Budget Expend. Budget Expend. Budget Expend. 1978 297 271 130 138 92 103 1983 498 428 217 250 145 164 1988 877 729 371 416 252 294 1989 NA 779 NA 440 NA 331 1990 1,032 855 426 496 319 352 1991 1,093 898 447 516 318 376 1992 1,140 872 460 523 329 376 1993 1,063 867 468 540 292 367 Figure 2. U.C. FUNDS for GENERAL CAMPUS INSTRUCTION B = Budgeted Amount X = Actual Expenditure $Millions 1150 B 1100 B 1050 B B 1000 950 900 B X 850 X X X 800 X 750 X 700 650 600 550 500 B 450 X 400 350 300 B 250__X_____________________________________________________________ 78 83 88 89 90 91 92 93 FISCAL YEAR Figure 3. U.C. FUNDS for HEALTH SCIENCES INSTRUCTION B = Budgeted Amount X = Actual Expenditure $Millions 550 X 525 X X 500 X 475 B 450 X B B 425 X B 400 375 B 350 325 300 275 250 X 225 B 200 175 150 X 125__B_____________________________________________________________ 78 83 88 89 90 91 92 93 FISCAL YEAR Figure 4. U.C. FUNDS for INSTITUTIONAL SUPPORT B = Budgeted Amount X = Actual Expenditure $Millions 400 375 X X X 350 X 325 X B B B 300 X B 275 250 B 225 200 175 X 150 B 125 100 XB 75________________________________________________________________ 78 83 88 89 90 91 92 93 FISCAL YEAR First, let's look at the above data for Actual Expenditures in the three categories over these 15 years. For the first 10 years, 1978-88, they all grew at the rate of 10% to 11% per year, like the earlier data studied in Part I. Also, like the previous data, we see significantly different behavior among the three categories during the most recent years of the budget crisis: over the last 2-year period, 1991-93, General Campus Instruction has dropped by $31 Million, while Institutional Support has dropped by only $9 Million and Health Sciences Instruction has increased by $24 Million. Next, let's compare Actual Expenditures with Budgeted Amounts. In Figure 2 we see that the actual expenditures for General Campus Instruction fall below the amounts budgeted for that category. This discrapancy has grown sharply over the years, amounting to a gap of $196 Million in FY93. In Figure 3 we see that actual expenditures for Health Sciences Instruction exceed the amounts budgeted; and the gap rises to $72 Million in FY93. In Figure 4 we see that actual expenditures for Institutional Support (Administration) exceed the amounts budgeted; and the gap rises to $75 Million in FY93. One might ask, How can there be any discrepancy at all between the amount allocated in the budget and the amount actually spent? The University President is the person to answer that question in detail. I assume that these discrepancies represent an accumulation of "revisions" to the budget, approved throughout the fiscal year under the standing authority given to the President by the Board of Regents (and perhaps partially delegated by him to the Chancellors.) CONCLUSION The point of this study was to find out what the University's own financial records could tell us about the true priorities of UC's leaders. The lesson learned is very clear: while the great majority of the University's faculty, staff and students suffer serious financial hardships, the rich (the medical schools) get richer and the powerful (the administrators) protect themselves. The Regents, as legal custodians of this public institution, are fully responsible for this situation; these have been their priorities for the University of California. But it is also possible that they can be changed. It is worth observing how crucial it was in this study to separate the medical sector from the rest of academia. If they were left mixed together, the sharp distinctions seen in the tables and graphs of this Report would virtually disappear. APPENDIX - TECHNICAL NOTES NOTE #1 - SOURCE: The data in Tables 1a and 1b were gathered from the annual UC publication, "Campus Financial Schedules," published by the Office of Corporate Accounting in the University of California Office of the President. "1993" means the fiscal year July 1, 1992 - June 30, 1993. These data are expenditures of "Current Funds," that is, annual operating funds, as distinct from the University's Plant Funds, Endowment Funds, Loan Funds and Retirement Funds. NOTE #2 - CATEGORIES: These UC accounting reports categorize annual expenditures according to ten standard functions, which I have grouped as follows: "Academic Functions" = Instruction, Research, Public Service, Academic Support, and Teaching Hospitals; "Administration & Support Services" = Student Services, Institutional Support, Operation & Maintenance of Plant, and Auxiliary Enterprises. I have left out the accounting category Student Financial Aid. NOTE #3 - TRANSFERS: In the data for Administration & Support Services I have included the "Transfers" (recharges) in order to get a better representation of the total expenditures of this sector. This is open to debate since it may produce some double counting. For example, I would not include transfer amounts in the data for the Academic Functions - to do so would significantly exaggerate the figures for the Medical Schools & Hospitals, which make large transfer payments to each other. For the Administration & Support Services, I have, as a check, examined the data without transfers and find that, to a rather high degree of accuracy, it merely scales down the numbers by a constant percentage - that is, the qualitative interpretation and the comparison between the evolution of the different sectors remain unchanged. NOTE #4 - RESTRICTED & UNRESTRICTED FUNDS: In UC's accounting lexicon: "Unrestricted Funds" are UC moneys under the control of the Regents, to allocate as they see fit; this includes state General Funds appropriations, student fees and other UC incomes. "Restricted Funds" are those provided to UC by external sources for specified purposes (e.g., federal research contracts and grants, private donations and endowments given for a specified purpose) and cannot be reallocated by the Regents. Occasionally the term "private money" is used to designate UC funds which do not come from the state's appropriation (State General Funds) but from some private source (unrestricted donations given to the University to be used at the discretion of the President or a Chancellor.) All UC funds are, nevertheless, public moneys; the Regents administer the University of California as a public trust. NOTE #5 - FURTHER DISAGGREGATION OF UNRESTRICTED FUNDS: The accounting publications further detail two components of unrestricted funds: "General Funds" (mostly from State Appropriations) and "Designated Funds" (other incomes collected by UC and under the full control of the Regents.) This separation is significant when UC interacts with Sacramento, as in negotiating each year's appropriation from the State. However, the purpose of this Report is to study UC's internal budgeting priorities and here the distinction between different types of unrestricted funds is irrelevant. I can illustrate this point with a striking example, which I came upon in the Campus Financial Schedules. The Berkeley campus shows a total expenditure for Institutional Support (the campus administration) amounting to $57 million for 1992-93 and the same total amount for 1989-90. The "General Funds" portion of this expenditure was $34 million in 1989-90 but dropped to $4 million in 1992-93, while the "Designated Funds" portion rose from $19 million in the earlier year to $49 million in the recent year. The source of this dramatic shift can be found in Schedule 1-D: Student Tuition & Fees provided only $3 million for Berkeley's Institutional Support expenditures in 1989-90 but provided $39 million in 1992-93. What does this mean? Have we just uncovered a dastardly secret - that all of the money from the recently increased student fees has been grabbed by the Berkeley administration to feed their own bureaucracy? No. The explanation, I am sure, is that this was just a bookkeeping convenience, taking the student fee revenue handed down to Berkeley from the UC President's Office and parking it in this account. All this money is fungible, as the lawyers say. And that is the same thing I am saying: count all of UC's unrestricted funds together, regardless of their origin - and then see how they are spent.