LOOKING INTO THE UC BUDGET  --  REPORT #5         (e-mail version)

            A Few Personal Notes on the Regents Meeting

            ALTERNATIVE BUDGET PLAN for 1993-94

            WHITE PAPER from UC President Jack W. Peltason


A Few Personal Notes on the Regents Meeting at UC Riverside, March 18-19, 1993:

by Charles Schwartz, Physics Dept., UC Berkeley   3/21/93

I was allowed 3 minutes Thursday afternoon to present the Alternative Budget
Plan (10 pages, see below) to the Regents Committee on Finance.  This was time
enough only for a brief summary and an appeal for more time during their main
session on the budget, scheduled for Friday morning.  Then President 
Peltason handed out a White Paper (3 pages, see below below) responding to my
budget analysis and recommendations.

Early Friday, I asked President Peltason, and also the Board Chair, to allow me
time in the budget discussion to respond to their White Paper and present my
alternative proposals in depth.  They refused.

After President Peltason had presented his budget plan in detail to the Board,
Professor W. E. Brownlee, Chair of the Academic Council, spoke.  He said that 
the Academic Council was completely in support of the President's plan; he did
not even mention the Resolution passed by the faculty at Berkeley or the
responses from other Divisions of the Academic Senate that expressed strong
objections by the faculty to the President's plan.

After student leaders spoke to the Board opposing the fee increase, I
attempted to speak in support of the alternatives in my proposal; but security
guards, acting under orders, took me out of the room by force.

Listening to the ensuing debate and vote by the regents (via a speaker set
up outside the building) I was struck by the high degree of dissension in
that usually solid Board.

The one thing certain is that controversy over the budget will continue; and
I believe that more and more people must become actively involved in the
essential debate over UC's priorities.


TO THE REGENTS of the University of California, 
Meeting at UC Riverside, March 18-19, 1993

                ALTERNATIVE  BUDGET  PLAN  for  1993-94

           Submitted by Charles Schwartz, Professor Emeritus, 
                  UC Berkeley  (510)642-4427

                     SUMMARY  OF  RECOMMENDATIONS

CUT Upper Level Administration on each campus and at Office of the President 
by....$80 million. This amounts to under 10% of the current annual expenditure 
on upper level administration; and is half the cut proposed in my first draft 
proposal.  Much deeper cuts are called for but will be best administered after 
a thorough study of the UC administration by outside management experts.

CUT Executive Program Salaries by 25%,saving....$10 million.

*TAKE one-half of the UC Teaching Hospitals' accumulated "Excess Revenue"... 
....$105 million.  This resource was previously kept "off the table" but it is 
now an issue of UC's priorities. Much of this profit was a windfall; and the 
Hospitals have been heavily subsidized by the State.

*PUT a 5% UC surcharge/tax on "Sales and Services of Educational Activities." 
.....$25 million.  The administration should decide how best to apportion this 
among the affected constituencies.

*PUT a 10% surcharge on University Extension and Summer Session...$15 million. 
The administration should apportion this fairly between the Professional and 
General Programs.

* These are intended as temporary measures only, necessitated by the current 
budget crisis.

       TOTAL savings and new revenue provided by this Plan......$235 million.
 Along with this Plan, there is to be full funding of merit increases for 
faculty and staff.  There will be no general cut in salary or benefits, and no 
fee increase for students in 1993-94.  The $605 fee increase approved by the 
Regents in November should be rescinded - it was approved on the grounds that 
there were no alternatives, which is incorrect.


     This Alternative Plan arises from an independent study of the 
University's financial records and budgetary history.  A series of reports, 
"Looking Into the UC Budget - Report #1, #2, #2a, #2b, #3  and #4 " - as well 
as the first draft of this Alternative Plan (2/28/93) and the Update to it   
(3/15/93)  have previously been distributed to the members of the Board. 
Several criticisms from Office of the President staff have led me to modify 
earlier calculations and recommendations.

     In the body of this document I shall present the numbers and the 
reasoning that lead to the above proposal; but first we must clarify some 
general principles that underlie all this discussion, and note some 
fundamental challenges that have arisen from this independent investigation.

                                                          +++++ page 2

     Guiding Principles for the University in Time of Stress:
            QUALITY, ACCESS, FAIRNESS, and

First Priority: On-campus Teaching & Research; that means Faculty & Students

Second Priority: Staff working Directly in Support of Faculty & Students

Third Priority:  Essential Management & Services for Priorities #1 & #2

Last Priority:  Peripheral Enterprises, such as Hospitals & Clinics,
                University Extension, Weapons Laboratories

No Priority:  Waste & Featherbedding

                                                          +++++ page 3
Academic Senate, Berkeley

                         BERKELEY FACULTY
                          MARCH 8, 1993

At a meeting of the Berkeley Faculty called by Professor Michael B. Teitz,
Chair of the Berkeley Division, to discuss proposed budget reductions for
1993-94, the following Resolution was passed by a vote of seventy-five
(75) to one (1) with three (3) abstentions.

    This body of the faculty expresses the opinion that the 
    Administration has not demonstrated adequately why student 
    fee increases and faculty reductions in salary are necessary. 
    We ask that the Administration prove their case that these 
    are the only budget alternatives.
    We affirm as a principle that budget cuts should be made in 
    a way that will preserve the teaching and research functions 
    of the University.  We suggest the cuts be proportional to 
    the "distance from the classroom."
                                                          +++++ page 4

[graphic:from UC Office of the President, with an added arrow and comment]

FACT SHEET    University of California - Revenue


   The percentage of UC's operating budget derived from the state
is declining, but state funding still provides the core support
for academic programs and is the key to attracting other revenue.
Almost all other UC revenue is restricted to specific  -----------> NOT!
uses and cannot replace the shortfall in state funds. 

     Building programs are funded separately by bonds approved by voters 
and the state Legislature.  Revenue from these bonds cannot be used for
any other purpose.

                 HOW UC's FUNDS ARE RESTRICTED*

Funds earmarked for the general support of UC including teaching, research
and public service programs and activities mandated by the state 

TEACHING HOSPITALS                       $1.6 BILLION
Fees for patient services at UC's five teaching hospitals, which must
support the continuing operation of these facilities.

FEDERAL GOVERNMENT                       $1.1 BILLION
Funds from federal agencies, which are restricted to support specific
research projects and teaching programs.

STUDENT FEES & TUITION                   $638 MILLION
Fees support student activities, financial aid, health centers and 
libraries.  Tuition includes fees charged by self-supporting programs
such as UC Extension and summer session.

Funds generated by activities such as educational workshops, and the
treatment of patients at medical clinics.  Generally, the revenue is
returned to the department or unit to help defray their cost of operations.

Money collected from operations such as parking lots, student housing and 
dining facilities.  These funds must be used to support their continued

Funds from private foundations, groups and individuals, generally
earmarked for specific purposes.

ENDOWMENTS                               $79 MILLION
Income earned on funds donated UC and then invested.  In most cases,
donors specify how the income is to be used.

LOCAL GOVERNMENTS                        $61 MILLION
Funds received through contracts and grants to perform specific services
for local governments.  For example, UC San Francisco receives revenue
from the city of San Francisco to manage San Francisco General Hospital.

OTHER SOURCES                           $253 MILLION
Funds from sources such as publication sales, or fees charged for the use
of facilities and services.  Generally, the revenue is returned to the
department or unit that generated the funds to help defray their cost
of operations.

*Source: Corporate accounting, 1991-92 figures.

                                                          +++++ page 5


                      UC President Jack W. Peltason

     "We do not have many options.  Basically, we have to consider various 
combinations of workforce reductions and related enrollment reductions, salary 
actions, and student fee increases."
     -- speaking at the Regents meeting November 19-20,1992;from text page 21.

     "Everything is on the table.  No decisions have been made. Given the 
magnitude of the new cut combined with the cuts we've already taken, nothing 
can be ruled out."
     -- speaking at the Regents meeting January 15, 1993;  quoted in UC
        Focus, February/March 1993

     "We have only three basic options, although each of them can have several 
--  cuts to campus and Office of the President budgets, which translate to
    workforce reductions.
--  salary actions; and
--  fee increases."
     -- speaking at the Regents meeting February 18, 1993; from text page 15.

     "The only feasible way to increase the revenues is to increase the fees 
to students."
     -- speaking at the Regents meeting February 18, 1993; from the 
        Secretary's official tape recording.

     "A 5% salary reduction is proposed reluctantly, only as a last resort and 
only because at this time we do not have viable alternatives."
     -- ITEM FOR ACTION #502, For Regents Meeting of March 18, 1993; page 3.

                      Student Regent Alex Wong

     In light of California's budget crunch, Wong said he is not optimistic 
about the university's budget problems.  He fears that fee hikes, staff 
reductions and salary cuts may be the only options available to the regents.
     "There just isn't this hidden pool of money, it just doesn't exist," Wong 
said. "It's which poison do we want to take."
     -- The Daily Californian, January 25, 1993.

     "Unrestricted Funds" are those over which the Board of Regents has 
complete control as to how they are spent.  There are two sub-classes of 
unrestricted funds:
"General Funds," composed of the State's lump sum annual appropriation to UC, 
plus University contributions to the State's General Funds appropriation, 
according to prior agreements; and
"Designated Funds," all other income whose allocation is under the Regents' 
control: Student Fees, income from Teaching Hospitals and Clinics and other 
Auxiliary Enterprises, etc.
     "Restricted Funds" are those from an outside source, such as the Federal 
Government or private donors, where the purpose of the funding is specified by 
the donor.


Total = $7,393   General = $2,104   Designated = $3,693    Restricted = $1,595
                                                          +++++ page 6
                     DETAILS  BEHIND  THE  PROPOSALS


     In my Budget Reports #1- #3, I presented a study of the growth of UC's 
upper level administration, looking at FTE growth over a 25 year history, 
comparing this to growth in other sectors of the University and estimating how 
much appears to be excess bureaucratic accretion. The general theory behind 
this study is that which became so popularly understood through the work of 
the late C. Northcote Parkinson - whose recent obituary is presented on the 
facing page.

     What I call Upper Level Administration is System-wide and Campus-wide 
management and administrative services ("Institutional Support" in UC's 
accounting lexicon)  plus "Academic Administration" (Deans' Offices). This 
does not include administration at the level of Departments, nor such campus-
wide services as Operation & Maintenance of Plant, Student Services, etc.

     The total amount of Current Funds Expenditures for this Upper Level 
Administration, for the last complete fiscal year is  $951,954,000; and this 
can be broken down as follows: 
Salaries and Wages.....$424,949,000     Other Expenditures.....$527,005,000
(Data from Schedules B in "UC Campus Financial Schedules 1991-92"; see also 
Report #2, p.8)

     In February, Vice President Baker issued a report to the Regents 
containing a critique of my analysis of administrative growth and excess. I 
incorporated most of his complaints into a revised analysis; and in Report #2b 
I arrived at a (conservative) estimate that something between $209 million and 
$320 million in annual administrative expenditures represents excess and waste 
that should be got rid of.

     This study of mine does not, and cannot, pinpoint exactly where and by 
how much each office of the administration has become overgrown and wasteful.  
This is a macro study.  The micro study needs to be conducted by management 
efficiency experts - who are well known in the business world but rarely, if 
ever, set to work on our university campuses.

     I offer the modest proposal to cut this administrative expenditure by $80 
million (less than 10%) to help meet the immediate budget deficit; and to have 
the University engage outside management experts to ferret out the rest of 
the indicated excess.


     I shall not review the controversy which started a year ago, and has yet 
to die away. Here are a couple of new things I have found. 

     The Legislative Analyst's Report (February 1993, page F-37) presents data 
that shows UC faculty salaries have increased by an average of 80% over the 
last decade, while UC top executives' salaries have increased by an average of 

     In perusing the UC budget book, "1992-93 Departmental Allocations",  two 
line items under the Office of the President caught my eye.  They are labeled:  
Personnel Planning/ Executive Program  and Executive Benefits & Retirement 
Plan;  and they had combined allocations of 27 full-time-equivalent employees 
and a budget of $2.8 million.  This appears to be exaggerated executive 
vanity, which UC can well do away with.

     The UC Executive Program presently covers some 325 individuals with an 
annual budget of some $40 million.  I propose to cut this by 25%, yielding a 
savings of $10 million.

                                                          +++++ page 7

      The New York Times  OBITUARIES Friday, March 12, 1993

   "C. Northcote Parkinson, 83, Dies; Writer With a Wry View of Labor"
[highlighted exerpts]

"work expands so as to fill the time available for its completion"

He argued that administrators and executives tend to make work for each other, 
and that because executives prefer to have subordinates rather than rivals,
they create and perpetuate bureaucracies in which power is defined by the
number of subordinates.

No matter how much work is actually getting accomplished, Mr. Parkinson wrote, 
the number of workers in an organization would relentlessly expand at a rate
that he calculated, perhaps tongue in cheek, between 5.7 percent and 6.56
percent a year.

                                                          +++++ page 8


     After issuing the first draft of my Alternative Budget Plan, I learned 
that the five Teaching Hospitals operated by UC (connected to the Davis, 
Irvine, Los Angeles, San Diego and San Francisco campuses) have been running 
at a substantial profit.

         Excess of Revenue Over Expenses at UC's 5 Teaching Hospitals
1989-90  Net Gain        $ 56,994,000
1990-91  Net Gain        $ 59,142,000
1991-92  Net Gain        $118,370,000
1992-93  Net Gain        $105,184,000    (Projection as of 12/31/92)
Source:  Annual Reports of the five Medical Centers; Activity and Financial 
Status Report 2/8/93

     This surplus money is currently being kept by the Hospitals, accumulated 
as "Equity in Current Assets", with a total Balance of   $207,154,000   as of 
12/31/92. Its anticipated use is described in the UCD Medical Center Annual 
Report for FY92 as follows: "The net gain will provide for continuing infusion 
of funds to capital projects envisioned in UCDMC's strategic capital plan and 
continued accumulation of reserves to fund working capital."

     However, it is also true that this money is classified as  "Unrestricted, 
Designated Funds," which means that the Board of Regents has full 
discretionary control over the allocation of these funds.  Given the 
continuing severe budget crisis facing the University, it is necessary and 
proper to consider using part of these "excess" funds to alleviate the fiscal 
stress now placed upon the University's central academic mission and its 
primary obligations to the citizens of California.  It is a mystery to me why 
the UC administration has kept this option hidden until now.

     Traditionally, peripheral enterprises such as the teaching hospitals have 
been run on a "self-supporting" basis.  This was so that they would not drain 
away resources from core academic funding.  But why should money not flow the 
other way, especially in times such as these?  It comes down to a question of 
remembering that the university's first priorities are owed to its faculty and 
its students.

     In fact, the hospitals have never been self-supporting; they have always 
been significantly subsidized by State funds funneled through the Board of 
Regents.  In the last fiscal year, 1991-92, the UC hospitals spent a total of  
$57,075,000  in General Funds. Furthermore, the Medical Staffs of the 
hospitals are comprised of the faculty of UC's Schools of Medicine, which were 
supported last year by a total of  $200,367,000  in General Funds. (data from 
"UC Campus Financial Schedules")

     I propose that the Regents take $105 million - amounting to one-half of 
the present Balance of this "Equity in Current Assets" - and redirect its use 
from improving capital assets at the hospitals to saving the University's core 
academic program from further depredation in this budget crisis. This proposal 
replaces my previous suggestion of adding a surcharge to the hospitals' 


     This revenue category was identified in my Report #4 as providing UC with 
annual income last year amounting to $546 million in unrestricted funds, which 
the Regents have traditionally designated for various self-supporting 
enterprises serving outside customers; and I suggested adding a surcharge to 
help pay for UC's academic budget deficit.  I have not been able to get from 
the administration data showing exactly what all the components of these 
"Educational Activities" are; however, it appears that the great majority of 
this comes from a number of medical clinics attached to the university's five 
medical schools. (And, as I understand it, this is a revenue stream separate 
from the Teaching Hospitals' accounts.)  The graph on the following page 
illustrates the situation in its overall form.

                                                          +++++ page 9


Data from "UC Campus Financial Schedules 1991-92" Schedule 11-D ($ in millions)

Source of Funds                         Funds Expenditure by Function

General Funds ------------------------------($1,082)---->INSTRUCTION
Sales & Services of Educational Activities----($273)---->INSTRUCTION
General Funds --------------------------------($296)---->ACADEMIC SUPPORT
Sales & Services of Educational Activities----($167)---->ACADEMIC SUPPORT
General Funds----------------------------------($57)---->TEACHING HOSPITALS
Teaching Hospitals--------------------------($1,479)---->TEACHING HOSPITALS

These are all Unrestricted Funds (General Funds & Designated Funds).
This does not include Transfers of Funds.

                                                          +++++ page 10

     Income generated by these activities is generally returned to the 
department or unit to help defray their cost of operations; but it also 
provides substantial additional income to the medical school faculty members 
and some funds for various improvements desired at the medical schools. 

     The following table shows data for UC's five Schools of Medicine, as 
gathered from "Campus Financial Schedules", Schedules C:  components of 
Current Funds Expenditures ($ in millions)

                        General      Designated   Restricted
            Total       Funds        Funds        Funds         Transfers
1989-90    $ 996        209          353          435           110
1990-91    1,072        206          393          473           131
1991-92    1,138        200          432          506           141

     We see that General Funds expenditures have decreased in these recent 
years; and we know this has happened to all General Funds appropriations for 
UC's academic departments. However, we note that both the Restricted Funds 
(mostly Federal research contracts and grants) and the Designated Funds (this 
is what we are interested in as "Sales and Services of Educational 
Activities") have been increasing significantly.  And we see that these 
Designated Funds spent by the medical schools amount to a lot of money - $432 
million last year.

     The Neuropsychiatric Hospitals and Clinics operated by UCLA and UCSF are 
another significant peripheral enterprise.  Last year they spent a total of 
$67 million, of which $41 million was General Funds and $25 million was 
Designated Funds. (See "Campus Financial Schedules")

     I propose that the Regents take 5% of this $546 million revenue stream; 
this will provide $25 million to meet the current budget crisis of the  
University.  The UC administration will have to provide more detailed 
information in order to decide how much of this will be a surcharge on 
outside clients and how much will be a "tax" on the additional revenue now 
flowing exclusively into the medical schools.


     These are two more peripheral enterprises, identified in Report #4, which 
brought $155 million in revenue to UC last year.  Again, I propose to levy a 
surcharge on these external customers to help meet the University's deficit 
and save the core academic program.

     From "Campus Financial Schedules 1991-1992" Schedules C, I have collected 
details of the  Current Funds Expenditures (Designated Funds) by University 
Extension, as follows:

     Continuing Education
Professional Programs   $71,729,000
General Programs        $25,130,000
Unspecified             $ 7,137,000
     Other              $24,187,000

     I propose that the Regents levy an overall 10% surcharge on these 
activities, yielding new revenue amounting to $15 million to meet the budget 
crisis.  I would ask the administration to apportion this surcharge so as to 
hit the Professional Program customers (lawyers, business executives, etc.) 
much harder than those in the General Program and Summer Session.
 "White Paper" issued by UC President Jack W. Peltason, March 18, 1993

ADMINISTRATION:  Professor Schwartz puts together two budget
categories (Institutional Support and Academic Administration)
and refers to them jointly as Administration; assumes that
Administration represents the upper level of UC management; and
asserts that growth in this area has far outpaced growth in
Instruction (growth in students and faculty).

The fact is, to make a valid comparison, administrative
expenditures have grown in proportion to growth in the
University.  Over the 20-year period 1971-72 through 1991-92,
considering expenditures from all fund sources, administrative
expenditures declined slightly, dropping from about 12 percent of
total expenditures in the early years to about 11 percent in more
recent times.

Considering just General Fund expenditures (that part of the
University's budget which supports core instructional programs),
administration has accounted for about 11 percent of total
expenditures over the period.

Administration at UC includes a wide range of institutional
support functions such as accounting, audits, planning and
budgeting, contracts and grants administration, computer centers
and information systems, payroll and personnel services,
purchasing, police, environmental health and safety, facilities
management, and a myriad of other support activities in addition
to the President and Chancellors, Vice Presidents and Vice
Chancellors and the Regents' Officers.

Academic Administration, which Professor Schwartz also includes
in his definition of Administration, covers not only the deans'
immediate offices but also services to students in the area of
advising and employment, support for temporary academic staff,
and outreach programs to the community.

Administration serves the research and public service functions
as well as the instructional function.  Growth in administration
is driven not only by growth in students and faculty, but also by
growth in federal and private research funds, teaching hospitals,
and state and federal regulations in areas such as environmental
health and safety, collective bargaining, affirmative action,
handicapped access, and the California Environmental Quality Act
(CEQA).  UC has received virtually no funding from the State to
help address these relatively new and costly administrative

                                                     +++++ page 2
Growth in administration occurs, also, in response to mandated
requirements of governmental agencies to provide increased
accountability and reporting, stewardship and fiduciary
responsibilities such as auditing and institutional debt
management, and the need for a multi-campus, single university
system to provide the necessary coordination and guidance in an
increasingly complex operating environment.

Total administrative expenditures include salaries of people who 
are recharged to self-supporting operations such as UC's teaching
hospitals, UC Extension, and auxiliary enterprises such as
student housing.

upper level administration.

RESPONSE:  If "upper level administration" refers to Executive 
Management (President, Vice Presidents, Chancellors, etc.), a 10%
cut would yield about $10 million, not $80 million.  To get $80
million from a 10% cut requires an $800 million base.  To get 
such a base, one has to include (1) support services provided by 
payroll clerks, mail handlers, secretaries, computer programmers,
accountants, police, contracts and grants personnel, etc.; and
(2) over $400 million in recharges--meaning charges for services
provided.  If you cut the services provided, then there is no
recharge income.

As a result of recent budget cuts, campus and Office of the
President budgets for administration were cut by 5 percent in
1990-91 and again in 1991-92, for a total cut of 10 percent or 
$25 million.  An additional cut of 10 percent, or nearly $20
million, has been made in 1992-93; further cuts will be made in
1993-94.  UC is engaged in a full-scale review of administrative
activities in an effort to achieve further management
efficiencies throughout the University.

25%; yield $10 million.

RESPONSE:  UC must have highly capable executives in order to be
well managed and efficient.  Competitive salaries are necessary
for recruitment and retention of such individuals.  Executive
salaries have been frozen for three years in a row, even when
other employees received merits.  Salaries of UC Chancellors lag
14% behind the comparison group this year; the lag will be
greater next year when executives and others get a 5% pay cut.

                                                   +++++ page 3
hospitals' accumulated excess ($105 million) and use for general
budget purposes.

RESPONSE:  This fails to take the long-term picture into account.
UC hospitals have been in great financial difficulty in the past,
and will be again in the future given federal and state health
care reform efforts.  The three former county hospitals treat a
disproportionate share of patients supported by public programs
such as Medicare and Medi-Cal.  In the current year, for example,
even with special funds available from SB 855, UC hospitals will
be underreimbursed by over $150 million for care of Medi-Cal
patients.  The cost of patient care is especially high at
teaching hospitals which must continuously reinvest gains in
state-of-the-art equipment and modernization of facilities in
order to remain competitive in a dramatically changing
marketplace and at the academic forefront.  Based on what other
academic medical centers have historically generated, UC believes
it needs about a 7% gain for reinvestment purposes, a figure UC
has been unable to achieve until recent years and even then at
only some of its hospitals.  If money for reinvestment is taken
from the hospitals now, they will have to be bailed out later on.
UC operates the hospitals only for the purpose of supporting
teaching, research, and public service programs in the health

educational sales and services; $25 million.

RESPONSE:  Raising prices will not necessarily generate more 
income;  in fact, income may go down and the teaching program
could be harmed.  For example, patients in UC dental clinics
undergo long waits and tedious examinations in exchange for
inexpensive dental care.  If the cost goes up, UC could lose
patients who are essential to the teaching program.

Extension and Summer Session Fees.

RESPONSE:  There is, first, a policy issue whether it is
appropriate to use fees from these self-supporting programs for
general support of UC.  Secondly, it is not clear that raising
fees would necessarily generate more income; instead, fewer
students might enroll and income might go down.