LOOKING INTO THE UC BUDGET -- REPORT #5 (e-mail version) Contents: 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. INTRODUCTION 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 [graphic] Guiding Principles for the University in Time of Stress: QUALITY, ACCESS, FAIRNESS, and GETTING OUR PRIORITIES STRAIGHT 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 [graphic] Academic Senate, Berkeley RESOLUTION 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 WHERE UC GETS ITS FUNDING 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* STATE OF CALIFORNIA & GENERAL FUND $2.2 BILLION Funds earmarked for the general support of UC including teaching, research and public service programs and activities mandated by the state Legislature. 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. EDUCATIONAL ACTIVITIES $546 MILLION 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. AUXILIARY ENTERPRISES $486 MILLION Money collected from operations such as parking lots, student housing and dining facilities. These funds must be used to support their continued operations. PRIVATE GIFTS, GRANTS & CONTRACTS $360 MILLION 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 INCORRECT STATEMENTS ON THE U. C. BUDGET CRISIS 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 variations: -- 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. _______________________________________________________ DEFINITIONS USED IN UC's FINANCIAL SYSTEM "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. ________________________________________________________ BREAKDOWN OF UC's CURRENT FUNDS EXPENDITURES FOR 1991-92 ($ in millions) Total = $7,393 General = $2,104 Designated = $3,693 Restricted = $1,595 +++++ page 6 DETAILS BEHIND THE PROPOSALS I. OVERGROWN ADMINISTRATION 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. II. OVERPAID EXECUTIVES 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 148%. 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 [graphic] 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 III. HOSPITALS' EXCESS REVENUE 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' operation. IV. SALES & SERVICES OF EDUCATIONAL ACTIVITIES This revenue category was identified in my Report #4 as providing UC with annual income last year amounting to $546 million in unrestricted funds, which the Regents have traditionally designated for various self-supporting enterprises serving outside customers; and I suggested adding a surcharge to help pay for UC's academic budget deficit. I have not been able to get from the administration data showing exactly what all the components of these "Educational Activities" are; however, it appears that the great majority of this comes from a number of medical clinics attached to the university's five medical schools. (And, as I understand it, this is a revenue stream separate from the Teaching Hospitals' accounts.) The graph on the following page illustrates the situation in its overall form. +++++ page 9 [graphic] FLOW OF SELECTED FUNDS WITHIN UC Data from "UC Campus Financial Schedules 1991-92" Schedule 11-D ($ 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. V. UNIVERSITY EXTENSION & SUMMER SCHOOL 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 A SUMMARY RESPONSE TO PROFESSOR CHARLES SCHWARTZ'S ANALYSIS OF THE UNIVERSITY OF CALIFORNIA BUDGET 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 requirements. +++++ 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. PROFESSOR SCHWARTZ RECOMMENDATION: Cut $80 million or 10% from 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. PROFESSOR SCHWARTZ RECOMMENDATION: Cut executive salaries by 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 PROFESSOR SCHWARTZ RECOMMENDATION: Take 1/2 of teaching 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 sciences. PROFESSOR SCHWARTZ RECOMMENDATION: Add a 5% surcharge to 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. PROFESSOR SCHWARTZ RECOMMENDATION: Add a 10% surcharge to 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. ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________