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

by Charles Schwartz, Department of Physics, University of California
Berkeley, CA 94720.       510-642-4427	          April 12, 1993


     This Report examines the responses given by the Regents and top 
UC administrators to the Alternative Budget Plan presented to them at 
the Board's March 18-19 meeting (see my Report #5.)

     A detailed study and analysis is given of the objections raised at 
that meeting by Regent Frank Clark and by President Jack Peltason, 
along with some other responses.  Of particular interest is new data 
concerning the finances of UC's five teaching hospitals; and it is 
discovered that substantial amounts put aside for building projects 
are unrestricted funds that can be re-allocated to more urgent needs.

     The objections raised by UC's leaders do not survive a reasoned 
analysis; and the conclusion is that my Alternative Budget Proposals 
are indeed feasible. Thus, those proposals deserve much further 
consideration as a means to preserve and protect the University's 
most precious assets - its faculty and its students.

     The next round is expected to occur at the Regents meeting in May.


						April 12, 1993

President Jack W. Peltason
University of California
300 Lakeside Drive, 22nd Floor
Oakland, CA 94612

Dear President Peltason;

     Here is my latest work, Report #5a in the Series "Looking Into the 
UC Budget."  You will see that the Alternative Budget Plan has gained 
much strength and credibility as the result of my continuing research, 
including study of the criticisms which were leveled against it at the 
March Regents meeting.

     It is clear that the Regents' vote (12-7) in favor of your Budget 
Plan was just one step on a long and difficult journey of self-
examination for the University of California.  You were wise enough to
acknowledge that the further development of budget alternatives could 
lead to a revision of that approved plan; and I believe that my work 
provides the best immediate possibilities for avoiding the damage that 
paycuts and increased student fees will inflict upon the University.  
I hope that you will now begin to treat my proposals in a more 
constructive manner than you have in the past.

     When you visited the Berkeley Division of the Academic Senate on 
April 1, spoke about the University's fiscal crisis and answered faculty 
members' questions from the floor, I took the opportunity to put my 
perennial request directly to you.  I asked that you, or some expert 
staff that you might designate, meet in an open forum with me and others 
to discuss and debate in detail the alternative budget proposals that 
I have developed.  I said that such a public debate would be a win-win 
proposition:  if you should show that I am wrong, then that would 
increase support among faculty, staff and students for your budget plan,
and that would improve campus morale;  if, on the other hand, my 
proposals should be found worthwhile, then that would lead to a better 
budget plan, benefitting the whole University.  Although you said No 
to my request, the invitation remains open.

     In any case, I plan to attend the May Regents meeting; and I ask 
that you provide me the opportunity at that time to engage in 
substantial discussion with the Board on budget alternatives.

     In addition, I urge you to ACT IMMEDIATELY to sequester all 
Unexpended Plant Funds throughout the University. The reason for this 
request is that these cash accounts contain substantial amounts of 
"unrestricted" funds (see the data on page 6 of this Report.) Given 
the fiscal emergency facing the University, I think it is imperative 
that the Regents have the opportunity to consider re-allocating all 
or part of those funds to higher priority needs of the University, and 
this must be done before those moneys are spent on construction 
projects and the like.

						Sincerely yours,

						Charles Schwartz
						Professor Emeritus
cc: Regents' Chair Khachigian



     Since I entered as a novice into this study of the University's 
complex finances and budget, it is natural that my reports and proposals 
would be looked upon with skepticism, especially as they challenge the 
established expertise and authority of the UC administration.  Therefore 
it is essential that I pay close attention to each objection and 
criticism raised by the Regents, the President and their staff, 
studying their responses, going back to the basic sources of data, 
learning more about the subject, and modifying my own analysis and 
recommendations as facts or logic may dictate.  

     My previous Reports #2a and #2b (on the question of overgrown 
administrative bureaucracy) were of this kind,  each of them responding 
to a particular critique delivered from the Office of the President, 
and each of them leading to a stronger foundation for my continuing 
work on the budget problem.

     When the Board of Regents met March 18-19 to adopt a budget for 
the University's 1993-94 year, they were presented not only with 
President Peltason's budget plan - featuring further layoffs and fee 
increases, and a first-ever cut in salary for all faculty and staff - 
but also with my Alternative Budget Plan (see my Report #5) - featuring 
instead a substantial trimming of upper level administration, and new 
revenues to be extracted from UC's teaching hospitals and other 
peripheral enterprises.  No longer able to ignore this challenge, 
the University's leaders delivered significant responses; and here we 
shall examine those responses in detail.


     After my allotted 3-minutes to present the Alternative Budget Plan 
to the Regents' Committee on Finance, Regent Frank W. Clark, Jr., 
responded as follows to my proposal that the Regents take $105 million, 
approximately one-half the accumulated Excess Revenues at UC's five 
teaching hospitals, and apply these funds to alleviate the current 
budget crisis. [ I have transcribed his remarks from the official tape 
recording of the Regents meeting, which was provided by the Regents' 

	Regent Clark: "I'd like to make one response to you, Doctor, 
	and that is with regard to - and I think it is incumbent that 
	we let you know right at the outset that we have not hidden, 
	you use the word 'hidden,' any moneys with regard to the 
	hospitals.  There are serious, grave legal problems with 
	respect to your suggestion, and I am amazed that you have 
	not considered that in making this statement, and analyzed 
	those problems.  We will discuss those more in a few minutes 
	in the Hospital Governance Committee, the General Counsel will. 
	But I want you to know nothing has been hidden, and to make 
	the statement or the allegation that it has been is improper."

     Regent Clark is a lawyer, the senior partner in a major L. A. law 
firm,  a member of the Board of Regents since 1980, and Chair of the 
Regents' Committee on Hospital Governance for the past four years. I took 
his criticisms very seriously, and the following correspondence ensued.

						March 21, 1993
Dear Regent Clark;

     You raised an issue at the Regents' meeting  last Thursday 
afternoon which needs to be clarified.  During the meeting of the 
Board's Committee on Finance, I was allowed 3-minutes to present my 
Alternative Budget Plan for 1993-94.  You then criticized my proposal 
that some of the accumulated "Excess of Revenue over Expenses" at UC's 
five teaching  hospitals be taken by the Regents and redirected to 
alleviate the damage being suffered by the University's core academic 
program in the current budget crisis.
     As I heard you, you claimed that there were legal and fiduciary 
restrictions which made such a consideration impossible; and you chided 
me for not having looked into these matters.  I ask that you enlighten 
me in detail about these matters.  Please tell me precisely what laws, 
contracts, or other legal obligations stand in the way of my proposal.

						Sincerely yours,
						Charles Schwartz
						March 24, 1993
Dear Dr. Schwartz:

     In response to your letter of March 21, I did not seek to "chide" 
you, and I apologize in the event that you construed my comment to be 
anything but constructive.
     I was seeking by my comment to reaffirm to you and the public, the 
obligations of the Regents as fiduciaries of the Public Trust 
constituting the University of California, pursuant to Section 9 of 
Article IX of the Constitution of the State of California, to prevent 
any action to be taken by the Regents which would in any manner adversely 
affect the ability of the Regents to pay the present and future multi-
millions of dollars of bonded indebtedness of the hospitals of the 
University of California.
     I believe we can agree upon not only the foregoing, but in addition, 
the present potential impairment of that ability, due to the relatively 
high costs of operating teaching hospitals resulting from our dedication 
to medical research and teaching, in addition to patient care, that is 
resulting from efforts to control, on a national basis, the ever 
escalating costs of health care generally, and particularly teaching 
						Sincerely yours,
						Frank W. Clark, Jr.

     Given the force of Regent Clark's verbal challenge, I was astonished 
to see how little substance there was in his letter.  The only legal 
reference he gives is to the California Constitution; and here is what 
that document has to say about the relevant powers and duties of the 

     (a) "The University of California shall constitute a public trust, 
to be administered by the existing corporation known as 'The Regents of 
the University of California,' with full powers of organization and 
government, subject only to such legislative control as may be necessary 
to insure the security of its funds and compliance with the terms of 
the endowments of the university...
     (f) "The Regents of the University of California shall be vested 
with the legal title and the management and disposition of the property 
of the university and of property held for its benefit and shall have 
the power to take and to hold, either by purchase or by donation, or 
gift, testamentary or otherwise, or in any other manner, without 
restriction, all real and personal property for the benefit of the 
university or incidentally to its conduct... Said corporation shall also 
have all the powers necessary or convenient for the effective 
administration of its trust, including the power to sue and to be sued, 
to use a seal, and to delegate to its committees or to the faculty of 
the university, or to others, such authority or functions as it may 
deem wise. ..."

     This language gives the Regents enormously broad powers and does 
not inhibit them from undertaking the action I had proposed.

     Regent Clark's one specific issue is the ability of the Regents to 
pay the bonded indebtedness of the UC hospitals.  This is a legitimate 
concern, which required me to gather more detailed data and see exactly 
what are the amounts of money involved. Using the UC publication, 
"Hospitals and Clinics Statements, Financial Report, 1990-1991" as well 
as the five Medical Centers' Annual Reports for 1991-92, I have gathered 
the following summary data from the "Statement of Changes in Fund 
Balances" for the last three completed fiscal years.  These numbers 
are for the combined finances of all 5 teaching hospitals (at UCD, UCI, 

TABLE 1:  Selected Annual Changes in the Balances of the Funds:
		Equity in Current Assets

($ in Millions)
					1989-90    1990-91    1991-92
Excess of Revenues over Expenses
(Money Added to the Funds)		$  57.0	   $  58.9    $ 118.1

Appropriations for Plant Improvements
(Money Withdrawn from the Funds)	$  66.1	   $ 106.2    $ 105.0

Principal Payments on Long-Term Debt
(Money Withdrawn from the Funds)	$   8.9	   $  15.6    $  18.7

Balance at Year End
(Includes Depreciation, etc.)		$ 135.5	   $ 138.3    $ 173.3

     The entries in the first row above represent the Net Gain in the 
hospitals' annual operations; this is the "profit" that first attracted 
my attention as money that could be used to solve some of the 
University's budget shortfall.  The projected Excess of Revenues for 
the current fiscal year, 1992-93, is $ 105 million.  

     The entries in the last row of this table represent the Balance 
of this Equity in Current Assets. As of December 31, 1992, this 
Balance was $207 million, and this was the number I used in my 
Alternative Budget Plan - proposing to take half of this accumulated 
excess, or $105 million, to relieve the University's current budget 
shortfall.  My focusing on this Balance in the Equity in Current 
Assets fund has been criticized by Vice President Cornelius L. Hopper, 
who oversees UC's Teaching Hospitals.  Here is what he said on this 
subject at the Regents meeting on March 18: [transcribed from the tape 

	Vice President Hopper: "On the Balance Sheet,  I only want to 
	point out, with respect to Equity in Current Assets,  there has 
	been some misunderstanding as to what this really represents. 
	And I think the best way of pointing this out is to say that 
	this is the residual ownership that we have in Current Assets.  
	You take the Current Assets, you subtract the Current Liabilities,
	and then this gives you the Equity in Current Assets.  But 77% 
	of those are in Accounts Receivable, they do not represent cash. 
	These reserves are used to reduce the need for borrowing working 
	capital, to fund bottom line losses that are incurred from time 
	to time, and to support both current and future capital projects."

     I have tried to verify the numbers referred to by Vice President 
Hopper, taking data from the "UC Teaching Hospitals' Balance Sheet as of 
December 31, 1992," (See the Report from UCOP to the Regents dated 
February 8, 1993, Prepared by: Office of the Senior Vice President--
Administration) as follows:		($ in thousands)
	Total Current Assets....................$ 577,560			
	Total Current Liabilities...............$ 296,504
	Equity in Current Assets..............	$ 207,154
But these numbers do not add up the way Vice President Hopper says. 

     Nevertheless, I now believe that focusing on the Balance of this 
fund may not be the best way to approach the issue; and I shall instead 
concentrate on those items that surely represent "real money."  The two 
middle rows of Table 1 contain new and important information about the 
use of excess operating funds at the hospitals. 

     Entries in row two of the table show the amounts spent on 
"Expenditures for Plant Assets" plus "Cash Appropriations for Future 
Plant Improvements."  This is a large outlay - $105 million last year - 
used to expand and improve the hospital facilities; and this is money 
we now look upon for alternative use in meeting  the University's 
immediate budget crisis.  Additional amounts are expected to accrue 
from current and future Excess Revenues and will likewise be available 
for re-allocation to higher priority needs of the University.

     I also note that some of this hospital money, appropriated in the 
recent past,  now resides in "Unexpended Plant Funds" - with a balance 
of $73 million as of December 31, 1992 - and this money can still be 
re-allocated at the Regents' discretion to other uses.  [For the whole 
University, over $90 million was transferred from Unrestricted Current 
Funds to Plant Funds as nonmandatory discretionary allocations during 
the last fiscal year. See "U. C. Financial Report 1991-1992", page 9.]

     Row three in Table 1, finally, has the data we need to evaluate 
Regent Clark's concern: the obligation to repay the hospitals' bonded 
indebtedness.  What stands out is the relatively small magnitude of 
this item: the Principal Payments amounted to only 16% of the Excess 
Revenue last year.  (Interest payments on the Long-Term Debt come out 
of operating expenses, so they have already been taken care of before 
we get to this stage.) Furthermore, this third row in Table 1 includes 
Principal Payments for all  forms of Long-Term Debt at the hospitals, 
of which bonds constitute only one-half.

     From this data I conclude that Regent Clark's objection is of only 
slight significance.  The real issue is one of priorities: balancing the 
needs of the hospitals against the needs of the rest of the University.  
This balancing is, of course, the central duty of the Regents: and the 
priorities are determined not by legalistics but by the simple and 
clear recognition that UC's central academic mission outweighs all 
other concerns.

     Again, I emphasize that all of the amounts discussed above are 
"unrestricted funds", which means that the Regents have full authority 
to allocate them, or re-allocate them, "for the benefit of the 
university or incidentally to its conduct," in the words of the State 
Constitution cited earlier.


      In addition to Regents Clark's criticisms at the March 18 meeting, 
President Peltason distributed a white paper, entitled, "A Summary 
Response to Professor Charles Schwartz's Analysis of the University of 
California Budget."  The full text of that document was attached to 
my Report #5, and I have appended it again to this Report.

     The most significant things about President Peltason's white paper 
are what it does not  say.  Nowhere does it claim that any fact or 
figure given in my series of Reports is wrong.  Nowhere does it claim 
that I have misunderstood or misrepresented the budgetary and accounting 
rules that govern the University's financial planning and fiscal 
operations. Nowhere does it challenge the validity or internal logic of 
my analytical work - although at one point (which I shall mention below) 
it does express a different preference as to methodology.

     Very significantly, nowhere in his white paper does President 
Peltason claim that my Alternative Budget Proposals are beyond fiscal 
possibility or beyond the powers of the Regents to enact.  This tacit 
acceptance of the viability of my Alternative Budget Proposals 
represents a major retreat from the administration's former position - 
namely, that President Peltason's budget choices were the only 
available options.

     Finally, we come to the test: Are my budget alternatives actually 
feasible ?  In only two instances does the white paper suggest that my 
proposals may not work; and those, we shall see, are very weak arguments.

     What, then, is President Peltason's white paper really saying ?  
It says that the UC administration prefers its budget to mine.  The 
argument - most clearly seen in the case of the hospitals' excess funds - 
is one of priorities regarding which segments of the University of 
California need to be protected the most and which can be sacrificed 
first in this time of overall budget crisis.  

     The most satisfying words in this white paper are found in its last 
paragraph: "There is, first, a policy issue whether it is appropriate to 
use fees from these self-supporting programs for general support of UC." 
This is exactly the policy debate I have been trying to bring out onto 
the table of public discourse; and this is the policy debate that 
the administration has been trying to keep locked up behind closed doors. 
Now, let's turn to the individual arguments of the white paper.

     The long discussion of "Administration" is barely more than a 
rehash of the critique presented by Vice President Baker at the 
February Regents meeting.  In my Report #2b, all the issues raised 
there were thoroughly examined and the details mentioned in Baker's 
critique were incorporated by me in a revised calculation of the 
estimated excess in administrative bureaucracy.  The white paper does 
not even acknowledge this improved calculation - the results of which 
appear in Report #5 in the detailed support for my proposal to cut 
$80 million from administrative expenditures.

     The one new critique raised in the white paper has to do with what 
the accounting category "Academic Administration" covers beyond the 
nominal definition of "Deans' Offices."  There may be some technical 
issue to be resolved here, but the white paper gives no numbers to 
indicate whether this is a significant issue or an insignificant one.  
I have looked carefully through "Campus Financial Schedules 1991-92" 
for these items mentioned in the white paper; and what I found there 
leads me to estimate that this is at best a very small correction to 
my overall estimate of excess administration.

     There remains a disagreement about which methodology is the right 
one to use in measuring the growth of administration over many years.  
I count FTE's and compare their growth over time; President Peltason 
prefers to look at the fraction of dollars spent on administration, 
over time.  In my Report #2b I gave extensive arguments why I think 
my methodology is more valid.  Obviously, President Peltason is not 
persuaded.  I think that, on theoretical grounds, my argument is much 
stronger.  However, I will assert that neither side in this argument 
can prove it is correct by mere argumentation. Therefore, how should 
one choose which side to take ?   I answer that the call of prudence 
and fiscal responsibility is to seek vigorously to remove waste wherever 
it may be found.  Thus, I have called for an immediate cut of $80 
million, amounting to one-quarter of my estimated excess in the 
administration, and also a detailed study of the UC bureaucracy to 
be conducted by outside management efficiency experts.

     Throughout this continuing debate over whether and how much the UC 
administration has grown bureaucratically obese there is one thing that 
speaks loudly by its absence. (The dog that didn't bark.)  If the 
President were able to say, We had a team of independent efficiency 
experts scour the whole UC administration just x years ago and they 
gave us a clean bill of health, that would probably shut me up.

     My second recommendation was to cut Executive salaries in the 
University by 25%. President Peltason's response to this proposal is a 
restatement of the arguments which are all too familiar from last 
year's debate surrounding the Gardner scandal.  My only additional 
comment, admittedly a subjective one, is that I have not been much 
impressed, lately, observing the calibre of UC's top executives.

     President Peltason's response to my third recommendation - taking 
some of the hospitals' excess revenues - raises no objective obstacles.  
It is only an argument about UC's internal priorities; and apparently 
he is more devoted to protecting the hospitals' long term financial 
affluence than to saving the central academic functions of the University 
from immediate damage.

     In response to my last two recommendations - that UC raise 
revenues by a combination of surcharge and tax upon the operation of 
its medical clinics and Extension program - President Peltason's white 
paper offers the suggestion that raising prices might chase customers 
away and result in reduced income.  Here, as in many parts of the white 
paper, we are given no numbers, no informed estimate of the quantitative 
significance of the objection raised.  I was pleased to note that during 
the Board's budget debate on March 19, Regent Hall raised these very 
items and stated his opinion that the 5% and 10% surcharges proposed 
could indeed succeed.

     In conclusion, we see that this white paper presents no substantial 
evidence challenging the feasibility of my Alternative Budget Proposals. 
What this white paper does show us is a set of budget priorities for 
the University which put administrators, hospitals and other peripheral 
enterprises ahead of students and faculty.


"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 requirements.
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 

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 norecharge 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.
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 

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.