LOOKING INTO THE UC BUDGET  --  Report #6      (email version)


  by Charles Schwartz, Department of Physics, University of California
  Berkeley, CA 94720.       510-642-4427	       October 1, 1993




                               SUMMARY 


This Report presents an EMERGENCY BUDGET PLAN for the University of 
California, designed to rescue this institution from the downward spiral 
produced by the recent budget policies of the UC administration.  Key elements 
of this plan - chosen to preserve the top priorities of Quality and Access - 
are:

*** Cancel the third VERIP (early retirement incentive program) for faculty.
*** Give all faculty a 10% pay raise, in addition to the general pay raises
 	recommended by the president for 1994-95.
*** Reduce student fees by $1,000 and promise no more fee increases for
 	the next two years.

Funds to provide for this Emergency Budget Plan are available to the Regents 
within the existing overall finances of UC.  This Report details the costs and 
the alternative resources available.  Key recommendations are:

* Cut excess bureaucracy in the UC administration.
* Cut executive salaries.
* Take some of the excess income of the UC hospitals.
* Take some of the business income of the UC medical schools.
* Put a surcharge on some UC enterprises serving outside customers.
* Reallocate some of the discretionary funds put into construction projects.


The first question is not, "Can this be done ?"  but rather, "Are the leaders 
of UC willing to give this alternative proposal a full and fair consideration ?"



                                 INTRODUCTION

     The following statement was presented to the UC Board of Regents at their 
meeting in San Francisco on September 23, 1993.  (They gave me 3 minutes to 
speak !)

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Why are you wrecking the University of California ?

     The shortage of state funds cannot be blamed for all the damage that has 
been done.  You, the Board of Regents, are responsible for deciding how the 
pain of budget cuts gets distributed within the University, and this is where 
you have done a terrible job.

     Two principles, defining UCs top priorities, have been recited and 
echoed throughout these budget debates: the principle of preserving QUALITY - 
which means the outstanding scholarly talent of the UC faculty - and the 
principle of preserving ACCESS - which means that all academically qualified 
students may get an education at UC, regardless of their financial 
circumstances.  But the budget policies you adopted in the last few years have 
inflicted their most serious damage on these two principles.

     What is the condition of the faculty after three years of salary freeze, 
a pay cut, and repeated early retirement incentives ?  That is a most 
important question.  Based upon what you, the Regents, are told by the 
officials who regularly report to you at this table, you would see a picture 
of the UC faculty as unhappy but accepting, working harder for less pay but 
still loyal to the university and supportive of the administration in these 
difficult times.

     I wish to show you another picture.  A great many faculty members, who 
still love and cherish this university, are disgusted with the UC 
administration, which they perceive as dominated by self-serving bureaucrats. 
They see your budget policies leading to the destruction of UC's academic 
quality, telling the older faculty members to go away into retirement and 
telling the best of the younger faculty to seek a more promising future 
elsewhere.

     Which of these two pictures is true ?  The answer is that they are both 
true; some faculty members see it one way, some see it the other way, and many 
see it both ways. A broad survey of faculty opinion on this question would be 
very revealing.  It is also important to recognize the psychological factor 
here: as faculty members talk with one another and share their opinions, the 
pessimistic outlooks are the ones most likely to be propagated and reinforced.  
What this means is that at some point there occurs what physicists would call 
a phase change:  the great majority of opinion coalesces around the 
pessimistic outlook.  When this happens, individual faculty members overcome 
their natural inertia, an exodus ensues, and the University of California is 
rapidly demolished as a first rate university.

     Thus, the budget policies you have chosen up to now could hardly have 
been more effectively designed to destroy the QUALITY of UC.

     When we consider student ACCESS to an education at UC, the same general 
situation appears.  By continually raising student fees you have created a set 
of barriers and fears among the students of California and their families.  It 
appears that UC is becoming more and more a place of privilege for the 
wealthier segments of society. The claim that higher financial aid cures the 
problem of higher fees is not true and it is not being bought by a great many 
Californians.  I trust you are aware of the recent news stories about 
California students, who previously would come to UC, now going to other 
states.  Here, again, the psychology of perceptions about this situation is 
very important.  Not only will growing numbers of students and their families 
become disenchanted with UC, but their elected representatives in Sacramento 
will also see less and less reason to support UC.  Here, again, a downward 
spiral, once begun, may lead to an accelerated fall that may be impossible to 
reverse.

     I started out by asking the question, "Why are you wrecking the 
University of California ?"  So far, I have only tried to show you that this 
wrecking-in-progress is the reality of what is happening to UC.  Why have you 
done it, Why have you chosen such a dangerously destructive path ?  That is 
easy to answer: You, the Regents, have simply followed the policy 
recommendations that were presented to you by the executives you hired to do 
that job: the president and the vice presidents and the chancellors.


What is to be done ?

     My purpose here today is not to dwell on blame, but to propose a remedy.  
This accelerating erosion of confidence in the future of UC can be turned 
around.  This will require that you, the Regents, make a fundamental change of 
course; this must be done dramatically and it must be done quickly.

     Let me outline a set of budget proposals for the next fiscal year, 1994-
95, that I think are the minimum steps necessary to save this university.  
These are short term measures - indeed, I would call this an Emergency Budget 
Plan - which will provide an opportunity to proceed with the necessary long 
term structural and programmatic changes that UC must work out.

*** Cancel the third VERIP (voluntary early retirement incentive program) for 
    faculty.

*** Give all faculty a 10% pay raise, in addition to the pay provisions 
    suggested by the president in July (half-year 5% COLA and merit increases.)

*** Reduce student fees by $1,000, which puts them back under the 10%-per-year 
    cap, and promise no more fee increases for the next two years.


     The money to fund these actions is available within the total financial 
resources of the University, funds which are under the Regents' control.  The 
series of reports ("Looking into the UC Budget") which I issued earlier this 
year provides the initial data and analysis to support these alternative 
budget options.  My earlier proposals were never seriously considered by the 
Board, and President Peltason rejected my many attempts to engage him in a 
rational and open debate on these budget alternatives.  Two "white papers" 
issued by the Office of the President to refute my data and proposals were 
studied in detail and led to an even stronger case for the validity of my 
analysis.

     I plan to present a detailed and updated proposal in support of this 
Emergency Budget Plan at the Regents' next meeting on the budget.  However, it 
is important for you, the members of the Board, to start right now responding 
to the challenge I have presented.  If you reject it or ignore it, then that 
sends out a message that you plan to continue on the same downward path.  If 
you can show some new enlightenment and a determination to change course, then 
UC has a chance to be saved.

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                COST OF THE EMERGENCY BUDGET PLAN

     In this section I estimate the additional funds that will be necessary to 
pay for the three elements of this Emergency Budget Plan.

Cancel VERIP III
     The Office of the President has provided a low estimate of 35% and a high 
estimate of 50% for the take rate among Academic Senate faculty members 
eligible for this generous incentive retirement program.  This translates into 
a gross salary savings between the limits of $74 million to $105 million per 
year.  Some of those vacancies will be refilled with lower salaried new 
faculty members, but no estimate of this number is given.  Therefore, I 
estimate that the net salary saving from Verip III, to be replaced by 
alternative funds, is in the range of  $50 million to $100 million.

Give all Faculty an extra 10% pay raise
     The total of UC faculty salaries amounts to approximately $550 million 
per year from General Funds.  Therefore, a 10% increase here requires  $55 
million.  

Reduce Student Fees by $1000
     To make up the net income from this source will require  $100 million.

      Thus the total cost of this Emergency Budget Plan is estimated to be in 
the range $205 million to $255 million.


                 ALTERNATIVE SOURCES OF FUNDS

     Here I shall recapitulate and update the results of my earlier budget 
studies (referred to as Report #2, etc.) and also add some new data on 
previously hidden resources under the control of the Regents.  The data I use 
all comes from public documents produced annually by the central accounting 
and budget offices of the University; and I shall not repeat here details and 
references that may be found in my earlier reports.  Numbers quoted are for 
the fiscal year 1991-92, unless specified otherwise; the University's data for 
1992-93 is not expected to be available until later this Fall.

Cut Excess Administrative Bureaucracy
 
    In Report #2 the growth of the UC administratiive staff was studied over a 
25 year history; and comparison of this with other growth rates - of 
instructional staff, students, total university staff -  led me to estimate 
that something of the order of $250 million in current annual spending was 
unnecessary and could be cut.

     The definition used for "administration" in this study covers the 
accounting category "Institutional Support" and the "Academic Administration" 
subcategory of "Academic Support."  This includes all the central 
administrative offices under the President and the Chancellors and the Deans; 
it does not include administration at the departmental level, nor does it 
include administration connected with student services, maintenance and 
operation of plant, auxiliary enterprises, hospitals, organized research 
units, etc.

     In Report #2a it was shown that 94% of the total expenditure for this 
Upper Level Administration came from "unrestricted funds," that is, money 
allocated entirely under the control and discretion of the Regents.

     A detailed critique of this study was issued by Vice President Baker in 
February; and I revised my analysis taking into account his specific claims - 
about newer administrative functions, changes in the accounting scheme, and 
the role of recharged services performed by the administration.  Report #2b 
gave the new result as follows:  out of a total annual expenditure of $951 
million for Upper Level Administration, it is estimated, conservatively, that 
between $209 million and $320 million is excess.

     Vice President Baker's critique contained an additional claim that has 
been cited repeatedly by UC officials to rebut my analysis and conclusions:  
the fraction of all UC expenditures which goes to administration has stayed 
nearly constant - at 11 or 12% - for the last 20 years.  This presents a 
completely different methodology, which I criticized at length in Report #2b.  
Nevertheless I have acknowledged that this argument -  over whether and by how 
much the UC administrative bureaucracy is overgrown - cannot be proved by 
either side using the bulk data available.  Therefore, I have repeatedly asked 
that independent outside management efficiency experts be brought in to 
evaluate UC's  administrative operations.  If this were done, it would not 
only settle the abstract argument but would also perform the constructive task 
of locating exactly where major savings may be made.

     In my Report #5 I recommended an immediate cut in administrative budgets 
by $80 million, amounting to about 30% of my estimate of the existing waste, 
while this thorough outside review is begun.

Cut Executive Compensation

     The elite of UC's administrators are classified as members of the 
Executive Program.  They number 341 at the latest count and they are paid a 
total of about $40 million per year.  It seems that almost everybody - aside 
from these executives and the Regents and their peers at other universities - 
believes that these people are greatly overpaid.  The main point is that a 
university, especially a public university, is a very different kind of 
institution from a private business corporation.

     I have suggested cutting executive pay by 25%:  annual saving of $10 
million.  I also noted, in Report #5, that a special bureaucracy has been 
built up to cater to the financial appetites of the Executive Program; and 
this costs several additional millions per year.

Surplus Income at the UC Hospitals
  
     In my Report #5 I noted that the five UC teaching hospitals were 
operating at a substantial profit in recent years.  The total amount reported 
as "Excess of Revenue over Expenses" was $118, 371,000 in 1991-92; and the 
latest report from the UC President's Office  puts this amount at $115,614,000 
for 1992-93.  I previously proposed that these funds should be put on the 
table for consideration in alleviating the budget damage being suffered by the 
rest of the university.  I now propose to take two-thirds of this surplus  - 
$75 million - for the Emergency Budget Plan.

     During the last budget session in Sacramento, UC was pressured by the 
Legislature to use some of these hospital profits to relieve the increase in 
student fees.  The UC President eventually agreed to advance $50 million from 
another source (the Short Term Investment Pool) and have this loan repaid by 
the UC hospitals from their "Equity in Current Assets" balance, which now 
stands at $201,614,000.  However, this loan is to be repaid over a period of 
15 years, so that the actual cost to the hospitals amounts to only $5 million 
per year -  a mere 5% of their annual profit intake.

Practice Income at the UC Medical Schools
 
     Report #5b discussed the clinical practice of medicine as a business 
enterprise conducted by UC's five Medical Schools; this is a major financial 
activity distinct from that of the teaching hospitals. It took me over four 
months to get the UC Office of the President (UCOP) to release the summary  
financial statements of the Medical School Fund Accounts so that we could see 
the exact amounts of money involved.  Table 1 presents a summary of this 
new data.

Table 1.   Financial Data on the UC Medical Schools Compensation Plans

                                            1991-92 Actual     1992-93 Est'd

INCOME: Subtotal Income.....................$ 437,144,552        429,510,755

EXPENDITURES:
   Administrative Costs                        59,716,216         66,422,939
   Faculty Compensation Plans (Sal's & Ben's) 215,207,588        230,724,289
   Program Enrichment:
      Other Salaries & Benefits                70,008,799         72,433,945
      Supplies, Expense & Travel               46,966,608         51,010,897
      Equipment, Facilty Improvements & Other  10,103,458         12,175,138
      
                  Subtotal Expenditures.....$ 402,002,668        432,767,206

BALANCES: Balance End of Year...............$ 151,748,200        140,808,263

Covers all UC medical & dental schools; data collected from reports provided 
by UCOP 8/11/93.
Subtotals do not include Interdepartmental Transfers of funds.
 
    This is an enormous amount of money flowing each year into the Medical 
Schools.  Looking at the 1991-92 figures we see:  total income of $437 
million; total expenditures of $402 million, divided among administrative 
costs ($60 million), compensation to Medical School faculty members over and 
above their regular academic salaries ($215 million), and the remaining $127 
million dispensed by the Deans within the Medical Schools for a variety of 
purposes categorized as "Program Enrichment." 

      (In my Report #5b I made estimates of this money using indirect sources 
of data.  My estimate of $450 million total expenditure was not too far off; 
my estimate of $150 million in costs was far too large and my $300 million 
estimate for faculty compensation was also excessive.  The biggest surprise in 
these authoritative numbers is the large amount, $127 million, left to be 
spent at the Medical School Deans' discretion.)

     It has been the custom to keep all this income within the Medical 
Schools.  My suggestion is to take a portion of this money to alleviate the 
general fiscal suffering of the rest of the university.  These are all UC 
funds and the Regents have the power to allocate them as they see fit.  I 
assume that these moneys are being put to good use at the Medical Schools and 
depriving them of some of this money will hurt; but other parts of the 
university are already hurting much more from a lack of funds.  So this is a 
matter of balancing the diverse needs of different parts of UC, i.e., it is a 
matter of priorities.

     In the current dire situation at UC, it seems reasonable to ask that one-
half of the Medical Schools' income from its business of medical practice be 
placed on the table for discussion of the entire UC budget;  and I propose 
that $100 million, which is less than one-half of this one-half, be 
appropriated for the present Emergency Budget Plan.

     The data provided by UCOP does not detail the income and distribution on 
a department by department basis. Nevertheless I was able to find some 
indication of the wide range of payments made to individual faculty members at 
UC's medical schools.  The report from UCLA identified a group of 51 Medical 
School faculty members who received total compensation of $23,905,993 in 1991-
92, an average of $468,745 each; and the estimated income of this group for 
1992-93 amounted to over $550,000 each.  

Other Outside Business Incomes to the University
 
    In Report #5 I proposed placing a surcharge on University Extension (total 
income of $131 million) to raise additional income for the UC general budget.  
This should be selectively applied to those customers most able to afford it; 
and I noted that the largest portion of this income came from its Professional 
Program, serving lawyers, business executives, engineers, etc.  A surcharge of 
10% -15% could produce a net revenue of about $10 million.

     The UC income category called "Sales and Services of Educational 
Activities" provided a total income of $546 million.  The largest component of 
this is the Medical Schools' activity discussed above; but additional 
revenues, totaling just over $100 million, come from various other sources 
that I would ask the UC administration to identify and consider for additional 
surcharges.  There might well be another 
$10 million easily raised here.

Reallocate Some Construction Funds

     The extensive building projects under way on many UC campuses have led 
many to ask why that money now going into concrete can't be used instead to 
help people, the students and the employees of UC who are now suffering under 
the budget crisis.  The administration's answer is that building funds are 
restricted to that purpose - coming from bond issues and earmarked private 
donations - and cannot be redirected to other uses.

     This answer is only partially true.  A significant amount of unrestricted 
university funding is regularly put into construction projects and other 
capital improvements.  Table 2 presents some new data I have collected, 
showing the yearly transfer of discretionary funds out of Current Funds (that 
is, the annual operating budget of the university) into Plant Funds  
(construction, etc.), as well as into Loan Funds and Endowment Funds that UC 
maintains as distinct financial accounts.

Table 2.  Transfers Among UC Funds:  Nonmandatory (discretionary allocations)
($ in Thousands)

               From Current Funds       To Plant     To Loan   To Endowment & 
Fiscal Year  Unrestricted  Restricted   Funds(net)   Funds     Similar Funds

1987-88     $ 159,056       12,817      153,741       1,649      16,483
1988-89       117,731       15,999      130,355      -1,831       5,206
1989-90        94,996       31,776      119,452        -576       7,896
1990-91       163,199      -32,595      120,826      -1,840      11,618
1991-92        98,536       40,744      131,191          44       8,045

Source:  "The University of California Financial Report," Table: "Changes in 
Fund Balances."

     From this table we see that an average of over $100 million per year in 
unrestricted funds has been transferred - at the discretion of the Regents - 
to construction projects.  If the Regents chose, in the past, to put that 
money into those other funds, then they can also choose to retrieve them now.  
From this data, we see that something like $100 million could readily be held 
back to meet the Emergency Budget Plan.  If need be, it could also be argued 
that larger amounts should be taken back, as a retrieval of transfers made in 
previous years.


                            CONCLUSION

     I have shown that alternative sources of new and reallocated moneys are 
available to provide at least $385 million, which is substantially more than 
the amount needed for the Emergency Budget Plan outlined above.

     None of this money comes free. The champions of those sectors of the 
University which are being asked to give up some of their cash will argue 
their need to keep it.  The rest of the University - which is now suffering 
the brunt of the budget cuts - will have to argue that their needs are 
greater.

     What I have done here is to demonstrate that there are alternatives, 
viable alternatives, to the narrow track of budget choices that the UC 
President and the Chancellors have chosen up to now.  It is the obligation of 
the Regents to open up the table and invite the debate on UCs true priorities 
to proceed fully and fairly.  Nothing less than the future of the University 
of California is at stake.