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 UCÕs 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 UCÕs true priorities
to proceed fully and fairly. Nothing less than the future of the University
of California is at stake.