LOOKING INTO THE UC BUDGET  -- Report #7a       (e-mail version)

by Charles Schwartz, Department of Physics, University of California
Berkeley, CA 94720.        510-642-4427         January 26, 1994


The UC administration has now given a detailed restatement of 
President Peltason's claim, made last year,  that the budgets for 
administration had already been cut by about 20%.  My Report #7, 
based upon UC's latest available budget and accounting documents, 
showed a 7% increase in spending for administration throughout the 

The new letter from UC's Office of the President, which is 
reproduced and analysed here, concludes that overall spending for 
administration was reduced by 2.75% over the last three fiscal 
years.  Thus, it is proven true - although not formally acknowledged
- that the President and his staff have been grossly exaggerating 
the extent of budget cuts applied to the UC administration.

A closer examination of the letter reveals further inconsistencies 
and contradictions, which, when corrected, lead to the conclusion 
that total administrative expenditures have not been cut at all over
this period, but have actually increased by a few percent.

The explanation is offered that the larger cuts in administration 
(20% or more) have been assigned for the future but have not yet 
been implemented.  Available data, however, fail to support even 
this weaker premise.

The official contradictions and dishonesty documented here further 
undermine the credibility of UC's leadership, which is so vital in 
this period of financial crisis. Some pertinent suggestions are 
offered to President Peltason for the task of rebuilding that trust.

                                                   January 14, 1994
Dear Professor Schwartz:

I write with reference to your October 7 letter to President 
Peltason as well as your November 28 "Report #7," both of which 
concern the University's administrative budget.

Let me point out, first, that the figures you cite include three 
major expenditure categories that we do not believe are appropriate 
to include in any analysis of "administration" as commonly 
understood.  These Institutional Support expenditures total $36.6 
million in 1992-93 and are discussed below.  An attached table 
displays annual expenditures in each category for the period 1989-90
to 1992-93.

  o   Payments to inventors under the University's patent program 
      totaled $15.1 million in 1992-93.  These payments were 
      previously recorded as an offset to income (and were so 
      recorded in 1989-90).  They were shown as an expense in 
      1992-93, however, in order to streamline the recording of 
      payments.  These funds do not belong to the University and are
      merely passed on to inventors through the University's records.

  o   Liability insurance accounted for $12 million of expenditures 
      in 1992-93, representing the systemwide cost for coverage 
      above the University's self-insured limit.  This cost might 
      more appropriately be assigned on a pro-rata basis to every 
      activity within the University including instruction, research,
      and public service.  We are, in fact, considering changes in 
      the way this expenditure is reflected in the financial 

  o   In 1983-84 and again in 1989-90, the State of California 
      deferred payments to the University for current-year employer
      contributions to the University of California Retirement 
      Program (UCRP) and requested that the UCRP lend itself the 
      funds due. At the same time, the State agreed to repay the 
      loans over a 30-year period with interest.  The interest 
      payments, amounting to $9.5 million in 1992-93, are provided 
      through a yearly appropriation of State funds and paid into 
      the UCRP.  Clearly, these payments do not relate to the 
      University's administrative expenditures.

The above three expenditure categories are included under 
Institutional Support in conformance with national accounting 
classification standards for universities.  They are not, however,
relevant to a discussion of "administration."  Adjusting for these 
expenditure categories presents a different picture of University 
administrative expenditures than the one portrayed in your "Report 
#7."  Looking at all fund sources combined, the same Financial 
Schedules utilized in your analysis show that administrative 
expenditures for the total University have not increased and, in 
fact, dropped by 2.75% between 1989-90 and 1992-93; a comparison of 
1992-93 with 1991-92 shows a decrease of 7.26%.  These reductions
have been achieved even after funding increases were provided for 
salary cost-of-living and merit increases and price increases.

We disagree with your representation in other respects as well.  For
example, the cost of academic administration (such as costs related 
to Deans' offices) is directly related to and essentially 
inseparable from academic programs.  In accordance with nationally 
prescribed accounting standards, the University appropriately 
classifies academic administration as Academic Support and not 
Institutional Support.

More generally, let me note that your data end with the 1992-93 
fiscal year and, therefore, do not reflect decisions being made in 
the current year--and decisions that will have to be made next year
--as campuses struggle to cope with the cumulative burden of budget 
cuts that will total about 20% or $433 million by 1994-95.  There is
typically a lag time between assignment of a budget cut and clear 
evidence of its impact on expenditure patterns as shown in the 
Financial Schedules.  This is particularly true with respect to 
recent reductions in the University's budget which were deeper and 
continued longer than anyone foresaw at the beginning. We attempted,
at first, to solve the problem with short-term temporary measures in
the hope and expectation that the situation would improve.  Later, 
we utilized one-time measures such as the salary reduction in 
1993-94 to give us time to identify permanent measures.  We are, of 
course, well aware that our losses will generally not be recouped 
and we are in the process of phasing in permanent solutions to the
problem of a reduced resource base.  We do not expect the budget 
cuts to be fully implemented until 1994-95.

All of the campuses report that administration has received 
disproportionately heavy cuts, and this is true for the Office of 
the President as well.  The real issue is whether administration is
reduced as a percentage of total expenditures.  We have previously 
pointed out to you that administrative expenditures, as a percentage
of total expenditures, have held steady at around 11 percent for 
many years and based upon the actions taken, will be declining in 
future years.


                                   Larry Hershman
                                   Associate Vice President and 
                                   Director of the Budget

                    FOUR-YEAR COMPARISON          [$ in Thousands]

CATEGORY                 1989-90     1990-91     1991-92     1992-93

Patent Expense               --          --          --       15,125
Liability Insurance       $6,714      $9,077      $9,338     $11,985
UCRP Interest Expense      5,024       9,791       9,672       9,543
TOTAL                    $11,738     $18,868     $19,010     $36,653


UC System Total          $369,665    $393,877    $394,345   $384,722
Less: Above                11,738      18,868      19,010     36,653
Adjusted Total           $357,927    $375,009    $375,335   $348,069

1989-90 to 1992-93        -2.75%
1991-92 to 1992-93        -7.26%

PATENT EXPENSE for years 1989-90 through 1991-92, included only the 
legal expenses incurred on behalf of the UC patent program; for 
1992-93, payments to inventors totaling $15,125,000 were also 
recorded in this account.
LIABILITY INSURANCE represents premium costs for the entire UC 
UCRP INTEREST EXPENSE represents interest charges incurred 
as the result of two deferred contributions by the State to UCRP in 
1983-84 and again in 1989-90.
NOTE: None of the above expenses are recharged to the campuses.

                           ANALYSIS  I

     Associate Vice President Hershman concludes in his letter that
the change in UC's expenditures for administration over the three-
year period 1989-90 to 1992-93 amounts to a decrease of 2.75%.  By
contrast, the previous statement by President Peltason claimed a 
total cut of some 20% for this same period:

 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
 *   "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."  -  J. W. Peltason, 3/18/93         *
 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

     This claim was what I questioned in my October 7 letter to 
President Peltason and what I examined further in my Report #7.  
This is no small quarrel; rather, it is key to the credibility of 
the President's declared principle of "sharing the pain" in these 
financially difficult times for the University of California.

     Now, even accepting all the numbers in Hershman's letter, we 
see that there is a huge discrepancy - between the 20% advertised by
Peltason and the 2.75% given by his Budget Director.  The Office of
the President thereby tacitly admits that they have exaggerated the 
cuts in administration by a factor of 7 !

     Perhaps Hershman's goal was merely to establish that 
administrative spending was reduced and not increased, as I 
concluded in my Report #7.  A closer study of the matter, however, 
reveals that even this narrow conclusion is spurious.

                          ANALYSIS  II

     The criticisms Hershman raises concerning my Report #7 have to
do with choosing a definition of what ought to be covered by the 
term "administration."  I have no interest here in arguing with 
Hershman over what is the "correct" definition; I only asked (in my
October 7 letter to President Peltason) that he define and justify 
the claim he made in the boxed quote above.  Hershman has now 
provided a definition that is based upon expenditures for 
Institutional Support as given in the UC accounting document "Campus
Financial Schedules."  This was one of the several options which I 
had laid out in my Report #7 and thus we have a firm starting point
of agreement.  Now we proceed to debate the details.

     Hershman says one should not include "academic administration"
(Deans' Offices). I think one ought to include this in 
"administration"; but I'll go along with Hershman on this - after 
all, it is his task to explain and justify the boxed claim by 
President Peltason.

     Hershman says that three categories of expenditure included in 
Institutional Support should be subtracted out.  I accept his point 
concerning patent expense, where there was a change in bookkeeping 
rules during this three-year period.  I am doubtful about his points
concerning liability insurance and UCRP interest expense, since I 
think he should follow consistently the bookkeeping rules that UC 
has set up. Nevertheless, I shall, for now, allow Hershman all these

     Now we come to a key issue of definition which Hershman does 
not discuss explicitly in his letter: Should one include or exclude 
the numbers for recharges (transfers of funds) when counting the 
expenditures for administration?  This makes a big difference.  The 
data given by Hershman are the figures without recharges.  
Fortunately, there is no need for me to engage in an argument here
with Hershman, since higher UC officials have already given this 
question a definitive answer. Vice President William Baker 
(Hershman's immediate superior), in his February 14, 1993, report to
the Board of Regents, stated authoritatively that one should include
recharges in counting overall UC expenditures for administration. 
And that report by Baker also contained the first statement of the 
claim, displayed in the box above,  regarding administrative cuts 
over the past three years. [See my Report #2b for the full text of 
Baker's document.]    Furthermore,  Baker's definition is implicitly
reaffirmed in Hershman's current letter when he states, in his last
paragraph, "We have previously pointed out to you that
administrative expenditures, as a percentage of total expenditures, 
have held steady at around 11% for many years..."  There is no way 
to arrive at that figure of 11% without including recharges in 
Institutional Support.

     Thus, I generously allow all three of Hershman's specific 
subtractions; but I insist that he remain consistent with the 
previous definition given by Office of the President for what 
constitutes expenditure for administration.  Here, in Table 1, are 
the figures for UC expenditures for Institutional Support, including
recharges, for each year in question, (see Table 2 in my Report #7)
along with the corrections given by Hershman.

Table 1. UC Institutional Support Expenditures - Including Recharges

($ in Millions)     1989-90     1990-91     1991-92     1992-93

UC System Total      $758.2      $793.1      $810.8      $809.3
Less: Corrections      11.7        18.9        19.0        36.7
Adjusted Total       $746.5      $774.2      $791.8      $772.6

     From Table 1, we see that the three-year change in the adjusted
total is an increase amounting to 3.5%.  Before Hershman's 
corrections, these figures showed an increase of 6.7%.  Hershman, in
his letter, makes the point that there is a 7.26% decrease in 
administrative expenditure if one looks only at his data for the 
last year, comparing 1992-93 to 1991-92. Using the data in Table 1,
however, this select comparison yields a mere 2.4% decrease.

     Thus, no matter how you slice it, the conclusion is the same: 
President Peltason's claim of a 20% cut in administration is 
completely contradicted by the data.

     I should add the following note.  In my Report #7 I also looked
at the data on administrative expenditures for each individual UC 
campus. Hershman's corrections apply only to the data for UCOP and 
do not change the results for any of the nine campuses.  The 
campuses showed three-year changes in administrative expenditures 
ranging from a decrease of 3% to an increase of 24%.  Thus, I must 
express the greatest skepticism about the statement in Hershman's 
letter (last paragraph): "All of the campuses report that 
administration has received disproportionately heavy cuts, ..."

                         ANALYSIS  III

     Hershman, in his letter, tries to find an escape route around 
the contradictions pointed out above:  "More generally, let me note 
that your data end with the 1992-93 fiscal year and, therefore, do 
not reflect decisions being made in the current year--and decisions 
that will have to be made next year...There is typically a lag time
between assignment of a budget cut and clear evidence of its impact 
on expenditure patterns as shown in the Financial Schedules."  In my
Report #7 I considered this hypothesis of a delayed action [see 
pages 4-5] but found that the data still could not be made 
consistent with President Peltason's claim.  The inclusion of 
Hershman's corrections does not substantially alter that result; nor
does Hershman offer any data in support of his suggestion that the 
20% cuts promised will be effective this year or next year.  Indeed,
the official UC document "1993-94 Departmental Allocations" shows 
prospective budgets for the current fiscal year in which allocations
for administration (categories 66 plus 72, with recharges) drop by a
mere 1.4% from those of last year.

     The real issue goes beyond numbers and has to do with the clear
meaning of words and the honest conveyance of facts.   My query and 
study were focused on President Peltason's statement quoted in the 
box.  That statement is clearly about decisions made and actions 
taken in the years up to and including 1992-93. For Hershman to now 
start talking about "decisions being made in the current year--and 
decisions that will have to be made next year," is pure obfuscation;
and this only serves to further undermine the credibility of the 
Office of the President.


     There appears to be no reasonable alternative to the conclusion
that the UC President and his top staff have been employing a 
strategy of disinformation, hiding their true budget priorities for
the University while attempting to placate students, faculty and 
staff, who have been bearing the brunt of the budget cuts.

     I would therefore recommend that the UC President take the 
following steps to repair the damage done to his credibility and to 
the University's esteem.

1.   Extend a full apology to the UC community and to the public for
this disinformation.

2.   Take corrective measures to insure that further disinformation 
will not be tolerated.

3.   Make good on his promise to cut back administrative spending,
within one year,  by at least 20% of the amount shown in Table 1: 
$150,000,000. That is a lot of money to be saved, yet it amounts 
to only one-half of my previous estimate of the total excess and 
waste in the University's administrative bureaucracy.