LOOKING INTO THE UC BUDGET -- Report #8 (e-mail version) by Charles Schwartz, Department of Physics, University of California Berkeley, CA 94720. 510-642-4427 December 20, 1993 SUMMARY The UC administration is preparing a new policy on STUDENT FEES (tuition) for approval by the Board of Regents next month. The new plan, available now only in draft form, will revolutionize the financial, political and social relationships of the University with the people of California. The UC leaders speak of a new social compact between the University, the State, and students and their families. However, it appears to this writer that many of the most important questions about this plan have not been answered, and for the University to proceed without first resolving these issues is to invite a variety of disasters. Part I of this report concerns the question of financial aid for needy students, which is supposed to accompany any high-fee model of higher education. Who will guarantee that adequate financial aid will be provided and what are the likely socio-political consequences? Much of this section is made up of quotations from members of the Board of Regents and their advisors during the past two months' open discussions of the student fee policy. Part II concerns a question of accounting: What is the present cost per student of undergraduate instruction at UC? Following the idea that UC must be fair in charging students and their families for no more than what they get, I calculate a cost which is less than one-half of the amount cited by the UC administration. This issue has long term consequences which should also be of great concern to faculty and the research mission of the university. While this study looks only at the University of California, the issues raised are also relevant to other states where large public universities have started down the path toward privatization. I do not know what steps, if any, those other universities have taken to avoid the hazards identified here. In any case, it would be unwise for UC to proceed without first resolving these issues for itself. In particular, the question of how to guarantee adequate financial aid for all needy students is not one that can be answered by mere statements of good intention; some new structural mechanisms will have to be designed and built into the plans at the outset. PART I. STUDENT FEES & FINANCIAL AID The chief reference is: "Preserving Affordable Quality and Access at the University of California -- a Discussion Document on Fees and Financial Aid," a draft document from the UC Office of the President (UCOP), dated October 12, 1993, and presented at the Regents meetings of October 12 and November 18. Key excerpts follow. The University's student fee and financial aid policy heretofore has been guided by a commitment to ensure access for students to the University under the Statewide Master Plan for Higher Education. Financial aid has been and must remain the cornerstone to affordability for low- and middle-income students. Grants, subsidized loans, and work help students pay the fees they are charged as well as cover the costs of books, housing, food, transportation, and other educational expenses. [page 1] The primary vehicle for achieving access has been to keep fees as low as possible by providing a substantial subsidy for all California resident students. For example, in 1991-92, the full cost of educating a resident student was $12,168. With the Educational and Registration Fees paid by resident undergraduate students at $2,274, the average educational subsidy provided to the University by the State for each student was $9,894. [page 1] Though annual budget increases of about 7 to 8 percent are needed over the next few years to stabilize the University's budget situation and not lose further ground, it is anticipated that the state will be able to fund increases of only about 3-4 percent annually, less than half the amount needed. Although finding funding for the other half is critical, the University has very few options for filling the gap. ... For the near term, estimates indicate that fee increases roughly similar to fee increases in the recent past, or about $600-$650 per year, would cover the gap. [page 2] The substantial educational subsidy provided to the University for students from high-income families may be a luxury of the past; ... The median income of the parents of University undergraduate students was $55,000 in 1991-92 with a third of undergraduates coming from families with parent incomes over $70,000. [pages 2-3] SUMMARY ... Underlying this debate are the goals of: 1) ensuring access to the quality educational program California residents have grown to admire and expect from the University of California; 2) regaining stability in funding for the University in meeting its mission, at a time of uncertain funding from the State; and 3) if called upon, rewriting the social compact in which students and their families, the University, and the State all share in the responsibility of keeping the University affordable for all California residents. [page 28] The draft document from UCOP presents several alternative policies for setting future student fees at UC; but all of them yield the same numbers, which are displayed in Table 1, below, along with numbers from recent and earlier years. Table 1. History of Student Fees at UC - average annual fees for resident undergraduates Each year's increase is shown in parentheses; the policy of a 10% cap on increases was dropped. Earlier Period Recent Period Planned Future 1984-85 $1324 1989-90 $1634 ( +80) 1994-95 $4411 (+684) 1985-86 $1326 ( +2) 1990-91 $1820 (+186) 1995-96 $5064 (+653) 1986-87 $1345 ( +19) 1991-92 $2486 (+666) 1996-97 $5727 (+663) 1987-88 $1492 (+147) 1992-93 $3044 (+558) 1997-98 $6393 (+666) 1988-89 $1554 ( +62) 1993-94 $3727 (+683) 1998-99 $7064 (+671) Historically, student fees at UC were meant to cover services for students beyond their basic education. Given the State's budget shortage in recent years, UC has raised fees dramatically - as a matter of necessity. Now, in the new vision being presented, still higher fees are seen as a social virtue: the many high-income families sending their children to UC will no longer be subsidized by the rest of the state's taxpayers. This new approach, abandoning the Master Plan commitment to zero tuition, has received major backing by the California Postsecondary Education Commission (CPEC). At the Regents' October 12 meeting, CPEC Executive Director Warren Fox summarized their proposal as follows. [Quotations from individuals are taken from the official tape recordings of the Regents meetings.] "Here are the principles that our Commission adopted to do its work on looking at policies to set undergraduate student charges at California's public universities. ... [T]he first principle is an important one: that students and their families will contribute along with the State for financing college education. ... However, we feel that the State should always make the major investment and at no time should individuals or their families make the major investment in covering the cost of education. ... Undergraduate charges [at UC] could rise to no more than 40% of the average cost of instruction." One obvious problem with this formulation of the new "social compact" is this: How will that 40% limit be maintained? Given the continuing economic problems of California and given the political pressures in Sacramento, it seems inevitable that as the University comes to rely more and more on student fees (tuition), the Governor and the Legislature will be even more inclined to reduce their appropriation to UC. Regent Ward Connerly expressed it this way: "I think that we have to prepare for the day when the cost ... that we charge to the consumer for the product, may in fact have to be what it costs us. That sounds heretical to some extent but I think that we almost have to prepare for that. And to argue the notion that the taxpayer should forever pay the majority of that cost seems to me to be one of those Jurassic Park dinosaurs." The main concern, of course, is about need-based financial aid. The University says that it is committed to preserving access for all academically qualified students, regardless of their economic circumstances; the word "affordability" is now popular. But many people are skeptical about whether UC will actually fulfill this promise. The UC President's Office provides statistics showing how it has increased student financial aid, returning a significant portion of new student fee revenue to assist needy students. They report that, "Despite rising fees, the percentage of UC freshman from low- income families has increased over the last three years." Student leaders, however, continue to present painful evidence of the damage that higher fees are inflicting and they point out significant shortcomings in the existing financial aid policies and practices. Several members of the Legislature have also expressing their concern: While fees were doubling from 1990 to 1993, Californians' personal income was declining. As a result, educational opportunity has become increasingly limited to the wealthy, and the promise of the Master Plan for Higher Education has been abrogated. ... We urge you to withdraw your fee proposals and begin to work cooperatively with students and the Legislature to develop comprehensive budget solutions which rely on reform, new efficiencies and priorities, and reinvestment of public support rather than closing the doors of opportunity. [Letter to UC President J. W. Peltason from Assemblymembers M. Archie-Hudson, R. J. Campbell, H. Solis and J. Bornstein, dated October 12, 1993] The Regents' own public discussion about student financial aid has been remarkable: Regent Meredith Khachigian: "I see some really potential problems with this kind of a proposal; and I have to put it in there with social engineering. And I worry about class warfare, all these kinds of things that I could see happening ... in the social fabric of our campuses. ... I am so appalled by some of the social consequences of some of these proposals." Regent William Bagley: "We [the Board of Regents] are in the progressive tax business, like it or not. Some of my colleagues here abhor progressive taxation. ('Hear, hear.') ... [T]hose that have higher incomes are going to pay more, those students or parents, and we are going to give that higher income person's stipend back to those that don't have it. That's progressive taxation." Student Regent Darby Morrisroe: "[A] 'high fee high aid' model will not work because it overlays itself over a current financial aid structure which is inadequate. ... In any of these models that are being proposed I don't see a fundamental look at how financial aid need is assessed, because that is essentially the problem with financial aid. ... [T]he federal government has had limited resources to allocate to financial aid. So...they changed the need assessment. They became more stringent with their criteria for financial aid allocation. So that even if the current financial aid system was fully funded, it wouldn't meet the need of students. ... And we tend to spend an exceptional amount of our time on student fee policy without ever significantly addressing financial aid - except to say, well, the increases we get from revenues will go back, in a 'return to aid' model. Well, that's good...but that isn't sufficient because it doesn't address how student need is assessed." President Jack Peltason: "There is ... strong commitment [to student aid]. There are all kinds of problems: How much money do we have available for student aid? and then, Which students do you distribute it to? ... If you give more to the middle-income, then you have less to give to the poorest. There are debates about how to allocate it, ... how to assess need, which need has the highest priority. ... There are more needy students at the moment and the need is greater than the dollars. So we are always having to make some tough decisions." Provost Walter Massey: "[I]t is often difficult to separate policy discussions from the implementation of policy... What kind of policy should the University adopt and pursue? Should we have one of 'affordability' as a model, where we say: those parents and students who can afford to pay more would pay more and [for] those who cannot ... we would make it affordable through other means? Now, as a policy we might adopt that and we might find that we can't implement it simply because the finances aren't there, the structure of the State wont allow us." Regent Harold Williams: [This was lost on the tape; so I have reconstructed it from my notes.] The reality is that financial aid will not cover all of the needs from increased fees. I think the result is that the middle class will get hit. I find it incredible that this body, the Regents of the University of California, composed of very rich and conservative people, would embark on a program of wealth redistribution that follows Karl Marx's utopian vision. And even if they do start out well in that direction, would the promise be sustainable? Looking down the road, one can predict many grave troubles: an uproar from lower-income families as they find financial aid lagging and their children cut off from higher education; a political backlash from middle class families who find themselves being squeezed out as the rich and poor are accommodated; the philosophical (and legal) question whether the University has legitimate authority to levy taxes, especially such a class-discriminating tax; and the intensified stress in the social fabric of our campuses, along class and racial lines, identified by Regent Khachigian. The Regents meet at UCLA on January 20-21 to decide on this policy. If they do not have satisfactory answers to these daunting questions, who then will be placed at risk? PART II. THE COST OF INSTRUCTION Putting aside all those questions of social equity, I now ask: What is a fair price to ask students (and their families) to pay for their education at UC? The UC President's Office cites the figure $12,168 as the full cost of instruction in 1991-92, with the following explanatory footnote found on page 12 of the draft document from UCOP. According to the methodology agreed upon with CPEC, cost of education is based on instruction-related, per-student revenues for UC's eight general campuses. Those revenues consist of State general funds, University general funds, student fee revenues, and lottery funds. Expenditures for health sciences, teaching hospitals, organized research, and public services are not included in the calculation. I wish to dispute that methodology and that conclusion. My analysis and computation, presented in detail in the Appendix of this report, lead to a figure of $5,040 for the annual cost per student of undergraduate instruction. This is less than half the amount claimed by UC and means that today's student fees already far exceed the 40% ceiling proposed by CPEC ! The principal differences are that I work from actual expenditure data, not revenue data, and I make a separation between undergraduate instruction and graduate instruction. This last point of distinction will be controversial; but I believe it is fundamental to a fair and honest analysis of the issue. The University has a three-fold mission: teaching, research and public service. Everything at the University revolves around the work of the faculty members, who likewise have a three-fold job: teaching, research and service. (Service, for faculty, means not only public service, but also university service and professional activities.) Faculty members receive a salary which covers all of these tasks together; and the payment of these salaries has, in the past, constituted the essential core of the State's support for the University. While one could, and often did, hear arguments about the proper balance between teaching and research, the basic commitment of the State was to support all three missions as an integrated whole that benefits society at large. It is now proposed to shift the financial burden for education, at least partly, onto the individual students who will receive an education at UC. Thus, that unitary package of financial support for the University must be taken apart - and this must be done fairly. As CPEC's Warren Fox stated to the Regents in October: "Students need to get return on their dollar and they should be able to see their funds spent directly for instructional purposes; and it should be called tuition." ... "The cost of instruction [$12,168] is the actual cost of delivering the classroom instruction. It doesn't count research and public service or any of the other things the university does, just instruction, as opposed to the cost of education, which would include all of those. We dealt with the percentage cost of instruction, which is the student paying a fair amount for those instructional activities directly related to the teaching and learning process." My approach follows that of UC and CPEC in separating off research and public service, and also in separating off the expenses of the hospitals and medical schools from the general campus activity. However, they make no distinction between undergraduate instruction and graduate instruction; and this, I believe, cannot be sold as fair to those who understand what really goes on in a "research university" like UC. According to UC's own statistics, faculty members spend 50% of their "instructional" time on graduate students and 50% on undergraduate students; yet graduate students account for only 19% of all students at UC's eight general campuses. (This does not count faculty members' "research" time, which is overwhelmingly devoted to graduate students rather than undergraduates.) The financial arrangements that UC makes for its graduate students in PhD programs, preparing them for careers in research, college teaching, etc., are completely unlike those for the undergraduates. Teaching Assistantships, Research Assistantships, tuition waivers, fee remissions, and various fellowships are provided to recruit the best talent from across the nation and around the world and to provide, wherever possible, complete financial support for these budding scientists and scholars. (Graduate students in the humanities, where there is so little in the way of outside research money, get substantially less support.) Graduate students in the professional schools of Medicine, Law and Business are already targeted for "differential fees." I am aware that faculty and administrators will deplore my approach of separating undergraduate instruction from graduate instruction; and I am aware that many student leaders, who maintain a commendable solidarity among all students, may also be upset by my approach. Nevertheless, I think it is essential - in order to be honest and fair with those in the public who will be asked to pay the bills - that we calculate the actual cost of undergraduate instruction alone. Let me put it this way. If the University should try to charge undergraduates for more than what they are getting (twice as much, by my calculations), and perhaps even get away with it for a while - imagine the consequences when somebody eventually goes to court and sues the University for fraudulent sales. The problem that I point out not only affects students and policymakers; it should concern faculty members as well. Who will pay for graduate education? is a question almost as dear to the research-oriented professor as, Who will pay for my research? In the "good old days" the State paid for the whole package. The new social compact that the University's leadership speaks about had better address these questions as well as the question of support for undergraduate education. There is a counter-argument to what I have said above: it points to the elite private universities, where undergraduate students pay a very large amount of tuition, and this does indeed subsidize the graduate/research activity of the institution. If Harvard and Stanford can do that, why not UC? What students attending the elite private schools get, compared to the top quality public ones, is largely in the label. Some people will pay a premium for prestige; I would only question how big the market is for that inflated product. If one combines the question of financial aid , raised in Part I, with the question of the true cost of instruction, raised here, the potential for disaster in the UC administration's plan becomes greatly magnified. There are alternative approaches - see, for example, my earlier budget reports - but the University's leaders have not yet been willing to give them significant consideration. APPENDIX: Calculating the Cost of Undergraduate Instruction Table 2 presents data on actual expenditures for the various functions of the university, taken from "The University of California Financial Report 1992-1993." The ten items are shown grouped according to the definitions in the Financial Report [page 3]: The primary programs are directly related to the three missions of the University - instruction, research, and public service. Academic support, teaching hospitals, institutional support, and operation and maintenance of plant are supporting programs. Programs providing support for students are student services, student financial aid, and auxiliary enterprises. Table 2. Current Funds Expenditures for the year ended June 30,1993 ($ in Thousands) GROUP 1: Instruction (23.7%) $1,668,175 primary Research (18.9%) 1,328,030 programs Public Service (2.2%) 153,677 GROUP 2: Academic Support (9.2%) 645,784 supporting Teaching Hospitals (23.1%) 1,627,666 programs Institutional Support (5.5%) 384,722 Oper.& Maint. of Plant (3.7%) 262,479 GROUP 3: Student Services (3.2%) 225,306 support for Student Financial Aid (4.6%) 322,433 students Auxiliary Enterprises (5.9%) 412,377 TOTAL $7,030,649 Starting with the total Expenditure for Instruction ($1668.2 Million), I subtract the following items: Summer Session = $21.0 Million; University Extension = $142.6 Million; Health Professions = $598.4 Million; Law Schools = $23.1 Million; and this gives us the figure for General Campus Expenditure for Instruction = $883.0 Million. [Further detailed data is gathered from, "UC Campus Financial Schedules 1992-93".] Now I ask, What fraction of their work time do UC faculty spend, on the average, at undergraduate instruction? Data to answer this question comes from the "University of California Faculty Time-Use Study 1983-84" and is shown in Table 3. Table 3. Results from survey of 100% I&R FTE faculty, excluding health sciences and law Principal Activity Hours/week All UC-related Activities 61.3 Instructional Activities 26.0 Research/Creative Activities 23.2 University Service 6.6 Professional Activities/Public Service 5.5 Breakdown of Instructional hours/week: Lower Div. Upper Div. Graduate Regularly Scheduled Courses 1.1 2.3 1.8 Supervising Indep./Special Study 0 0.5 2.1 Combine these: Undergraduate = 3.9 Graduate = 3.9 A portion of faculty members' University Service is on committees dealing with instructional matters; I estimate this to be roughly 1/3 of the 6.6 hours/week reported above. Adding this to the 26.0 hours/week reported for Instruction, gives a total of 28.2 hours/week, which is 46% of the total reported work week of 61.3 hours. Next, we see from Table 3 that one-half of faculty members' Instructional hours are spent for undergraduate instruction; thus, about 23% of the average faculty members' total work time is spent on undergraduate instruction. Combining this 23% with the figure $883 Million leads to the annual expenditure: Direct Cost of Undergraduate Instruction (DCUI) = $203 Million. To get the Complete Cost we must add appropriate indirect costs contained in the expenditures under Group 2 (supporting programs) shown in Table 2. First, consider the administrative overhead. The full amount of Institutional Support covers administrative services for all university activity, which comes to $5.4 Billion if we exclude the hospitals. The DCUI (at $203 Million) amounts to only 3.8% of this total activity of the University and so I'll charge only 3.8% of the expenditure for Institutional Support ($385 Million) as overhead for undergraduate instruction: $15 Million. Second, consider Operation & Maintenance of Plant. Taking 3.8% of this would not be fair, since undergraduate students are so numerous on campus, albeit packed into classrooms while faculty and staff have their own offices and laboratories. Examining the several components of this expenditure - building repair and cleaning, grounds upkeep, utilities, etc. - and estimating a fair portion of each to charge for undergraduates' usage, I arrive at an overhead cost of $55 Million. Finally, consider Academic Support. General libraries constitute a major portion of this category, at $139 Million, with another $50 Million for other instructional facilities that undergraduates use. I will charge 50% of this cost to undergraduate instruction, based largely upon available data on library usage: $95 Million. This gives us a total of $165 Million indirect cost to be added to the $203 Million direct cost, for a Total Cost of Undergraduate Instruction = $368 Million. The number of (full time equivalent) undergraduate students at UC is 114,386; and thus the current actual cost of undergraduate instruction at UC = $3,220. per student per year. This would be the appropriate charge for full payment of tuition. We need to consider, in addition to this tuition, fees charged for Student Services (in Group 3 of Table 2.) Before the current budget crisis, UC charged students for the total cost of enrollment services and for a variety of other services which are complementary to, but not a part of, the instructional program. The average of those fees charged in 1990-91 was $1,820 and I take this as the current true cost of Student Services. Thus, I arrive at a fairly calculated total annual cost for undergraduate students at UC, tuition plus fees, equal to $5,040. This is less than half of the $12,168 figure given by UC and CPEC. Present fees (at $3727 for 1993-94) are already 74% of this total cost, far exceeding the 40% ceiling proposed by CPEC. Furthermore, the plan laid out by the UC administration for future increases in student fees (see Table 1) shows them exceeding 100% of this total cost by the year 1995 !