Thursday, July 28, 2011

State Releases Audit of UC System

After more than a year of research and investigation, the state auditor has released her audit of the UC system. The major findings can be found in the following passage: “the university budgeted widely varying amounts to its 10 campuses. For fiscal year 2009–10, the per-student budget amount ranged from $12,309 for the Santa Barbara campus to $55,186 for the San Francisco campus. Although the university identified four factors that it believes contributed to the differing budget amounts, it did not quantify their effects. The university can also improve the transparency of its financial operations. Although the university publishes annually a report of the campuses’ financial schedules, it could provide other information including beginning and ending balances for individual funds and could publish consistent information for its auxiliary enterprises. We further reported that the Office of the President needs to more precisely track about $1 billion of expenses annually that it currently tracks in a single accounting code—Miscellaneous Services—and that a recent change in university policy allows campuses to subsidize auxiliary enterprises with funding from other sources, despite the intent that they be self-supporting. Finally, we discovered two instances when the university designated $23 million in student funding to pay for capital projects on the Los Angeles campus that were not authorized by the student referendum establishing the fee.” These findings reveal that the UC has been covertly redistributing state funds and student tuition dollars without the knowledge of student, parents, and taxpayers. Moreover, while the UC has improved aspects of its budget transparency, there still is a great deal of money that cannot be traced. In short, the UC fails to act like a public institution because it does not provide important information to the public.

In its response to these criticisms, the UC argues that its budgetary system is simply too complex to explain, and a more detailed analysis of its spending and funding would require many staff hours and years to gather: “I cannot help but comment on the extraordinary time and effort – and considerable expense on the part of the BSA and the University – that went into this audit, which in the end found only minor issues to address. We are proud of the fact that we have come through this review with validation of so many of our procedures and policies which in recent years have come under considerable public scrutiny. But, at what cost? I urge the Legislative Audit Committee to require those who seek to use the limited audit resources of the State to provide more evidence of malfeasance than innuendo and presupposition behind their requests.” The UC clearly does not get it if they think that the audit only dealt with “minor issues” like the secret redistribution of state funds and student tuition or the inability of the system to track its own expenses.

In response to UC’s response, the auditor retorts: “We appreciate the university’s concern about the trade‐off in staff time to implement this recommendation. In that light, the university may wish to consider implementing a Web site similar to the one we created that contains supplemental accounting information we obtained during this audit. On our Web site, we present a link (‐105/) to information related to public funding from the university’s corporate financial system related to fund categories; fund groups; and funds that includes beginning balances, revenues, expenses, transfers, and ending balances. Our information technology team created this Web site using fewer than 60 hours of staff time. We therefore fail to see why the university believes it needs between 12 and 18 months to review and implement this recommendation.” As the auditor implies, on the one hand, the system says that it highly transparent, and at the same time, they argue that they cannot afford to clarify their complicated budgetary system.

In one of the more surprising findings in the audit, we found out that the regents have the authority to use any student voted fees for any purpose the regents want to pursue: “According to the Office of the President, referendum results are advisory under Section 84.20 of the policy, and the regents retain ultimate authority under the State Constitution to impose or modify any and all student fees, including those established by campus‐based referenda.” So if the students vote to fund a learning center, the regents can use the money to fund a new athletic center.

Speaking of athletics, the regents have also authorized a change in policy that allows self-supporting auxiliaries to be funded by multiple funding sources: “Campuses are provided the flexibility to organize and manage their auxiliary operations to meet their individual needs under the University’s Business and Finance Bulletin A-72, Establishment of Auxiliary Enterprises (BFB-72). Generally, auxiliaries are self-supporting, although they are not required to be self-supporting. Other appropriate funds can be used to support auxiliary organizations at the discretion of the chancellor. Donor gifts are an example of funds from other appropriate sources that may be used to support an auxiliary organization. Funds from other sources are only used when permitted.” In other words, self-supporting entities don’t have to be self-supporting.

Turning to the most controversial aspect of the report, the auditor points out that the campuses serving the most under-represented students also get the lowest level of findings. While it is understandable that the university objects to this conclusion, they cannot object to the facts. Whatever the cause, the reality is that Black and Hispanic students may be receiving an inferior education because their tuition dollars are going to support non-under-represented professional students on other campuses. A more accurate description of this situation is that a side-effect of undergraduates subsidizing graduate and professional students on other campuses is that under-represented students are being under-funded.

As the report indicates, the UC is going through the process of changing its funding streams so that campuses get to keep their tuition dollars and other revenue; however, the university still has not figured out what to do about state funds, which make up for most of the inequity caused by redistribution. Furthermore, the UC has argued that the new funding model will be revenue neutral, which means that the wealthy campuses will remain wealthy, while the poor campuses stay poor.

On a positive note, the auditor calls for the UC to distinguish among the costs of undergraduate, graduate, and professional education: “As part of its reexamination of the base budget, it should . . . identify the amount of revenues from the general funds and tuition budget that each campus receives for specific types of students (such as undergraduate, graduate, and health sciences) and explain any differences in the amount provided per student among the campuses.” If the UC does clarify these difference, we can begin to see how the university is really spending its money.

More later.

Click here for UC’s counter-productive spin

Tuesday, July 19, 2011

Our Irrational Higher Ed Economy

David Segal's New York Times article on the economics of law schools highlights many of the same factors that we presently see facing the University of California and other universities and colleges: while the price for higher education continues to escalate, the quality of instruction is being downsized. In the case of law schools, Segal reports that many schools are increasing their enrollments and raising their tuition because there is such a high demand from students, and even though many students with large loans can not find jobs when they graduate, schools are not reducing the supply: “Legal diplomas have such allure that law schools have been able to jack up tuition four times faster than the soaring cost of college. And many law schools have added students to their incoming classes — a step that, for them, means almost pure profits — even during the worst recession in the legal profession’s history.”

Segal hints that one reason why some law schools are increasing their price tag and their enrollments is that it helps them raise their standing in the all-important U.S. News & World Report rankings: “There are many reasons for this ever-climbing sticker price, but the most bizarre comes courtesy of the highly influential US News rankings. Part of the US News algorithm is a figure called expenditures per student, which is essentially the sum that a school spends on teacher salaries, libraries and other education expenses, divided by the number of students.” As I have pointed out before, this standard method of university accounting not only has no real relation to educational quality, but it pushes schools to increase their budgets by supporting unnecessary expenses like new administrative positions.

Just as the counter-productive U.S. News ranking system distorts the priorities of higher education institutions, an equally faulty bond rating system pushes schools to increase tuition and enrollments: “Like all stand-alone institutions, N.Y.L.S. is even more dependent on student tuition than those attached to universities, and Moody’s highlighted this fact in its 2006 appraisal of the school’s bonds. Under a section about potential “challenges” that could lead to a downgrade, Moody’s cited “significant and sustained deterioration of student market position.”” In other words, schools are told that if they do not increase their revenue generated from students, the schools’ will see their bond ratings go down and their interest rates go up.
Thus in the pursuit of higher rankings and lower interest rates, universities and colleges force more students to take on higher debt during a time when there are fewer jobs. The central decisions of our institutions of higher education are therefore being determined by faulty rating and ranking systems in which no one really believes and everyone uses. Welcome to the irrational economy and the death of the middle class.

Wednesday, July 13, 2011

A Tale of Two UCs

As we get ready for another large tuition increase, and we read about the elimination of several UC degree programs, the bond rating agency, Fitch, has re-affirmed the university’s strong fiscal standing. While the bond raters have been wrong in the past, we can still read the latest analysis of UC’s fiscal health as indicating the real priorities of the administration.

Since the UC has decided to help reduce its pension liability by selling about $1 billion of commercial paper (debt), it has asked to have its financial status rated. As I have argued in the past, due to the UCs high level of debt, it is dependent on getting a high rating from the bond raters so that it can receive a low interest rate, and one result of this dependency on debt is that the bond raters can tell the university how they think the system should structure its finances. Moreover, even though the bond raters pretend to be neutral and free of any ideology, they covertly push the same agenda that we find in the World Bank and the International Monetary fund. This agenda pushes for the privatization of public entities, a taking on of huge debts, and the deregulation of markets. The plan for the UC set out by Fitch is thus in many ways the global plan being pushed by conservatives and bond raters.

In reading the summary of Fitch’s report, we learn that the university has received a high rating because of, “UC's substantial level of balance sheet resources and liquidity; diverse revenue base, which enables the system to weather temporary weakness in any one funding source; and manageable debt burden, despite the expansive, capital intensive nature of its operations.” In other words, UC has many different revenue streams, and although it has a high level of debt, over $14 billion, it has the resources to take care of its financial obligations.

According to Fitch, one of the main signs of UC’s fiscal health is its ability to constantly raise tuition: “Recent reductions in state appropriations, and the potential for additional cuts through the intermediate term, are partially mitigated by the university's still considerable, though now more limited, ability to raise tuition and fees, and its overall limited reliance on state operating support.” In other words, the UC should not worry too much about losing state funds because it has shown a willingness to raise tuition. In fact, this same logic of privatization is driving the state’s reduction of funding for the UC; since the Democrats believe they cannot raise taxes, they cut the UC, which they know will turn around and raise tuition.

Not only does the state feel comfortable reducing the university’s funding, but they are planning to borrow another $1 billion from the UC system, and the reason why the administration will accept this deal is that the university will turn a profit by lending money to the state. This deal make sense on paper because due to UC’s high bond rating and the state’s low rating, the state has to pay a higher interest rate to borrow money, and if the UC lends money, the state can improve its bond rating, and the UC can profit from the difference between its low interest rate and the state’s high interest rate.

What is left out of this equation is that students are paying 6.8% to take out their loans, and these loans not only allow the UC to raise tuition, but the money generated from tuition can be leant to the state at something like 5%, which is better than the 2-3% the UC gets from putting tuition dollars into its Short Term Investment Pool. If we connect the dots, we see that students are lending money to the state, so that the university can bring in more money, but the end result is that the students will have to pay for this interest deal.

Perhaps the biggest casualty of this constant escalation of tuition is the middle class. While students whose parents make below $50,000 will have their tuition covered by financial aid, other students who are not rich and do not qualify for aid will end up paying more and taking out huge loans. In fact, over the period of 1999 to 2009, the percentage of UC students whose parents combined income is between $50,000 and $150,000 has gone from 50% to 40%.

As I have stressed before, almost everything the UC does loses money, and so the only stable source of income is student tuition dollars. Ultimately, the state and the bond raters are telling the UC to screw the middle class, and the UC is obliging on a regular basis.

Thursday, July 7, 2011

UC’s Steady Move to Privatization

At the next UC regents meeting, a proposal will be presented to increase tuition by 9.6%, which will be added to the previously accepted 8% increase for a total increase of 17.6%. The official reason for this increase is that the state has reduced UC funding by $650 million. Moreover, the anticipated state cut has also pushed UC Berkeley, UCLA, and UCSD to increase its nonresident student enrollments, and in the case of Berkeley, about a third of its new students are coming from outside of California, and these nonresident students are very attractive because they full tuition without any financial aid. This is what privatization looks look.

By increasing the cost of attendance and decreasing the percentage of Californian students, the UC is following in the footsteps of Michigan and Virginia, and the result will soon be that a larger proportion of students will come from outside of California and more of them will come from families in the top income bracket. However, unlike Michigan and Virginia, the UC is still dedicated to using financial aid to make school affordable for lower-income and lower-middle class students. Of course, something has to give here, and it is the Californian middle-class students who cannot afford the increased tuition but do not qualify for financial aid who will find themselves excluded from a UC education.

The UC likes to argue that it has no choice but to raise tuition and chase nonresident students, but as I have shown before, the administration’s logic is flawed. If the university wanted to, it could decrease tuition and increase student enrollments, but this would require a very different funding model. Instead of having undergraduates subsidize graduate education, professional education, research, and administration, the system could make sure that each sector could support itself. This process would require budgetary transparency and an increase in funding for for graduate and professional students.

When in the past I have called for this type of budgeting, I have been told that the only way to maintain UC’s excellence is by hiding its funding process from the public and everyone else. In other words, if people knew that the UC was jacking up undergraduate tuition in order to support expensive graduate and research programs, citizens would rebel and call for the defunding of the university. However, my response is that only a transparent budget would allow us to see if there really are non-essential costs that could be eliminated. In fact, part of being a public university is allowing the public to see how you really spend your funds.

Yet, while professors and administrators often complain about the creeping privatization of the UC system, they still want to be paid like they are working for private schools. Moreover, the fear of losing star professors to elite private universities pushes the system to pay some of its employees at a high market rate, while all of the other faculty members and workers are asked to do more for less. By allowing individual faculty members to negotiate private deals with administrators, the system not only creates collusion between the faculty and the administration, but it also drives up costs as it eliminates transparency and equity.

This system of private deals at a public university is going to get even worse if the regents approve of the plan of letting the president decide on his own about employee compensation increases. This new system will not only decrease transparency, but it will also increase inequality as the president garners support by handing out raises. Public institutions do not function this way; rather, this is how autocrats rise to power and maintain their control. If we really want a public university, all of us have to fight for it.