Budget Lessons for 2010

The good news in 2009 was that a few truths went public.  Today I'll start with two cats in particular that got out of the UCOP bag:

• Major cuts in public funding are bad for UC.  This seems obvious, but UCOP minimized or denied the problem for years.  Less than a year ago, UC's President Yudof thanked the governor for cuts that were not "disproportionate" and that "helped to protect the university’s base budget from potentially even deeper cuts."  It was progress when Yudof began to publicize the state's long-term disinvestment in UC and CSU, and then at the September Regents meeting to call the state an "unreliable partner."   UCOP has in effect adopted the Futures Report's notion of "core campus funds" in debunking the myth that the state cuts are just a small part of UC overall budget, so don't matter much.

•  Students object to major fee increases.  For years, UC has been boiling the student-fee frog slowly enough to keep the frog in the pot.  The Compact for Higher Education built in 7-10% annual fee increases year after year.  The 32% increase voted in November changed all this, and the student protests on most UC campuses got impressively sympathetic coverage in the press (see this blog's section on "November 2009 Regents Meeting").  The Governor's chief of staff claimed that the student protests were the "tipping point" in pushing the Governor's office to now call calling for better higher ed support.

Where does this leave UC?  In big, big trouble.

Repeated and severe state funding cuts force UCOP and the Regents to be desperately willing to raise student fees, as structurally the only alternative revenue stream large enough to replace even part of the lost general funds.  But in November, students raised the political cost of fee hikes.  Hikes will continue, but much more cautiously, and the Regents will need to be creative in looking elsewhere.

Where?

The federal government is source number 1. Schwarzenegger's proposed state budget relies on future federal money for 35% of his deficit reduction.  UC officials have started calling on the feds to begin direct support of basic operations at selected state universities.

The plan was already unlikely, since the federal government decided four decades ago to support higher education through research funding, student grants and loans, and  other major outlays (Pell Grants alone are around $20 billion per year) as a cost-sharing partnership with the states.  In addition, President Obama's State of the Union message has just promised a 3-year freeze on all non-military discretionary federal spending.  There is a report that some education programs like Pell Grants would be spared, but Wednesday night Obama killed any chance for important new educational programs and for a second stimulus.

The second non-student revenue source is increased state revenues.   This week, Oregonians got these by defying conventional wisdom and voting for tax increases, specifically to avoid further cuts in public education.  The opposite is happening in California: the Governor proposed no new money now in exchange for promises of future money later, if the voters modify the state constitution to force it.

Even if Governor Schwarzenegger's proposal were to pass, it would move higher ed funding from 7.5% to 10% of a state general fund base that has just shrunk 20%.  A meaningful future promise would have been rooted in real dollar outlays to UC and CSU corrected for inflation. This is how actual revenue needs and expenditures are calculated, and how the baselines in ours and other budget reports are measured.  The Governor is promising only a low "new normal," with the hook being that the higher ed low would at least be higher than that of the prison system.

None of this is going to happen for years, if ever.  In the meantime, were Governor Schwarzenegger to make good on his recent discovery that universities produce more social value than do overcrowded prisons, he would reverse the cuts that he himself imposed on UC and CSU last year.  He would grant the Regents's budget request for an additional $913 million over last year's slashed base.  Instead, he is proposing the restoration of  40% of the Regents modest restoration request, or about the same amount as the one-time February 2009 cut, leaving the new low baseline intact.

The Governor has absolutely no political reason to do any better than this.   UCOP and the Senate's Top Two immediately lined up behind his proposal for better funding in the future.  This removed any pressure on the Governor to produce better funding now.

In a better world --  for example the state of Oregon -- the higher education establishment would be hammering the capitol for the kind of tax increases and tax rationalization that would put the state's public services  on the level that basic Keynesian recovery requires, to say nothing of future growth.  This would mostly involve reversing Arnold's own foolish tax cuts, and plugging new corporate loopholes opened as recently as last year.

But with UC's leadership publicly back in Arnold's camp, there is no united higher ed front pushing for immediate, decisive, stimulus-producing public funding.  UC faculty, staff, and students are forced back in the position of pushing well beyond their own leadership, and state hooverizing, stagnating and downsizing can continue as envisioned and implemented by minority Republican rule for the past 30 years.

This minority has no idea what to do with the eclectically brilliant internationally multiracial California that we actually have -- other than to cut public sector capacities and  increase inequality.  So in 2010 it will be up to us to represent UC and CSU financial needs that make universities central actors in the rebuilding of California society.

Never Mind the Bollocks, Here's Bob and Charlie

While I have been grossly neglecting our Bizarro World Gov, various budgetary dreamworks, and the Regents meetings - I plead four simultaneous paper deadlines - others thankfully have not.   Charlie Schwartz addressed the Regents on apparent lapses in oversight of their bond indebtedness.  Bob Samuels fired away at the "latest list of the approved exceptions to the UC’s own compensation policies," among other things.

There are so many unanswered questions. In the great tradition of academic investigation, Bob and Charlie are continuing in the pursuit until the data are relatively complete and things make actual sense. I have argued with both of them on various points, but the core fact is that these are two of the heroes of the current UC crisis.  They are both trying to expose budgetary incoherence and oppose bad policies that hurt the university and its people. Charlie Schwartz has been doing this for nearly twenty years, offering a long, exhaustive series of detailed financial analyses of various aspect of university operations.  I am unaware of anything like it in the United States. This series of reports, along with the efforts of Bob Samuels, Bob Meister, Stan Glantz and Eric Hays, among others on this blog and elsewhere, are crucial contributions to budgetary enlightenment and to university reconstruction. 

Schwartz should get some kind of distinguished service medal from the university administration on whom he has lavished so much intelligent attention.  That's not going to happen, so let me pause for a moment to honor these folks who obviously love the University of California and the University as a humane, generative ideal and who fight for it with all the skills they can bring to bear. I am thanking you.

Which also reminds me of this piece about UCI's Medical Center finances by Jessie Lee, whom I believe is an undergraduate journalism student at Irvine.  Has there been anything this good on the Med centers produced by regular staff with access to 25% of base compensation bumps from participation in the Clinical Enterprise Management Recognition Program?

An organization is only as good as its ability to honor the greatness of the people who make it up. How are we doing?

Thanks to one and all for this fabulous work.

One Way Forward

Charles Scwhartz has a new proposal for how faculty and others might respond to the State of the State and Arnold's proposed budget up at his blog universityprobe.org. In it he outlines a variety of ideas and arguments to further both funding and reform of the UC system. Given the productive debate that followed Gerry Barnett's recent post on Charlie's new model for UC we thought that we would alert everyone to Charlie's proposal, encourage you to check it out, and to open up a space here to discuss it. Please feel free to comment here or at universityprobe.

A Method to the Madness?

By Michael Meranze

While it is too soon to tell the true implications of the Governor’s State of the State and his proposed 2010-2011 budget certain strategies seem clear and they should give pause to any enthusiasm that might have greeted Arnold’s general statements about shifting priorities from punishment to education. I think that we need to try to seize the rhetorical opening that the State of the State provided while challenging the ways that Schwarzenegger frames the problem and proposes to solve it.

There were positive elements to this week’s policy announcements. When Arnold declared that “The priorities have become out of whack over the years. … 30 years ago 10 percent of the general fund went to higher education and three percent went to prisons. Today, almost 11 percent goes to prisons and only 7.5 percent goes to higher education. Spending 45 percent more on prisons than universities is no way to proceed into the future. What does it say about our state? What does it say about any state that focuses more on prison uniforms than on caps and gowns? It simply is not healthy” he opened up a space to challenge one of the most devastating policy trends of the last several decades—not just in California but throughout the nation. The shift from social investment to mass incarceration has been a fundamental moment in the growth of inequality since the 1980s. This recognition of the need to alter public priorities, along with his promise to protect CSU and UC from further cuts is something to be taken up and pressed.

But as the Governor’s elaboration of his vision (both in a supplementary statement and in his budget) makes clear, we need to resist his strategy to reverse this trend. Although this is beyond the direct question of higher education, the Governor’s proposal depends on reforming corrections not by reforming sentencing but by contracting out inmate care to corporate prisons. In doing so, the Governor aims to sidestep the demands placed on the prison system by federal courts and strike another blow against labor costs while avoiding a real re-consideration of the policy of mass incarceration itself. It is the costs that he is concerned about. In effect, the Governor would be engaging in a subsidization (to use Aranye Fradenburg’s phrase) of corporate prisons in order to slow down the privatization of higher education (as is marked by the rise in student fees).

These problems become clearer in the Governor’s actual budget proposals. The Governor’s proposal depends on the arrival of large numbers of federal funds. For that reason alone it is probably not long for this world. But more striking is the distribution of actual cuts. While the State of the State placed great emphasis on the relationship of punishment to education, in the proposed budget the really deep cuts will be coming out of transportation, the protection of natural resources, and health and human services. If the rhetoric is that of education vs. punishment (and it is true that there are some proposed cuts to corrections) the real tradeoffs seem to be between education and services for the poor, the sick, and the elderly. (BudgetSummary, 13) While the Governor is presuming that he can gain additional funds from the Federal Government he is refusing to consider expanding the state’s revenues.

It is the logic of the zero-sum game that the Governor is playing. He has steadfastly refused to consider new sources of revenues or any fundamental revision of our regressive tax system (note that while he proposes increased off-shore drilling but no mention of an oil-extraction tax). Once again he is urging legislators to take up the Parsky Commission suggestions which not only will make the tax system more regressive but probably will lower revenues in the long-run. Under the welcome rhetoric of a shift in the state’s priorities from punishment to education, he is proposing to further strip those in greatest need without discomforting those with the greatest resources. Susan Kennedy’s fascinating comment that “Those protests on the U.C. campuses were the tipping point,” indicated not only that the fall’s protests made a real difference but how much remains to be done. Personally, I don’t want to fund higher education at the expense of the poor and the sick. We need to make sure that we make our commitments to higher education and our commitments to a wider shift in the priorities of the state clear. The Governor’s State of the State opened up a new space to make that argument—we should do all we can to prevent his budget from closing it off.

Fixing the Research Funding Structure

Gerald Barnett and I have a piece in today's Chronicle of Higher Education that combines some of this blog's consistent themes: full costing, budgetary transparency, the value of research, and matching public funding to our actual public ambitions.  The article also ties in with recent posts and commentary on the position of science in public higher ed.  Subscribers can find it here, and here's a temporary link.  Comments are more than welcome, our place or theirs.

A View from a Science Department: Parts 3 and 4

This post continues Part 1 and Part 2
Part 3:  Does extramural research pay for itself?

Extramurally funded research has sometimes been described as "revenue generating".  In fact, the leaders of our research unit have argued to higher administrators that we should not suffer further budget cuts because we provide a large amount of indirect cost recovery (ICR) to UC (so far this argument has not been successful).  Does extramurally funded research actually pay for itself?  My guess is that the answer depends on how costs are counted and what is considered to be a payoff.  It turns out that our research unit currently generates more ICR for UC per year than we receive from UC in core funding per year, so by that limited measure extramurally funded research does come out positive.  But does it pay for itself when ALL costs are considered, such as building construction and maintenance, libraries, staff to do the contracts and grants paperwork, etc.?  That seems less likely.

Even if extramurally funded research were a net financial positive for UC, I doubt that it could be a long-term benefit to the general budget.  Faculty who bring in considerable outside funding do not do so to subsidize the rest of the system -- if they are squeezed too much, they will leave for another institution that provides more resources.  Moreover, it seems that those faculty members who are effective at getting more funding from sources outside UC also happen to be quite effective at getting more discretionary funding from within UC.  For this reason, I think the question of whether extramurally funded research is a net positive or negative is immaterial -- any positive can never be of general benefit, except in the short term.  What really matters is whether the research is worth the cost to UC in the long term.

Of course, it would be beneficial if UC could raise the indirect cost rate on federally funded research above ~54% (but at least that is considerably higher than the 10% rate I've received for state funded research).  It would be interesting to know why private research universities are able to negotiate higher indirect rates than public universities.  I calculate that UC income from federal research would increase by 8% if we were to receive the Harvard indirect cost rate (67%), corresponding to an additional $180 million for UC, thus filling in a large portion of the cut in state funding.  On the other hand, it will be difficult for UC to argue for a higher indirect rate to cover the full cost of research when UC is currently using a substantial fraction of ICR as discretionary funds rather than reimbursing the actual indirect costs of research.  The return of only one third of ICR to our research unit is not sufficient to maintain the infrastructure, but at least one third is higher than the fraction we used to receive.

If there is no direct financial payoff to extramurally funded research, why is everyone, including historically teaching-only institutions, trying to do more of it?  Extramural funding has a perceived indirect payoff in that it is reputation-enhancing, both by direct measure of the funding level and by the increased research that it supports.  Institutions with greater reputations can attract more private donations and find more students willing to pay higher tuition.  This system of seeking after ever more extramural funding is not sustainable, however.  The number of institutions, PIs, and grant proposals increases faster than the federal science budget, thus yielding diminishing returns on invested time and effort.  There will be a big crunch the next time the federal science budget goes flat.


Part 4:  Privatization?

There has been much talk about the "privatization" of UC (e.g., substitution of student tuition for state support).  Our research unit is explicitly following that path, except that we are attempting to substitute private philanthropy for state support.  Our long-term goal is to become as well endowed as other research institutions in our discipline that were built up without previous years of generous state support.  It's true that the market goes down at times, but at least it comes back up again.  State support, especially for research, only goes down.  For example, when UC finally managed to get the legislature to restore a cut in state research funding several years ago, it was line-item vetoed by the governor.

Increases in UC tuition do not affect our graduate students because their tuition is paid by grants and a few other sources.  Tuition increases are a slight burden on grants, especially when they unexpectedly occur midcycle, but we have been able to handle it so far.  Since the tuition paid for our graduate students does not return to us, we have no incentive to raise it, aside from the fact that it will increase revenue to UC overall.

Some faculty have expressed the desire to somehow disaffiliate from UC, reasoning that we would be better off alone because the ICR we generate for UC exceeds the core funding UC provides to us.  Considering all the factors, though, I'm not certain the numbers would work out in the black (putting aside the issue of ownership of the land and buildings).  But this sentiment does illustrate the deep dissatisfaction over the low level of service and infrastructure maintenance we receive for all the ICR we provide to UC.  UCOP is especially disliked since it skims off a large amount of money without providing much obvious value in return.

From what I've heard, our faculty support the values of "maintaining excellence" and "encouraging entrepreneurship" because they believe our unit will fare better under those criteria.  We've been disappointed, however, that the reality has not yet matched the rhetoric and that cuts have been applied across the board at the system-wide and campus level rather than selectively directed at particular units (other than ourselves).  Our fear is that cuts will be applied to our unit at a rate faster than we can accommodate and that we will lose our excellence in research -- followed by loss of top-notch colleagues and high-quality graduate students and diminishing extramural funding and private donations.