The May Budget Revision: UC Budget Goes from Bad to Worse

I'm sorry to rain on the parade, but even though the state continues to recover, UC does not.

In November 2014, Gov. Brown offered UC a 4 percent increase in state funding, or $119.5 million.  The UC Regents countered with their famous 5 percent tuition increase, which would have added another $131 million (not counting financial aid revenue from the state).  That might sound like a lot of new revenue, but it isn't. Were both pieces in place, UC would be getting about half of the16 percent annual increase it had estimated it needs for several years running to recover from the Schwarzenegger and the Brown cuts. See my November post on the Regents meeting for context and for UCOP's chart on the subject.

There are various ways to describe the problem: it   is a $1.5 billion structural deficit (2011 values) or it is the $1 billion in cuts since 2008 that CFO Brostrom uses in public statements. A third way is even more ominous: the last Independent Audit Report of UC's finances had UC losing $5.7 billion on operations in FY2013 and $4.5 billion in FY2014 (page 10).  These losses were partially offset by non operating gains (investment returns is the largest piece). Even so, the shortfall was $1.0 billion in 2014.

The Governor has again offered UC the same state increase and no more. He has added a compact-like agreement to do this for four years in a row.  At the appearance of a new headwind he can abandon this commitment as Gov. Schwarzenegger abandoned his, but more to the point is that this is a minimal increase that would likely have emerged from the normal budgeting process.  UC has agreed to freeze tuition for another 2 years, so that increment is lost. In 2017-18, UC can request a tuition increase, but one to be tied to an inflation rate that is likely to remain well under the 5 percent UC proposed. 

In other words, UCOP has agreed to several more years of austerity and shortfalls.  This will keep the deficit in place and, as far as I can tell, sustain annual operating losses.  

Students will be happy they will not be paying more. They will not be happy that they will still be getting less.  Educational quality became a clear student issue last fall. But the state's likely political calculation is that cost is still more important than quality, and that students will also take deal.

One possible compensation for bad operating budgets would be a structural fix.   Here we arrive at the pension announcement.  This Democratic administration has taken to describing UC's pension liability as both a gap to be filled and an affront to state budgeting.  It is not just a budgetary problem in this narrative but a moral failing on UC's part. UCOP wanted the state to start paying the employer's share of the pension as it had in the past, and as it does for Cal State. The state's refusal to do this was one reason why the restart of the contributions was delayed. 

The state continues to refuse annual contributions. What it has now offered instead is a one-time payment of $436 million staggered over three years. In exchange, UC is to tier its pension again by adding a Defined Contribution plan for new employees and capping the Defined Benefit pension at the state employee level of $117, 020. (See Dan Mitchell's rundown here.)

In budget negotiations, it is always a bad idea to make a permanent change in exchange for a one-time payment, and this one is no exception.  In addition, the amount received is very small: $145.33 million per year for three years, while UCRP, the pension fund, has a $73 billion net position for pension payments, which is up nearly $10 billion from the previous year, and paid out nearly $4 billion in benefits last year  (page 17).  Why would you restructure your pension, which your employees dearly love, in exchange for 3.6 percent of your annual pension expense, and for just three years?  

UCOP has already handed UC employees an 8 percent pay cut in the form of restarted contributions, and UC operating funds have been squeezed to do the same--with very good results for pension solvency.  So what is the real purpose here?  Perhaps the purpose is to convert UC's pension into a 403(b) over time, and that UCOP wants this as well. I don't know this, but I can't explain why UCOP would take this deal when the pension is actually on the mend.

I can see why the state would do it. It gets a chunk of UC operating expenses off its budget. State politicians can also divide up the UC employee body.  The Academic Senate already cooperated in one tiering of the current pension for ladder faculty; most unionized employees voted to keep younger employees with them in one tier while paying an additional percent of their income to help the fund.  Represented staff generally make less than the $117k pension limit, will thus be less affected by the cap, and have resented high executive salaries.  Thus the state may face little UC employee opposition overall.  

Ladder faculty, senior managers, and Management and Senior Professionals will be seriously affected. The cap would make faculty retention harder: in most disciplines, the cap will kick in at mid-career when the most visible faculty are most liable to be recruited away, and a capped pension will make it that much easier for competitors to beat UC's best offer.   (In some disciplines, assistant professors will start at or above the cap.) UC campuses have long been starved for internal funding for non-sponsored research, academic programming, and new teaching initiatives, but have been able to offer retirement security in the age of academic adjuncting and the "disposable employee."  As retirement benefits are cut and/or destabilized, faculty will lose the one clearly superior thing about working at UC.   

Jerry Brown has long been inserting himself into the middle of UC educational policy, most obviously with his campaign to convert some percentage of UC courses to online. This current deal sets the first actual quota for new students: one third of them must be transfer students from community colleges.  Listen to the clips of the governor and his budget director that Prof. Mitchell has posted.  They offer a good representation of executive branch aggressiveness, and also feature Gov. Brown saying that he wants UC's lower division to shrink.  

This idea is equally bad for students and for the University.  Resident undergraduates who actually want to go to a four-year university will be squeezed between non-resident applications who pay 3 times more and community college students who have seats set aside for them.  In addition, they will lose the lower division courses that form part of the integrated curriculum for the major they will eventually complete.  Putting the first half of college into some other institution's hands will make coherent sequencing and skills accumulation that much harder.  On their side, campuses have a budgetary ecosystem that a shrunken lower division will damage.  Lower division enrollments cross-subsidize graduate education, sponsored research, and student services, among other things, and provide graduates with teaching opportunities.  Shrinking lower division enrollments will shrink funds that support UC's status as a research university.

We'll have more to say about all this during the Regents meet next week and as the plan unfolds. But my main impression today is that this is another step in the state's half-unconscious plan called, "the UC reversion to the mean."  UC was for decades a spectacular, standout place.   It now seems slated to follow California's K-12 system down the national rankings--or would do were other states not busily pushing the rankings collectively down by slashing their university systems too.  

The higher community needs to say, if our senior managers will not, that all of these budget economies are false. Saving money as Sacramento would like simply reduces the quality and the quantity of the intellectual and human capital that UC can produce.  The economist Walter McMahon offers the most comprehensive quantification that includes the non-market and social benefits of higher ed. He shows they are together twice as large as the private, market benefits.  And yet the state, led by Jerry Brown, is trying to fund UC only for the latter, in which it is a three-year skills training service that starves both higher order capabilities and research. If this carries on, massive public benefits will be lost. 

In addition, the quantitatively larger portion of the benefits of higher education, these indirect and non market benefits, consist of deep, complex capabilities like powers of critical thinking and a capacity for democratic deliberation.  These are often generated by liberal arts and sciences disciplines that form the campus core. They depend almost entirely on state funds and tuition.  UC is now starving the core but sustaining the periphery, particularly the medical centers where so much of the administrative growth, pension liability, and high-end salaries have accrued.  One good feature of UC having lost two of its national laboratories to a private limited-liability corporation during the Bush years was that the federal government reimburses UC for pension costs at Lawrence Livermore and Los Alamos National Laboratories.  It may be time for a similar spin-off of the medical centers.  

I think that would be too bad, personally--medical research and practice are obviously crucial academic and public services.  Unfortunately, this latest poverty deal makes the internal competition for dwindling resources even worse, and the campus core is not protected.

Photo credit: Onbeyond, LLC, 2003.  Sample public campaign ad for UC, declined by UCOP