This Week at the Regents: The Budget

This week's Regents meeting's Agenda is chock full of important items.  In particular, UCOP is presenting the 2016-2017 budget proposal along with a three-year "sustainability" plan, a proposal to improve the finances of UCRP through internal borrowing, and a proposal to centralize the management of the Health Care system. Unfortunately, the lessons from this week's Regents' agenda is that despite UCOP's efforts to tout its agreement with Governor Brown, last year's tuition gambit has done little to change the fundamentally underfunded situation of the University.  Nor is there any indication that either the Regents or UCOP are prepared to break from long-standing patterns of strategy in order to begin to ensure a UC focused on its educational mission and on increasing the quality of its offerings.

THE PLAN ITSELF

UCOP's proposed budget is a work up of the deal that President Napolitano and Governor Brown negotiated by sidelining both the Legislature and the Academic Senate.   Chris and I have already commented on the deal itself so let me simply point to some of the more important elements.  The proposed Budget for 2016-2017 assumes another 4% increase in base funding, $96 million in one-time funding in exchange for changes in UC's retirement system, $25 million for enrolling an additional 5000 California residents, $25 million for deferred maintenance, and an additional $68.7 million in new Non-Resident Tuition (NRT) revenue.  It continues to make the annual promises about the fantastic savings that UCOP is gaining through various technological and management initiatives. In all, UCOP reports a total 2015-16 revenue of $28.3 billion of which core funds constitute $7.3 billion.  In 2016-2017 they are budgeting for an increased core revenue of $481.3 million.

Along with the proposed budget UCOP is submitting what it calls a three year "Financial Stability Plan."  The plan restates the Brown-Napolitano deal that calls for continued 4% annual base budget increases through 2018-2019 and fulfillment of the Governor's promise of $436 million over 3 years (although the Legislature has only promised the first $96 million) in exchange for reducing retirement benefits substantially for future employees.  It includes the proposed $25 million that the Legislature has offered for an additional 5,000 California resident students in 2016-17, and offers to enroll an additional 2500 more in 2017-2018 and 2018-2019 (hopefully in exchange for additional funding). It increases the NRT by 8%, the student services fee 5% annually, and proposes tuition increases tied to inflation beginning in 2017-2018.

A first point, which Chris has made many times, is that the 4% increases, while better than the extreme cuts of the late Schwarzenegger and early Brown administrations, are too small to overcome the longer-term under-funding of the University that goes back 15 years.  To make matters worse, both the Budget and the Financial Stability Plan each bake in increasing burdens on campuses and their students, faculty, and staff.  The $25 million promised for the upcoming year's 5000 additional resident students is approximately half of what both UC and the LAO agree is the marginal cost of an additional student (8). The new underfunded students will force campuses to shift funds from other efforts to pay for these costs (costs that will draw on core funds).

In order to help pay for these students, UC campuses will continue to increase the number of non-resident students, although they say at a slower pace (due to political pressures), so that there will be an additional 1200 non-resident students next year and the latter will be paying an 8% tuition increase.  UCOP apparently believes that the State will continue to pay $25 million each year to help support the initial 5000.  This seems a reasonable assumption in the short term, though it is a long-term problem if it is not included in an expanded base allocation.   If the additional 5000 are also inadequately funded, UC will have added 10,000 resident students over 3 years without providing campuses with the resources needed to properly educate and support these students.

UCOP insists that they are determined to lower the faculty-student ratio throughout the system.  But does anyone really foresee an increase in faculty numbers that could do that even as student numbers jump--6200 new students in 2016-2017 plus at least an additional 2500 additional residents in each of the following two years?  For those campuses with significant NRT, at least some of those funds will need to go to supporting the new enrollments.  For the other half of the UC system without significant NRT,  those enrollments likely will eat up a chunk of the monies they will receive from rebenching and the additional 4% in base state funding.  This plan may be sustainable in the sense that the campuses and students will still be here at its conclusion.  But it doesn't suggest that UCOP's stated commitments to increasing quality and improving campus facilities can be met.

The Budget and Sustainability plan together lock in continued under-funding, increased burdens on campuses, faculty, and students, and further erosion of shared governance at UC.  At its best it is predicated on a set of promises from Governor Brown.  I needn't remind people how well previous compacts with Governor's have held up over time.

THE FUTURE FOR THE FACULTY

A second aspect of the Budget, one of special importance to both faculty and staff, is the proposed reorganization of the retirement system.  In her negotiations with the Governor, President Napolitano agreed to create a new tier for those hired on or after July 1, 2016.  These employees would have a pensionable salary limit (i.e. the amount of annual salary that can be considered in calculating the size of a person's pension) based on the state's PEPRA limits rather than the previous, and much higher social security cap.  In return, the Legislature agreed to release $96 million once these changes have been made, and the Governor has promised additional funds up to the $436 million I mentioned above.  The Legislature has made no commitment to the last two years of the Governor's promise. (For good accounting of these developments there are various posts on this site and by Dan Mitchell on the UCLA Faculty Association Blog).

I have no doubt that there was, and is, political pressure on this from Sacramento.  But to get some sense of the extent of UCOP's concessions on this score it might be helpful to turn to another item on the Regents Agenda--a proposal to borrow money over the next three years from the University's Short Term Investment Pool (STIP) to help pay down the legally defined unfunded liability of UCRP. (As Bob Samuels pointed out long ago, this legal liability is based on the requirement that UCRP has enough money on hand to pay out pensions if everyone retired immediately).  This short term funding is something that the Senate has been pushing for several years, though campuses, perhaps especially those with medical centers, have been resistant.

In very basic terms, the proposal will allow the University to borrow from its own funds to help pay into UCRP, thereby helping to keep the University's annual contribution to UCRP at a steady state and to shorten the time until the unfunded liability has been paid.  Strikingly, UCOP is proposing to borrow $1,463,400,000--or put another way nearly three times the amount of money that the Governor is promising in exchange for a dramatic reduction in the worth of UC benefits.  As UCOP continues to emphasize, perhaps in the hopes of muting opposition, this new plan will not affect anyone employed before July 1, 2016.  But it will affect new generations of UC employees and lead to a significant reduction in overall compensation.  Although theoretically some of this loss could be made up in salary and other forms of compensation,  those forms of compensation do not have the same tax benefits as do pensions. More importantly, they increase retirement risk.  Nor is it clear why anyone should think that state funding for salaries will increase in the future at a rate that will cover the lost compensation value for future employees.

There is presently a Task Force charged with determining what the new pension tier will look like and with coming up with strategies to minimize the reduction in benefits to future employees (since it is unlikely that they can be eliminated).  The Task Force is expected to present its conclusions to President Napolitano next month and there will be a limited period for comment early next year.  But as Dan Mitchell has repeatedly pointed out (e.g., here, here, and here), the proposal for STIP funding includes a statement that "New employees will have the opportunity to choose a fully defined contribution plan as a retirement option, as an alternative to the PEPRA-capped defined benefit plan." (3)  This statement is included despite the fact that even the University's own FAQ on the question insist that no decision has been made as to whether to have a purely defined Defined Contribution Plan (h/t Michael Buroway).

So we have a cut in retirement benefits negotiated outside of the regular shared governance plan, a special Task Force, set up by the President to determine the shape of those cuts, official information on the Task Force site saying that no decision has been made about a defined contribution plan, and an item on the Regents Agenda suggesting that that decision has been made even though the Task Force has not finished its discussions.  This situation exists despite the fact that several years ago, after extensive study, the University recognized that a Defined Contribution Plan was less able to serve either the needs of individuals or the needs of the institution as a whole.  Nor does the amended language of the Budget Bill (section 85) require the University to start a Defined Contribution Plan. This decision by UCOP to overturn the carefully established retirement consensus builds upon other indications that UCOP is perfectly happy to sideline shared governance when it is convenient for them.

THE RETURN OF THE REPRESSED

There is one other item, or rather the absence of one other item, in the Budget proposal that is significant.  In its Budget Summary (pg. 29) UCOP notes a series of accountability measures required by the State. Interestingly, I could find no mention in the documents (please let me know if I missed it) of another set of legal obligations that are important for the budget.  Those are from section 84 that requires the University to provide much more detailed transparency about its administrative structure--especially concerning the Managers and Senior Professionals Group (MSP) and to rethink its proclaimed market comparisons for the Senior Management Group.  I mention this not because I want to demonize the people in either group but because it is difficult to see how a truly sustainable future can be created for the University that does not seriously rethink its administrative structure, starting with a better understanding of the relation between administration and the educational core.

If UC truly wishes to create a sustainable future for itself, it will need to create a more decentralized administrative structure, one more attuned to the actual teaching, learning, and research that goes on in the everyday life of the institution.   That sort of transformation might have resulted from the UCOF process a few years ago--but it didn't.  It is clear that it will not emerge from UCOP.  But it is needed more than ever.