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Wednesday, August 24, 2016

Wednesday, August 24, 2016

What Berkeley's Problem is Not

As the Berkeley and Davis campuses seek new chancellors, they'll be looking for people who can deal with endless public university budget problems.  In Berkeley's case, there's the $150 million structural deficit that surfaced on outgoing Chancellor Nicholas Dirks' watch.  

What should the next chancellor do to fix the deficit? Chancellor Dirks raised the prospect of cuts to the academic core, but mostly stuck to the standard model of growing private revenue streams. This has meant more fundraising, more non-resident students, more high-priced "innovative master's programs and more executive education.  It also means using [public university] assets in more commercial ways." It will mean figuring out how to start raising tuition again while promoting the high tuition-high aid model.   The quotations are from Nicholas Dirks.  Privatization was what he was doing, and what he did well within the rules of the game, particularly in fundraising. Leaving aside his management mistakes to focus on the budget issues, should Berkeley look for Nick Dirks 2.0, Nick Dirks on steroids, some kind of Double Dirks? 

The deficit predated anything chancellor Dirks did. John Wilton, the campus's lead budget officer, had announced it in November 2013, and traced it to old and new forms of state underfunding.  The Schwarzenegger and Brown budget cuts did enormous damage to UC finances. For a while, budget shortfalls were covered by reserves, but several years into the era of subpar funding, these were running out. Vice-chancellor Wilton had also already factored in all non-state and private revenue growth projections. The UC Berkeley deficit has come from a combination of state, university-wide, and campus budget choices. In addition, that deficit was not going to be closed by the growth in private funding.  More on that issue below.

We get reports that senior UC Berkeley officials are pinning much of their deficit, up to $50 million a year, on a choice the university system imposed called "rebenching." This is a program to start to reduce inequities in the UC Office of the President's allocations among the campuses. For many years, a student at UC Davis received a much higher state outlay than did the same kind of student at UC Santa Cruz; the same was true for UCLA vs. UC Irvine, and so on around the system. A 2011 report by the California State Auditor found large cross-campus inequalities and no good reason why this was so. It also found that the campuses with a higher proportion of Black, Latino, and Native American students got less money per student. (See Table 6 and this post for figures and analysis.)  The pre-rebenching allocations were clearly unethical and arguably racist, and although UCOP's response plausibly denied racist intent, it worked with the Academic Senate to rebench allocations to improve equity.   

But was Berkeley supposed to pay for it all? Have a look at the 2012 report of the Rebenching Budget Committee.  The total allocated for the entire system’s rebenching was about $37 million per year, now stepped up to $46 million per year total for all campuses (page 12).  So even were the entire system being rebenched at Berkeley's sole expense, it still wouldn't come to $50 million a year.  

In any case, this is not how rebenching works. The equity funding comes

(1) from new state money (it is not redistribution but finally-equitable distribution), allocated by 
(2) weighted enrollments (more per-student money for campuses with large doctoral programs like Berkeley) after 
(3) "set-asides" for designated programs that adjusts each campus's base budget, leading to 
(4) a leveling up of all campuses to the top campus level (Los Angeles). 

The effect on Berkeley can be seen in my number 1 favorite recent UC spreadsheet, Appendix A of the rebenching report. First, Berkeley's reduction under the new system was a bit over $6 million (row U), far smaller than Davis's or Los Angeles' because it wasn't as overpaid, so to speak, by the established system.  Again that's much less than $50 million.  But that wasn't to be an actual loss because, after various considerations, Berkeley was to be rebenched up by about $28 million per year, or +10% on its original base budget.  The 2012 plan had rebenching giving the Berkeley campus $4,688,619 more each year for six years.  This was only half of the additional new money going to the two most underfunded campuses by equalized weighted enrollment--Irvine and Santa Barbara--but it was not a deficit maker.

Perhaps the actual allocations have not followed the plan. But if that is the case, officials should produce figures that show what has happened instead.

Here's a visual of rebenching over six years (Appendix B).

Berkeley was a bit over the old average, so seemed a loser in the socialist benchmarking paradise. But in reality it is below the new benchmark, and so is to benefit from rebenching like all campuses other than Los Angeles, which is to stay the same.  Note that this is only one of the campus's many revenue streams, does not include non-resident tuition which each campus keeps for itself, is based on weighted enrollment, etc. Note especially the deeper issue, which is inadequate state funding. This had been softened at the wealthier campuses but not at the poor ones.

Rebenching is not Berkeley's problem. So if the public system isn't sinking Berkeley, what is?

That would be a combination of public cuts, already mentioned, new costs incurred by campuses, and new costs that UCOP or the state has pushed onto the campuses in recent years. The new costs that UC campuses haven’t incurred themselves include:
  • Normal cost inflation.  VC Wilton estimated this as historically 3-4% per year, meaning the UCOP “deal” on state increases  (4% per year for a few years) is essentially a zero gain.
  • Capital projects.  The state has largely withdrawn from campus development.   
  • Pension contributions (up from zero to 14% of payroll since 2010).
  • Increased employer health care costs, including retiree health care.
  • Central administration, aka UCOP,  which is now funded via campus taxes to the tune of something close to 15% of state funding.
  • Subsidies for UCSF (a $130 million premium in enrollment-based allocations (Appendix A row J * row M)
There are also campus-based structural costs, particularly the practice of covering a large share of research costs (19% at Berkeley) with institutional funds. (Background on this can be found here.)

How do these costs hit Berkeley? A quick scan of the campus's Annual Financial Report for 2014-15 (pdf page 5) shows that pension contributions have grown from zero to $128.4 million per year.  “Other employee benefits,” which I assume is largely heath care, is up to $274.4 million.  Interest on debt and capital leases is $90 million a year (up $10 million year on year). In the realm of capital projects, "proceeds from debt issuance” fall short of “purchase of capital assets” by $140 million (and by $160 million in the previous year).   Grants and contracts income declined $40 million over one year (they  have since rebounded). At the same time, over two years, Berkeley's outlays of its own "institutional funds" to support research, mostly losses on extramurally-funded projects, increased $26 million (from $138 million to $164 million).   This is a partial list of the real contributors to Berkeley's $150 million annual deficit.  

What drives these expenses?  State politics for one: were the state to fund UC's employer share of pension contributions, Berkeley would fix $128 million of its $150 million problem.  There are also necessary growth and upgrades: some chunk of the capital project costs are in the category of always improving teaching and research. Research policy is another: federal agencies force universities to subsidize research and foundations and corporations are even worse. 

But a big general driver is what I call the price of privatization. It is expensive to compete with Stanford, Cal Tech, et al for corporate partners, non-resident students, research grants, wealthy donors, senior executives, and everything else. VC Wilton said it best: "Berkeley must now compete for its three most important revenue sources [philanthropy, students, and research] against the best private and public universities." He went on to assert, "Because 87% of our revenue does not result from a legislative process, the need to be market-competitive is essential." The decline of public funding has induced a preoccupation with competing to increase mostly private revenue streams and with covering all the costs of the market competitions on offer.

In the post-crisis scramble, where do managers draw the line between necessary investments and privatization boondoggles?  Which of the projects that created that $140 million shortfall for capital debt/assets is part of the core mission and which supports off-campus interests or a favored group? How big are the avoidable costs of competition? Which competitions should be avoided on the basis of costs? If a research and teaching mission lacks a competitive revenue market, do you tax it for the sake of someone else's market competition? When you don't really know where to draw the line, and money is cheap, do you try all of them, especially if you can launch them by executive order?  Faculty, staff, and students should be directly involved in answering these questions.  They are budgetary and also properly political.

Post-Dirks, Berkeley has a real choice between faster, better privatization (and its costs) or figuring out privatization's costs and cutting it down to size.  Ironically, dialing back is supported by the budget data of its advocates. VC Wilton probably was not telling Chancellor Dirks that privatization would work because fundraising and partnerships were magic bullets.  I think they saw it more as a muddle-through strategy designed to kludge the system for another 5 years (2013-2018) with gains from non-resident tuition, educational businesses, real estate, and endowment income, at which point UC would either start big tuition hikes again or Berkeley could gain its semi-freedom to charge its own higher tuition.

The full debate between privatization and its costs never happened.  This is in large part because of the managerial decisionism I won't discuss here, and also because, as Jacques Lacan would have expected, denial was an important part of the disclosure.  Wilton Part 1 disclosed budget strategy failure.  Wilton Part 2 hid it in plain sight.  While former Chancellor Robert Birgeneau was a true believer who could effortlessly suture the contradiction, Chancellor Dirks was perhaps unsettled by the double message that UC Berkeley’s administration has been broadcasting for a decade: we must privatize; we are more public than ever. Were this so, he would naturally seem indecisive, as though he “embrace[d] ambiguity.”   In fact, privatization is ambiguous.  It wants private money, especially high net tuition, and to keep its public subsidies, and to keep its public-mission image.  Chancellor Dirks' Chronicle of Higher Education article and his resignation memos are classic performances of the not-quite-convinced that make the model feel as unworkable as it actually is.  I assume he was following the established Berkeley administrative program.  He knew the formula.  But he hadn't swallowed the blue pill. 

Berkeley's problem isn't rebenching.  Berkeley's problem isn't the UC system. Berkeley's problem is unrestored public funding in conjunction with privatization, which raises costs while encouraging cuts.  How much does its own program grow the funding gap between what public education needs and what privatization makes us want?  I'm sure the campus can find a chancellor who is willing to find out.  


10 comments:

Bob Samuels said...

I find the pension contribution numbers very unclear. The UC made a deal with the state based on getting a much higher pension contribution, but is this money going to the campuses? Also, there have been employer contributions for several years now, so why is there a sudden increase? Also, wasn't Berkeley cutting many staff and administrative positions? What about the debt from the athletic department and the new stadium. Berkeley also increased its funding by increasing the number of non-resident students.

Chris Newfield said...

The employer contributions is a 6-year ramp up. Everything you mention would need to be part of a real study of the structural problems.

R. J. Wallace said...

Look, the "privatization" battle has already been lost: when the state contributes just 11% of your total operating budget, you are already, for better or worse, substantially dependent on other revenue sources, including tuition (from both in state and out of state students) and philanthropy. Regarding the "price of privatization" (the need to compete with elite private institutions, such as Stanford and Harvard): you may not have noticed this, but Berkeley is an academically elite institution (just ranked the #3 research university in the world, for instance), which means that it is constantly in competition with elite private institutions for students, faculty, and research dollars. This is not the result of some new managerial strategy ("what privatization wants"), but is baked into the kind of institution that Berkeley is, and it is inherently expensive.

I'm sure that all of us at the UC lament the withdrawal of public support from our institution. But it seems to me silly to complain about administrators who seek new revenue sources in response to this political reality, as if they were the ones driving "privatization" and its attendant evils. The "high tuition, high aid" model might not be a lovely solution, but it at least it addresses the problem of generating adequate resources to support the university in an era of public retrenchment. Anyway, if you don't like it, then please articulate a realistic alternative. (And no, it isn't an alternative to say that the state would give the UC more money if only its administrators would set a good example of themselves, and advocate more eloquently for public support.)

What is really at threat right now is the idea of excellence in public higher education. If we stick to the terms of the pact between Napolitano and Brown, going forward, then Berkeley will become increasingly untenable as an institution. That is, given the other cost pressures that you yourself describe, it will gradually but ineluctably lose its ability to compete with elite private institutions for the best faculty, students, research grants, and so on. It will become like many other US public universities, an efficient provider of higher education products for the masses. Jerry Brown would be fine with this outcome; indeed, I think it is really his vision for the University of California (cheaper faculty who teach more courses to students in streamlined, three-year degree programs, mostly in STEM subjects). But as a Berkeley faculty member, it isn't my vision for the university. And I certainly hope that Nick Dirks's successor will work assiduously to identify additional revenue sources to keep Berkeley going in something like its current form, even if the results look to you like privatization.

Chris Newfield said...

Prof. Wallace: thank you for this very clear and eloquent comment. A few quick responses:

--I agree with you that excellence in public higher education is essential and that Berkeley in particular should stay great. I share your total rejection of the Jerry Brown dumbing down. He is already doing this (class size growth is the simplest example), and it needs to be reversed.

--A state of 40 million people needs more than a few exceptional research universities. Hence my insistence on leveling up and never down.

--Those last two goals are compatible, but only with high levels of public funding. Private revenue streams, for good economic reasons involving investors trying to minimize spillovers in their investments etc etc, simply never achieve quality at scale.

--More people, even in politics, are starting to recognize this. I don't agree with your strong assumption that the privatization battle has been lost. It's an old strategy that is no longer delivering the affordable and accessible quality it promised (or plentiful research funding). The mainstreaming of "free college" is just one example of a changing balance of ideological forces.

--The viability of quality at mass scale is a historical fact: Berkeley became its fabulous self in the 1950s and 1960s entirely on the basis of massive public investment that, though driven by Cold War defense factors, took great political courage in order to prevail in many of the same arguments we are having today. There is no necessary connection between privatization and increased competitiveness in elite competitions. These competitions are baked into Berkeley, but dependence on private revenue streams is not.

--My core argument was that privatization doesn't work in accounting terms. In a sentence, gross revenues are summed but net outcomes are not, at least publicly, and Berkeley's deficit is a plausible example of this. I agree with you that this is not a matter of bad administrators, and think it comes from a system whose political status, fueled by circumstance, greatly surpasses its validity. I certainly wouldn't expect a skeptic to be convinced by a few paragraphs on a first pass look at a summary financial schedule. But you didn't address that claim. I have more detailed calculations in a book coming out this fall, in the hope that it will help inspire more people (including some with professional accounting skills) to get involved in the full testing the privatization assumptions that we are asked to live with.

-- The baseline expectation in a post like this is is that UC Berkeley admin will at some point validate their rebenching claim with data. The post was prompted by an email chain in which a number of your colleagues said that they couldn't find any. The broader call is for systematic study of the losses as well as the gains of current policy. This will eventually involve ethical, educational, and political factors as well as budgetary ones. Full judgements are beyond the competence (and, in my view, the legitimate institutional authority) of any admin group, and should be open for discussion and analysis with faculty et al.

--You are right to imply that the "realistic alternative" does not now exist. Nor will it exist independently of our action. But we can bring it into existence with arguments and political interventions that show that (1) the forty-year old low-tax regime that seemed like it could cut costs with no losses has failed (that starts with the accounting argument); (2) the alternative, tax-funded excellence as you describe it, is cheaper, more sustainable, and more affordable. Although I share your "pessimism of the intellect," I don't see any way out other than this kind of work.

Sorry that wasn't so quick!

California Policy Issues said...

It would be useful to get precise info on what the $150 million "deficit" actually means. Does it mean that each year, Berkeley is taking in fewer dollars than it is spending to the tune of $150 million? Are its reserves therefore declining by $150 million per year? I ask because in state and local finance, words like "deficit" and "structural deficit" are used in very loose ways and often don't mean what common English suggests they might mean.

California Policy Issues said...

It would be useful to get precise info on what the $150 million "deficit" actually means. Does it mean that each year, Berkeley is taking in fewer dollars than it is spending to the tune of $150 million? Are its reserves therefore declining by $150 million per year? I ask because in state and local finance, words like "deficit" and "structural deficit" are used in very loose ways and often don't mean what common English suggests they might mean.

Chris Newfield said...

check out pdf pages 4 and 5 of the 2014-15 Annual Financial Report linked above. Varying stories can be told about the size, origins, and relative permanence of the deficits tallied there (in both net position and cash flow). But they do all mean annual shortfalls in the $150 M neighborhood. Please let us know if you think otherwise.

Chris Newfield said...

elsewhere in privatization-land: https://newrepublic.com/article/136256/will-america-finally-stop-privatizing-everything

Herry Johnson said...
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Dr Purva Pius said...
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