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 health 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.