After the Successful Pursuit of Private Revenue Streams, are UC Campuses Destined for Deficits?

The short answer seems to be yes.  At least one large campus is in and out of negative, two other big ones are heading towards it, and the state of the rest is unknown.   All of these have been prize pupils of revenue diversification--going into every kind of private alternative to state funding they can find.  How is this working out for them?  This is a question the UC Regents should consider when they meet this week, as they ponder the main budget request that UCOP has put together, and its apparently large 7.5 percent increase from the state.

UC Berkeley had struggled for years with reorganizations and other deals that didn't pan out as expected (e.g. Operation Excellence and its aftermath). In late 2013, then-VC for Administration and Finance John Wilton announced that Berkeley's "current path is financially unsustainable" (page 2), and said that only prudent preparation (aka building reserves) had prevented the campus from already being in deficit.  In early 2016, that deficit officially surfaced, prompting layoffs and other measures to get rid of it, as well as a one-time campus earmark of $25 million from the legislature for 2018-19.

Berkeley appeared to have stopped losing money on operations in FY 2018. In September 2019, the chancellor claimed the deficit was gone, crediting alternative revenue streams.  But current information suggests the campus has gone right back into deficit again. It projects a $43 million deficit for 2019-20, or a swing of $128 million from last year's surplus (slide 7).

Onward: here's UCLA's Budget Discussion for 2018-19.  Slide 7 contrasts the revenues the campus controls (yellow range) with those it doesn't (blue), comparing years at the beginning and the end of the period.

Ten years on from the last pre-cuts year of 2007-08, UCLA is still down $200 million in state funding.  It made up a lot of that with triple tuition from non-resident students (this is a gross, not a net).  It grew other tuition funds by taking more students.  (This is a more expensive way to grow revenues than charging the same student body more, since you also raise your costs.) UCLA expanded Self-Supporting Degree Programs (SSDPs) aggressively, and the revenues reflect another triple-tuition strategy in which you charge three times as much for what you hope are programs already in the can on the state side so you don't have to invent new things and staff up.  And UCLA is also investing various kinds of unspent funds.

It's worth noting a few visible weaknesses: tuition loses 1/3rd off the top for financial aid, which state funding does not. (Non-resident tuition now has a 10 percent contribution for return-to-aid.)  So $526 million gross tuition (excluding SSDPs) is actually $351 million net. Were SSDPs bringing in free money (more on that later), they would add about 6% of new funding to the core budget after 10 years of growth.   The reasonable idea is that you put together a lot of smaller private revenue solutions and they add up to enough to make up for lost public funds.

UCLA has worked its buns off, and  Slide 9 shows the reward.

The reward is to run an operating deficit of 21 percent of core funds by 2023.

Note that UCLA proposes to cut this projected deficit in half by positing no pension increases and expanding teaching revenues with no new staff of any kind.  Neither of these assumptions hold up.  Even if they did, UCLA would still run an 11 percent deficit on its core.

There's also UCSD-- a poster child of corporate-friendly non-state revenue growth.  But after years of hustle, it too faces an operating deficit, though smaller, growing to 4 percent of its $1.5 billion core budget ($58.3 million) in 2022-23.  This slide is courtesy of Mohamed al Elew in his thorough Triton treatment of the issue.

These three are best-case UC campuses in different ways.  All the system's campuses have distinct mixtures of resources and liabilities.  For example, UCOP has been insisting that UC Riverside mostly self-fund its start-up medical school, creating hardships for other academic programs that it now acknowledges (page 13).  Whatever their local situation, all of the campuses have been scrambling to find non-public revenues, and they have been enthusiastic and generally done well.  So why these deficit troubles?  And will next year's overall system budget, even if passed, really help?

Not so much, because of structural issues.  Turning now to systemwide materials prepared for the Board of Regents meetings this week, we can see that 4 big problems are not being addressed.

1. First is instructional revenues.  UCOP calculates that per-student funds available for instruction are about 20 percent below their 2000-01 level and still under their 2005-06 level (reduced by a second round of cuts--see Display 5).  We're jaded about the cuts in state funding (still down 24 percent at UCLA below their 2007-08 level, for example [slide 8]).  But these overall shortfalls should shock people because the figures include gross tuition and tuition paid by Cal Grants.  Tuition  revenues were supposed to have rescued our budgets: I assume state leaders, including the one now chairing the Board of Regents, still believe it.  But tuition hasn't rescued overall revenues.

2. There are also research costs. Research is essential and also expensive, and costs the host university money out of pocket to perform.  In FY 2015, Berkeley spent $174 million, UCLA spent $213 million, and UCSD spent $186 million of institutional funds to support it.  UCOP is still unable to talk about these major costs that governments and corporations ignore, or explain to the state that research is (a) the most important core function of the University of California and (b) a cost rather than a profit center. Campuses will continue to need to cover a share of research expenditures (22 percent at UC Berkeley, 21 percent at UCLA, 17 percent at UCSD).  The state and other research sponsors are going to have to fund these eventually, or we'll risk permanent deficits.

3. Pension contributions.  Ten years ago, neither employees nor UC paid into the pension fund.  Now both do.  UCOP estimates that $400 million a year of operating funds go toward these costs across the system. Total resources have to be discounted by that amount.

4. Facilities and maintenance.  While it was cutting back on everything else, the state also stopped floating bonds to pay for new construction or paying to cover deferred maintenance.  Both have degraded teaching and research conditions all over the system. The state's response to complaints was to pass legislation (AB 94, 2013) to allow UC to use operating money on capital projects. This made  the shortage of operating funds even worse.

UCOP is now proposing a major new construction program, as well as one-time deferred maintenance funding.   More remarkable images ensued.

UC has a capital need of $52 billion. Half of that has no funding source.  Display 2 shows that most of the unfunded capital need is on the campuses.  Educational activities can't fund their buildings and maintenance, while the businesses can--which is a fact of life that policymakers should face.

If we use the category loosely to include seismic and life safety issues, UC has a $14 billion deferred maintenance issue.  In recent years, campuses have had nearly nothing to spend on it.  I learned from one campus that it covers such a small fraction of its actual maintenance backlog each year that it would have to double its expenditures to catch up with its 2019 maintenance backlog by the year 2119.

There are plenty of related charts to enjoy, but you see the drift.  UC will never recover, not ever, unless it can get the state to fund solutions that match the scale of the problem.  There are no alternative revenue streams that can do this.

To stick with the last two problems I've noted: the state should provide the $2 billion it saved during the pension contribution holiday to UCRP,  in a multi-year funding plan it works out withe UCOP.  And the campuses maintenance problem needs a $14 billion general obligation bond issue.   The "alternative revenue streams' model has dug quite a hole. Let's admit how deep it is so we can eventually climb out of it.