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| UC Board of Regents, March 2017 |
This is the answer: Never.
Or not at least until the campuses fight and change current Office of the President (UCOP) budget ideology and practice. They have never done that. Not yet.
I’m going to compare UCOP’s January state budget show with their offstage borrowing. State funding yields little, while the debt yields a lot.
I’ll keep my eye on two major implications for the campuses. The first is a lock-in of structural deficits with continuing cuts to the educational core--to both teaching and research.
UCLA remains a case in point (Liner Note 48). At the UCLA Faculty Association Blog, Dan Mitchell has found a current-year deficit of $290 million, and a three-year cumulative deficit for UCLA of $1.37 billion and counting. UCLA’s Council for Planning and Budget (CPB) has released a March update to their fall report that is close to this deficit estimate (see Table 4, DMS p 18). UPDATE March 26: Interim CFO reports, "
The second implication follows UCLA CPB’s confirmation of their previous finding that academic units and student affairs run small or zero deficits, while the big deficit spending comes from senior management initiatives (DMS 2). Management initiatives may be crowding out academics through the former’s access to deficit spending and the proceeds of institutional borrowing that faculty units lack.
To track both of these issues, every campus is going to need UCLA CPB-style vigilance from their Senates, for starters. Much more light needs to be shed on this matter of academic units being made to pay for losses run up by non-academic other stuff.
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UCOP’s January budget presentation to the Regents’ Finance and Capital Strategies (Item F1) was oblivious to all this. Nathan Brostrom, system CFO, delivered it as usual, with his regular junior partner, CaĂn Diaz, Associate VP for Budget Analysis and Planning. Their theme was budget victory and enthusiastic Newsom support.
“The Governor introduced one of the strongest budgets . .. that we have seen in the past two decades,” Brostrom said. That is like saying, “the Governor’s ramen noodle dinner tonight is one of the best ramen dinners of the last twenty nights.” Click here for further discussion of UC’s Ramen Decades. But even this was an overstatement. Brostrom’s triumphalist framing headed off serious questions from individual regents about the adequacy of the governor’s offer.
In the Governor’s January proposal for 2026-27, the only good surprise was that he proposed actually to pay UC the full increase mandated by the Compact that he had signed, rather than deferring it as he usually does. For 2026-27 the governor is proposing to keep his word! Again! This future miracle likely caused much of the room’s relief.
The Governor’s proposal for the state allocation is better seen than heard.
FIGURE 1
Well what the heck, because Brostrom and Diaz covered for the governor by misdescribing their own November 2025 budget request. At that time, they had asked for a $702.7 million increase in UC’s base budget from the state and $1.36 billion in one-time funds for deferred maintenance and related projects. The first amount came from the Compact’s 5% increase plus all past Compact increases on which the state reneged. The total ask rounded off to $2 billion.
I’ve explained why I thought this was asking for a minimal, carb-only budget (Liner Note 44). But the total was big by ramen standards.
Here’s their January summary of their November request.
FIGURE 2
Brostrom and Diaz simply leave out their requested $1.36 billion for their deferred maintenance and related problems (already lowballed as $9 billion in Figure 6). They don’t explain what actually happened: that Newsom reduced the requested $702.7 million to $480.3 million, minus another $8.1 million for housing debt service, leaving $472.2 million. This is 2/3rds of November’s request for continuing base funding and less than one-quarter of UCOP’s overall November ask.
Brostrom and Diaz didn’t point out Newsom’s reduction. Nor did any regent mention the apparently unmentionable: the state budget is nearly $250 billion, and Newsom could fully honor his UC Compact on base funding with an additional 0.05% of that. Better, apparently, not to mention the logical conclusion that Newsom (and the Democratic legislature) really don’t care too much about UC.
In the blue bubble—the funding Newsom offers—UCOP has thrown in nearly $300 million called “TSP + Asset Management Strategies. This gets the apparent total of new funding back up there in the $700 millions! But TSP stands for Tuition Stability Plan, meaning it’s student not state money, and the assets being managed are also UC’s.
Inflation, the slide notes, means UC has an additional $937 million in costs for doing exactly the same thing as this year. So UCOP has gotten half of what UC’s campuses need just to meet inflation.
This is obviously bad news for the campuses—it means continuing structural deficits that will grow without further cuts.
And yet you won’t hear doubts about UCOP’s deal for UC campuses in an open meeting of the UC Regents. The Brostrom spin was exactly the opposite, in which the Governor loves UC and proves his love with his powerful fiscal outlays.
With these misleading presentations, UCOP has turned the Board of Regents into a clinical case of hyponormalization. I’ve noted this before: “In hypernormality, the system’s dysfunction is widely noted. In hyponormality, information is withheld and discussion is blocked so that dysfunction can be denied. In both cases, administrative authority is maintained as program damage propagates through the system.”
In sum, the January presentation hid the deficits in what we might call UC Academic. The meeting sailed on, obvious to programs dying of induced cost disease along the shore.
Does UCOP have any plan? Well yes. Their same one plan!
FIGURE 3
However, high “return-to-aid” comes out of gross tuition receipts and lowers the revenues that support operations on the campuses.
The affordability politics feed the rest of the UCOP plan, which is to continue to overcrowd UC campuses, in large part via enrollment growth the state doesn’t fund, offering the legislature a political bona fide for which UC gets nothing in return, while UCOP affirms the commodified B.A. as workforce preparedness, which in turn supports degraded learning conditions on the campuses.
Sorry it’s not better news. My point is that it doesn’t have to be like this.
Note that the theater of state budgeting is fought over puny amounts that offer no meaningful change year after year. Meanwhile, if UCLA is typical, campus academic units live within their budgets, which are reduced in every typical year by inflation and politically-driven enrollment growth.
The real money and any financial fun is clearly elsewhere in the UC budget. Here we arrive at what presentations in the Board’s open finance sessions never directly discuss. That is UC Business—and their enormous debt.
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Here’s a new wonderful chart to show what overall UC operating revenues look like. It runs for the better part of a decade through the most recent UC Financial Report.
FIGURE 4
Start with the $10 billion mark ($10,000 thousands) : I’ve arbitrarily pegged a reddish-brown line there, which tracks inflation since 2018. This is not consumer inflation but the Higher Education Price Index (HEPI, designed to reflect what colleges and universities actually spend money on.
With one major and one minor exception, all UC revenues are at or below the $5 billion level– net student tuition and fees (orange), state funding (magenta), federal research funding (dark brown), and so on. Every one of these revenue sources fails to match higher ed inflation.
The minor exception is “Educational Activities, net.” In spite of its name, it is “primarily medical professional fees” (Annual Financial Report 2024-25, p 21).
The major exception is “Medical Centers, net.” Their revenues (not profits!) have doubled in seven years to top $25 billion.
In short, the only way to be at UC and get resources that beat inflation is to generate medical income. Everything else—UC Academic —is flat or falling relative to inflation.
This is a Tale of Two Universities of California. The academic core is 20 or 30% of the total budget (around 30% if you rightly include research grants, Display 1). To repeat, it experiences steady fiscal stagnation and real-dollar decline.
Medical operations are at least half of the remainder. They leverage the brains, the research, the tremendous energy of the faculty and staff of both the Academic and the Business sides—UC Health is a very high-end knowledge business the capabilities it houses and expands are obviously admirable. The issue here, though, is that they experience continuous and exciting revenue growth (“Budget for Current Operations,” 2025-26, p 4).
Were you a financial manager, which part of the operation would get your best care and feeding? Which part would most engage you as a regent, when forced to endure the state’s shell game in Figure 1?
Personally I vote for the medical side. After a quarter-century of UCOP failure to get adequate funding increases for the core, my managerial alter ego might have given up on that. (I define “failure” in charts like Figures 4 and 5 here.)
So back to UC Business. Getting those huge revenues in UC Health actually costs a lot. The medical centers have very high staff and “supplies and materials” costs. Billing and compliance are an endless nightmare. University medicine also needs a steady diet of capital projects. Capital projects require a steady diet of debt.
A core feature of UC financing that Brostrom and Diaz don’t bring up in the open meetings is the growth of UC debt.
FIGURE 5
UC total debt has doubled in this same period. Totals vary slightly, but we can round UC’s total long-term debt on June 30, 2025 to $40 billion.
UCOP adds billions in debt every year. They took on $3 billion in net new obligations in FY25 (Table 13.2a). Their net borrowing in FY25 was in the range of what they received in state funding. Accordingly, UC spent $1.3 billion last year in debt service (MDA.3, p 18).
Is this massive debt growth supposed to go on forever? And what does the debt actually build? Not all of this is medical debt. But really a lot is.
Where the debt actually goes came up in the January Finance and Capital Strategies Committee meeting in the form of a question from the only UC regent who exercises financial due diligence in public, Schwarzenegger appointee Hadi Makarechian, zooming in from the flight deck.
FIGURE 6
I’ve edited the exchange for length and clarity (@ 32’).
Regent Hadi Makarechian: We raised some bonds just last year. . . . How much of that is going to be football construction and expansion?
CFO Nathan Brostrom: we did a $2 billion bond issue in December. It was actually massively oversubscribed. We actually had over $5 billion of orders. So we actually increased the amount to $2.2 billion. That was almost all for new construction. A lot of it for our medical centers, for the San Francisco project, for the Davis project. We are doing another bond issue at the end of February, which will be almost entirely for refunding and refinancing.
Yes, UC borrows so much that refinancing is a continuous issue. And it is pleased that market demand lets it borrow even more.
In the initial presentation, Brostrom noted proposed legislation that would get the state back in the business of issuing General Obligation bonds on its own credit and using the proceeds to fund UC and CSU construction. The state did this for decades—it’s how it built UC and CSU, covering financing costs with tax receipts because the resulting academic buildings and large, high-quality campuses were a public benefit. The state stopped issuing general obligation bonds for higher ed this around 2006, during the Schwarzenegger years, so UC has had to use revenue bonds instead, meaning that interest must be covered by revenues generated by building activities (student rents in housing, patient fees in medical buildings; some discussion p 81).
Brostrom said more about the strategy.
NB: The bond issues that I mentioned in our presentation would be state GO bonds, general obligation bonds. So they would not be our obligation. We're going to be advocating for those in particular, because in our med centers and housing, we have a revenue source to repay them, but a lot in the education and research buildings, we don't have a ready revenue source.
You might assume that student tuition and state funding are revenue sources. But they don’t work the same for rating agencies, and there isn’t actually any to spare to fund capital projects for UC Academic. General funds plus tuition don’t properly cover campus operations, and hence the deficits.
Makarechian persists on this point.
HM: Aside from those [prospective future GO bonds], what is our debt capacity . . . that's left for us?
B: So, right now, we have $30 billion of outstanding debt in our general lien, as well as a second lien for medical centers, and then a third lien for housing. That doesn't include any of the P3 projects that we have done. That's just our straight debt.
And the total rounds up to $40 billion. (See Table 13.2a for some amounts and flavors.) Back to the exchange.
NB: You know, the good thing about the projects we've been doing, both on the medical center side and on housing, is that they are accretive in debt capacity. They create debt capacity, because we're adding beds that will have a revenue stream with them. Where we have less debt capacity is for education projects or research projects, where we're actually often times pledging our indirect cost recovery or other revenue sources that are threatened now.
So we have to be much more careful with those projects than with the-- I think most of the projects you're going to see are going to be in the health area and in housing.
HM: Yeah, but that's the side that limits our capacity for growth, because if you don't have classroom capacity or labs or whatever--they're not revenue, they're not housing or food services and all that stuff--but if you're limited in that area, then we couldn't accept more students.
That's really the gist of my question. What sort of debt capacity do we have left for that kind of expansion? Because I don't think we can expect much from the state on that side.
B: Yeah, that's, um, uh, I'm not going to give a hard number now, because the rating agencies will slap my hand after this, but we did just get our ratings reaffirmed at AA, so, I will work with Meg, and come up with what we think are our current. It's usually a range, Regent Makarechian, because of the range and interest rates.
Actually, if Brostrom answered the question, the hand slapping would come from his own campuses. At this point, Makarechian folded. “I’m good with the answer,” he said, even though he didn’t get an answer about debt capacity. Brostrom managed to avoid having to tell the regents when UC might have to stop covering major costs with borrowing, which touches on the issue of when it would have to stop building.
Brostrom did clarify his thinking about the distinct funding status of UC Academic. To build a campus research facility, UC has to pledge “our indirect cost recovery or other revenue sources that are threatened now.” Research doesn’t generate net positive revenue like new customers do—students paying rent or board, patients paying high American medical fees.
Nor, for Bostrom, can teaching fund borrowing. This is an interesting perspective, since finance does see students as customers. But California student customers don’t pay enough per Assignable Square Foot to build a new classroom, library, or student affairs building, given construction costs. On the other hand, high growth in patient revenues creates huge revenues to expand debt capacity. This is obviously the better business. Hence the strategy of campus overcrowding, and of using UC debt capacity for the businesses like medical and housing.
I’m shocked by UC’s steady accumulation of debt. But it bothers me not so much because I think UC faces insolvency, which I don’t. Its asset base is just too massive--$112 billion--and its net position, largely because of market gains, was $11 billion in FY2025 (Table MDA1). The debt bothers me because it covers up, and even accelerates, shrinking academic capacity on the campuses. And UCOP is all in on the strategy.
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Okay, this is getting a bit long even for me, so let me make one final point about deficits in the UC system overall. What I see is that massive revenues do not give UC comfortable or stable overall margins on operations. Massive borrowing likely makes them worse.
Take 2024-25, which is close to a best case (markets up, endowments up, pension and retiree health benefits more manageable). Narrating their figures of “primary activities” (Table MDA.3), UCOP concludes, “revenues associated with primary activities exceeded expenses by $1.6 billion in 2025 primarily due to the decrease in pension expense and retiree health benefits expense. In 2024 and 2023, expenses exceeded revenues associated with primary activities by $0.5 billion and 2.2 billion, respectively.”
In other words, UC’s “primary” operations lost $2.7 billion in FY23 and FY24, and then swung positive in FY25 because of lower benefits costs. In spite of massive revenues, and the constant feeding of UC Business, UC overall isn’t reliably running in the black year after year.
As I stare at Table MDA.3, I can make FY25’s positive income go away. As is regularly the case, “operating revenues,” which lose a lot, are saved by “non-operating revenues,” and state funds indeed should be counted as operating revenues. However, UCOP books $2.2 billion in “Private gifts, net,” yet states in the notes that “the annual income distribution transferred to the campuses from endowments held by the University was $620.4 million” for FY25 (p 100-01). The campuses certainly got private gift revenue from their campus foundations, but UCOP doesn’t say how much. Is cash flow from gifts really over $2 billion and not closer to $1 billion?
I’m not comfortable with this. The same goes for the additional $1 billion in Other Revenues, defined as “including unrestricted investment income.” This revenue is also a creature of market performance.
If we want to know how UC operations are doing, and include only education-based “non-operating” revenues (state funding, “Direct government grants,” and “Federal Pell Grants”), UC in FY25 stayed in the red. Not by much--$280 million. But it looks like the University, with its enormous revenues, huge fiscal complexity, and titanic financing efforts, is barely scraping by.
In short, given the current model, UCOP will not be fixing the campus deficits. Like never.
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At the end of the September 2025 meeting of the same regents’ finance committee, and a long delicate discussion of the Tuition Stability Plan renewal, its chair Michael Cohen thought it was over, and then saw a request to speak.
Q: I have a quick one, and I recognize I've been with the system for only 18 days.
Michael Cohen: Yes. Please, please add your insights from 10 days.
Q. So, basically I’m all for affordability and low indebtedness for our students, completely committed to that. At the same time, the plans that we have, where we guarantee the tuition for student cohorts for five years, I mean, it's admirable, if we can afford it. The question is, can we afford it? Because all our costs, faculty costs, staff costs, student employee costs increase annually, not every five years. So, I think the structural deficits will keep increasing with this model. In my opinion, but again, I've been around for only a few days.
CFO Bostrom: Truth is, the way it works, once you get fully baked in, it does increase by 5% every year . . . it's a 20% increase for the new class that comes in. So, it does average out to be 5%.
The questioner was Dennis Assanis, the new chancellor for UC Santa Barbara. He went home and (re)did the math, put up a “transparency” website (99% data free!), and imposed cuts to UCSB Academic of 10%.
