May 2011

Budget Anxiety Increases

The dire state and University budget situation was the focus of the Academic Assembly’s April 13 meeting in Oakland. UCOP’s presentation, which was first shown to the Board of Regents in March, details the precipitous decline in per student funding between 1990-91 and 2011-12, and outlines alternative scenarios for addressing the budget gap. Highlights of the presentation from Vice President for Budget and Capital Resources Patrick Lenz included the following:

• Since 1990, the state’s contribution to UC has declined on a per student basis by 57% (inflation adjusted) from $16,720 to $7,210.

 

• For the first time, student fee revenue exceeds the amount UC receives from the state. In 1990, the state provided 78% of student funding while student fees made up 12%; the state’s share of funding is now 42% of the total, while the student fee portion has risen to 46%.  

• The total amount spent per student has declined by about 20% over the past 20 years.  

• In addition to the $500M cut in state funds, UC will face an additional $362.5M in mandatory cost increases, creating an $862.5M budget shortfall in 2011-12.   Mandatory costs include employer contributions to UCRP, rising health care and utility costs, unfunded enrollment growth, capital renewal needs, and other costs.  

• Since 2007-08, campuses and UCOP have responded to budget cuts through layoffs, deferred hiring, program elimination/consolidation, debt restructuring, and administrative efficiencies.  

• To help reduce the campus share of the $500M cut, the Office of the President is eliminating at least $50M from central administration and an additional $30 million in centrally-funded academic research programs, on top of $55M in cuts it has taken since 2007-08.  

• The $500M cut may not be the worst case scenario, as the Governor’s budget depended on a June ballot initiative to extend tax increases, which has been blocked by Republicans in the legislature.

From L: Vice President Lenz, President Yudof, Provost and Executive Vice President Pitts, Senate Chair Dan Simmons, Senate Parliamentarian Jean Olson, & Senate Vice Chair Robert Anderson at the April 13 Academic Assembly meeting

Long-term funding model

In response to continuing instability in state budgetary processes, the President has asked UCOP staff to develop a five-year budget plan for the University that recognizes that state support and student fees are UC’s two main sources of revenue to support its core functions, and that the two are tied together. In May, UCOP will present several simulations based on different funding scenarios to the Regents, and will discuss the implications of an “all-cuts” budget. The plan begins from the premise that a specified level of funding is necessary to support a quality UC education, and that level of funding can only be attained through a combination of increased state support and student fees, mitigated by administrative efficiency improvements. In recognition of the importance of competitive salaries to UC’s excellence, the plan assumes annual 3% faculty salary adjustments based on merit, in addition to normal merit increases, and similar 3% salary adjustments for unrepresented staff. The funding scenarios assume that UC’s budget gap will grow to $2.4B by 2015-16 without new revenues and cost reductions, and that even with aggressive efficiency measures and alternative revenue generation, UC will still face a funding gap of $1.5B by 2015-16. The Regents will be presented with scenarios that consider how that gap can be closed by different combinations of increased state support and tuition over the five-year period. The presentation will focus on the consequences for tuition if state funding remains flat or does not significantly increase. For example, if the state maintains funding at its current level, tuition would have to rise by 18.3% each year, whereas if the state increased its investment by 12.4% annually, the University would not have to raise tuition above current levels to close the projected gap. The plan aims to reduce the volatility of tuition increases, making it possible for students and their families to plan better for UC costs from one year to the next, as well as to enable UCOP and campuses to make rational plans for the future.

 

UCOP is working with campus chancellors on one-time bridging options to address shortfalls in case of additional state funding reductions, such as additional debt restructuring and STIP/TRIP borrowing.

 

The Governor is preparing his May 16 budget revision, and it may include a September or November ballot initiative proposal and a Plan B budget to complement either timeframe. Such a plan is likely to include additional cuts to make up for the loss of tax revenue from taxes that expire in July. The State Senate has indicated it will develop its own budget proposal in mid-June, but it is unclear if and when an actual budget would be approved and adopted by both the Governor and both houses of the Legislature. And even if a budget is adopted, if it assumes revenue that is contingent on a future ballot initiative, the uncertainty about UC’s funding for 2011-12 could stretch well into the fall. It is not likely the Regents would be able to act on a long-term fiscal stability plan before the September or November meeting.

 

Funding Streams and Rebenching

In addition, UCOP is working to make its own budget more transparent. First, it plans to implement the new “Funding Streams” budget model beginning July 1, in which all revenues generated on a campus will be retained by that campus, and central operations and priorities will be funded by a flat assessment, currently estimated to be about 1.4%. The Academic Council supported the Funding Streams plan, but raised questions about its impact on enrollment and the lack of a mechanism for enforcing enrollment targets. A task force of the Academic Council is currently working on a proposal to manage enrollment, including non-resident enrollment, while meeting the University’s Master Plan commitments.

 

Council also maintained that “rebenching” the formulas that determine the allocation of state funds per student is integrally tied to Funding Streams. At Council’s request, the administration accelerated its convening of a joint Senate-administrative task force to address the details of rebenching. The President’s Budget Rebenching Committee includes five chancellors, two divisional chairs, and several other Senate representatives. It had its first meeting in April and hopes to produce a set of recommendations for systemwide review by the end of 2011. 

 

UCRP Contributions

One of the most significant budgetary pressures on the University stems from the fact that UC’s employer contribution to UCRP is scheduled to rise to 7% of covered compensation in fiscal year 2011-12, and to 10% in 2012-13. The Regents have not approved increases beyond that date, but UCOP has told campuses to expect 2% annual increases starting in 2013-14. UC employee contributions will rise to 3.5% of salary effective July 2011 and to 5% effective July 2012. UC will bring the Regents a plan for 2013-14 employee and employer contributions within a few months. The Senate opposes an employee contribution higher than 7% for current employees to remain in the existing plan.

 

Plan to fund UCRP with STIP Borrowing

The current 4%/2% employer/employee contribution is inadequate to fund the normal cost of UCRP, or the interest on the unfunded liability necessary to keep the pension plan whole. To help address the problem, the Board of Regents has authorized several actions that UCOP projects will reduce the required employer contribution from 20% to 18.8%, representing a savings of over $100 million per year. These include a combination of borrowing from the Short Term Investment Pool (STIP) and external sources that will result in the transfer of a total of $2.2B in assets to UCRP in the current fiscal year and 2011-12.

 

UC transferred $1.1B from STIP into UCRP on April 1, and now believes that it will be most cost effective to invest an additional $936M in a variable rate, 30-year corporate bond fixed at 1.5% for three to five years with a call option. They hope to execute this action by August 2011.

 

In addition, UCOP is making no-interest loans available for strategic investments in infrastructure. UC hopes all of these efforts—creating administrative efficiencies, capital market strategies such as restructuring debt and creating internal borrowing mechanisms, and increasing philanthropy—will contribute to more predictable revenue growth so that UC can plan for its future.   ¦