Wednesday, November 11, 2009

FAQ: How and why the state's lack of funding has affected the UC core-operating budget

By Natalie Oshin and Joanna Clay

Concrete and steel skeletons cover UCI’s campus. It is silent as the drills and tools amass in a pile to the side, awaiting the state bond that will pay the costs to keep going.

This Thanksgiving employees are encouraged to take more vacation time and furlough days, pushing many workers into debt due to a decrease in working hours.

Students anxiously wait as they watch their financial responsibility rise. As fees are projected to increase in the following quarters, some students take out bank loans to cover the debt and others drop out. This standstill is a mark of the growing deficit and lack of investment by the state in California higher education.

Richard Lynch, the Associate Vice Chancellor of the UCI Budget Office, and Jesse Cheng, the UC Student Regent at UCI, sat down to demystify the budget, the state’s contribution to the UC, and where the accountability lies.

[Note: The FAQ below is derived from information supplied in interviews, along with publicly available documents and published reports.]

1. After almost a century of operation, the UC system finally created its Master Plan for public higher education in conjunction with the state in 1960. What is the Master Plan and how does it relate to the budget?

According to Richard Lynch, there are three main components of the Master Plan. These are the junior colleges, the State College system, and the University of California.

In the original 1960 document of the Master Plan, the state appropriated a total of approximately $121 million to the University of California, which was approximately 11% of the total state budget. This was very ambitious, given it was more than any other state in the nation was willing to spend on higher education. The initial Master Plan, though, acknowledged that changes to the cost estimates were inevitable and could not be predicted.

As Lynch says, research, which is what separates the UC system from other colleges, is what most of the state budget supports. As a consequence, the Master Plan was meant to account largely for this aspect and Lynch's claim is supported by the original document of the Master Plan that stated expenditures for research increased from $66.3 million to $208.7 million in the decade preceding the Master Plan.

This could explain why the research departments have not been affected, because clearly the Master Plan’s goal was to further institutional and instructional research. The 2002 edition of the Master Plan, the most recent version, however, emphasized the importance of the guarantee of a free public higher education to all children in California, and it recognized this as a fundamental, Constitutional right as dictated in the California State Constitution. Because of population growth since the conception of the Master Plan, the drafting committee declared in the introduction that the state is expected to support public education with the “understanding that a substantial increase in education investment will be required”. Therefore, officials of both the state and the UC system understood that more funding would be required as the UC’s grew.

In a presentation to the UC Regents by Provost Greenwood in 2005, he said that the key features of the Master Plan were “to ensure quality and efficient allocation of resources [and a] cost structure [that] enables universal access”. He also claimed that it was the state’s responsibility to fund access and that affordability was guaranteed through a state funding committee. In fact, Provost Greenwood said the main challenges and threats to the Master Plan were “declining state financial support [and] preserving affordability”.

2. How have the Master Plan’s budget policies changed over the years?

Before the creation of the Master Plan, the University of California was created under the principle that public education systems would not charge tuition to residents of California. In fact, even in the 1960 document of the Master Plan, it was expressed that a tuition-free higher education was in the best interest of the state and should be continued.

The 2002 Master Plan, however, found that the question of what an adequate amount of funding provided to schools should be, could not be answered easily. It asserted that, “California’s determinations of adequacy have been made primarily on the basis of historical expenditures, rather than on analysis of what schools actually need to provide equitable educational opportunities for all students”. A concept of adequacy was developed that was based on the belief that how much funding is provided by the state and how it is allocated to the schools depends on expectations of student achievement and institutional performance. The problem with allocating money linked to expectations of student achievement is that there are factors that could influence student achievement, such as family and cultural values, school policies, and the skills of educational providers, that allocation of funds cannot necessarily influence.

Indeed, the Master Plan was already sacrificing quality for quantity when it analyzed comparative costs on the basis of credit hours. Credit hours were the manner in which they evaluated faculty salaries, thus the educator with the most students was more valuable, turning academics into a popularity contest. The Master Plan explains that “the number of student credit hours is the sum of the product of the credit hour value of each course and the number of students enrolled in the course. Thus, 30 students completing a course of three credit hours would count as 90 student credit hours”.

Forty years ago a shift in the budget trend was occurring, and the numbers are there to prove it. In 1970, the State General Fund provided about $820 million, or 1 percent, of its total personal income, as opposed to the previous decade’s appropriation of about 11 percent of the state’s total budget.

In 1980, the newer Master Plan announced that “undergraduate teaching was being sacrificed [and] it continues to be a major issue in California”. This means that, contrary to the original Master Plan’s recognition that changes needed to be made to the allocation of funds that the state was providing, the state was further reducing its own contribution to the UC system and was raising the tuition of students to compensate.

Richard Lynch commented that there have certainly been changes in the state’s allocation of funds in the past 25 years, including a focus on what the cost would be to the state to allow one more student to enter the UC system. He said the state’s allocation methods have changed over the years, for example, in the 1990’s the state based its new allocation of funds on a marginal cost formula, which was based on the premise of what it costs to admit one more student. This had the effect of decreasing new enrollment because, as Lynch explains, marginal cost means “what does it cost to add one more [student]? For the newer campuses such as Irvine, over half of the school’s enrollment is funded at the marginal cost rate, which means that it’s all as if we were just adding one more to a sustainable base, so in some respects, our student enrollment is funded less per student that some of the older campuses”.

The impacts are hardest on newer campuses like UCI, making him worry about the lack of stability and planning there is in going forward. In the present decade, the governor of California began making compacts with the UC system, trying to add some stability to the funding stream, guaranteeing a certain percentage of funding, but now there is no compact and Richard believes that this is “probably the most serious thing that is off the table” because of the recent years of budget cuts.

3. What is the difference between tuition and student fees, and what part does the state play in this aspect?

Tuition is strictly for teaching expenses. Comprehensive state colleges and universities have historically received a majority of their operational revenue from a combination of state financing, student fees, tuition, and other revenue sources. In the case of research universities, a substantial source of the ‘other’ revenues has been state, federal, and private research grants while student fees support aspects of the campus other than academia, such as health, housing, and recreation.

The Office of the President states tuition makes up 29 percent of the unrestricted funds and 28 percent of the total UC budget. This may seem like a small slice of a big pie but tuition is a very important part of the budget because it falls under unrestricted funds, which is the core-operating budget for the UC system. Unrestricted funds are made up of tuition, UC general funds and state general funds. The core-operating budget is in charge of maintaining faculty, specifically, paying staff salaries. Therefore, tuition makes up a small percentage of professors’ and teaching assistants’ salaries.

UC President Mark Yudof contends that in order to not lose important faculty, whose departure would surely damage the university, student tuition will go up. It will ensure that class sizes remain reasonable so students can graduate on time and not have to risk spending even more money on their education.

4. Why are fees increasing?

Mark Yudof commented in The Chronicle on Higher Education, “To begin to rebuild the university, we will have to raise tuition in two phases by a total of 32 percent over the next two years—from $7,788 to $10,302. The fact is that the university has half as much money per student today as it did in 1990, based on current dollars. That’s because the state is no longer a reliable partner."

It used to be that the state would fund 78 percent of a student’s education and UC general funds and student fees would cover the rest. Now the state covers roughly 58 percent and this will decrease even more if the new set of fee increases goes through. Since 1990 the amount the state has contributed has slowly declined, the UC contribution has remained stagnant, and student fees have had to compensate by rising to fit the bill. Therefore, the rise in student fees is a direct result of the state’s falling investment in California public universities.

As mentioned in the previous question, fees go to the core-operating budget in charge of paying faculty. Student fees are rising because the state has cut 20 percent of its contribution, putting pressure on UC funds and students to keep faculty at the university.

Richard Lynch explained that the state’s funding directly pays for “faculty salaries, central administrative salaries of operations, and most of the academic enterprise operational needs, so many of our core activities are funded from the state funds, so when that is cut, it’s where our primary business is”. Tuition has steadily increased because these important features of the university must be accounted for and supported in some financial way, and since the state is unwilling to bear the burden, it then falls on the students.

Regarding the status of the core operating budget, Yudof said, “When it comes to our core support, we have only two main sources: taxpayer dollars from the state and student tuition.”

On the other hand, The American Federation of Teachers (AFT) contends that UC didn't have to turn to fee increases to solve the budget shortfall. They believe the fee hikes should be stopped, "We feel that Yudof should have made a deal with the governor with a trigger that if the state does not fund the UC at a certain level, student fees would go up. But Yudof has already pushed for drastic fee increases, and so the state has no reason to increase our funding."

Although it may seem entirely too cumbersome to force students to bear the burden, Yudof commented on the way Californians are prioritizing. “Between two burdensome alternatives — cutting costs and higher tuition — higher tuition is more protective of your welfare.”

5. Why was faculty so hard hit by the budget cuts?

Faculty was hardest hit by the budget cuts because the state cut 20 percent of it’s funding to the UC. Since the state only contributes around 17 percent of the UC budget, this cut seems small. However, this 20% was responsible for all UC core operations such as faculty and student services. Therefore, when the cut was made, faculty was directly hit.

Also, it’s important to visualize how big this pot really is: we are talking millions of dollars in loss from the state. Jesse Cheng, UCI student and UC Student Regent remarked, “The UC budget is $19 billion and the core operating budget is around $5 billion. The state used to fund about $3.5 billion of the $5 billion, [and] now it funds $2.8 billion.” That’s a big break.

Cheng explained how class sizes, layoffs, library closures, and furloughs are all direct results of the approximately $1 billion decrease in core-operating functions.

The Office of the President estimates that the cumulative cut in UC’s state funding for 2008-09 and 2009-10 will be $813 million. The reduction in state funding for 2009-10 was $637 million less that the $3.25 billion original appropriation from the state in 2008-09.

Student fees are increasing to accommodate for this loss and to retain faculty despite the substantial loss. Mark Yudof stated, “There are worse pains than having to write a larger check than before to cover higher tuition. There is the pain of seeing the best professors and researchers depart, not because they are disloyal, but because they feel the state has lost its way and won’t ever find it again.”

6. What are the reserves? Where do they come from? Why can’t we use them to mitigate the state cut?

The Office of the President defines the restricted funds as “the funds that are reported in the university’s financial statements as 'unrestricted net assets' — terminology required to be used under generally accepted accounting principles — [that] are dollars kept in thousands of funds and accounts that, for the most part, each individual campus controls for very specific uses. These funds and accounts include revenue from clinical services performed by doctors and dentists, money set aside for construction, renovation and maintenance of buildings, debt repayment and other purposes.”

In other words, The Office of the Presidents earmarks these restricted funds for “academic programs, research initiatives, capital projects or other purposes.”

There are thousands of restricted accounts all over the UC system and each campus allocates their funds completely differently. Transferring funds previously allocated for specific projects can be illegal (depending on the case). If it is legal to transfer the funds, the campus will decide independently – something that is currently occurring at every campus during this fiscal crisis.

Richard Lynch explained the rhetoric regarding 'unrestricted net assets'. “Those fund balances, reserves, are not really unrestricted reserves. Most of them are restricted for specific purposes. The Bureau of the Treasurer’s Office and the UC system [the reserves] are important for them to maintain in order to ensure that we remain a sustainable enterprise."

However, the Office of the President contends, “UC is evaluating every one of the more than 76,000 accounts and funds to make sure dollars are being spent consistent with the university’s evolving priorities and needs.”

Jesse Cheng once again clarified where the funds come from and why they are tagged by UC. “Any profit from the UC’s goes into one bank account and it looks unreserved but it’s really restricted, mentally, for all these other things. It’s a pretty common budget technique. You have a carry-forward account. For example, housing: housing has a huge carry-forward account. Why do you need such a large carry-forward account? Well, people forget that in three years UCI Housing has to pay a $1.2 million dollar bond so they’re trying to build that carry-forward to pay that bond in time. It goes the same for these unrestricted net assets. Why do you have so many billions in reserves? Don’t forget we need this much money to keep hospitals running, to validate our energy labs…. There are other factors at play here. Just because we haven’t been able to create a separate account doesn’t mean they don’t exist.”

As a student representative for UCI, Cheng made an important comment about the use of reserves to mitigate the fiscal impact. “We could draw down all our reserves, in the amount the UC is losing, we could draw down our reserves real quick and we’d still be stuck. In five years we’d still be in a worse place, worse than we are [in] now.”

Lynch and Cheng confirm that the reserves are restricted however AFT believes there is no reason the entire budget, unrestricted and restricted, should not be transparent. They also affirm that some funds can be redirected at the discretion of the UC, "The UC budget is $20 billion, and the state contribution represents about 16% and only 3% of the total budget was cut. We think this reduction should be shared equally between units. Medical centers bring in hundreds of millions in profits every year, and parking, housing, and services, all turn a profit. Taxing all units 5% would resolve the budget crisis. Moreover, according to its own legal financial statements, only 35% of the UC budget is legally restricted; in fact, courts have ruled that the UC budget is only restricted by its priorities."

7. Should the UC system be held accountable for anything, or is it entirely on the state?

It is important to understand the role of the state in funding public higher education. As their investment decreases, citizens' investment must increase. This is why over the past decade the state has gone from a majority contributor to a minority contributor when it comes to students' costs.

However, the UC system must hold the state and Californians accountable for their neglect.

AFT says, "It is too easy to blame the state for all of UC’s problems. While we need to fight for increased state funding, we have to look at the UC’s own budget structures."

Jesse Cheng had something to say about the UC’s role in the budget crisis. “The state is at fault. But I think it’s a point to realize that the UC system is responsible for holding the state accountable. The state’s investment in the UC is the system’s fault as well because we haven’t held their feet to the fire. For us to be effective as a public education model, we need to do that.” Jesse went on to say that like any public good such as health care or anything else, we must advocate for our value as a state investment.

Indeed, if no one holds the state accountable, the UC system could end up with tuition as high as private schools in the state, and the entire idea of the Master Plan would have failed completely. Richard Lynch claimed that the UC system aims to “make seats available for the top 12 percent of California high school graduating seniors, and we have stayed true to that plan to date”; however, this might not continue because those who are at the top of their classes might not be able to afford increasing costs at the UC’s. Carol M. Burke, an English professor at UCI, is worried about the impact this could have on the school, potentially making it no longer competitive with other schools and no longer attracting students of the same caliber.

Of course, decisions regarding the budget are also made by leaders of individual schools. At UCI, this is Vice Chancellor Provost Michael R. Gottfredson. Richard Lynch’s office makes many recommendations to him regarding the level of funding needed for programs, how to allocate these funds, and whether to approve or deny funding for programs. In the end, the final decision is made by the campus leader based on the amount of funds made available to him by the state.

8. Why does it seem that faculty has been cut but buildings are still being constructed?

With multiple projects occurring on campus, it may seem that buildings are still being constructed but it is quite to the contrary. Construction has halted. Jesse Cheng explained that the state decides which projects it will fund and that “capital projects are funded by completely different state funds” than those that pay for teacher’s salaries and other aspects directly related to academics. Since capital funding stopped, he said, construction was put on hold because “the state ran out of funding and could no longer fund these buildings. The capital budget did take a hit, but they are separate budgets”.

It is also important to understand that funding for capital projects comes from state bonds, not from the state funds going to core-operating functions.

Richard Lynch supported this fact and said that construction funding now comes from state bonds that have already been sold, and this is completely separate from the operating budget. In fact, there have been cuts to construction projects specifically at UCI to the Humanities building, Social and Behavioral Sciences building, the Engineering building, and the Arts building, including buildings at other campuses. Design and Construction Services for UCI states that the projected schedule for construction is subject to change because certain projects are currently unfunded as of November 2009 and they may be canceled due to lack of funding.

An interesting fact stated in the 1960 Master Plan is that further construction is dependent on the percentage of students living in residence halls. Therefore, more students on campus means more buildings.

The 2002 Master Plan in the section entitled, “Affordability of a High Quality Education System”, stated that prior to Proposition 13 being passed in California, the state financed school construction and modernization primarily through locally approved General Obligation bonds, once again emphasizing that this is a different part of the state budget.

9. Does the state fund athletics? Why were sport teams cut?

Jesse Cheng explained why teams were cut and where the funding comes from. “The cut was probably made entirely within student affairs. State fees are not going to athletics, but because they cut a certain amount of money from tuition out of athletics” it is then possible to redirect that money somewhere else. He goes on to explain that students pay a separate fee, outside of their tuition because of “a choice that UC Irvine students made to fund athletics” years ago.

Cutting sports programs is an operational decision made within the school by the athletic director of UCI, Michael Izzi, along with his staff. The state has almost nothing to do with this decision directly, although clearly it was made because of general cuts to the school. It is a combination of some decline in the program’s revenues and private gift support. UCI’s intercollegiate athletic department receives slightly less than one half of its resources from the registration fee paid by students and the spirit fee adds about 15 percent of their total funding. The balance of their funding comes from sports camp and other program revenues, and gifts and private donations.


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  2. Thanks for the information.But the main reason why the state lack funding is because of the Obama Administration as this government has not been able to fufill the requirements of the people who voted them for this needs.

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  3. Yes, you're right but this problem has been around since the early 90s and in 2002 there was a huge fee increase as well. So Obama should hold the state accountable (Arnold) but this could have been addressed way before Obama. That's the issue.