The Blue and Gold Scam

I confess that, like many, I was impressed by Yudof's raising the cap for Blue and Gold eligibility to $80,000: it looked a step in the right direction, intended to extend access to UC for the middle class, and a way to return to students some of the extra revenue collected through tuition increases.

But now, as Bob Meister makes clear in his analysis, the proposed increased cap is financed by revising the amount of "self-help" students are supposed to provide, and deducting such amount from their financial aid. In other words, eligibility is extended by reducing the amount provided to current recipients, at no cost to the University, who pockets the extra tuition revenue. A gimmick or, in the words of UC Financial Aid Directors, “a political plan, not a practical plan”. Unfortunately, this does nothing to improve our early assessment of Yudof's leadership.

Mons Parturiens

The final report of the Commission on the Future is out. Move it along, people, nothing to see.

What else did the Regents do?

Well, we know the Regents increased student tuition by 8%, and we know that one UCPD oficer drew a gun on students protesting the fee increase (UCPD also proceeded to take down legally posted fliers on the Berkeley campus denouncing this extreme over-reaction to the student protests — so much for the First Amendment).

Less known is that the Regents also proceeded to approve total compensation of $481,000 for the Vice Chancellor of Research at UC Davis, an increase of $243,600 over the compensation previously approved for this position. Executive VP of Business Operations Nathan Bostrum justified the appointment by pointing out the plight of UC's senior managment:

If you look at our senior management, they're grossly underpaid relative to the market. Our chancellors are 22 percent under market relative to other executives.

Student fees to rise 8%

In an "open letter to California," President Yudof announced today that he plans to bring to the Regents a proposal for a further 8% increase in tuition for in-state students (on top of the 32% increase last year), bringing in-state tuition to a total of $12,150. At the same time, UC would raise the ceiling on the Blue and Gold Program from $70,000 to $80,000 a year.

Nothing unexpected, I suppose. CSU had already announced similar increases, and the State's "restoration" of some of the cuts from last year does not go nearly far enough. But one wishes that at the same time as the University asks students and their families to pay more to attend a UC campus, they would also make a commitment towards transparency and get the different constituency around the university (students, faculty, staff, etc) involved in a serious discussion of UC's financial situation.

Harbinger of things to come

The state of the University.

Yudof's recommendations on UCRP: option C

From Academic Senate Chair Simmons (most faculty and staff should have received this):

President Yudof informed me last week that he has reached his decision on the recommendations of the PEB task force recommendations. He will recommend to the Regents that they adopt a modified version of Option C with a consistent 2.5 percent age factor for all employees, an employer contribution of 8.1 percent of covered compensation, and an employee contribution of 7.0 percent. The total normal cost of the new-tier plan is 15.1 %, which is slightly below the total normal cost of revisions to the CALPERS benefits included in the recent State budget. The new-tier benefits will apply to employees hired after July 1, 2013.

President Yudof will carry his recommendation to the Regents at the November meeting. The Regents will be expected to act on the recommendations at a special meeting on December 13. Bob and I have discussed this option with a couple of key Regents, and I anticipate that the President's recommendation will be supported, but of course there is no certainty.

The Regents will not be asked to act on employee contribution levels for current employees under continuation of the existing benefits of the current plan. As you know, employee contributions will ramp up to 3.5 percent on July 1, 2011, then 5.0 percent on July 1, 2012. The finance plan in the PEB task force report contemplates an increase to 7.0 percent, then perhaps higher over time perhaps increasing to 8.0 %.

The recommendation will maintain the existing COLA provisions, unchanged for the new-tier.

President Yudof will also recommend that Appendix E not be implemented, rejecting the recommendation in the task force report.

Appendix E concerns “restoring” benefits to those whose salary exceeds the IRS covered compensation cap (these are recommendations 10 and 11 in the task force report, apparently — and correctly — rejected by Yudof. [Thanks to a reader for pointing me to the correct "Appendix E".]

Needless to say, although it looks like the University and employees will cover the normal cost of UCRP by July 1, 2013, this does nothing to address the current unfunded liability. And any savings achieved through the new tier for employees hired after July 1, 2013 will take a long time to materialize.

UCRP option D

The Berkeley Faculty Association has rejected all three options (A, B, and C) for returning UCRP to fully funded status (Options A and B were put forward by the Post-Employment Benefit task force, and option C was developed by dissenting faculty and staff members of that task force): UCRP's unfunded liability

has multiple, complex causes, including, most fundamentally, the political failure of the state of California to support its own system of public higher education. The effects of this on UCRP have been especially dramatic, [...] because pension plans by their nature depend on long time spans between when contributions are made and benefits paid [...]. It is in this way that UC’s liability for its pension obligations, which it can neither morally nor legally walk away from, have snowballed out of control and become a threat to UC as a whole. Recent attempts to find money to pay down the liability by raising in-state student fees and by increasing enrollment of out-of-state students paying even higher fees only replace one threat to UC with another, and put the burden of solving the problem on those who had no role in creating it.

Instead of the three option, the Berkeley FA advocates process D, "a new, collaborative,
professionally facilitated, stakeholder process for developing creative solutions to the crisis at UCRP" informed by principles such as the following:

1. Do not propose regressive changes to contributions or benefits.
2. Do not propose a new tier that imposes costs only on future employees. 
3. Changes to contributions and benefits to amortize the unfunded liability should be temporary in
   nature.
4. Structure changes to contributions and benefits to amortize the unfunded liability as
   progressively as possible.
5. Focus on identifying and/or developing new internal sources of university funding for the UC's employer contribution other than student fee increases.
6. Establish a Stakeholders' Board of Trustees for UCRP implementing shared governance of the pension fund.

UCOF final report

The UC Commission on the Future adopted a final draft of its report at their meeting on Oct. 11. The draft is available here.There does not seem to much new in the recommendations that were actually adopted:

1. Shorter time to degrees, and easier CC transfers so that more students can be put through UC without increasing faculty, housing, etc.
2. Endorsement of the pilot project on online instruction.
3. Increase in out-of-state students paying non-resident tuition.
4. Adoption of "multi-year tuiton schedule" (this is one is a recognition that further tuition increases are forthcoming; rumors are getting around that the Regents will increase tuition by as much as 20% at their November meeting).
5. Increased indirect cost recovery rates, which supposedly would bring in an extra $300M a year.
6. Increased "administrative efficiency à la Bain, bringing in as much as $500M a year in savings.
7. Development of "self-supporting" programs on the model of the business schools.

Savings of $300M in grant overhead, while desirable, seems far fetched, and likely to encounter resistance in those departments that actually bring in grants. And $500M in administrative efficiencies seems frankly like pie in the sky.

More ominous than the adopted recommendations, however, are other measures considered elsewhere in the document. The report concludes with "contingency recommendations" to be considered should the financial situation further deteriorate:

1. Curtail student enrollment;
2. Reduce the amount of tuition set aside for financial aid (historically 33%);
3. Raise or eliminate the system-wide limit on the proportion of nonresident students;
4. Substantially increase tuition and fees, including charging differential tuition by campus;
5. Downsize the University’s faculty and staff workforce
6. Forego new building and capital projects that are not absolutely essential for safety. 

As the report itself makes clear, the introduction of differential tuition by campus would go a long way towards undermining the nature of the system as a 10-campus university.  It is also surprising that the downsizing of faculty and staff apparently "came to the Commission from the Academic Council."

Finally, let me point out an action item on the UCOF agenda under the heading "teaching and curriculum" (not in the draft final report of UCOF). After noting that innovation calls for the introduction of new programs, the document points out that "Adding new programs in a zero-sum environment requires eliminating or reducing program investments elsewhere." The item calls for Provost Pitts to identify "best practices"  for program review. While it's not clear whether such procedures fall under the purview of the Provost (as opposed to the individual campuses), this recommendation would seem to call for procedures for shutting down or consolidating under-performing programs around the system. [I was not able to find out the outcome of UCOF's vote on this, but I assume it was adopted.] 

Comparison-eight salaries

System-wide senate committees and working groups have started posting documents before they reach the stage of Council approval, which is a welcome development to the extent that it gives the rest of the faculty some insight into the workings of the system-wide senate and helps dispel the perception of senate proceedings as shrouded in mystery and removed from faculty concerns.

Among these documents is a report by the working group on Faculty Salaries and Total Remuneration, entitled "Faculty Salary Gap and Restoring UC Competitiveness." It makes for very interesting reading, at a time when UC seems poised to cut retirement benefits and increase employee contributions.

It's noteworthy that the proposed regime of fiscal austerity does not extend to upper echelons of the administration, witness the executive salary increases enacted by the Regents at their September meeting, bringing "executive salary increases and bonuses in fiscal year 2010 to an additional annual commitment of $11.5 million".

Equally  noteworthy is the stark contrast with faculty salaries. According to the working group report, faculty salaries lag significantly behind average salaries at the "comparison eight" institutions, a group which comprises four public universities (Illinois, Michigan, Virginia and SUNY Buffalo) and four private ones (Harvard, MIT, Stanford and Yale). Associate Professors seems to have it the worst: UC salaries lag behind comparison-eight averages by 13.3% for Full Professors, 15.2% for Associate Professors, and 9.2% for Assistant Professors.

These are average salaries, reflecting any off-step increments awarded to faculty (and we know there are units across the system where most faculty – like in Lake Wobegon – are above step). The administration has long argued that the salary lag disappears when considering total compensation, which includes benefits; but that was not true in the past, and it will certainly be even more of a fig leaf with the upcoming changes in the pension plan. 

The situation is even more disturbing when looking at the salary scales, which of course do not reflect off-step increases. Just to take an example from the report, the average salary for Full Professors at comparison-eight universities is $146,030; supposedly this should correspond to the mid-point through the Full Professor rank at UC. The on-step salary for Full Professors, step V  is $103,300 or almost a whopping 30% below the benchmark (and, yes, there actually are full professors in the system with on-step salaries). Clearly UC salary scales are totally meaningless.

In 2007 the Regents enacted a 4-year plan conceived (a) to close the gap with the comparison eight; and (b) to adjust the salary scales in order better to reflect real faculty salaries. The first year of the plan was implemented in 2007-08, but years 2-4 were promptly scrapped during the recession. In fact, faculty salaries, far from being adjusted upwards, were further reduced by the furlough program. 

The work group insists the a simple resumption of the 4-year plan would not be "tenable," and that a joint Senate-UCOP task force be appointed to further look into the situation. In the meantime, the following recommendations are put forward to the council for approval and transmittal to UCOP:

1. UC budget proposals must provide for a resumption of the Faculty Salary Plan as of 2010-11;
2. In recognition of resumed UCRP contributions, UC must enact an across-the-board increase of the salary scales of no less than 2%, also effective 2010-11;
3. As soon as possible, the university must enact a further across-the-board increase of 5% applied to both salary and off-step increments, with further increments apportioned to actual salaries and salary scales as determined by the future task force.

These are all very real issues. Faculty do not have the protection afforded a large portion of the staff by the unions, which negotiate salary and benefits. The senate is our only voice, for now at least. Each division is represented on the Council by the divisional senate chair. Contact your representative on the council and urge swift and forceful action on the issue.

UC Regents vote to increase UCRP contributions

We knew this was coming. From UCOP's official announcement:

The University of California Board of Regents today (Sept. 16) voted unanimously to increase the amount UC and its employees contribute to the pension plan, taking an important step towards putting it on solid financial footing.

Beginning in July 2011, employee members of the UC Retirement Plan (UCRP) will begin contributing 3.5 percent of salary into the plan; UC will contribute 7 percent. The amount will increase again in July 2012, with employees paying 5 percent and UC paying 10 percent.

Of course, further changes to the Retirement Plan might be forthcoming at the Regents' meeting in November.

The Bain Berkeley model for faculty: the sequel

First of all, here's why we should all care about what happens at Berkeley. The model being pushed at UCB by the administration on the basis of their Operational Excellence  initiative and the report commissioned from Bain is bound to be a benchmark for the whole system. The other nine campuses will be under increased pressure either to take similar measures or to be relegated to second-tier teaching institutions. It's important therefore that faculty and staff through the system respond to the more extreme distortions of the Berkeley-Bain model, on pain of seeing that model pushed on them as well.

We already commented on the two main components of the proposed model, i.e., the push to both centralize and standardize, and Chris Newfield now has a detailed analysis. In particular, Newfiled points out how the solutions proposed by the Bain report do not align with the problems they identify. Their diagnosis of the administrative problems at Berkeley should rather recommend a bottom-up, distributed organizational model (which is characteristic of organizations with a capacity to innovate), not the top-down, authoritarian model that Bain imported wholesale from  corporate culture – and an outdated one at that.

The most disturbing aspect of the report, of course, is the proposed staff reorganization based on the concept of supervisory span (the target here is a 6.6 span, meaning that each supervisor should have on average 6.6 position immediately below in the organizational chart). Moreover, the advertised 6% to 8% cut in their $700M payroll would translate in laying off close to 10% of the staff. Berkeley staff are understandably worried, especially in absence of any meaningful and organized response (see the comments to Michael Meranze's Staffing the Downsize).

Faculty should not be lulled in the conviction that the proposed reorganization does not affect them. It does and it will. If the recommendations of the Bain report are implemented, this would make life much more difficult for faculty as well (as also Chris Newfield points out). Let's not make any mistakes about this: until and unless the faculty speak up about this and support, even lead, the staff in their push-back, this what the future will look like at UCB and across the system.

But there is more: the Berkeley administration has, of course, a particular vision for the faculty as well (we would not expect anything less from them). It's just that it's easier to deal with staff first. The documents posted in preparation for the Aug 19 "Retreat" for Deans and Chairs spells it all out. A handout ominously entitled "Beyond Compromise" (written by two Berkeley faculty and an administrator) explains the implications of the Commission on the Future recommendations for Berkeley. Beside the by-now old chestnuts of online instruction and non-resident tuition, the presentation introduces "alternative faculty compensation plans." The handout does not go into much detail about these compensation plans, but it does indicate clearly that it would involve a "two-tiered status of faculty." The top tier supposedly would be comprised of research faculty (bringing in copious amounts of grant money under increased overhead rates), while the bottom tier would be comprised of mainly teaching faculty, including a "greater proportion of courses to be taught be lecturers and GSIs." The proposed shift would naturally result in "fewer ladder rank faculty, more lecturers."

Not a lot of reflection is needed to see just how bad an idea this is. The two-tiered model for faculty runs counter to very idea of a research institutions and undermines shared governance. The whole point a student coming to Berkeley is the opportunity to be taught by world-class faculty and, for instance, learn physics from a Nobel laureate. Conversely, our top faculty should relish the opportunity to teach introductory-level courses. Expanding the roles of lecturers and GSIs would greatly damage the idea of an institution such as Berkeley. Graduate students are not here to provide cheap labor but to learn the trade and develop their research skills.

One also has to wonder how exactly Berkeley plans to reduce the ratio of ladder faculty to lecturers and GSIs. Attrition through a hiring freeze? Tightening tenure standards? Encouraging people to leave by not matching outside offers?

Again, if the faculty at Berkeley and elsewhere do not speak up and develop an articulated response to these guidelines, this is what the future will look like.

The Berkeley Bain Report

The consulting firm of Bain & Co. has finally released their Operational Excellence report commissioned by Chancellor Birgeneau. It's chok-full of organizational jargon and catch phrases, not excluding crimes against the English language (who knew that to "incent" is now a verb?). I have taken only the most cursory of looks at the 205 slides of the report, and here are some first-hand impressions.

There are, of course, some commendable ideas in the report, for instance when it comes to energy savings (yes, it's a good idea to turn off the lights when you leave your office). But the rest of the recommendations are informed by just two principles: centralize and standardize. The distributed nature of many services at UCB, along with the diversification it entails, are identified as cost sources. The proposed solution is to centralize as much as possible the delivery of services, not just to achieve economies of scale but also to bring about increased efficiencies when the units reach a given critical mass – the appropriate size (measured in FTEs) to allow for  a more rational allocation of tasks.

The report addresses several areas:

1. Procurement
2. Organizational simplification (including HR, Finance) 
3. IT
4. Energy management 
5. Student services
6. Space management

(the last more tentative). One recurring theme that is bound to be the most controversial is the issue of supervisory span, i.e., the average number of people who report to a given supervisor. The average span at Berkeley is relatively low (about 4.4). The report recommends bringing that closer to the benchmark of "6-7 for expertise-based functions and 11-13 for task-based functions" (whatever that means). The result would be a much flatter organizational chart, with many people now in supervisory position re-classified as "contributors" (i.e., people with no further employees below them – gotta love the jargon, in the best Minitrue tradition). The report makes no effort to hide that as part of this flattening process, many employees would have to be "transitioned" (the transition is of course from "gainfully employed" to "out of work").

The main thrust of the report seems to be that about $100M of potential savings can be achieved by reducing diversification in the delivery of services, downsizing and re-organizing lower-level staff, and centralizing many functions. (I also could not help noticing how the report makes no mention of the extravagant expenses incurred by the supposedly self-sufficient UCB Athletics department, which, have been consistently backfilled with campus funds for many years.)

It is also important to take notice not just of the substance of the recommendations, but also the manner of their implementation. Bain envisages these changes to be brought about in a completely top-down manner (the word they use, of course, is "cascaded"), with no participation by the staff and faculty that would bear the brunt of these measures.

And all this, of course, cost Berkeley about three million dollars. I am sure many of our own faculty at business schools across the system could have come up with better solutions for a lot less.

The end of furloughs

UC furloughs end today, not a minute too soon. Paychecks will return to "normal" as of October 1.

Furloughs were  a bad idea to begin with (achieving savings of about 200 million, or 1% of UC's overall budget), the majority of employees (those not paid out of the general fund) were exempted from them, thereby creating a group of second class employees bearing the brunt of the cuts, and were hugely unpopular.

In addition to being a bad idea, the furloughs were badly executed. All will remember the infamous "Pitts memo," dictating that — contrary to the preferences of a majority of the faculty — furloughs were not to be taken on instructional days. Not being able to take furloughs on teaching days meant the furloughs were really just as straight pay cut, as faculty do not stop doing research on furlough days. The apparent reason for Pitt's edict was "bad optics:" it would have looked bad with the governor, the legislature and the public at large (a concern that apparently Cal State did not share).

Funny how there is no consideration of bad optics when it comes to extravagant executive compensation, $700,000 in housing expenses for the UC President (in just two years), or the "restoration" of retirement benefits for senior management at the same time as UC plans to cut those benefits for everyone else.

Even on the numbers there was never any clarity. It took the University a long time to admit that the furlough program would result in savings far greater than the advertised $200 million (about $500 million), with the extra savings to remain with the units that generated them (a clearly obfuscatory formula). 

So, good riddance to the furloughs, as we brace for the next bright idea to come out of UCOP.

PBE Task Force Report

The UC task force on Post-Employment Benefits has now released its report, which was preceded by a letter by President Yudof outlining the main recommendations (Chris Newfield speculates about the unusual timing of the letter). An informative piece appears in the Daily Californian.

The starting point is well-known: UCRP suffers from two particularly short-sighted decisions: the suspensions of employee and employer contributions in 1990 and the outsourcing of the UCRP portfolio in 2000. The combined effect of these two factors on UCRP funding levels are easily summarized:

UCRP is going from 150% funding in 2001 to projected 60% funding in 2014.

The contribution "vacation" was particularly dumb not only because it was (and is) unreasonable to expect the retirement plan to be able to coast forever without further injections of cash, but also because suspension of contributions applied to the two-thirds of employees on external grants as well. While funding agencies were all too happy not to have pay for retirement benefits, this was money that was lost forever to the University, money that UC might have to make up for with its own resources at some point (i.e., now). Had there not been a contribution vacation, UCRP would be funded at 120% today, even with the substantial declines of 2008-09.

The decision to outsource the UCRP portfolio to external managers and concomitant blacklisting of UC Treasurer Patricia Small also contributed to the decline in the funding ratio. It marked a shift from safe financial instruments to much riskier ones — stock, private equity etc. — with millions of dollars paid out in brokerage fees, while trying to chase higher rates of return that never materialized.

UCRP's unfunded liability was $13 billion in 2009 (at market value, lower on an actuarial basis); catching up would require immediate and steep resumption of contributions (about 20% this year, and as much as 37% of covered compensation in 2014  — contributions are traditionally paid one-third by employees and two-thirds by the University: how would you like to pay 12% contributions in four years?).

So UCRP is in deep shit, and the PBE task force report was developed to address the situation.  The report centers around a rapid increase in contributions (15% by 2012, divided in the usual way one-third for employees and two-thirds for the University) and the institution of a New Tier with substantially reduced contributions and benefits for new employees. Current employees would be grandfathered into the old UCRP, although with higher contribtions.

The New Tier would not have an option for a lump-sum cash out, and would raise the minimum retirement age to 55 (with maximum benefits at 65). Anther option being considered is Social Security "integration," i.e., the taking into account of Social Security benefits towards the theoretical goal of replacing 100% of a retiree's income. In fact, two "designs" are being considered for the New Tier, with different levels of benefit and contributions. Finally, current employees would also be given a one-time option to switch to the New Tier.

UC consultants Hewitt and Mercer were asked to assess the competitiveness of the New Tier with respect to peer institutions and, somewhat to the task force's surprise, found it non-competitive across all salary levels (even when UC's lower salaries are taken into account): in other words, a recipe for UC quality decline. The task force recognizes that in the face of these reduction in benefits, it is all the more urgent that UC regain salary equity with peer institutions.

Even with the New Tier in place for new employees and ramped-up contributions for old ones, there would remains huge funding gap that needs to be filled to cover UCRP's unfunded liability. Here the task force recommends a number of options, from the emission of Pension Obligation Bonds to borrowing from the University's Short-Term Investment Pool (STIP).

Perhaps most notably, the faculty on the task force decided to issue a "minority report" (while faculty and staff were well represented on the task force, their presence was minimal on the Steering Committee that formulated the final recommendations). The dissenting opinion is signed by Edward Abeyta, Robert Anderson, James Chalfant, Helen Henry, Lin King, Robert May, and Shane White, according to whom the Task Force

has made a number of recommendations, including some that we believe would be very harmful to the University. While we agree with many of the specific recommendations made, the overall emphasis on the part of the Steering Committee has been to promote cost cutting over the preservation of sustainable, competitive retirement benefits.

In particular, the minority report finds that of the two options for the New Tier proposed by the Task force, one is clearly uncompetitive (option A), and the other one is marginally competitive but only after sizable salary increases (option B):

Option A would reduce the UCRP benefit of an employee retiring at age 60 with a salary of $55,000 by 56.8%, while Option B would reduce it by 42.4%.

The dissenting opinion clearly

oppose[s] adoption of any pension plan, including Option B, which is competitive only after future hypothetical salary increases. [...] Experience suggests extreme skepticism that UC will follow through with any such salary increases. We urge that the President prepare a credible plan for salary increases to take effect simultaneously with the adoption of the new tier.

Moreover, the steep rise in current employee contributions (to 7% or above) is viewed as a way to "coerce" current employees to switch to the New Tier, in violation of the California Vested Rights Doctrine. Needless to say, the proposed "restoration" of benefits to highest paid employees (as recommended by the task force) is also viewed as an attempt to exempt Senior Management and Medical Faculty from the more draconian cuts aimed at the rest of us, the hoi polloi. 

The dissenting faculty and staff put forward a third otion for the New Tier, "Option C" which was considered but not endorsed by the steering committee. The desire to pre-empt serious discussion of Option C is viewed by some as the rationale behind Yudof's letter on UCRP changes.  In sum, the dissenting opinion

advocate[s]  (1) removing Option A from further consideration; (2) continuing consideration of Option C; (3) limiting employee contributions to 7% under “Choice” for current employees to keep the current UCRP benefit terms; (4) careful evaluation of the consequences of all recommendations for total remuneration, using the methodology that we have worked with since 2007.

As the report implies, these proposals are an effort to replace the furloughs with permanent cuts in total compensation. If this does not wake up the faculty and staff to UCOP's real priorities, nothing will.

Mandatory reading

Charles Schwartz's latest installment on the UCRP is mandatory reading for anyone worried about the performance of UC's pension fund.  President Yudof has been rebutting calls for more "shared governance" in the management of UCRP investments by pointing out that UCRP is doing just fine, thank you, and that UC faculty and staff have nothing to worry about. In particular, Yudof points out that

For the decade ended June 30, 2009, UCRP’s total return exceeded that of the benchmark by 30 percent, whereas for the previous decade the return exceeded benchmarks by only 4 percent.

This is because the 2001-2009 annualized return was  2.30% against a 1.77% benchmark (+.53%), whereas the 1991-2001 return was 13.9% against a 13.3% benchmark (+.6%).

This way of representing the annualized return is just meaningless crap: if the benchmark had been 0% even a .001 return would have been infinitely better (no doubt justifying even higher incentive pay for the Treasurer and even more astronomical fees for the external investment managers).

In fact, Schwartz compares UCRP's performance against that of a peer group  (the way it used to be before UC Treasurer Patricia Small was forced to resign so that the University could retain brokerage firms earning fat fees and commissions). Schwartz's conclusion:

The overall picture from this data is that there was much better performance, relative to peers, in the earlier years than there has been in the last decade.

So, if anybody needed any more reason to be worried about the way the University plays with our retirement money, look no further.

Oh Canada

The College Board recently released new figures for college completion rates. The percentage of 25-34 year olds  holding college degrees especially attracted attention (Bob Herbert in the NYT, for instance):

The US, having long held spot number one in the world, has now fallen to number 12. But just as interesting is the fact that Canada, where higher education has long been subsidized, is leading with 55.8%. Annual fees and tuition for an arts and sciences degree are about CAD 5,000 at the University of Toronto (half as much as at UC), and about CAD 3,600 at McGill (about 1/3 of UC fees). If there ever was any doubt that tuition is inversely correlated with completion rates, this should give everybody pause.

Among the College Board recommendations:

Keep college affordable by controlling college costs, using available aid and  resources wisely, and insisting that state governments meet their obligations  for funding higher education.

State budget and UC

The Legislature and Governor are apparently getting close to a budget agreement, with the respective proposals now only about $4 billion apart. The centerpiece of the Democrat's proposal, approved by the budget conference committee, is a tax swap increasing income taxes but reducing sales taxes. While it's not clear what the net result of the swap would be, whether it will result in lower or higher revenue for the State, it does seem to go in the right direction by replacing a regressive tax with a progressive one (but revenue from income taxes tends to be more volatile than that from sales taxes). We will see. In the meanwhile, the Governor has put State employees back on 3-days-a-month furloughs until a budget agreement is reached (the fact that employee unions that play nice with the Governor were exempted shows that this was dictated more by politics than fiscal emergency).

As far as the University of California is concerned, the proposal approved in committee maintains the $305 million in restored funding for UC, supplemented by $355 million for capital construction, and $51.3 million  to support (past) enrollment growth.

It's clear that the news could have been much worse, and the fact that both the Governor and the Legislature have proposed no further cuts is certainly welcome. But it should also be clear that this is  a drop in the bucket, which does nothing to address years of decline. The $305 million are just about the amount that was being saved last year through furloughs, so we should — God willing — see an end to furlough program. But one of the reason the furlough program was so unpopular was that it hurt a lot of people for a relatively small amount of savings (about 1% of the University's $20 billion budget).

Needless to say, UCOP's was quick to release a statement by Patrick Lenz (UC's vice president for budget) praising the Legislature for going along with the Governor's proposal. The statement says nothing about general fund money lost in the last twenty years, and makes it look like everything would just fine at UC if the State restores those $305 million. Except, of course, that UC reserves the right to further increase fees:

The proposed budget recommendations... reduce the potential for significant additional increases in student fee.

I am not sure students and their families will find the nuanced statement very reassuring.

Summertime

(Not that the living is particularly easy.) Sorry for the long posting hiatus, I have been mostly on the go for the last couple of months. Sadly perhaps, not much new to report on the UC front. Let's see:

1. UCOP is pushing ahead with the idea of online education, which they view as the silver bullet for UC's woes. They seem to have no idea how expensive it is, and how much it would water down the UC brand. Not to mention that we heard no explanation whatsoever of why students would want to pay full UC tuition for online classes taught by graduate students or part-time faculty. At their latest meeting, the Regents approved a pilot program, on condition that it be externally funded from private sources. It's hard to tell who they have in mind. Perhaps some of the behemoths of online education in which UC Regent Richard Blum has so heavily invested?
2. UCOP's second brainchild is the idea that they can save half a billion dollars in "administrative efficiencies." That's an enormous amount, and they seem to have pulled that number out of their you-know-what. As far as anybody can tell, these efficiencies will amount to more centralization, more standardization, and more over-extended and under-paid staff. While students are asked to pay more for less, staff are asked to do more for less pay. It does not take a genius to see that this will lead to lower "quality of life" on UC campuses, not just for staff, but for faculty and students as well. 
3. Summertime is, of course, budget season in Sacramento. Nothing much seems to be happening on the Capitol, except for the Governor's idea to put State employees on minimum wage until the Legislature approves a budget. California is yet again facing a budget gap of biblical proportions, with very few ideas of how to about closing it. (Notice that the gap is biblical compared to the $80 or $90 billion budget, but only a  small percentage of California's GDP of 1.85 trillion: while not easy, one would expect that not to be impossible to achieve.) UCOP is all giddy about the promised $300 million in restored funding, an amount that would help end the furloughs, as UCOP has promised. But the Governor's proposed restoration of funding is predicated on several billion in federal aid (not coming any time soon) and huge cuts in services.

The Rise of the Cyber-Campus

Christopher Edley, Dean of Boalt Hall and special advisor to President Yudof, has come up with a "fantasy." The fantasy comprises a cyber-campus delivering online instruction (and UC degrees)  "from Kentucky to Kuala Lampur." Dean Edley envisages thousand of students paying  fees on a par with those at residential campuses (as suggested, apparently, but the Governor himself), taking courses designed and "owned" by senate faculty, but delivered by "squadrons" of graduate students.

"Demand will be unlimited,"  the final goal — "global domination." The only bottleneck to the rise of the cyber-campus will be supply of graduate students (and of course, those pesky senate committees, "revel[ing]  in the comfort of denial and the conservatism of greatness").

Asked whether he was "trying to set up a separate online academic senate," Dean Edley replied: "I’m not going to go there."

[A reply by Berkeley's Faculty Association to Edley's presentation is here, and more discussion here.]

The May Revise

The Governor's revised budget is out. As widely anticipated, it's a mean, nasty budget, aimed mostly at cutting services for the elderly, the poor, and the sick and disabled. The Governor's proposal do do completely away with CalWORKS would affect about 1.4 million people in California, and withdraw support for families of the unemployed including one million children.

The Governor's budget for K-12 and higher education is in line with the January budget, meaning a small increase in funding for UC, CSU and CC over last year's deep cuts (not enough to even making up for years of decline). Some have seen here a clear gamble: threaten to turn California into the only state without a welfare-to-work program, and force the Democrats in the legislature to agree  to cuts in education in return for not annihilating CalWORKS. Since K-12 is protected by Prop. 98 (and accounts for roughly $35 billion of the $83 billion budget), and the revised budget already targets state employees' salaries and benefits, we can expect such cuts, if the Democrats fall in the Governor's trap, to affect higher ed to a greater degree.

The tale of the disappearing billions

Remember the hopeful news we were getting during the first few months of the year about rising state revenues? Well, the LA Times now reports that those gains have been completely wiped out when April revenue fell $3B short of expectations. Nobody really knows why: it might be that when the Legislature reached a budget deal last year they sped up collections in an effort to bring in more of that revenue in 2009; or it might be that with unemployment at a staggering 12.6% and furloughs of public employees people just don't have as much taxable (or expendable) income.

Be that as it may, the Governor and the Legislature now face an almost impossible task. According to the LA Times,

The retraction could mean even deeper cuts in government services — schools, healthcare for the poor and services for the elderly. Lawmakers may also be forced to consider more reductions in funds for public universities, as well as tax hikes.

Which will of course drive the State into an even deeper economic funk.  The Governor had been making noises lately about restoring (at least in part) funding for UC and CSU. We are not optimistic about that happening any time soon, which might well mean extended furloughs, layoffs, and even deeper cuts for the University.

The Governor's revised budget is due out on May 14. Brace yourselves.

UCRP allocation strategies

HFMWeek, a news portal aimed at hedge fund managers, reported yesterday a shift in the University's $63B portfolio allocation. Not surprisingly, the office of the Treasurer, which manages both the UCRP portfolio and the General Endowment Pool, has decided to decrease its  safe, long-term absolute return allocation and pursue a riskier strategy in hedge funds and other "opportunistic investments:"

UCRP has decided to decrease its long-term absolute return allocation from 10% down to 6.5%, as well as its US equity allocation ... the university had made extensive investments in hedge funds by the end of 2009, allocating across Europe-focused event driven equity, relative value credit, event driven credit and global macro.

Relative value credit and global macro refer to investment strategies that have made the news lately. Relative value credit involves taking  a long  position on certain assets while shorting other assets, in the attempt to minimize exposure to market moves. Conversely, a global macro strategy aims to exploit such movements in global financial markets by taking positions in financial derivatives (Soros followed a global macro strategy when he single-handedly brought the British pound to its knees back in 1992).

This might or might not be a sound strategy mix; it is certainly part of the current frenzy to maximize the expected rate of return in order to protect UC's credit rating. But, given that this is our money, should not UC employees have a voice in how the portfolio is allocated?

The Academic Council's "Choices" report

Not much to disagree with, here. I was impressed by AC's clarity of vision and force of argument. AC recommends that UC:

• Maintain or increase state support
• Avoid suffocating core academic programs 
• Delay the start of any new programs until the core is stable 
• Adopt a multi-year fee strategy 
• Increase budget transparency 
• Balance system-wide needs and campus needs 
• Disentangle sources of funds but recognize essential cross-subsidization 
• Avoid stratification and tiering 
• Increase diversity by recruiting non-resident students 
• Prioritize retirement funding and total remuneration 
• Honor its commitment to current employees by rewarding future service under current UCRP plan terms 
• Consider Pension Obligation Bonds to maintain the health of UCRP 
• Recognize that online education will not substantially cut cost 
• Recognize that shifting salaries to grants will have adverse consequences 
• Overhaul Indirect Cost Recovery Tax auxiliaries and medical centers 
• Increase fundraising efforts  
• Review growth of campus administration 
• Curb construction projects
• Recognize UC Merced’s unique situation and fund that campus accordingly

The real question is what the Council will do when this report goes unheeded, just like its two predecessors, the "Futures"  and the "Cuts" reports.

UCPB Choices Report Endorsed by Academic Council 4/10

UCRP problems: solved!

It's so simple, you have to wonder why nobody came up with it yet: buy Greek government bonds (current yield: 7.5%), hedging with a credit default swap from AIG. Next problem, please.

UCRP implosion

Please take a look at Chris Newfield's post on the current dire predicament of UCRP and at the report of the Task Force on Investment and Retirement (a task force convened by system-wide Faculty welfare).

The TFIR predicts that even with the gradual resumption of contributions to UCRP and the optimistic 7.5% expected rate of return, by 2022 UC would have to contribute 50% of covered salary to meet its obligations. And of course the State has already made it clear that they do not intend to fund UC's share of contributions (although they do so for CalPERS).

A few considerations can be added to Chris Newfield's analysis.

For the first time, this has the potential to hit UC in what they refer to as "revenue centers," i.e., clinical enterprises and externally supported research. The reason is that funding agencies and health insurers will only pay the employer's contributions to UCRP up to the level UC pays, and only up to six months following the closing of fiscal year when they are due. Since only one out of three UC salaries comes from general fund moneys, each deferred contribution dollar by UC results in two dollars that are lost forever. UC would then be in the position of having to insist that funding agencies and health insurers pay much higher contributions than the university at large (with the risk of losing grants and business contracts), or else make up for the difference from internal funds, if not now in the future.

The TFIR recommends that UC resume contributions immediately at the full "normal cost" level (or 17% of covered salary, divided between employees at 5% and UC at 12%), instead of the gradual ramp-up implemented by the Regents. By definition, "normal cost" does not make up for accrued liabilities, so TFIR recommends that the university (or the state) float "pension bonds" to finance repayment of liabilities. As long as UC can borrow money at lower interest than the UCRP expected rate of return, this is better than allowing those liabilities to balloon.

The alternative to these pension bonds would be a sudden dramatic increase of contributions, upwards of 20% of covered salary.

It's highly likely that UC will take a long hard look at benefits levels, with an eye to a drastic reduction. There has been a lot rumors about a "2 tier" system, in which new hires' retirement is a "defined contribution" plan (403(b) or 457(b)). But this is too little, as the big hurdle are the already accrued benefits and the liabilities originating from their underfunding.

What else can UC do? One thing they cannot do is reduce benefits that are already accrued for current employees. Such benefits are regarded as deferred compensation and UC is contractually obligated to provide them. But one thing they probably can do is reduce current employees' benefits yet to be accrued in the future. Employees would keep all the benefits in their current UCRP statements, but any future contributions would be redirected to a 403(b) or 547(b) plan, or similar. Ordinarily, this would lead to litigation, but since UC faculty don't have collective representation, UC is probably not too worried about this.

Anyway, go read Chris Newfield's post and the TFIR report. Although it's not clear that much can be done about this, the more UC faculty and staff are aware of the issues and involved in discussion, the better we are all going to be.

UC faculty salaries

A couple of interesting data points coming out of UCOP shed some light on where UC faculty salaries stand with respect to the "Comparison Eight" institutions. The Comparison Eight are four private and four public institutions that are used by UC to compare faculty salary scales and student fees. The four public universities are Illinois, Michicgan, Virginia and SUNY Buffalo; the four privates are Harvard, MIT, Stanford and Yale.

So, how does UC compare with peer institutions? The first slide shows that the last time UC salaries (general campus averages, not professional or medical schools) were in line with the the Comparison Eight average was in 1999-2000. That's when the peak of the dot-com boom occurred, Al Gore was running for president and Lieberman was still a democrat:

By 2009-2010 the average of the four private peers was out of sight, and UC was only slightly above the average of the four public peers, in spite of most of the faculty living in some of the most expensive real estate markets in the country.

As is well known, in 2006-07, the university implemented a plan to bring UC salaries back to market level by, well, next year. The first part of the 4-year plan was implemented in  2006-07, by we know what happened next:

UC salaries are now less than 90% than the market level, with no talk of resuming the 2006 plan.

UC Berkeley invests $300,000 for each student

We commented a few months ago about the hare-brained scheme at UC Berkeley to fund construction of the California Memorial Stadium and the new Athletic Center. UC was planning to pay for debt service for construction bonds at Cal Stadium by selling stadium seats at $220,000 each. We don't know how that is working out. But it appears that a similar scheme to fund the Athletic Center has run into some trouble.

UC's plan to pay for the Athletic Center was to float a $135 million construction bond, raise a similar amount through private donations, invest that amount in the stock market and use the returns on that investment to pay for debt service.

It was a good plan. Except that as David Downs reports in the Chronicle, the donations never materialized, and the first payment of $4.92 million will come due in a couple of years. It should be noted that Berkeley's intercollegiate athletic, which is supposed to be self-supporting, has in fact been losing money for many years, and had to be bailed out with several million dollars of campus general funds, and this before the Athletic Center fiasco. And the $135-million, 142,000-square foot, 4-story Center being build to house the lockers of Berkeley's football team will serve at most 450 students a year. That's $300,000 or 315 square feet for each of the 450 student-athletes using the Center.

Skimming the UCOF proposals

As widely reported, the proposals contained in the preliminary report of the UC Commission on the Future, are numerous and varied.  Here are a few highlights, beginning with the good parts.

• Continue the University's commitment to the Top 1/8, which promises the top 12.5% of high school graduates in California admission to a UC campus.
• Continued commitment to financial aid for low-income students.
• Increased graduate enrollment, to bring in line with the proportion of graduate students to undergraduates at peer research institutions.
• Establish financial aid eligibility for undocumented students.
• Give students a multi-year tuition (the standard term to replace "fee") schedule, so as to avoid mid-year increases like the one from last November.

All of these are laudable and clear goals, but none of the above address the financial situation of the university. When it comes to pointing to a possible solution to the current budget crisis, the Commission's recommendations are often vague, outlandish, controversial, or all of the above:

• Increased enrollment of non-resident students, ranging from 5% to 15% of total enrollment, possibly displacing California students. 
• Increase the newly-christened tuition by 5%, 10%, or 10% or  (according to different scenarios) a year for five years, bringing tuition to $13,148, $16,591, or $20,721 by 1015-16, respectively.
• Introduction of 3-year degrees by streamlining requirements and expansion of summer session courses and AP credit transfers.
• Exploration of online courses, the holy grail of financially challenged institutions.
• Revision and renegotiation of Indirect Cost Recovery (IRC) formulas, based on the principle that externally supported research must include 100% of indirect costs.
• Expansion of self-supporting programs, e.g., Executive MBA's.
• Allow externally supported researchers to buy out their teaching from their grants, and hiring non-ladder faculty to "backfill" those researchers' vacated teaching.
• Explore the possibility of allowing different campuses to set different tuition levels.
• Promote a set of administrative "best practices" to eliminate administrative redundancies and bring about efficiencies at all levels. 

What is most striking about these proposal is how vague they are. The last point, concerning "administrative best practices," for instance, is just an empty slogan unless substantiated by clear examples and precise criteria of applicability. Other proposals are bound to be controversial with the faculty: implemementing 3-year degrees would require strictly holding faculty and departments to pre-set teaching load (a number being circulated is 900 credit hours a year for each faculty member). Similarly, insisting on 100% indirect cost recovery will not ingratiate the science faculty at all.

The proposal that perhaps most endangers the UC system as it was originally conceived is the possibility of setting differential tuition by campus. This would mean that Berkeley and Los Angeles would be able to charge private-level tuition, while reduced funding at the remaining eight campuses would gradually turn them into state schools. It would be, for all practical purposes, the end of the UC system.

The Commission's report contains a couple of significant acknowledgments, though. The first is the recognition that with less than 100% ICR, research has to be subsidized by core funds. While this might have some rational during the good times, it is less justifiable now. The other one recognizes that given the disparity among disciplines in their access to external sources, internal funding has to be prioritized towards disciplines in the arts, humanities, and social sciences.

The report fails to endorse an oil severance tax targeted for higher-ed funding, the way it is used, for instance, in Texas. Instead, the report goes into some discussion of a general tax for higher education, which would be even more politically unfeasible than oil severance.

But the most basic and longest-lasting impression that one receives upon reading the report, is that it is a document which fundamentally lacks an overarching vision for the university. It's a report that puts together a number of local ideas, some of which have been circulating for years, hoping that their cumulative effect would lead the university out of the crisis. There is no reason to think so. The recommendations are vague, politically controversial, and occasionally contradictory.

Only the articulation of a comprehensive plan, guided by some clear and fundamental principles, would have a chance of bringing together the different constituencies in the university. The way the recommendations are formulated right now, they will only pit students against administrators, science faculty against humanities faculty, and top-tier campuses against the lower-tier ones.

UCOF recommendations

Here is a long document summarizing recommendations from UCOF's Working groups:

UCOF first recommendations

It's a long document (153pp), I will peruse and post some comments, but in the meanwhile I make it available here for public scrutiny.

Why universities should (not) be run like a business

There is an insightful post by Iain Pears over at Future Thoughts discussing the extent to which universities are, or are not, like a business, and identifying areas where university administrators, in spite of their paying lip service to the business model, have in fact much to learn from best business practices:

the current problems are arising not because university management is efficient, but because it is not. 

The proximate occasion of the post is the bone-headed restructuring plan at King's College London, but the considerations in the post seem uncannily apt for the situation at UC.

First off, it is clear that universities are not at all like businesses. At least in theory, but often in practice as well, there are all sorts of checks and balances on the way a public company is run: CEO's answer to the board and its Chairman, who in turn answer to the shareholders. Disclosure requirements, such as  10-K forms filed with the SEC, and competitive pressure protect shareholders and their interests. If Management screws up, share values go down, and shareholders have the power to take corrective measures. None of this happens in the case of universities: not-being driven by profit, there is no immediate way to measure their performance, and their boards do not answer to any vested outsiders:

The problem with importing managerial techniques into universities – and into the public sector generally – is that it has centralised authority along business lines, but has not at the same time imported the checks which monitor performance and the balances to control managerial power. The result has been conditions which are a gift to the mediocre.

It is not unexpected, then, that university administrators, fancying themselves "masters of the universe," but without external checks, would implement a skewed set of priorities.  This is true at UC as it is at KCL.

The author at Future Thoughts identifies four areas where KCL has adopted policies that call into questions the quality of its managers. It's not a little unsettling to realize that very similar considerations apply at UC:

1. Ballooning administrative costs: in well-run businesses, the proportion of administrative costs is supposed to drop relative to revenue as companies expand, resulting in administrative efficiencies and improved bottom line. Adminstrative bloat at UC has come at the cost of teaching, service, and research (which are the constitutionally mandated function of the institution).
2. Heavy expansion of debt to fund an ambitious development programme. This is all to familiar: judging by the priorities implemented by the administration, UC seems more interested in funding capital projects by floating bonds on the securities market than maintaining the quality that has characterized it for so long. In a private company, capital investment leads to lower unit costs and higher revenue. University capital investments would be justified if they cut overhead by more than what they cost. It is difficult to make the case that this is happening at UC (see the Cal Stadium retrofitting, for instance). Otherwise,
   
   
   

   Such programmes are more likely to be a burden on the balance sheet, transfer money to debt payments away from core functions, without offering matching efficiency gains. They are precisely the sort of expenditure which should be put on hold at the first sign of trouble.

3. Mishandling of personnel. KCL does not have the shared governance tradition of UC, but in both cases the administration has shown blatant disregard of faculty input (we won't forget the Pitts memo, although Pitts may wish we did). As a result, the system-wide Senate has lost much of its credibility as a vehicle for the voice of the faculty: where the Senate has not gone along with whatever scheme was being hatched in Oakland, their voice has been feeble and timid. 
4.  Failure to guard the university's reputation. Here again, UC's reputation as the premier public system of higher education in the world has been tattered. This is of course, not just the University's doing. Years of neglect and dwindling state resources are the primary culprit. But for just as many years UC leaders (the Regents, UCOP, and the Academic Senate) have been whistling in the dark, pretending that it was just another cyclic drop.

Universities are not like business, true, but require the same qualities from their managers as successful businesses do: vision, leadership, intelligence, respect, adaptability to different circumstances and the particular nature of the organization, all in the service of the "bottom line:" teaching, service, and research.

UC students and faculty, their families, as well as the people of California and the companies that want to do business in the state — these are the shareholders of the university who should finally hold the institution accountable.

Robbing Peter to pay Paul

The University of California was ordered to pay back $38 million in fees that were improperly charged to almost three thousand students at professional schools in LA, Berkeley, and elsewhere. Apparently the University admitted the students in 2003 with a commitment that they would be grandfathered into the fee schedule at the time of admission, only later to renege on that commitment and raise their fees by thousands of dollars midway through their degrees. The University has already lost similar suits, and in response the Regents have approved short-term fee increases at such professional schools to pay for the cost of the rulings. According to the  SF Chronicle, UC counsel Christopher Patti indicated that that might happen again if this latest ruling is not reversed in appeal.

In the meantime, as if almost on cue, at their next meeting in San Francisco this coming March 23-25 the Regents will consider a policy change that would allow professional schools to set their fees at levels comparable to similar schools at private universities. Currently professional schools are not allowed to raise fees above comparable public universities. The proposed policy change would just delete the word "public" from current policy.

The University of course has long considered students as a potential source of additional revenue rather than the constituency they are constitutionally mandated to serve (witness the 32% fee increase approved in November). What is particularly disturbing in this case is the insouciance with which UC proceeds to renege on firm commitments.

UCRP, GASB, and the Rate of Return

In an article in yesterday's NYT, Mary Williams Walsh reports on an increasing dual trend in public pension funds' investment strategies. On the one hand such funds are shifting their portfolios away from stocks, which they view as too volatile, and towards "safer" long-term bonds; on the other hand, to make up for the lower returns traditionally afforded by bonds, they are increasing their exposure in instruments that are viewed as riskier, such as "commodity futures, junk bonds, foreign stocks, deeply discounted mortgage-backed securities and margin investing," which are usually traded over the counter.

The mixed strategy might look as sheer madness, and indeed it is, but there is a method to the madness, or at least a rationale if not a justification. This has to do with (relatively) new accounting rules for governments, education boards, and other public entities imposed by the Governmental Accounting Standards Board (GASB). Two GASB statements, in particular, are relevant to public pension funds, including UCRP:

1. Statement 45 (issued in 2004) requires pension funds to disclose in their financial sheets the unfunded actuarial liabilities deriving from "post-employment benefits other than pensions," in particular retiree health care and life insurance. 
2. Statement 50 (issued in 2007) aligns reporting requirements for pensions to those for other post-employment benefits, as laid out in Statement 45. In particular, pension plans must disclose both the funded status of the plan and the "methods and assumptions" employed to determine the fair value of investments (including, supposedly, the expect rate of return). This is especially relevant for defined benefit plans, such as UCRP, whose liabilities are not linked to market performance.

Now obviously, in recent times, public pension funds' portfolios have taken a severe beating.  As reported by Walsh, for instance, CalPERS has lost billions of dollars in private equity and real estate in recent years. And according to the presentation of the UC task force on post-employment benefits, the value of the UCRP portfolio has plummeted by about $20B between 2001 and 2009 (bringing down its funded status from 149% in 2001 to 95% in 2009 — further projected to drop to 61% by 2013, even with 17% contributions scheduled to resume this coming April 15).

So it becomes clearer why public pension funds are under increased pressure to sustain their expected rate of return on investments, even if this means "going to Las Vegas," as the former chairman of the Texas Pension Review Board put it in the Walsh article. Without such riskier investment strategies, and given the shift to long-term bonds, the expected rate of return would further drop and their unfunded actuarial liabilities (which now have to be disclosed) would balloon.  Notice that pension funds have also been systematically over-estimating their rate of return, expecting it to be somewhere around 8% annually, whereas it has historically been a lot lower.

It is important to notice that private funds are in a somewhat different place. They also have been shifting their portfolios from stocks to bonds in recent times (this is the case, for instance, at Boeing), not planning however to sell the bonds at some future point, but to hold on to  them for many years and use the yield from the bonds to pay off pensions to their retirees as needed. Of course, it also helps that private funds are not subject to the same disclosure requirements as government entities.

So, where does that leave UCRP? For a long time, UCRP pursued a very similar strategy to the current Boeing plan, light in stocks and heavy in bonds. These were the heydays of UCRP, when contributions went on vacation for twenty years and UC Treasurer Patricia Small was single-handedly managing the immense portfolio from her office in Oakland. Then, in one of the most obscure episodes in UCRP history,  Small was forced to retire, as the Regents decided — in a not completely disinterested fashion — to shift their strategy to better yielding instruments managed by brokerage firms charging the University millions of dollars in fees. As a result, contributions have resumed and the funded status of UCRP has plummeted.

Still, this does not explain why the GASB disclosure requirements have everyone in Oakland in a panic. After all, these are just accounting rules, and disclosure of unfunded actuarial liabilities does not change the substance of the funded status of UCRP. People in Oakland knew full well that a storm was gathering even before they were hit by the GASB requirement (and if they didn't, then someone at UCOP was not doing their job).

But therein lies the rub. Disclosure of liabilities is bound to affect the University's credit rating and a case can be made that defending the credit rating has been behind a lot of UCOP's actions lately, from the furloughs to the fee increases. In fact, the announcement of the post-employment benefits task force says that explicitly. After noting that UC's unfunded liability will increase from $13 billion today to $18 billion by 2013 and to nearly $26 billion by 2018, the announcement points out that

Such a significant liability could affect UC's credit rating when seeking funding for campus buildings, hospitals and other bond-funded programs.

So UCOP is under increasing pressure to reduce its unfunded liabilities in order to protect its rating. We do not know if UCRP is also "going to Las Vegas," but it would not be a surprise if they decided to turn to riskier investments in order to boost their rate of return, which in turn will show up on their financial sheets as decreased liability. Notice that UCOP is still assuming a rate of return of 7.5%, even though the market value of assets dropped 5.6% in 2007-08 and a whopping 19.2% in 2008-09. And yet, even on that optimistic assumption, and even with resumed contributions, they project that UCRP will be funded at 61% by 2013.

So they must be desperate in Oakland, and everything is on the table. The post-retirement benefits task force has been talking explicitly of reduced benefits for new hires, but expect them to consider reduced benefits for current employees as well, given a chance they might be able to get away with it (a question for UCOP's office of the legal counsel). The same holds for retiree health care, which is increasingly expensive. In contrast to retirement, the University is under no prima facie contractual obligation to provide a given level of health care insurance to employees, past, present, and future. So post-retirement health care is probably on the table not just for new hires, and not just for current employees, but nobody would be surprised if it was on the table for current retirees as well (in the form of higher premiums and deductibles).

Furthermore, the  office of the legal analyst has already requested that the state not fund the University's share of the resumed contributions to UCRP, not even the $20M appropriated in the January budget vis a vis the $228M requested by the Regents for that purpose (but notice that the state fund contributions to CalPERS). The legal analyst also recommends that UC employees be required "to cover a portion of the costs of any future benefit enhancements or unfunded liabilities that might emerge in UCRP."

We understand why the University is in such throes when it comes to retirees' benefits. Quite simply they need a whole lot of money, which must must however come from within the UC budget other than the general fund, i.e., in the form of student fees, increased premiums and contributions, a change from a defined benefit to a defined contribution model, or even extended furloughs.

A lot will be happening soon. Stay tuned.

The day after

Yesterday's rallies and demonstrations were heard around the state and across the country. While mostly peaceful (except for a car window smashed at UCSC, the 880 freeway blocked in Oakland, and a tense confrontation at UCD), participation was somewhat less than expected. At each event numbers were in the hundreds, not the thousands. First-hand accounts can be found elsewhere, I just want to point out John Garamendi's expression of support for UC in the HuffPo, renewing calls to support Alberto Torrico's AB 656 introducing an oil-severance tax to support higher eduction in the state. Garamendi is one the few rational voices left in California politics.

Furloughs 2010-11

As is well known, Pres. Yudof has committed to ending the furlough program this summer. Now, of course, that is a proposition that raises more questions than it answers, and here is why. UCOP must be fully aware that things are not going to be significantly better next year: although the Governor's January budget allows for a somewhat larger appropriation for UC next year than this year, this will be more than offset by the loss of federal stimulus funds. And this is predicated on the very unlikely assumption that the May revise will resemble the January proposal in this respect, which is furthermore conditional upon the federal government's pitching in a few billions here and there.

So UCOP would seem to have two options, neither one of which is good. If they fail to follow through on the commitment, then their credibility is shot to smithereens (even more than it is now). If they do follow through, that raises the obvious question of why furloughs were necessary this year in the first place, and again this exposes a certain level of duplicity. So what gives? Is it possible that our fearless leaders in Oakland have not actually thought this through? 

There is, however, a third option. It all depends on what you mean by "UCOP ending the furloughs." It would appear that (given the heat UCOP is taking on the furloughs) their plan is to pass the buck to the campuses, by imposing a certain savings target, and allowing the campuses to handle this as they see fit.

I would expect some campuses (UCB and UCLA, say) to find enough funds in their budgets to end the furloughs, while other, less endowment-rich campuses, would have no choice but to continue the furloughs.

Just a thought, we'll see what happens. In the meantime, let's see how this March 4 events turn out.

CUCFA statement in support of California Democracy Act

The Council of UC Faculty Associations has released a statement in support of George Lakoff's proposed constitutional amendment to change the 2/3 majority rule back to a simple majority in matters of budget and revenue. 

The California Democracy Act is the initiative started by George Lakoff to restore a simple majority requirement for state budget and tax changes. Californians for Democracy are now collecting signatures to get the initiative on the fall statewide ballot.

You can learn more and download a petition for the ballot initiative to at http://www.ca4democracy.com/

You can’t actually sign the petition online. But, if you are a California registered voter, you can print it out, sign it, and mail it in by listing yourself as both signatory and circulator/witness. There is also a version of the form that allows you to add three more signatories. All signatories on a single form must be registered in the same county.

The deadline is April 12. By then 697,000 valid signatures will be needed, but to insure sufficient valid signatures are collected the goal is to collect 1 million signatures.

The Council for UC Faculty Associations endorses the initiative. This signature gathering effort is an opportunity for you to join your colleagues in helping to change the structure of the state legislature so that an intransigent minority will no longer be able to stop all action on the budget.

Please download the petition, sign it, and send it C4D. Although this is a long shot in the present political climate in California, it's the best hope we have. If this fails to qualify or gets voted down in November, it would be very bad news for the state and the university.

March 4

March 4 is only a couple of days away, and a number of events are scheduled around the state, including a rally on the Capitol steps. The administration has mounted a sizable effort to redirect the protests away from Oakland towards Sacramento, and certainly the dysfunctional Legislature and ineffective Governor bear much of the fault for the current state of the University. But it is also clear that, under the heading "never let a good crisis go to waste," UCOP is looking to use the current situation to push through momentous changes in the way the University is funded and run, from a shift to a "public/private" model to an attack on faculty governance (a weak senate leadership being complicit in this effort).

Will it work? Much depends on participation on the various campuses, especially when it comes to faculty that until now have preferred to sit on the sidelines.

UC Audit

The legislature's Joint Legislative Audit Committee has just approved a request submitted by State Sen. Leland Yee to conduct an audit of the University of California finances.

Sen. Yee's request  addressed three major clusters of issues:

1. Public Funds: What are the major public sources of funding for UC? This includes money awarded by the Federal govenrment for the administration of grants.  How much of the public funding is restricted in use by the funder?  How does UC define "restricted" funds internally?  How does UC expend the indirect cost money that it receives for the administration of grants from the federal government? How is public money tracked and allocated?  How are escalator increases in grants spent if employee salaries are frozen?
2. Expenditures of State Funds and Student Fees: How does the UC spend student fees and funds from the state?  What is UC's method for tracking and adjusting non-salary expenditures and expenditure categories (such as travel, consultants, entertainment, general supplies, etc)? What is UC's method for tracking per-student expenditures for instruction?  As an annual average, how much does UC spend per undergraduate student on instruction-excluding graduate instruction and research costs?  
3. Auxiliaries: What is UC's definition of an auxiliary?  How many auxiliaries exist in the UC system?  How are auxiliary revenues being used and coded by UC?  What firewalls exist to ensure no state funds are used to backfill, supplement or guarantee projects or programs authorized by auxiliary organizations?

Something is rotten

Not, as Marcellus would have it, in the state of Denmark, but with the Board of Regents. A recent article by Peter Byrne over at blog.spot.us details the conflict of interest of several Regents, including the Governor himself, in the way the University invests its endowment and pension fund portfolios.

The conflict of interest is perhaps most obvious in the case of Paul Wachter, CEO of Main Street Advisors as welll as longtime personal friend and financial adviser to Gov. Schwarzenegger. It is in the latter capacity that Wachter is in charge of Schwarzenegger's blind trust. Among the Governor's assets that are not in a blind trust is "over $1,000,000" in stock of Dimensional Fund Advisors — and Regent Wachter similarly owns, according to his financial disclosure, "over $1,000,000" in DFA stock. (No upper limit is specified in either case on the disclosure forms.)

Interestingly, since 2004, the University of California Retirement Plan has invested over a third of a billion dollars in a DFA "emerging market fund." The original investment of $226M in 2006 was raised to $329M in 2007, although the value of UC's investment  plummeted to $151M (a drop of over 50%) by the end of 2008. But we should rest assured that the value of Schwarzenegger's and Wachter's investment in DFA was shielded by the large management fees DFA charges its investors.

As Byrne puts it,

it is remarkable that Schwarzenegger and Wachter allowed the UC Treasurer to invest hundreds of millions of public dollars with an investment management firm which they partly own. The regent’s investments with DFA were not a secret: they was publicly reported to the board. And Schwarzenegger’s and Wachter’s large stake in DFA has long been a matter of public record, so the Treasurer could easily have refrained from investing in DFA.

We had already commented on the shady ways in which UC manages its investment portfolio, and this seems just further confirmation.  All the glorious details, including some possible conflict of interest of former Regents Chair Blum. aka Mr. DiFi, in the management of CALPERS's investment fund, can be found over at blog.spot.us.

Faculty statement in support of March 4 action

The future of the University of California, and public education in California more generally, is under extreme threat. Governor Schwarzenegger and the State Legislature have slashed funding, and the UC Regents, Office of the President, and campus administrations have responded with measures that undermine the core teaching, research, and service mission of the university: student fees have been raised dramatically, hiring has been frozen, faculty and staff have been furloughed, lecturers have been fired, and many staff positions have been consolidated or eliminated, even as salaries of the highest UC executives have been increased. Market standards have superseded the values of intellectual creativity and excellence. Next year’s planned cuts will only accelerate these trends. The defunding of public higher education makes a college education inaccessible to many Californians, especially those already most disadvantaged; it endangers the vibrancy and livelihood of the state; it lowers the quality of life of all of its inhabitants.

The Governor acknowledged that student and faculty protests have affected him. The time for more pressure is now.

We continue the fight for public education in California. On March 1, UC faculty, staff, and students will lobby the Governor and legislators in Sacramento. Then, the struggle for public education ramps up on March 4, a day of system- and state-wide actions called by students, staff, and faculty from the ten UC campuses, the Cal State University system, the Community Colleges, and K-12 schools. That day, there will be a march on Sacramento and other actions in the state capital, as well as actions on local campuses and elsewhere, to demand the restoration of high quality public education that is accessible and affordable to all. We, the undersigned UC faculty, will suspend “business as usual” and participate in the March 4th day of actions for public education.

UC faculty can add their name to the letter by pointing their browsers to http://checkingeducation.com/faculty-statement.

UC Berkeley and the 14th Amendment

On January 13 the UC Berkeley Committee on Student Conduct (CSC) placed Angela Miller, a UCB Junior, on interim  suspension, banned her from Campus property, precluded her from speaking to anyone affiliated with UC Berkeley, and evicted her from Campus housing. Ms. Miller was accused of participating in the Dec. 11, 2009 demonstration outside the Chancellor’s University House during which windows were vandalized and a concrete planter was broken. Eight people were arrested, including Ms. Miller, but given the insufficient evidence the Alameda County DA decided not to file any charges.

Evidently unhappy with this outcome, Berkeley decided to bring Ms. Miller in front a CSC panel to respond to the charges. During these proceedings  Ms. Miller was denied her right to counsel, refused access to photographic evidence (that only showed carrying a torch), and not notified of the Administration's intention to bring witnesses (who then turned out to rely in hearsay). Addressing her character and political views instead, the panel decided that Ms. Miller was a danger to the campus community, and proceeded to suspend her.

A post by UC Berkeley law students at Uncivil Procedure makes it clear that the University's proceedings violated Ms. Miller's constitutional rights to due process (as set forth in the 14th Amendment), also noting that

California law is clear that the rules governing disciplinary hearings at public universities are subject to constitutional due process guarantees.

The Uncivil Procedure post is a well-written and interesting piece: it forcefully shreds to pieces the University's charges against Ms. Miller, documents the breach of her constitutional rights, and makes a reasonable case that the CSC panel's aim was "to chill and impede student activism [...] UCB’s warning to any who dare show a contrary opinion." Somebody should be giving these law students an A.