Financing the University – Part 19

by Charles Schwartz, Professor Emeritus, University of California. Berkeley
schwartz@physics.berkeley.edu                                     June 23, 2009

This series is available on the internet at  http://socrates.berkeley.edu/~schwrtz
and also see the blog at http://UniversityProbe.org


UC PRESIDENT YUDOF’S NONSENSICAL PLAN FOR SALARY CUTS

A dramatic proposal from UCOP (University of California Office of the President), designed to deal with the University’s financial emergency, doesn’t make sense when you look into the numbers. Happily, we are able to show how the same goal can be achieved while saving all employees a lot of money.

Introducing the Plan

     As reported by InsideHigherEd.com on 6/18/2009:

U. of California Weighs Options for Pay Cuts and Furloughs
Faculty and staff at the University of California could face a salary cut of 8 percent, 21 days of unpaid furloughs, or a combination of pay cuts and furloughs in 2010, under a proposal made by the president of the university system Wednesday. In a letter and memorandum sent to all employees of the 10-campus system and obtained by Inside Higher Ed, President Mark G. Yudof said that the “unprecedented challenges” facing the university—a deficit of nearly $800 million in the current and next fiscal years—would require $195 million in pay reductions, on top of $211 million generated through tuition increases and about $400 million that would fall to individual campuses to save through program and other reductions. The systemwide cut would be accomplished, Yudof wrote, either through an 8 percent salary decrease from August 2009 through July 2010 (4 percent for those earning under $46,000), 21 days of unpaid holidays and scheduled furloughs (slightly fewer for those who work only during the academic year and for those earning under $46,000), or 12 unpaid days and a 3.4 percent salary decrease. Yudof said university leaders would decide on one option to present to UC's Board of Regents in July.

     The June 16, 2009, letter from President Yudof to Mary Croughan, Chair of the Academic Council, was made available at the June 17 meeting of the Assembly of the Academic Senate, which I attended as an observer. The “Furlough/Salary Reduction Plan Options.” which Yudof presented and then discussed at the meeting, is in the form of a formal “Declaration of Financial Emergency”; this new concept, offered by the President only two months ago as a potential budgeting tool, is now being implemented in reality (assuming approval by the Regents.) The crisis arises from the severe budget deficit of the State of California.

     This is a systemwide plan, which starts with the following statement:

In order to ensure equity across the University, each of the Plans set forth below would apply to all faculty and staff, except student employees, including those funded by contracts and grants, clinical income and other auxiliary activity, and general [state] funds.

     This feature of the plans, which I shall refer to as the Principle of Equity in Sacrifice, can be criticized by some; but I think it is reasonable and will not question it here.  My focus is on the numbers that follow. There seems to be a major blunder in the planning.

Follow the Numbers

     Here is the crux of President Yudof’s plan. The full documents can be found at http://atyourservice.ucop.edu/news/general/0906-reduction_info.pdf.

OPTION I: 8 Percent Salary Reduction Plan
Plan: Salaries for all faculty and staff be reduced by 8%. Salaries for faculty and staff earning less than $46,000 per year be reduced by 4%.
Duration: August 1, 2009 through July 31, 2010 unless extended by subsequent Regental action. …
Projected UC General Fund Savings: It is anticipated that this Option would generate $193.5 million in UC General fund savings.

     Options II and III involve using furloughs to replace all or part of the salary cuts. The numbers are just about the same.  In my analysis below I shall approximate Option I by using an average 7% reduction in all salaries.

     Data on the total UC payroll for calendar year 2008  has been posted by UCOP at http://www.universityofcalifornia.edu/news/compensation/payroll2008/welcome.html and Table 2—Breakdown of 2008 compensation by fund source—provides the information we need to follow Yudof’s plan.

     TOTAL PAY for 2008 was $9,559,120,183.  and 7% of that is just about $670 million. To see how we get from $670 million to the $194 million savings that Yudof says will result from his plan, we need to use the further data in Table 2 that show the percentage of total pay coming from various sources. We start with:

State General Funds    21.5%
Student Fees (Ed. Fees + Reg. Fees + Prof. Fees)    6.9%

(These student fees are usually seen as a replacement for diminished state funding.)
Adding these, we get  28.4%; and that portion of the  $670 million is $190 million.

     OK. This is Yudof’s target for the “UC General fund savings.”  So far, so good.

     But what about the other $480 million ($670-$190 = $480) that will be saved by cutting everyone’s salary? In speaking to the Academic Senate group on June 17, President Yudof said that the money saved by cutting salaries of employees working under externally funded research contracts and grants would be reinvested in those same research programs going forward.  That makes sense because those are truly restricted funds, which UC cannot legally use for purposes other than those originally intended.  Table 2 shows the following percentages of restricted research funds going into UC’s total pay:

Federal government including contracts and grants    9.8%
Private Gifts, Grants and Contracts    5.9%
Local Government appropriations, contracts, and grants    1.4%
State special appropriations, contracts, and grants    1.4%
Subtotal = 18.5%    

     That accounts for  $124 million. There is also 1.2% from Endowment funds, which are likely to be restricted; that gives another $8 million, for a subtotal of $132 million.

     So, we still have $348 million ($480 – $132 = $348) to consider. The sources of all the other salary monies are:

Teaching Hospitals    21.9%
Medical Compensation Plan    9.6%
Federal overhead, etc.    7.8%
Auxiliary Enterprises, etc.    6.4%
University General Funds    3.8%
Other student fees    2.3%
Subtotal = 51.8%    

     This $348 million in “savings,” achieved by applying the uniform salary cuts to all employees, comes from funding sources that are unrestricted.  Unlike the contracts and grants monies, there are no external or legal controls on how that money may be spent; it is entirely within the authority of The Regents.  President Yudof has said nothing about what he plans to do with this $348 million in additional funds.

     At the meeting of the Assembly of the Academic Senate, I had the opportunity to ask President Yudof directly about this inconsistency.  I found his answer most confusing, and I hope he will take the trouble to explain his reasoning publicly.

Follow Some Logic

     Earlier statements issued by the Office of the President stated that all non-state funding sources were restricted.  I challenged that characterization in my writings and public statements, and in a subsequent letter from Yudof’s office my criticisms were validated.  See the letter from Vice President Patrick Lenz, dated May 12, 2009, which is posted along with my paper, “Financing the University – Part 18” at http://socrates.berkeley.edu/~schwrtz. Vice President Lenz wrote:

With respect to funds generated from sales and services, those activities may not be restricted in the legal sense, but they are of limited use in a budgetary sense.

     Let’s get the logic of this situation clear. In normal budgetary conditions, it is the standard procedure to say that all money taken in by the hospitals and the clinics, by the dormitories and dining rooms, etc. (all the various “sales and services” of UC-run business enterprises) should stay with those entities. (“They earned it; they keep it.”)

     But this is not a normal budget situation; President Yudof has asked for a formal Declaration of Financial Emergency; he has also established the Principle of Equity in Sacrifice.  So there is every reason to put all unrestricted money on the table for open analysis and debate. Then let The Regents decide.

     To do otherwise leads us into a strange and twisted world.  Suppose you say you will treat the teaching hospitals as you treat the external research contracts and grants. That is, the 21.9% of $670 million ($147 million) which those Medical Center Directors will collect by docking the pay of all their employees by 8% will be used … How?  Will it be used to buy expensive new equipment, to pay off some debts for new buildings or to refurbish some old buildings? Certainly it would not be used to pay bonuses to any of the staff or management.

     This money is a windfall for those institutions, brought about by the State’s budget woes and the University’s Principle of Equity in Sacrifice.  The employees of the hospitals are told that they are sharing the pain of fellow employees throughout the University, but their contributions are not being used for the general benefit of the University.  The same strange situation would occur at the Auxiliary Enterprises (dormitories, dining and parking facilities) on each campus.

     WHAT A NONSENSICAL SITUATION!

The Sensible Way Out

     If you follow the Principle of Equity in Sacrifice more sensibly, by allocating all of the unrestricted savings from the salary cuts to meet the budget shortfall from state funding, then you find a pleasant surprise.  Let’s say that we take all of the $538 million ($670-$132 = $538) in savings from the unrestricted 8% salary cuts and use this to replace the shortfall in state funding.  But that $538 million is far more than the $194 million that President Yudof set as the target for this emergency plan.  That means that a much lower percentage in the salary cut can do the job. I estimate that it can be around 3% instead of 8% (with a corresponding reduction in the low salary region.)  This is good news for everybody!