Financing the University – Part 19
by Charles Schwartz, Professor Emeritus, University of California.
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.
As reported by InsideHigherEd.com on 6/18/2009:
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
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.
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.
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.
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
Student Fees (Ed. Fees + Reg. Fees + Prof. Fees) 6.9%
(These student fees are usually seen as a replacement for diminished
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
State special appropriations, contracts, and grants
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:
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.
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!
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!