How much will it cost us to restore public higher education?

 

This post has been superseded by updated versions:

How much will it cost us to restore public higher education in 2011-12?

How much will it cost us to restore public higher education in 2012-13?

How much will it cost us to restore public higher education in 2013-14?

 


 

Raising revenue has become such a taboo subject in California politics, nobody has gone to the trouble of actually answering that question — until now.

For the median California tax return (individual or joint), restoring the entire system while rolling back student fees to what they were a decade ago would cost less than $32 next April 15.

Surprised? So were we. Read “Financial Options for Restoring Quality and Access to Public Higher Education in California” below or download a PDF of it (March 2010, 9 pp.) If you’re really a policy wonk, download the spreadsheets behind this report.

540 Calculator: What restoring the system will cost you.


WORKING PAPER

FINANCIAL OPTIONS FOR RESTORING QUALITY AND ACCESS TO PUBLIC HIGHER EDUCATION IN CALIFORNIA

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Stanton A. Glantz
Professor of Medicine
American Legacy Foundation Distinguished Professor in Tobacco Control
University of California San Francisco
Chair, University of California Systemwide Committee on Planning and Budget (2005-6)
Vice President, Council of UC Faculty Associations
glantz@medicine.ucsf.edu

Eric Hays
Director of Research, Council of UC Faculty Associations
info@cucfa.org

(Version 2 — March 18, 2010)
Council of UC Faculty Associations
15 Shattuck Square, #200
Berkeley, CA 94704
Phone: (800) 431-3348

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EXECUTIVE SUMMARY

It is widely recognized that large reductions in state funding and sizeable increases in student fees have eroded quality and accessibility in California’s three-segment system of public higher education: the University of California, California State University and California Community Colleges. But, until now, no one has  estimated what it would cost – through restored taxpayer funding or tuition increases — to restore the system’s historic quality while accommodating the thousands of qualified students excluded by recent budget cuts. This working paper considers state funding, student fees and accessibility to answer three basic questions about the public higher education system in California:

#1.  How much would it cost taxpayers to push the “reset” button for public higher education, restoring access and quality (measured as per-student state support) while rolling back student fees to 2000-01 levels, adjusted for inflation?

Answer: It would cost taxpayers $4.643 billion.

#2. Absent restoration of taxpayer support for public higher education, how much more would student fees need to be increased to restore the level of per-student resources available in 2000-01 and accommodate all eligible students?

Answer: UC fees would have to increase above currently approved levels by $5,514 (to a total of $17,064), CSU fees by $2,075 (to $6,968) and CCC fees by $484 (to $1,264).

#3.   If the Governor and Legislature were to decide to push the “reset” button, — reinstating the quality and accessibility standards of the Master Plan by returning state support and student fees to 2000-01 levels, adjusted for inflation — what would it cost the typical California taxpayer?

Answer: It would cost the median California taxpayer less than $32.

Introduction

It is widely recognized that beginning with Governor Gray Davis’ 2001-2 budget year and accelerating with Governor Arnold Schwarzenegger’s Compact for Higher Education,[1] higher education in California has suffered large reductions in state funding.  These reductions have effectively abandoned the California Master Plan for Higher Education[2] promise of high quality, low cost public higher education for all, through an articulated system consisting of the University of California, California State University and California Community Colleges. Funding has fallen more quickly in California than in the United States as a whole (Figure 1a).

At the same time, fees in all three sectors have increased much faster in California than in the US as a whole (Figure 1b). While these fee increases have generally been framed as responses to the State’s immediate budgetary problems, they are also congruent with an explicit public policy choice, purportedly based on free market principles, to shift higher education from a public good provided by society as a whole through taxation to being a private good purchased through user fees.

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state-funding-ca-us

fees-ca-us

Figure 1. State funding and fees per student in California compared to the rest of the United States. State support of higher education in California has been below the national average. Support has fallen more rapidly and fees have increased more quickly than in the rest of the United States. California is not simply following national trends. (Sources: State Higher Education Executive Officers http://www.sheeo.org/finance/shef-home.htm, California Legislative Analyst’s Office http://lao.ca.gov/sections/econ_fiscal/Historical_Expenditures_Pivot.xls, College Board http://www.trends-collegeboard.com/college_pricing/, and California Post Secondary Education Commission http://www.cpec.ca.gov/OnLineData/SelectFirstOptions.ASP?ReportType=Enroll.)

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This shift in public policy is stated in the 2004 Compact on Higher Education between Governor Schwarzenegger and the UC President and CSU Chancellor: “In order to help maintain quality and enhance academic and research programs, UC will continue to seek additional private resources and maximize other fund sources available to the University to support basic programs. CSU will do the same in order to enhance the quality of its academic programs.” Until this point, the state was viewed as the primary source of support for “basic programs” with private sources being used for additional initiatives.

This working paper seeks to tie together the three elements of change: drops in state funding, fee increases, and declines in quality (measured as per student expenditures). It takes as its base year 2000-01, the last year that higher education was reasonably financially intact before the recent large fee increases. This paper addresses three questions:

  1. How much would it cost taxpayers to push the “reset” button for public higher education, restoring access and quality (measured as per-student state support) while rolling back student fees to 2000-01 levels, adjusted for inflation?
  2. Absent restoration of taxpayer support for public higher education, how much more would student fees need to be increased to restore the level of per-student resources available in 2000-01, and accommodate all eligible students?
  3. If the Governor and Legislature were to decide to push the “reset” button, — reinstating the quality and accessibility standards of the Master Plan by returning state support and student fees to 2000-01 levels, adjusted for inflation — what would it cost the typical California taxpayer?

Answer No. 1: Returning quality and fees to the level of 2000-01 would cost taxpayers $4.643 billion.

By restoring state funding to 2000-01 levels, it would be possible to return student fees to the levels of 2000-01 (adjusted for inflation) while maintaining quality (measured as total per student funding). Specifically, annual fees at UC would be rolled back to $4,924 (from $11,550), for CSU to $2,284 (from $4,893) and CCC to $410 (from $780).

table1

Table 1 shows the calculations that produced this number.[3] We begin with the numbers of full time equivalent (FTE) students in each of the three sectors of California higher education and total state general funds supplied to each sector,[4] then divide one by the other to obtain the state funding per student FTE. Next we adjust the 2000-01 dollar amounts for inflation to their equivalents for 2009-10 and subtract the actual levels of funding per student currently enrolled in each sector to determine the funding shortfall compared to 2000-01.

Restoring full state funding for existing enrollments would cost a total of $3.543 billion.

These calculations do not tell the whole story, however, because all three sectors have responded to resource cuts by admitting fewer students than they would under the Master Plan. UC has reduced enrollment by 2,300 students,[5] CSU has reduced enrollment by 40,000 students;[6] and the CCCs have reduced enrollment by 186,000 FTE students.[7] We assume that providing funding for these students, in addition to current enrollments, would restore full access to each segment of California’s public higher education system. The cost to support full enrollment at 2000-01 levels of state per-student support would be $4.643 billion.

Student fees would return to their 2000-01 levels, adjusted for inflation: $4,924 for UC, $2,284 for CSU and $410 for CCC.

Answer No. 2: Restoring the public higher education system for all students who meet the standards outlined in the Master Plan only by increasing student fees would require raising UC fees an additional $5,514 (to a total of $17,064), CSU fees by $2,075 (to $6,968) and CCC fees by $484 (to $1,264).

Table 2 outlines the calculations that led to these numbers.[8] The overall approach is the same as in Table 1, except that rather than restoring per student total expenditures by increasing state support, it is done by increasing student fees.  Calculations for UC and CSU assume that it continues its “high fee high aid” policy of allocating 33 percent of fees to student aid.[9] The total funding per student used as a measure of quality is the sum of state funding and net tuition and fees after deleting the fee amounts returned to aid.

These calculations assume no further cuts in state support for higher education. For each additional 10 percent cut in state support, tuition and fees at UC would have to be increased by $1,645, CSU by $812 and CCC by $268 in order to maintain quality at current enrollment levels.

table2

Answer No.3: Restoring public higher education while returning student fees to 2000-01 levels would cost the median California taxpayer an additional $32.

Table 3 outlines these calculations. We obtained the distribution of taxes paid by adjusted gross income from the Franchise Tax Board for 2006,[10] the most recent year available, then allocated the $4.643 billion it would cost to restore public higher education to 2000-01 proportionately to the amount that each taxpayer now pays across all taxpayers.  Note that the categories are for tax returns, not individuals, so the results are for joint returns (families), individual returns, partnerships and Subchapter S corporations, as well as corporations that pay income taxes.

For the median personal income taxpayer, restoring the entire system while rolling back student fees to what they were a decade ago would cost less than $32 next April 15.[11] For the two-thirds of state taxpayers with taxable incomes below $60,000, it would cost $86 or less. For the 12 million state taxpayers with AGI below $100,000 (81 percent), it would be $242 or less.

Income taxes are presented as one option, simply to illustrate the cost for typical taxpayers.  Personal and corporate income taxes are only 65 percent[12] of all state revenues; part of the $4.643 billion could be allocated to other taxes, which would lower the effect on individual income tax payers. We also assume that the costs would be distributed uniformly across all tax categories. If the cost were allocated more or less progressively, that would also affect impact on individual taxpayers.

Limitations

The calculations outlined in this working paper are all based on publicly available numbers and do not benefit from models of enrollment dynamics that may be maintained by state agencies or the three segments of the California public higher education system. We assume that there would be no change in enrollment between Fall 2009 and Fall 2010 under our base case. The estimates do not account for price elasticity: as tuition and fees increase, some students decide not to attend public higher education in California, which will reduce student demand.

We assume, based on public statements and documents, that increasing UC enrollment by 2,300, CSU by 40,000 and CCCs by 186,000 would allow every interested student to attend an appropriate institution of public higher education in California. As a result, the $4.643 billion estimated total cost (and the corresponding $32 median tax increase) may be an upper bound estimate of the actual cost. At the same time, the $3.543 billion shortfall based on current enrollments (Table 1), which corresponds to a median tax increase of $24, probably underestimates the cost. The true cost — and impact on taxpayers — is likely to be between these two estimates: $24-32.

Finally, the distribution of taxes is based on 2006, the most recent time for which data are available; this distribution will be slightly different in 2010.

These calculations will be updated and subsequent versions of this Working Paper will be released as better data become available.

table3

FOOTNOTES:

[1] The full text of the Compact is at http://budget.ucop.edu/2005-11compactagreement.pdf.

[2] The full text of the Master Plan is at http://www.ucop.edu/acadinit/mastplan/MasterPlan1960.pdf. For a discussion of the history and current status of the Master Plan, see Legislative Analyst Office, “The Master Plan at 50: Assessing California’s Vision for Higher Education,” November, 2009, available at http://www.lao.ca.gov/laoapp/PubDetails.aspx?id=2141.

[3] The spreadsheet used to obtain all the results in this working paper is available.

[4] FTE data comes from the California Postsecondary Education Commission available at http://www.cpec.ca.gov/OnLineData/SelectFirstOptions.ASP?ReportType=Enroll, state expenditure data comes from the Legislative Analyst’s Office available at http://lao.ca.gov/sections/econ_fiscal/Historical_Expenditures_Pivot.xls.

[5] UC cut enrollment 2,300 in 2009-10 and plans to cut enrollment a further 2,300 in 2010-11, see: http://www.universityofcalifornia.edu/regents/regmeet/nov09/f3.pdf)

[6] According to http://www.calstate.edu/PA/News/2009/enrollment-budget.shtml CSU is curtailing enrollments by “more than 40,000 students.”

[7] According to http://www.cpec.ca.gov/Agendas/Agenda0909/Item_07.pdf CCC enrollment has been reduced by 186,000 FTE students. The estimated increases in state funding or fees that are computed based on this estimate are higher than would be necessary to the extent that some of these students are the 2,300 denied admission at UC or the 40,000 denied admission at CSU. Restoring access to UC and CSU would reduce the demands placed on CCC.

[8] Table 2 of the December, 2009, version of this report calculated the fees required to restore higher education quality, but did not include the costs to accommodate eligible students who are currently being denied admission. This version of the report updates Table 2 and the relevant discussion to calculate the fees required to restore quality and enrollment.

[9] See page 16 of http://www.assembly.ca.gov/acs/committee/c2/hearing/2005/april%2020%20%202005-uc%20csu-%20public-%20cm.doc.

[10] State income tax revenue by adjusted gross income class: http://www.ftb.ca.gov/aboutftb/Tax_Statistics/AGIC.shtml and state income tax revenue from corporations: http://www.ftb.ca.gov/aboutftb/Tax_Statistics/Corporations.shtml.

[11] For comparison, in 2007 the statewide median income for all personal income tax returns rose to $35,646, while the median income listed on joint returns was $68,797. Source: Franchise Tax Board, available at http://www.ftb.ca.gov/aboutftb/press/2009/release_25.shtml.

[12] Governor’s Budget Revenue Estimates: http://www.ebudget.ca.gov/pdf/BudgetSummary/RevenueEstimates.pdf.

Surprised? So were we. Read “Financial Options for Restoring Quality and Access to Public Higher Education in California” below or download PDF

Where Does UC Tuition Go?

by Bob Meister,
President, Council of UC Faculty Associations
Professor of Political and Social Thought, UC Santa Cruz

(A PDF version of this article is available.)

UC feels free to use Educational Fees however it pleases without accountability. That’s why it can pledge “ed fees” as collateral for construction bonds and use them to pay debt service.[1] In the past week, I have discovered another, equally disturbing, consequence of UC’s refusal to be accountable for its use of “ed fees:” It has allowed (or perhaps more accurately used) the rapid growth in “ed fees” to dramatically increase the disparities in the per student funds it provides to each campus. As tuition rises, students are not getting what they think they are paying for on their own campuses, and the entity they are paying has not been transparent about where the money goes.

Why was this discovery so shocking? I knew that UC distributes enrollment-generated revenue unequally among the campuses. But this was so, I believed, for purely historical reasons. Over twenty years ago, when state funds far exceeded “ed fees,” UC let the more established campuses lock in a higher base budget (justified by a higher proportion of grad students) while requiring that all future budget increases be funded across the system on an equal per student basis. Although state funds are still distributed unequally under this formula, it was natural to assume that the principle of funding all UC students equally across the system would apply not only to new state funds, but also to any increase in tuition that was charged uniformly across the system. But UC has not held itself to any principle governing its use of tuition. As “ed fee” revenue tripled over the past twenty years—it now exceeds UC’s total state funding—UC reintroduced differential rates of per student funding on the tuition side, which meant that the campus funding differentials increased as system-wide tuition went higher. By funding campuses unequally out of tuition, UC implicitly reneged on the principle of equal distribution that it would have applied if UC revenue growth had occurred primarily through state funding, rather than through “ed fee” increases. Someone in UC’s Office of the President made this decision in secret. Until this year there was no consultation with the Academic Senate (even some Chancellors were kept in the dark) about the formula for returning “ed fees” to the campuses.[2]

The bar graphs below (made public by UCSC Chancellor Blumenthal) show that UC’s present policy is to return to seven campuses as little 80% of the annual “ed fees” generated by them so that it can return considerably more to three campuses. UC provides no explanation for this disparity—“ed fees” are distributed at its discretion. It should be noted, moreover, that the dollar-effect of the “ed fee” return gap becomes greater as tuition grows, and that undergraduate tuition will have risen by 76% from 2007-2008 (the basis for the graph) if the proposed November fee increases take full effect in 2010-2011.[3] UC’s intended distribution of “ed fee” increases will make campus funding even more unequal without apparent justification. This is another example of UC’s ability to do whatever it wants with “ed fees,” and provides yet another reason to oppose further “ed fee” increases until UC makes itself accountable for how these funds are actually used.

ed_fees_by_campus

UC typically deflects demands for actual accountability by telling stories about why it needs to do the things being questioned. It might, for example, say that it needs flexibility to help research-heavy campuses with lots of grad students. But it rarely provides an evidence supported, principled justification for engaging in practices that appear inequitable on their face. This leaves its critics wondering whether to simply take its reasons on faith or to look for other explanations. It’s possible, for example, that UC jiggers the return of “ed fees” to campuses in response to pressure from administrators with the strongest personal UCOP connections, or in response to political pressure from external constituencies who favor a particular campus or discipline or professional school field.  Or perhaps UC is diverting “ed fees” to more favored campuses to help them finance construction. Or maybe it is using “ed fees” to invest in medical centers that make money, or to subsidize medical centers that lose money.  Or it might simply be following old formulas for distributing “ed fees” that are so out of alignment with current conditions that they are unintentionally depriving some campuses of desperately needed funding that is unfairly going to others. UC may be making ad hoc or poorly considered changes in the allocation of the flows precisely because this is unrestricted money for which it is not held accountable.

President Yudof, who is new to the UC system, has not tried to rationalize the graphs that appear above. Here’s what he told the Daily Cal:

I think [UCSC Chancellor] George [Blumenthal] is on to something here. What happens is the state money for grad students comes in as a block to the system and then we distribute it out to the campuses. We have some formulas for doing that that have been there for a very long time. ….It’s broken. I promised George, and you have my word and faith of honor, and this predates me, that we’re gonna try to fix it and make the formulas more transparent and fairer. …I think those are valid points–the formula is old and it’s not transparent. …We actually have teams of people looking at that, I suspect we’re gonna be changing those formulas.[4]

President Yudof ‘s response runs together the still-unequal distribution of UC’s shrinking state funds and the increasingly unequal distribution of UC’s growing tuition funds, but he clearly recognizes that both formulae are unfair. Yet he still wants a 32% tuition increase that will make the distribution even more unfair. Why? All UC’s leaders insist that “[e]very fee increase since 1990-91, with one exception (in 2007-08), has been levied to make up for inadequate state funding.”[5] There are also, however, many UC tuition comparison studies demonstrating that ours is too low on the assumption that the price that students will pay for higher education is independent of the subsidy their university happens to receive from the state or an endowment. It seems that UC planned to raise tuition regardless of the level of state funding, and timed the largest increases to coincide with large state budget cuts.

Based on publicly available data we can say only a limited amount more about the link between the most recent tuition increases and state budget cuts. It’s clear that the enrollment funding UC receives from the state is now $5K per student less than in 2006-2007; but, even in that year, the most advantaged campuses received twice what the least advantaged campuses received from the growing pot of student fee funds that UC gets from both tuition and the state.[6]

We do know that tuition increases exacerbate the disparities in inter-campus funding. As the disparities increase, the painful cry that students are paying more for less becomes louder on the disadvantaged campuses.  Can the inter-campus differentials be justified? Should students be asked to pay tuition increases that will go disproportionately to other campuses? The answer depends partly on whether UC’s internal funding policies can be justified, and whether it holds itself accountable for following its own policies. Thus far it has provided neither justifications nor accountability.

Further tuition increases should be stopped until UC accounts for where this money has gone and will go. It must produce a principle based, evidence supported explanation for how it is distributing ed fees. The money involved is not an abstract flow of dollars moving from students to UC’s bank accounts and back to the campuses. Some of this money has been scraped together by low and middle income families who must take out second and third mortgages to send their children to UC.  Does it make sense, from the perspective of the UC system as a whole, to ask the parents of children attending UC Merced, Irvine, Riverside, Santa Cruz, and Santa Barbara (and even Berkeley) to subsidize the favored campuses without disclosing that subsidy, or how it is actually used by the campus receiving it?  Such subsidies might have been tolerable in an earlier time, when tuition was lower. But at this point, they appear as an increasingly unfair shift of the financial burden to students who may not benefit from the tuition dollars they believe they are putting toward their educations.

November 10, 2009

ed_fee_increases

FOOTNOTES

[1] Meister, “They Pledged Your Tuition” I-III, http://www.cucfa.org/news/tuition_bonds.php

[2] The most recent “ed fee” return figures for UCSC are attached to illustrate the systemwide problem.

[3] Source: http://budget.ucsf.edu/downloads/student-fees-1960-present.xls

[4] http://www.dailycal.org/article/107121/uc_president_discusses_systemwide_financial_crisis

[5] http://www.universityofcalifornia.edu/news/article/22164

[6] http://www.universityofcalifornia.edu/finreports/index.php?file=/07-08/finschd.html; http://www.ucop.edu/budget/enroll/2007-08.pdf

Soon every faculty member will have a personal senior manager: Is this a good way to spend money?

by Richard Evans

(A PDF version of this article is available.)

In a letter to the UC Davis community, Chancellor Katehi and Provost Lavernia declared that we should work collectively “to address today’s major budget cuts, which come as a consequence of the state’s decade-long disinvestment in higher education.” I think there is a more immediate target for constructive change that would balance the UC budget.

It’s true that UC’s share of the state’s general fund has been declining (from 7.5 percent in 1967-68 to as low as 3 percent in recent years, according to the California Postsecondary Education Commission[1]), but that has been a steady trend. The more immediate reason for the current enormous increases in student fees, and for the sudden need for employee furloughs, is the startling recent growth of UC’s senior management. Data available from the UC Office of the President shows that there were 2.5 faculty members for each senior manager in the UC system in 1993. Now there are as many senior managers as faculty.[2] Just think: Each professor could have his or her personal senior manager.

faculty_management_fte

In the decade beginning in 1997, while faculty increased by 24 percent and student enrollment increased 39 percent, senior management grew by 118 percent. This past year, with the budget crisis in full swing, senior management has grown at twice the rate of faculty. That comes at a high price, because many managers are very well compensated for their work. A report on administrative growth by the UCLA Faculty Association[3] estimated that UC would have $800 million more each year if senior management had grown at the same rate as the rest of the university since 1997, instead of four times faster.

What could we do with $800 million? That is the total amount of the state funding cuts for 2008-09 and 2009-10, and four times the savings of the employee furloughs.[4] Consider this: UC revenue from student fees has tripled in the last eight years. The ratio of state general fund revenue to student fee revenue in 1997 was 3.6:1. Last year it was 1.9:1. If we used that $800 million to reduce student fees, the ratio would go back to the 1997 value.[5] To put another way, it could pay the educational fees for 100,000 resident undergraduates.

Of course the budget crisis is more complex than this. Of course we must try to convince the state government and the public of the wisdom of investment in our university system. But changing attitudes about public investment is a large task that involves far more than just UC. I’m not sure that those who are reluctant to increase UC support will be swayed by arguments presented by a UC president whose 2008 compensation was $828,000. Or by a new UC Davis chancellor whose salary (27 percent greater than that of her predecessor) equals that of the US president.

Our effort to solve the budget problems has a greater chance for success if we first aim at something we have direct control over. UC has shared governance (in theory), and does its own hiring. I suggest that we — administrators, faculty, staff and students — review the justification, costs, and benefits related to the explosive growth in senior management. If we could reduce management costs by $800 million, we could eliminate much of the financial hardship on students and staff. We could argue convincingly to the governor and state legislature that a well-run UC deserves full support. Perhaps most impressive, we could present a model for turning back a nationwide trend in university hiring.

FOOTNOTES

[1] Source: http://www.cpec.ca.gov/completereports/2008reports/FiscalProfiles2008.asp

[2] Source: http://www.ucop.edu/ucophome/uwnews/stat/

[3] Source: http://www.uclafaculty.org/FASite/Admin._Growth.html

[4] Source: http://www.dateline.ucdavis.edu/dl_detail.lasso?id=11822

[5] Source: http://www.cpec.ca.gov/FiscalData/FundingOptions.asp

Petitons to Support Accessible High Quality Public Higher Education

California’s public higher education is at a turning point due to the state’s systematic defunding of the Community College, Cal State, and University of California systems. Most immediately, the University of California Regents will vote at their November 17-19 meeting on a proposal to increase student fees by 32% over the next year. This fee increase would be in addition to the 9.3% increase that took effect at the beginning of the 2009/2010 academic year. UC student fees have more than doubled in the last decade, and with the proposed increase the cost to attend the UC will have tripled since 2000/2001. Meanwhile, in all three systems, class sizes are increasing, programs and departments are at risk, and student debt is rising. As student fees increase, students receive a lower quality education for a higher price.

The Santa Cruz Faculty Association has created three petitions. One is addressed to the UC Regents and demands that they vote against the proposed student fee hikes and that they aggressively pursue the restoration of public funding to the levels laid out in the 1960 California Master Plan for Higher Education. A second is addressed to California state legislators and demands that they vote to restore state funding of public higher education in California to the levels laid out in the 1960 California Master Plan for Higher Education. A third, addressed to the Governor, demands that he submit a budget that restores state funding of public higher education in California to the levels laid out in the Master Plan.

The Regents meeting is Nov. 17-19. The battle over public higher education is NOW! We need your signatures NOW!

After signing the three petitions below, forward this message to your friends, parents, colleagues, neighbors, to the cashier in the grocery store, tell everyone you know that we need to act now to restore quality, affordable and accessible public education to the State of California.

Tell the UC Regents to stop the fee hikes!

Tell your Legislator to restore state funding for public higher education!

Tell the Governor to restore state funding for public higher education!

Presentation to Regents Committee on Audit and Compliance

by Bob Meister, President, Council of UC Faculty Associations

I said this to the Regents Committee on Audit and Compliance. It was a “Regents” meeting in name only. Only two Regents were physically present (at least one more was on the phone). All of the other places at the table were taken by UCOP people, and they were clearly in control. Chris Rosen also spoke on behalf of CUCFA, and our position was strongly endorsed by Charlie Schwartz, Annie McClanahan (UCB Grad Student), Derrick Wortes (AFSCME) and Craig Flanery, speaking on behalf of AAUP. Although the rest of the committee meeting was supposedly public, we were ushered out after the comment period.

Wednesday, October 28, 2009

I’m Bob Meister, President of CUCFA, and I’ve come to request that you perform an audit. We want you to audit the source of repayment for all projects funded by General Revenue bonds.

The audit should address two questions:

  • Are projects that earn no revenue, or insufficient revenue, partially repaid out of education fees?

  • What other components of General Revenue have been diverted or increased to subsidize such projects if education fees (the largest component) are not being used?

Why should you, the Regents, audit yourselves? Because you have two policies that potentially conflict:

  1. Your construction finance policy: Since 2004 you have issued bonds (now totaling $5.8B) that are not backed by revenues from specific projects, but, rather, by UC’s “General Revenues.” The pledge of General Revenues specifically includes “education fees” and allows their use to pay off bonds.
  2. Your student fee policy: Your Student Fee Policy does not yet list construction among the permissible uses of “education fees.” This policy was not changed when “ed fees” were included in the General Revenue Pool pledged for construction.

Can UC prove that “ed fees” are not in fact used for construction by invoking your student fee policy? That’s what President Yudof and VP Taylor have tried to do in recent statements to the press: they’re citing your fee policy to prove they haven’t violated it. But your construction finance policy now obligates you to turn over all fees, including “ed fees,” for bond repayment in certain circumstances. And you’ve also promised to raise fees, including “ed fees,” as high as necessary to avoid those circumstances. How can you ask students to assume that it’s impossible to do what you’ve already promised to do?

You must perform an audit to prove that you haven’t—at least, not yet. This should be easy. Your construction policy requires that every project funded by General Revenue Bonds indicate revenue sources for both collateral and repayment. Producing the documentation you required could show you did everything possible to protect “ed fees” from being used for construction, even when no one was looking.

What if you decline to audit? Many will then infer that you don’t have documents that would back up the claims of President Yudof and VP Taylor—and that you, as Regents, didn’t demand them before approving campus construction projects. You would then need to find some other way of showing UC students that you care how their “ed fees” are used. Students have a right to know this before you raise their “ed fees” by another 32%.

Are They Saying I’m Right? “They Pledged Your Tuition” III

by Bob Meister,
President, Council of UC Faculty Associations
Professor of Political and Social Thought, UC Santa Cruz

(A pdf version of this document is available.)

On October 20, UC issued a press release[1] (10/20/09) in which VP’s Taylor and Lenz respond to my Open Letter to Students: “They Pledged Your Tuition.” The UC press release confirms two major points I made:

1. It admits that all student tuition (including the education fee) is now pledged as part of the collateral for UC construction bonds.

2. It assumes that it would be wrong to use the Education Fee to pay for construction, or to service construction debt.

I say it assumes this because VP Taylor did not in any way qualify his categorical statement to the press on 10/20 that “educational fees are not used to pay debt service.” Although Regental policy allows “registration” fees to be used to fund construction projects related to student services, VP Taylor did not suggest that the Regents had adopted a similar rationale for using education fees to fund some buildings, such as classrooms, rather than others (such as administration buildings). Nor did he point out that Berkeley Law has been allowed to charge students a tuition-like supplement (beyond UC’s common education fee) for the express purpose of funding construction at Berkeley Law. His press release said nothing in support of any regental policies that might allow education fees to be used to pay debt service on some kinds of construction bonds.

Perhaps the reason the VP refrained from advocating this use of “ed fees” in a press release is that doing so would call attention to an apparent inconsistency between the Regents’ inclusion of “ed fees” in its General Revenue and their Student Fee Policy:

  • The Regents’ 2003 plan for a General Revenue Pool for financing construction bonds explicitly lumps both “ed fees “and “reg fees” as the single largest source of revenues that is pledged to repay construction debt; every subsequent bond indenture and financial statement says that the Regents could and would use “ed fees” for this purpose, as necessary.[2]
  • Yet the Regents’ “Student Fee Policy” does not include construction funding among the permissible uses of “ed fees.”[3] This policy, which was amended in 2004 and 2005, still does not include construction, despite the fact that the Regents have been legally obligated to use “ed fees” for debt service in certain circumstances ever since the first General Revenue Bonds were sold in 2004.

VP Taylor has now put the Regents in a pickle. Does their Student Fee Policy legally prohibit them from doing what they have pledged to do, or did they simply violate the Fee Policy when they did it? When President Yudof told the student press that UC couldn’t do this, because it would be “illegal” (Daily Cal, 10/19/09) he might have meant that Regental fee policy would legally trump the pledge? If the pledge could trump the policy, this opens the question of whether protecting the instructional uses of “ed fees” is still a high regental priority.

We no longer know what the Regents’ priorities are. The fact that their old “ed fee” policy remains in place suggests only that they are reluctant to admit that these fees can now be used for construction. Maybe they don’t know, or don’t want to know, whether “ed fees” are diverted by campuses competing for bond-funded projects; maybe the Regents simply count on VP Taylor to assure them that the campuses wouldn’t think of using “ed fees” for debt service. Does VP Taylor really know that the instructional use of “ed fees” is sacrosanct on every campus? Have the Regents asked him to find out?

There is now no dispute that the Regents pledged student “ed fees” for construction; it is also clear that their own Student Fee Policy reflects the assumption that they shouldn’t be used for this purpose. So what are the outstanding issues?

The first question is relatively narrow: Is UC actually using tuition revenue to pay debt service on construction?

The second question is a matter of values: Should UC use its opportunity to borrow against ever-increasing tuition in order to advance construction projects while cutting back on student instruction and services?

Both questions need to be addressed by the growing student movement to “Save UC.”

  • 1. Is UC actually using tuition revenue to pay debt service on construction?

In the October 20 press release, VP Taylor flatly denies that UC uses any tuition revenue to pay debt service. This statement is at odds with his October 6 presentation to UC’s Academic Senate Committee on Planning and Budget that lists “sources of debt repayment” in the following order.

  • Student tuition and fees
  • Indirect cost recovery
  • Sales and Services -Educational activities
  • Sales and Services -Auxiliary enterprises
  • Unrestricted investment income
  • Other (Section 28, student approved fees)[4]

Here we have the full menu of revenue sources that the campuses can use for collateral and/or repayment of projects funded by General Revenue Bonds. Tuition (including “ed fees”) is first on the list, and is the largest single component of the menu. He also says UC should “align” its construction finance program to avail itself of the growing “debt capacity” that General Revenue Bonds provide. How can these statements, originally made to the UC Committee on Planning and Budget on October 6, be reconciled with VP Taylor’s October 20 press release stating that “educational fees are not used to pay debt service?”

There is only one way: drilling down to individual projects. According to regental policy “[e]ach external financing request must identify a specific fund source to be pledged to repay the obligation” and that this must be done, even for “non-revenue generating facilities with an administrative component.”[5] If VP Taylor’s press release is true, then every project that the Regents have thus far approved (all those listed at the back of eighteen supplemental bond indentures)[6] should be accompanied by what non-experts might call a ‘shadow’ indenture—i.e., a collateral and repayment plan that allows no recourse to charges against instruction.[7]

The Regents have a Committee on Audit that is supposed to protect the Regents from doing anything wrong with the money they administer as a trust for the People of California. I will attend the Audit Committee’s October 28 meeting and ask it to audit VP Taylor’s October 20 statement that Regents have not, in fact, approved any construction project that draws on tuition revenue (charges instructional programs) for debt service. This task should be straightforward if VP Taylor has these documents at his fingertips. The Audit Committee can reasonably assume that he would not have approved the press release without checking them.

While it verifies that neither the Regents nor the Adminstration has done anything wrong with past tuition increases, the Audit Commitee should seek a delay in Regental approval of the next tuition increase, now scheduled for November.

The need for a regental audit should not, however, overshadow the more important question:

  • 2. Is UC’s Aa1 bond rating now a higher priority for the Regents than its instructional quality?

This is not a question most students would think to ask: how would they know about UC’s bond rating and how it might be influencing decisions and priorities?

In their press release VPs Taylor and Lenz ignore my question about UC’s bond rating: they simply repeat UC’s oft-stated position that the reason for tuition increases is that the state has cut instructional funds. This reason is plausible because tuition revenues could be used for instruction. The problem is, as the bond documents indicate, that tuition does not have to be used for instruction. It can be used for construction, and has been pledged as collateral for bonds used to pay for construction. Until we see documentary evidence to the contrary, we may also assume that it is among the revenue sources used to pay debt service on bonds.

The plain fact is that tuition increases give the Regents an opportunity to borrow more for construction by increasing the pledged collateral. This effect of tuition on collateral is automatic; it does not require a further Regental decision. It follows that any increase in tuition helps UC’s bond rating, regardless of how it is used, or what happens to instruction. So which is UC’s higher priority, its bond rating or instructional quality?

The question remains unanswered. How can we know the Regents’ real priorities now that they have given up on California’s Master Plan? Even the Regents claim not to know what goals they now serve or should serve: they have appointed a Commission (the Gould Commission) to tell them.

VP Taylor’s presentation of October 6 does not speak of regental priorities: it simply recommends that UC seize the opportunity created by tuition growth to increase construction borrowing. But should the Regents accelerate construction while cutting back on student instruction and services? VP Taylor attempts to answer this question in his 10/20 press release by explaining that UC saves a total of $29M in bond interest on bonds totaling $5.8B by pledging student tuition. He thus implies that this saving (in 2008 it was only .2%)[8] is the only difference the pledge of “ed fees” makes to the Regents.

The pledge of “ed fees,” which are rising, also allows them to issue more bonds. Thus far in 2009 the Regents have issued $1.6B in new General Revenue bonds (at 4.6%-4.8%)—incurring more than twice the annual debt service that VP Taylor says UC has saved by including “ed fees” in the pledge. The Regents will soon announce a plan to pile on even more debt service by issuing yet another $2B in bonds to fund projects they have already approved. Under current regental plans, UC will have added roughly $230M in new General Revenue Bond debt service since the 2008 financial crisis began, or more than 8x the amount that pledging “ed fees” has saved in lower interest cost. This calls into question the whole idea that the slightly lower interest rate the Regents receive by pledging all their “general revenues” is a way to preserve funding for instruction.

Students should question what UC wants to do with their tuition before going along with the next increase. They shouldn’t get bogged down in arguing about whether the lower interest rate justifies UC’s decision to borrow more for construction. They should ask how their “ed fees” are being used at a time when the university is so short of funds that it must furlough faculty and staff, cut back support of basic services, including those funded by their “reg fees” and special fee assessments, which have not been affected by state budget cuts.

What if UC really wants to raise tuition simply because it has market research saying it is too low: that if it charged more, students would pay more? It wouldn’t give this as a reason. It would tell each of its constituencies that it really wants to raise tuition for them: students will be told that UC is doing it to increase financial aid and replace funding for academic offerings that the state has withdrawn; faculty will be told that they’re doing it to restore and raise salaries; staff will be told that there’s no chance of a living wage without higher tuition. None of these groups will be told that UC also wants to raise tuition to expand its construction program—that’s what Wall Street has been told. If UC’s internal constituencies don’t unite, UC will raise tuition so that it can do whatever it wants, which may simply be what Wall Street wants. That’s part of the privatization effect.

To Sum Up:

UC’s top priority should be to preserve and restore California’s Master Plan for Higher Education. If this is no longer UC’s highest priority, this change should be announced and UC should then be held publicly accountable for what it does with all its revenue—even the revenue that it regards as its own, beginning with tuition.

  • UC needs to be accountable for whether it has in fact used tuition (charges against instruction) as a source of funds for construction projects that don’t pay for themselves.
  • Tuition increases should be delayed until we get an answer. The Audit Committee must audit, now that questions have been raised about whether the Regents have (knowingly or not) approved the use of tuition for construction in the past.
  • In addition to the audit, students should demand to know precisely what a 32% increase in tuition will fund. It’s their money, their family’s money and/or their student loan debt. They should know where this money is going.
  • Delaying tuition increases is only one step toward restoring UC as a high quality accessible public university. The Regents’ highest priority must be maintaining UC as a public University in accordance with the California Master Plan for Higher Education, not preserving UC’s bond rating so that it can more rapidly privatize.

FOOTNOTES

[1] http://www.universityofcalifornia.edu/news/article/22164

[2] http://cucfa.org/archive/Regents_2003_on_indenture_General%20Revenues.pdfhttp://cucfa.org/archive/Regents_2003_on_indenture_General_Revenues_IIf.pdf

[3] http://www.universityofcalifornia.edu/regents/policies/6069.html

[4] http://cucfa.org/archive/Taylor_PPT_06_OCT_2009.pdf Italics added.

[5] Ibid., p. 6.

[6] These are now archived at www.cucfa.org.

[7] To the extent the “ed fees” are not being used to fund such buildings, students and employees should ask what other revenue sources listed above are being increased and/or diverted to pay off unrelated projects. Have student approved fees or employee parking fees been increased and then diverted for this purpose? There is also the question of how construction cost over-runs are funded. When I chaired my campus Committee on Planning and Budget, there was a tendency to fund these by taxing instructional budgets.

[8] http://cucfa.org/archive/CA_Regents_of_the_Univ_of_CA_2009_Ser_Q_and_Ser_R_POS.pdf

Response to Faculty Questions: “They Pledged Your Tuition” II

by Bob Meister, President, Council of UC Faculty Associations
Professor of Political and Social Thought, UC Santa Cruz

(A PDF version of this document is available.)

Faculty colleagues have many questions about my open letter to students, “They Pledged Your Tuition.” Most of the questions come down to, “So what if students didn’t know that UC has been leveraging their tuition increases to fund more construction?” Let me formulate several versions of this question, and give some answers.

  • Why should students care that their tuition is also used as bond collateral?

I clearly got my title right: there’s no question that since July 2003 UC has pledged student tuition (and other student fees) as part of the collateral for all the projects to be funded by General Revenue Bonds, which were first issued in 2004. I also gave students a clear enough explanation of what this means: that their tuition could be pledged because they can be legally obliged to pay it, but UC is not legally restricted in how to use it.

Much of my original letter was an effort to educate students about what UC’s bond pledge says with the exclamation points added. It says that UC could use tuition for any purpose; it also says that it would use tuition to repay interest and principal on bonds ahead of any instructional use. Beyond this, the indenture and every bond offering based on it include a “general covenant” requiring UC to raise tuition and fees as much as necessary to repay bond holders. Just before agreeing to this, UC also promises to do nothing that would cause its bond ratings to fall. Lower ratings would normally lower the price at which UC bonds can be sold before maturity. UC can protect its bond rating, while borrowing more, by adding to pledged collateral; but the only components of collateral under UC’s control are tuition and fees. This is why raising tuition and fees is the only concrete action UC promises the bond trustee and ratings agencies as part of its bond pledge.

Most students wouldn’t know that the increases in their tuition automatically add to UC’s collateral for construction bonds—and that UC can add collateral faster in years when state funds are cut. Why? Because higher tuition could be used to pay for what state education funds no longer cover, and many students want the most visible instructional cuts to be reversed. In my Open Letter I explain that this may not happen because the Regents see tuition revenue as a capital asset of the UC, and not as a straightforward replacement for state educational funds, which are not bankable in this way. Now that they know this, students should question how much of the 32% tuition increase will be used to restore educational cuts that UC blames on the state, and whether they would tolerate any increase as long as buildings are UC’s highest priority.

Since writing my letter, I can tell students much more than that UC could and would use tuition in this way: I can tell them that it has done this, roughly doubling the amount since 2008, and that it plans to do much more—beginning with another $2B bond issue that the Regents will announce after the 32% tuition increase in order to fund projects that they have already approved, but not announced. This information appears in a presentation by CFO Peter Taylor on October 6.. His slides show that General Revenue (i.e., tuition-backed) bonds provide UC with a rapidly growing capacity to take on more construction debt at favorable interest rates, and recommends that UC take advantage of this borrowing opportunity. This is how tuition increases look from his perspective, but not from a student perspective. They should be told that their tuition increases will allow UC to make construction a higher priority, whether or not instructional funding benefits.

  • Even if it’s clear that tuition increases add to UC’s bond collateral, how do you know that tuition revenues are also being used to repay UC bonds?

This is a fair question based on my Open Letter to students—the very question I was urging them to ask. My letter distinguishes between what one pledges as collateral for a loan and what revenue stream one identifies as a source of repayment. As a rapidly-growing UC revenue stream, tuition could be either or both. I suspected that tuition could be both, but I wasn’t sure based on public available documents that tuition was being used as more than collateral. Peter Taylor’s presentation clearly shows that tuition is also the primary source of revenue for debt repayment, and recommends (for obvious reasons) increasing use of bonds that can be repaid in this way. The debt service on recently issued bonds, and new ones already in the pipeline, will have doubled to c. $435M between 2008 and 2012—a period in which tuition may also double.

If you think about it, CFO Taylor’s increased reliance on tuition as a way to repay bonds is obvious. State funds can’t be used for this purpose as a matter of state law; the “direct cost” portion of research contracts can’t be used for either debt collateral or for debt repayment because its use is restricted by the research contract themselves. Research “overhead” is never sufficient to cover the full cost of research, which UC is expected to “share” as part of its mission. Only bond-funded projects that bring in user fees, like parking garages and dorms, can be expected to pay for themselves. So what else is there but tuition to pick up the slack? And then, there’s the fact that UC has been allowed, since 2004, to increase tuition at will.

Do you have any doubt that the use of tuition for debt service will increase as tuition increases and UC borrowing against it also increases?

  • How did this use of tuition revenues come about?

UC has made no secret of its desire to raise tuition. It told UCPB, when I was on it, that tuition was much too low, based on market factors that were independent of state budget cuts or increases. Under Gray Davis, however, UC was still concerned that continued state funding depended on its visible reluctance to raise tuition too fast—that eagerness to charge what the market allowed would provoke state cuts. UC’s long-term strategy was thus to raise tuition (which was too low anyway) in response to state cuts, so as to avoid retaliation, and to do this regardless of whether higher tuition would be used to restore the losses in instruction that seemed to necessitate it. Not restoring these losses was, I would argue, part of UC’s strategy, insofar as the continuing threat to other people and programs was part of its argument for the further tuition increases that UC wanted to impose anyway. Saving people and programs was, therefore, not UC’s first priority in using tuition increases: its first priority was to strengthen the case for further tuition increases. This strategy explains why President Dynes leapt at the opportunity afforded by Governor Schwarzenegger to accept permanent cuts in state funding in return for permission to raise tuition indefinitely without reprisal, and why the 2004 Dynes/Schwarzenegger Compact was such a turning point in the history of UC privatization.

Did Dynes and Schwarzenegger also, secretly, agree that UC could use tuition revenue, as it grew, to build whatever it wants independently of state bond funds? I don’t know. At the time of the Compact, UCPB was not told that was part of the deal, and was unaware that higher tuition in any amount would give UC more leverage to fund construction on its own. But maybe Schwarzenegger knew that this would sweeten the deal for Dynes. The tuition pledge had been adopted at an open Regents meeting, where Professor Charles Schwartz objected on the grounds that what has happened could happen. At that time, the tuition revenues -available to fund construction were less than half of what they are today, and General Revenue Bonds could be seen as a way to refinance existing bonds that already paid for themselves. So in 2004 the Regents could have said that including tuition in UC’s bond pledge provided investors with more diversified collateral, reducing risk lowering interest rates. It’s hard to argue now that this was its only effect.

My Open Letter asks UC students to demand proof that lower interest rates was the only effect of pledging tuition before going along with the next increase. Some students may choose to understand the link between higher tuition and construction growth as a conspiracy. To me UC’s policy would be just as bad if it had come about through a series of unplanned, opportunistic decisions made by people who had no interest in resisting privatization, which they saw as UC’s long-term future.

Did some UC decision-makers wrongly profit from these decisions? Others can investigate this question. Do all UC decision-makers benefit from privatization? Yes, after 2004 their pay scales were reset to match private sector compensation, rather than compensation in state agencies. For top administrators, privatization has already happened. And privatization is the problem.

  • Why is it wrong to make UC’s richest students pay for new construction through higher tuition? Are they the only students harmed?

UC’s median student is even more greatly harmed. That student (or his/her family) must borrow more to pay for higher tuition. UC’s 2004 capital plan was in fact based on the assumption that, as the home mortgage and student loan industries were expanding, the median students could and would borrow more into the indefinite future. Today, UC expects median students and their parents to take on long-term debt at very high interest rates, ever-higher as their credit ratings go down, so that UC can borrow from Wall Street at 4.6% by issuing Aa1 bonds. This looks like one of those mispriced credit swaps—but it’s not really a swap at all for the median UC student who has little choice. This is what UC implicitly communicates to bond raters when it demonstrates its ability to raise tuition indefinitely, and to substitute out-of-state-students who will pay even more for in-state students who are unwilling or unable to finance the next tuition increase through assuming increased personal debt. Median students who borrow more will end up paying much more for their education (including debt service) than richer students.

I heard that UCOP plans to answer my “charge” by appointing a team of “experts” to explain that it’s normal for organizations to financialize as much as possible and to shift their credit risk onto others if they can. The experts don’t need to persuade me, I know it’s normal. I also know that whether they can do this is, and ought to be, a political question. UC is still a public institution that can be made to answer political questions publicly. We should ask these questions before it is too late.

  • Does UC’s tuition-backed method of bond financing affect what gets built?

It leaves UC much freer to build projects that don’t pay for themselves without having to increase its endowment. UC has in effect leveraged its post-2004 freedom to raise tuition in order to borrow a pseudo-endowment that is now projected to reach $8B and will be unrestricted in its use. This is in contrast to UC’s actual endowment which is around $5B, almost all of which is donor-restricted. (Unrestricted endowment income is part of the General Revenue pledge.)

  • So why isn’t it smart to borrow a larger endowment that the Regents can use as they please?

UC’s financial planners probably think they’re being smart, partly because they can use this borrowed money for projects that no longer have to earn the revenue that provide their principle source of repayment, which is now tuition. UC has used General Revenue Bonds to refinance existing bonds at lower rate of interest, which seems smart. I don’t doubt that these refinanced projects (including student dorms and parking lots) did pay for themselves—they had to show bondholders a favorable ratio between the additional cost of debt to the university and the additional revenue brought in by the funded project. That’s why UC issued its pre-2004 bonds for projects such as dorms.

Since 2004, however, all projects funded by General Revenue Bonds are funded by all General Revenue. This means that UC no longer published a debt service coverage ratio (net revenues divided by debt service for the year) for any project funded by General Revenue Bonds. Why? Because the principal source of repayment for all of them is student tuition across the UC system as a whole. To the extent that these bond-funded projects no longer have to pay for themselves, they will simply be a drain on increased tuition income that won’t be used for education and research. If UC were to publish a single debt service coverage ratio for all General Revenue Bonds, it would be conceding my point: that all construction projects funded in this way are subsidized by tuition and tuition increases.

  • Are you sure that projects funded by General Revenue bonds don’t pay for themselves?

I can’t say this for sure based on public documents alone: I can only show that they no longer have to pay for themselves. The burden is now on UC to prove otherwise.

Can UC prove otherwise? It would be easy if it were true. Charles Schwartz, a retired Berkeley physics professor, has just last week requested debt service coverage ratios for all individual projects funded by General Revenue Bonds, as it does for project-specific bonds. Maybe UC still requires that adequate debt service coverage be demonstrated before it approves any new projects, even if the bond-raters no longer ask this question because they are paid from tuition. I’m sure UC could easily show debt service coverage for parking lots and dorms. It would be much harder for UC to shows this for other bond-funded projects, like administration and telecom buildings (and the Berkeley stadium) unless it conceives of students as paying a virtual rent on these buildings out of their tuition. The disclosures of such “shadow” accounts for each project would, however, prove my point by showing the exact amounts of tuition that are diverted from instructional use to support these projects.

What other lines of defense might UC take? I’m sure I haven’t thought of them all. One conceivable argument is that all projects funded by General Revenue Bonds should be heavily subsidized by tuition and fee increases because they were necessitated by enrollment. This argument could be sustained if General Revenue Bonds were in fact limited to projects necessary to accommodate enrollment growth. The revenue source used to repay these bonds—higher tuition from a larger number of students—would then be closely aligned with the purpose for borrowing. It’s clear, however, from the eighteen supplemental bond indentures that only some of UC’s bond-funded projects could be justified in this way. How much? The indentures do not show what portion of bond proceeds goes to each project: all the projects are funded by all the bonds. And, none of the indentures attribute revenues to specific projects, which, insofar as they exist, will simply be added to the General Revenue fund used to repay all bonds. If UC argues that it exists for the benefit of students whose tuition should be used to fund whatever it chooses to do, it will have conceded that my analysis is right. Students will then be entitled to ask whether UC’s choice of construction projects justifies increasing their tuition.

What other information could UC offer that would answer their question? There may be internal documents I can’t imagine that others have seen. Until I see these documents, I must, sadly, assume that keeping up UC’s overall construction program has higher priority than funding the educational needs created by enrollment growth. I wish I were wrong.

  • Do we know how much these bond-funded projects drain from education?

The short answer is that we can’t know based on public documents. We know that interest on tuition-backed bonds will rise to c. $425M in the next 2-3 years (based on currently-approved projects) and that tuition will pay most of this interest. Whatever revenues these projects actually earn will be added to the General Revenue fund in categories of research overhead, user fees, etc., which are lower-ranked than tuition as a source of repayment. These General Revenue Bonds can be used to fund projects that don’t bring in additional General Revenue at all; they can also be used to fund projects that might reasonably be funded by student tuition or fees, such as classroom buildings, dorms or student centers. But now that all projects are funded by all student fees, student fee increases can be used to subsidize any project on any campus. The amount of this budgetary subsidy, which only begins with debt service and can encompass all losses associated with these projects, is the true educational cost of UC’s approach. To discover all these losses, we would need to drill down to the campus in order to see which programs have been cut (or ‘taxed’) the most to support new construction that does not specifically benefit them.

A clear example is UC Berkeley’s new football stadium, which will be financed by tuition-backed bonds. It’s conceivable that UCB has a debt service coverage ratio showing that it could have issued a “stadium bond” that would pay for itself with revenues earned. If so, it should share this analysis with the 49’ers. What if the stadium is not being financed by revenue from Berkeley football, but by tuition increases across the whole UC system? The rationale must then be that it adds luster to UC’s “brand” for which all students should pay. What does this say to other campus chancellors? It says that they should propose construction projects that enhance UC’s brand regardless of how much they drain funds from education, because such projects will certainly be built somewhere and will drain educational funds across the system.

  • Should construction come first, even for students?

UC may have market studies showing that new buildings help its “brand,” and that curricular cuts don’t hurt its “brand.” If such studies are the basis for its present priorities, let it say so. Students and faculty can then judge for themselves whether UC’s “brand” is more important to them than the quality of education they actually receive (and can give). In my opinion, a choice in favor of education would do more for UC’s “brand” than keeping planned construction projects on track.

  • Are construction projects bad?

No, I hate the classroom in which I now teach, and try to get my classes scheduled in the new, mostly science, building on the UCSC campus. But I would rather have TAs.

  • Doesn’t UC get a lower interest rate by adding tuition to the pledge?

Yes, in 2008 it paid .2% less in interest for tuition-backed bonds than it paid for slightly-lower –rated bonds that were backed by revenues from specific projects.

  • Wouldn’t UC have to use tuition to cover all its bonds if other pledged revenue stream were insufficient? If so, why not pledge tuition to get a lower interest rate?

If I understand this question correctly, it’s based on a spurious argument. The kernel of truth in this argument is that UC bonds are backed by something more than the contingent property right (lien) that bondholders have in the pledged collateral. If the pledge were insufficient, the loan document could also be enforceable against UC as an ordinary legal contract. The only way that UC could renege on this contract would be to threaten bankruptcy, which bondholders might be willing to avoid by taking what Wall Street calls a “haircut.” The spurious argument is that if UC could have paid bondholders out of tuition as an alternative to renegotiating its debts, then it makes no difference for it to pledge tuition upfront in order to reduce the likelihood of such a scenario.

These are, of course, completely different scenarios. UC issues secured debt for its construction projects, not unsecured debt (Commercial Paper) that requires it to keep a large positive bank balance but is otherwise much like a credit card. The fact that secured debt could revert to the status of credit card debt if the security vanishes does not justify UC’s General Revenue Bond program, which places something like a mortgage (really a lien) on student tuition. Consider the example of an ordinary mortgage in which the bank has a lien on your house, which serves as collateral. If your first mortgage is under water at the time of foreclosure, the holder of the second mortgage can try to collect against your paycheck alongside unsecured creditors, such as MasterCard.[1] Does this mean you should pledge your paycheck as part of every mortgage, so that the bank can be assured of a more diverse source of funds for repayment? Most people wouldn’t pledge their paycheck. Why? Because in a real emergency they would want to pay for other things first. The bank would not necessarily be their highest priority.

UC has in effect pledged its paycheck (the portion it is free to sign over), but wants you (and more importantly students) to believe that it isn’t actually drawing on this paycheck to fund whatever it chooses to build. This pledge clearly commits UC to raise the collateral it controls (tuition and fees) to whatever levels the rating agencies require. What other effects does it have? Wouldn’t pledging your own paycheck in this way affect your budget (spending) priorities? Wouldn’t collateral of this kind reduce the lender’s concern with whether the loan proceeds are used for a project that pays for itself or a project that drains other revenue? Wouldn’t the bank’s right to seize your whole paycheck in the event of default reduce its concern with whether your use of the loan proceeds generates new income sufficient to pay it back? Surely it would be satisfied to know that you have the power to raise paycheck at its request. UC gets its Aa1 bond rating by demonstrating its ability to do this, and not by demonstrating that its construction projects are good investments.

My question is whether UC’s pledge of tuition has changed it budgetary priorities away from curriculum and toward construction, and whether this method of financing makes UC unaccountable for the drain that construction projects place on curriculum during a financial “emergency.”

It’s a question of priorities, and of values.

  • What’s wrong with UC’s values?

Nothing is wrong with the value of public higher education—UC’s leaders need to articulate that value, as Clark Kerr once did, as something that can be even better than the best private education. Why? Because Kerr’s Master Plan for Higher Education both expressed and aroused the desire for higher education as the pre-eminent common good that all Californians can in principle enjoy—a value added to the many uses education has for private advancement. UC’s specific role in the Master Plan is thatthe education it offers as equal to the best anywhere—and potentially even better because it also serves a public purpose

It is thus an article of faith for many Californians that UC is still great, and even greater because of its values. UC leaders have often urged me to suppress my criticisms, not because they are wrong, but because they would shake the public faith on which UC depends.

My underlying argument is that proponents of UC privatization both rely upon and betray the public’s willingness to believe that UC’s values are not changing—that it simply needs new sources of funding to do what it has always done. Californians need to know that a tuition-dependent UC will have its priorities driven by financial markets rather than by citizens. This means it will use the revenue streams from present activities, especially revenues that it can raise, to invest in new non-educational “initiatives” and “partnerships” that drain funds from UC’s Master Plan Mission.[2]

Faculty who oppose UC’s present run to privatization need to draw on the willingness of Californians to believe that UC is still good because it’s still public. We demand that UC be accountable for all its funds, not just its state funds, and that it become more, not less, transparent about its priorities as a public trust during a financial emergency. Is funding public higher education the highest Regental priority for the use of the vast, accumulated assets that they regard as their own? Or is public higher education now merely a contractual service they provide to the extent that the state is willing to pay them for it?

I wrote first to students, and not to my faculty colleagues, because I think that Regental accountability should begin with tuition, and with the 32% tuition increase now proposed. UC officials who deal with Wall Street will, of course, tell the Regents to regard tuition revenue as their own money, unlike state funds, which are restricted as to use. The Regents will do this because they can—because from the standpoint of the financial world UC is already private (it belongs entirely to the Regents) except for the $2.6B in educational funding it still gets from the state. Has UC’s public mission become an exception within a broader set of priorities set by the private sector? Is higher education something that Californians must now bribe UC to deliver? I hope this has not happened yet.

Questions about tuition—its use and the reasons to increase it—are, I think, the first place to test Regental priorities for the use of non-state money, and eventually all UC’s  money. That’s why I’ve urged UC students to take these questions to the November Regents Meeting at UCLA.

October 19, 2009

FOOTNOTES

[1] My example is hypothetical. The rights of second mortgage holders to enforce their loan contracts depend on state law and the terms of each loan document.

[2] President Yudof’s New York Times interview of September 27 2009 suggests that UC received a lot of public investment to feed the aspirations of my generation, the baby-boomers, and that most attractive public investments now lie in providing geriatric care for us. This is, of course, how a fund manager would think in deciding where to reinvest the capital that can be raised by leveraging tuition.

As CPB Chair at UC Santa Cruz, I heard a similar suggestion about how to “leverage” major campus “assets”: alumni loyalty and a magnificent ocean view. The answer, discussed seriously, was selling burial plots for rich alumni from the 1960s and 70s who were disillusioned by campus change. I suggested that our graveyard be called “Sunset College: Where the 60’s Never Die.”

Clark Kerr’s Forgotten Legacy

Nelson Lichtenstein
Department of History
Chair, Ad Hoc Teach-In Committee
University of California, Santa Barbara
October 14, 2009

Welcome. We expect to have an exciting day before us. The term “teach-in” had its origins in the 1960s when students and faculty sought to understand and therefore become active participants in the debate over the war in Vietnam. The same is true today: by assembling both experts and activists, inside policy-makers and outside critics, we will best prepare ourselves for the task that confronts us: nothing less than the defense of a great university in a time of acute dangers.

Our event here is both educational and political, designed to provide a progressive, alternative analysis of the budget crisis and a positive road forward for California, the UC system, and education at all levels of our state. The threat comes not from those who have actually denounced public higher education, but from those inside the UC system and the state government who say they have the University’s best interests at heart even as they distort and defame all that has made the University great. We hope this teach-in will forge the analytic weapons necessary to fight back.

To understand what we are in danger of losing, it helps to know why and how our university was built. This system is a product of the early post World War II years when the University of California was refounded, refunded, and greatly expanded. Although no single individual can lay claim to reshaping an entire institution of higher education, Clark Kerr comes close.

Kerr was a visionary. He was Berkeley’s chancellor in the 1950s and UC President from 1958 to 1967. As the architect of the 1960 Master Plan for higher education in California, Kerr refounded the UC system as the standard to which every other institution of higher learning aspired. Kerr’s hallmark was a guarantee “that there would be a place in college for every high school graduate…who chose to attend.”

Kerr’s dream for a “multiversity,” as he called it, was rooted in his career as a labor economist and liberal. He finished his BA at Swarthmore and then came West to Stanford for graduate study. He hated Stanford! To him the school was an institution in which its wealthy trustees distorted the educational mission. So he transferred to Berkeley where he worked with Paul Taylor, the radical advocate for California farm workers. Together, they studied the poverty, hardship, and desperation that John Steinbeck captured in his 1937 novel, the Grapes of Wrath. Kerr’s Depression-era experiences left him keenly aware of the inequalities that distorted American democracy but also dedicated to the peaceful resolution of conflict between labor and capital in the U.S. and elsewhere.

By the 1950s, Kerr had become convinced that a vastly expanded system of higher education was the key to a dynamic, harmonious society based on skill and knowledge. In this new economy, mass higher education was the key to this newly prosperous America where a booming California was clearly in the vanguard. In his famous 1963 book, “The Uses of the University,” Kerr argued that the university was “at the hinge of history.”

Kerr’s vision is all about you: a university campus designed to educate the great mass of the American people, To accommodate the influx of baby boomers, Kerr oversaw the opening of the San Diego, Irvine, and Santa Cruz campuses and he greatly expanded UC Santa Barbara. And despite the expenditure of an enormous sum of money, a UC education remained affordable. Under Kerr’s tenure, UC students had no tuition and almost no fees.

Four principles underlay Kerr’s University; they should be honored and defended today.

First, he rejected the philanthropic model for higher education, a model which then and now puts the name of so many wealthy men and women above the doorways of our great schools. UC would not be dependent upon the likes of a Leland Stanford, an Andrew Carnegie, a James Buchannan Duke, a John D. Rockefeller, or an Andrew Mellon. Instead it would be a product of the people of California, dependent upon the tax revenue of the state and accountable to a democratic polity.

Second, UC would be a system both decentralized and a unitary. Under Kerr’s leadership, UC Santa Barbara got its first independent chancellor and so too did UCLA, Davis, Santa Cruz and the rest of the campuses. But UC has always been one system, with one standard for faculty, student achievement, and administrative procedures. This is an amazing accomplishment, envied but still not emulated by many state systems, including such good ones as Michigan, Virginia, New York, and Wisconsin.

Third, all Californians would have access to higher education: a three tiered system that enabled first generation college students to live at home and then transfer to a State University or a to UC when and if they chose. Not all faculty liked this idea, especially if you were stuck at a state university without UC’s graduate programs, but for students it provided a ladder that they could climb, so that immigrants and the working class, in California more than any other state, might gain the knowledge and skills they so demanded. But all of this was and is dependent on low fees and plenty of classroom seats. Kerr built and expanded nine campuses of UC in the 1950s and 1960s. Today we have built Merced, just one more, and although enrollment at UC is higher than in Kerr’s day, it has not kept up with soaring population of the state.

And finally and perhaps most important, Clark Kerr and his generation of educators understood that the university was an investment, not in individual well being, although that was certainly true, but in the public goods that make a society both prosperous and democratic. Kerr himself too often thought that corporations and agribusiness would use the knowledge and trained graduates generated by the university in an equitable fashion – that was one reason students at Berkeley and Santa Barbara students revolted against his leadership 45 years ago.

But that the university was a public trust, that it must be responsible to a democratic populous, this Kerr firmly believed. It was the kind of vision that could inspire genuine loyalty to UC at the ballot box and in the legislature where both Republicans and Democrats voted tax increases to pay for it. Today, Kerr’s idea of a unified, egalitarian, system of higher education requires a renewed defense. It is a vision that this event seeks to recapture and recast for our own time.

They Pledged Your Tuition to Wall Street (summary)

UC on Wall Street: Another Reason Your Tuition Goes Up

Bob Meister, President, Council of UC Faculty Associations (CUCFA) Professor of Political and Social Thought, UCSC

(Download a PDF of this document. This is a summary of a longer piece.)

How does UC sell $1.3 billion in construction bonds immediately after declaring an “extreme financial emergency,” slashing funds for teaching and research and cutting staff and faculty pay? By using your tuition as collateral. Higher tuition lets UC borrow more for construction even while it cuts instruction and research.

You’re often told that your tuition goes up because the state pays less for higher education, but you’re almost never told that UC isn’t obliged to use your tuition in the way it uses public money. Unlike state funds, your tuition money can also pay the interest on construction bonds and be used as bond collateral.

UC has in fact promised its bond trustee (Bank of New York Mellon Trust) and the companies that rate bonds (S&P and Moody’s) that bondholders have first claim on your tuition in the event of default. (See the full “They Pledged Your Tuition to Wall Street.”) It has also promised bondholders that it will raise tuition as needed to avoid bond default. Most importantly, UC has pledged to do nothing to lower the ratings on its bonds. Your tuition is not only pledged to Wall Street, Wall Street could demand the next tuition hike by threatening to lower UC’s Aa1 bond rating.

Harvard, the world’s richest educational corporation, curbed construction when endowments fell because its people and programs came first. Its bond rating, slightly higher than UC’s, does not seem to have suffered. UC, however, seems to have the opposite priorities. It started borrowing against your tuition in spring 2004—when Gov. Schwarzenegger gave it a green light to raise tuition, and claims the ability to do this in every prospectus for bonds partially backed by your tuition.

By June 2008, UC’s pledged collateral has jumped by 60% (from $4.2 billion to $6.72 billion). Tuition, a large and growing component of that collateral, will have risen by 109% since 2004 if this year’s increase happens. The Regents have approved another $2B in projects that they plan to fund primarily with tuition-backed bonds, because this is where their debt-bearing capacity will grow. When these new bonds are issued, after your tuition hike is a done deal, debt service on all tuition-backed bonds will have risen to around $430M, nearly double what it was last year. Your tuition and fees make up the largest component of this debt service and the only component that UC has pledged to increase.

Increasing the collateral for bonds and paying more in debt service are clearly among the reasons why the Regents want to raise your tuition. But students would be more likely to resist if they knew this. By describing tuition increases as a simple substitute for state educational funds, UC avoids the question of how much goes for construction, rather than instruction.

Don’t be fooled by the argument that UC is simply emulating the great private universities. The ones I know now use their endowment income to subsidize tuition for students who would otherwise need loans: UC, by contrast, now pledges its ability to drive you and your families deeper into debt so that it can increase its leverage on Wall Street. This is what it looks like to privatize a great public university.

Will you go along with this November’s 32% tuition increase, now that you know the money is being promised to Wall Street?

It will happen unless you stop it.

(The above is a summary of a longer piece.)

They Pledged Your Tuition to Wall Street

An Open Letter to UC Students
From Bob Meister,
President, Council of UC Faculty Associations
Professor of Political and Social Thought, UC Santa Cruz

(Download a PDF version of this document or view a one page summary.)

As students, you pay tuition in order to get an education at UC, and you know that the Regents plan to raise your tuition even higher. You may think that the tuition you pay is primarily or exclusively used for instruction, but this is not its only use. UC recently sold more than $1.6B in highly rated bonds one month after declaring an “extreme financial emergency.” Why is its bond rating excellent, even after UC says that without cutting employee pay it will have difficulty paying its bills?  The single most important reason that UC has an excellent bond rating, much better than the state’s, is that it can now raise your tuition at will. Your tuition is UC’s #1 source of revenue to pay back bonds, ahead of new earnings from bond-funded projects, which do not even come second. The bond interest UC now pays will be $300M this year, and is projected to go way up as UC greatly increases the private capital it raises through tuition-backed bonds over the next decade. UC should disclose its plans to issue new tuition-backed bonds before you are asked to accept this year’s 32% tuition increase, which will automatically become part of the collateral for those bonds.[1]

Because UC pledges 100% of tuition to maintain its bond rating, it has also implicitly assured bond financiers that it will raise your tuition so that it can borrow more. Since 2004, UC has based its financial planning on the growing confidence of bond markets that your tuition will increase. (Why? Because you’ve put up with this so far, and because UC has no other plan. Its capacity to raise tuition is advertised in every bond prospectus.)

(Before I go on, you should understand that there’s a difference between using your tuition as collateral for construction bonds and actually spending to pay the interest on those bonds. UC now spends some tuition revenue on debt service, and is likely spend more for this purpose as it borrows more against tuition. Since 2004, all of your tuition has been pledged in the sense that it will be paid into an account held by the bond trustee in the event of default.)

In pledging all your tuition as collateral for its bonds, UC is relying on a simple notion which, if used by an individual trying to borrow money, would go like this: if you had a good paycheck and you expected to have steady raises in the future, you could pledge your whole paycheck to secure a loan. Your bank might offer you a lower interest rate for pledging it all without expecting you to use it all to service your debt. You could then still live off your paycheck as well as get a lower interest rate. UC has done just that with your tuition. It considers itself smart to have made this kind of deal. In 2008 it paid 0.2% less in interest for bonds backed by tuition (and all General Revenues)[2] than for bonds funded by project revenues alone, such as those that paid for employee parking garages.

So, one reason that UC has pledged all of your tuition, including future hikes, may have been to get a better interest rate, and that is likely to be the explanation it gives publicly. But is lowering interest rates the only reason why UC pledged your tuition?

In fact, there are stronger explanations that are less benign. The first is that, although tuition can be used for the same purposes as state educational funds, it can also be used for other purposes including construction, the collateral for construction bonds, and paying interest on those bonds. None of the latter uses is permissible for state funds, so the gradual substitution of tuition for state funds gives UC a growing opportunity to break free of the state in its capital funding. A second explanation for the tuition pledge is based on the idea that a bank will pay less attention to whether you’re making a good investment if it has access to your entire paycheck in the event you haven’t made a good invetment. This means that UC can be much less transparent about how much revenue it earns from tuition-backed bonds, which are now more than half of its total borrowing and are expected to greatly exceed all other borrowing over the next decade. A third explanation for including your tuition in the pledge is that tuition is expected to rise no matter what happens, and is likely to go up even faster in bad budget years. UC’s pledged collateral rose by 60% ($4.2B to $6.72B) from the last pre-Schwarzenegger year through June 2008. Tuition, a large and growing component of that collateral, has risen much faster since the state economy collapsed in 2008–it will be up 109% by Spring 2010 We won’t know the effect of recent increases on UC’s total collateral until its next two financial statements come out, but it appears that UC has nearly doubled its borrowing against that collateral in 2009 alone. The fact that UC can (and does) raise tuition during state economic crises means that a bad budget year can be a good bond year.

Why haven’t you been told that UC has been using your tuition as collateral to borrow billions of dollars? The obvious reason is that tuition increases are justified (to you) as a way to pay instructional expenses that taxpayers refuse to pay. If that’s why they’re being imposed, it’s natural to assume that tuition increase will be used to minimize cuts to education. But when UC pledges your tuition to its bond trustee (Bank of NY Mellon Trust), it’s really (legally) saying that your tuition doesn’t have to be used for education, or anything in particular. That’s why it can be used to back UC construction bonds, and why the growth in tuition revenue, as such, is enough to satisfy UC’s bond rating agencies (S&P and Moody’s), whether or not UC can pay its bills. The effect of UC’s pledge is to place a new legal restriction on the use of funds that it must first say it could have used for anything, including education. Thereafter, construction comes ahead of instruction.

Some of UC’s new, and self-imposed, constructions costs will come off the top of its annual budget, despite this year’s “extreme financial emergency.” When UC chose t0 take on $1.35B in new construction debt for 70 projects in August 2009—one month after imposing employee furloughs that “saved” $170M—it committed to spending $70-80M in extra interest payments for years into the future –they’ve just released the interest rates for each new bond series. Earlier in the year, UC had already issued $.8B in tuition-backed bonds in spring 2009, only some of which were for refinancing older projects at lower interest rate. It’s thus likely that the interest due on new projects funded during 2009 alone will have eaten up more than half of UC’s “savings” from the furloughs. Would the furloughs have been “unavoidable” if UC were not secretly planning to incur additional interest expenses for new bond-funded construction? I’ve just today (October 9) received a list of the 70 tuition-funded projects that were not announced until after the furloughs, and that UC decided not to postpone in order to avoid furloughs. These projects are listed at the end of this document. You can judge for yourself how urgent they are, and how high your tuition would go to finance more like them.

Interest payments are not the only cost of issuing bonds that comes off the top of UC’s budget: there are also reserves. UC’s Bond Indenture provides for reserves to be held in the name of UC’s bond trustee (BoNYMellonTrust ), even while allowing the Regents to control the larger accounts maintained to pay for actual construction and to avoid holding reserves for interest alone. Do these trustee-held reserves (which can’t be spent for other purposes) show up in UC’s audited financial statement? There is a line reporting that “non-current assets held by trustees” as of June 30, 2008 were $753M—a number, perhaps coincidentally, close to UC’s current-year shortfall in state funds. Does this line refer to the bond trustees? If so, how much higher will this number be as a result of this year’s $2.5B in newly-issued bonds? President Yudof knows. He could have had this line in UC’s Financial Statement in mind when he threw off a number of $900M in apparently “unrestricted” reserves that he says are really earmarked for construction.[3] But he could have been referring, instead, to a separate construction fund, held by the Regents, or to their deposit in its common pool of reserves (called STIP), which in recent years has totaled up to $6B, and could have swelled even higher as a result of UC’s 2009 bond issues. The bottom line is that you should demand further disclosures about UC’s bond-related reserves.

A further question is the extent to which UC promised to manage its budget so as to protect its bond rating. The “due diligence” documents that UC should have furnished to the bond trustee( BoNYMellon) and the bond ratings companies (S&P and Moody’s) would normally address the “best-” and “worst-” case scenarios. If UC prepared such documents, they might well contain assurances, made as early as the first bonds issued 2004, about what UC would do when its state funding fell to present levels, These reductions were already anticipated, although not quite this soon. If so, these documents would  explain, in a concrete way, why President Yudof now says that he had to cut pay (i.e., impose furloughs) and raise fees (especially tuition) as evidence that UC’s bonds are still good, indeed better than ever. The trust and ratings companies won’t release the documents UC furnished to get its bond rating, but President Yudof could do so. You should demand UC’s “due diligence” documents before you accept the claim that UC is raising your tuition as a matter of necessity, rather than as a choice to put construction first.

Even without such disclosures, UC’s shift in priorities from state-funded instruction to privately-funded construction is hidden in plain sight – in the text of the General Revenue Bond Indenture . The Indenture says (presumably the language is standard) that the Regents, in addition to avoiding default, “shall not permit to be done anything that might in any way weaken, diminish or impair the security intended to be given pursuant to the Indenture”[4] (italics added). You would be foolish to regard this as meaningless lawyer-talk that leaves funding higher education intact as UC’s highest budgetary priority. It, rather, makes UC’s bond rating its highest budgetary priority.

The shift in priorities reflected in UC’s General Revenue bonds is even more important than the off-the-top costs, which will certainly rise over the decade unless UC’s priorities are reversed. The concept of a “General Revenue” bond is a hybrid between a “general obligation bond” and a “revenue bond,” and is as close as UC can come to backing each individual project with all it revenues without having the power to tax—although the power to raise fees comes close. By pledging “General Revenues” (everything it can legally pledge) for every project UC thus changed its spending (aka “budget”) priorities to suit the bond market. This shouldn’t be surprising—you, too, would change your spending priorities to suit that bank if you pledged your entire paycheck, or as much of it as you could.[5] For UC this means increasing tuition for its own sake, because every tuition dollar can be added directly to the pledged collateral. It also means cutting spending when and where it can get away with doing so.  What this is means is that state budget cuts are actually good for UC’s bond rating, because they allow UC to raise tuition simultaneously. Construction funding is a reason why the Regent’s want to raise tuition, perhaps the most important reason, but, as students, you are unlikely to go along with big increases to fund UC’s list of construction projects. Cutting back on instructional budgets is how they get you to agree to higher tuition without telling you how much will go to fund construction. On my campus, the most visible instructional cuts typically become permanent, and we’re told that without higher tuition they would have been worse. Campus administrations can always say that no particular tuition increase is ever large enough to reverse whatever instructional cuts were imposed to persuade you that it was necessary. If you accept this claim, you’ll never question how much of your tuition is used to fund construction, and whether you would have found an increase justified had you known.

To people in the financial world, it’s already obvious that UC committed itself to raise tuition and cut budgets when it decided in 2004 to secure its bonds. Most of my UC colleagues—faculty, students and staff—nevertheless find it unthinkable that UC would actually raise tuition and cut instruction in order to fund construction. People understand that UC wants to build. What’s unthinkable is that UC would still want to build rather than protect its programs and people when other great universities, including Harvard, indefinitely postponed new construction when their endowment income fell. Why? Because protecting people and programs seem to be a higher priority for Harvard than for UC.

Obvious? Unthinkable? UC’s actions are both. The Regents were under no legal obligation to spend any of your tuition on education—that’s why they can promise to turn the entire amount over to bondholders in the event of default. But neither were they obliged to pledge every penny of your tuition (all its other available revenue) in order to protect their borrowing power in capital markets. President Yudof could be referring to UC’s bond rating when he says that all UC’s “unrestricted” funds are “tied up or must be maintained at a certain amount for the fiscal health of the university.”[6] Those of you who have skipped my footnotes should note that the title of his piece is “Why UC Must Raise Tuition.”

What UC has done was not inevitable, and went far beyond anything that the world of bond financing could have legally required of it. Before you go along with this year’s increase of 32% (which is compounded over last year’s increase), you should ask whether UC promised to manage its budget (your education) so as not to lower its bond rating.

It should be unthinkable that the Regents could have made such a commitment in 2004.[7] To think that they actually did this means that, since 2004, UC’s highest priorities have been set by bond raters, and not by the State of California. I’m going public with my concerns about what this means for you, the students of our university, because I’m tired hearing that it will always be too soon to protest UC’s privatized future until it is already too late. By then, “the inevitable” will have happened by a thousand cuts, and taxpayers will believe that UC is determined to privatize no matter how much money it gets from the state. I, thus, see no point in waiting to know more before urging you to say “no” to the November tuition increase. More information won’t persuade my more cautious colleagues who think now is never the time to reverse the trend toward privatization—not even during a budget crisis when jobs are on the line, much less during good times when funds are flowing.

UC has a leadership problem, a problem of direction. So, yes, your tuition is pledged to finance UC’s plans to raise increasing amounts of capital in bond markets, and you should know what these plans are before paying more in tuition. I’ve made a further calculation in deciding that this is the right time for you to question UC’s leadership. If UC’s leaders can answer your questions by showing that the net budgetary impact of tuition-backed bonds is thus far relatively small, then you still have time to reverse their direction. If they are planning to greatly increase the funds raised by such bonds by rapidly raising tuition, this means that your time is running out.

Based on what I’ve said thus far, here’s why you should conclude that now is the time to demand full accountability from UC, and each of its campuses:

  • UC’s off-the-top diversion of funds from instruction budgets to construction finance is not transparent in any document available to you, the general public or even to me. (I’ve recently seen such a document, but was not allowed to keep it or take notes.)
  • Had the full extent of UC budgetary diversion for construction been transparent, this year’s “emergency” cuts and fee increases would have appeared as what they were, a choice of priorities, rather than inevitable.
  • UC’s most recent (post-“emergency”) construction bonds are just the beginning of a long-term (10-15 year) plan to borrow very much more against very much higher tuition in order to fund individual projects that no longer have to be approved by the state or paid for out of each project’s own revenue. The next step in this direction is this year’s 32% tuition increase, which the Regents plan to approve in November.
  • Before you accept this, yet again, you need to find out how much of this additional tuition revenue will be diverted for construction and how UC’s shift from state funded to tuition-funded construction finance has affected its priorities as a still-public university – and in particular, how it will affect its ability to deliver the first class education you came her to obtain.  Is UC simply raising your tuition because it can, and because doing so automatically increases the collateral available for its bonds?

Some UC apologists will dismiss such questions about UC’s priorities, saying they are based on the naïve assumption that all your tuition money should go to the classroom, rather than, for example, research. In giving such an answer, they would be holding back a crucial piece of information that appears in UC’s non-public documents, which explicitly say that taxing research overhead is the #2 source of repayment funds for General Revenue bonds. This doesn’t mean that new buildings will be paid for by the additional research overhead they “earn.” Even federal grants, which pay UC the maximum “overhead” it gets from anyone, expect UC to “share” (i.e., eat) about 10% of the full budgetary cost on the grounds that doing research should be one of UC’s priorities.[8] But once you see that no UC research ever fully pays for itself, you’ll see that UC must be assuming that all new research labs will add more costs than revenues. The bond documents don’t say that new projects will generate surplus revenue that could be used to support instruction: they are not like private sector “investments” that return a profit to the enterprise. Each new capital project that UC finances on its own, without state subsidy, is at best break-even. Most will be a permanent (perhaps growing) drain on campus resources that will be covered, first, by raising your tuition, second by spreading existing research support funds even thinner, and third by charging you more for other things, like student activities, while giving you less. The list goes on, but what you need to know is that even UC’s new research labs and sports facilities can’t be justified by how much new revenue they bring. Even if they earn some revenue, they’re being built for the prestige of the campuses (and thus the Chancellors) with no disclosure about how much they add to costs, how much tuition will be raised as a result, and whose instructional and research support budget will be cut.

UC has responded to criticism of its post-“emergency” bond issues by simply saying (to the press and on its website) that it would be irresponsible to issue bonds without having a revenue source to pay them back. You shouldn’t be bamboozled by this vague, well-crafted statement into assuming that this revenue source comes mainly from the bond projects themselves. It comes mainly from your tuition, and UC’s ability to raise it at will and, secondarily, from its ability to cut at will what it actually spends on instruction and on overhead support for researchers. As a result, it’s simply misleading for UC’s website to suggest that it can’t use these bonds to pay the costs of keeping class size down, keeping libraries open, preserving student access to lab courses, maintaining staff support for classroom instruction, and retaining the high quality faculty who make UC a magnet for California’s best students. UC now gets more than half of the revenue added by each new student from tuition, rather than from the state—and it expects tuition to rise as state funds decline. It is fine for UC to say that it won’t use the bonds to support instruction because the state underfunded enrollments by $122M, or that it shouldn’t pay for operating costs by borrowing. I’m not saying that it should. But, if it shouldn’t, this bears on the question of how much tuition should increase, and whether tuition-backed bonds should be used primarily to fund buildings that will be used primarily for instructional purposes. I’m open to the argument that using tuition to finance buildings devoted to cutting edge research might be justified by the prestige and value of the work done in them, but I doubt that this is true of the administrative and service buildings that may already be covered by voter-approved state bonds for which UC is unwilling to wait, even though recent layoffs have left it with a lot of unused space.

UC’s 2004 decision to become tuition funded for both its budget and its capital projects reflects a fundamental change in its priorities and purpose that goes far beyond anything the world of bond financing could require.

  • The first way to understand this shift is conceptual: you need to grasp the fact that the revenue a public university raises through tuition (unlike its funding from the state) can be used as collateral to borrow capital markets. This means that a public university deciding to privatize will value tuition dollars more highly than state dollars—partly because it can more easily financialize tuition, and partly because the process of becoming tuition-dependent allows it to simultaneously blame all budget cuts on the state, and the fact that it can’t raise tuition enough.
  • A second way to understand this shift is through its direct effect on your finances: a privatizing university will generate the higher tuition used to finance capital projects by requiring you (its median student) to borrow the same money from the home mortgage and student loan industries. It is, thus, requiring you to support UC’s excellent bond rating by taking on personal debt backed by your own credit rating. This is a surreal form of credit swap in which UC funds new construction by getting your parents to risk foreclosure and you to risk insolvency for much of your adulthood. In return UC takes on the risk of what? There are several scenarios, but most end with the risk of having to accept non-California students who can pay higher tuition to replace California students who can’t or won’t borrow enough to finance higher tuition. Such a “swap” works mainly to UC’s advantage, not yours, unless you would otherwise have taken on just as much debt for a worse purpose.[9] This is yet another way in which UC is becoming debt-financed rather than taxpayer-financed.
  • A third way of understanding UC privatization is budgetary: that it shifts UC’s spending priorities away from what the state will fund and toward producing revenue streams that it can treat as capital assets.[10]
  • A fourth way of understanding UC privatization is political in the sense that UC leaders now take an openly negative stand toward California taxpayers, and especially the state legislature. Instead of expecting – or trying to mobilize – political support for public higher education, UC now blames public indifference for what it is now “forced” to do, and implies that a legislature that won’t pay should have no say over how UC uses the money that it “raises” on its own, such as tuition. Once UC openly declares its intent to use “its own” funds to raise more private funds, regardless of how much the state still pays, why should the state pay more?[11]

Should the State of California restore funding to UC? Of course it should. Otherwise, UC can’t continue as the great public university it still is. But, as a taxpayer, I would be reluctant to pay more unless UC also reverses course: it must, once again, be willing to use the revenue it holds in public trust to advance its state-mandated purpose. UC’s continuation as a great public university is impossible if advancing public higher education has ceased to be its own top priority.

Many will try to discourage you from becoming active in the effort to ”Save UC” by saying that its problems are typical of those facing public universities in the state and nation as a whole. They would encourage you to think that this is not the place to address these problems, or try to persuade you that now is not the time. But you should not conclude that, if a problem exists everywhere, it can’t be confronted anywhere; nor should you conclude that if a problem is ongoing, it can’t be addressed now. This is, in fact, a good place and time for us to confront a wider long-term problem. UC is a nationally prominent, and successful, public institution that has a deep reservoir of public support and a large body of students, faculty and staff who are ready to be educated and engaged in action.

There is also an immediate focus around which to mobilize—the Regents’ plan to raise tuition by 32% in November. If students, faculty and staff were to demand that funding public higher education be UC’s highest priority in the use of “its own” funds and assets, this would strengthen the moral case for restoring public funds.[12] My severest criticism of UC’s leadership is that it has lost (or given up on) the moral case that must be made for public higher education, which has, according to President Yudof, “lost its shine.”[13]

The fact that UC’s privatization reflects a national problem is not a reason to despair: it is, rather, a reason to make the fight against it our highest priority. The problem is here, the time is now, and we are building a movement that can produce new knowledge on which other movements could build. This kind of teaching and research in the public interest is what UC does best. Let it shine.

Want to know more?  Here are answers to questions on this issue raised by skeptical faculty.

Projects funded by UC’s August 2009 General Revenue Bonds: [Amounts are not provided]

Berkeley
Biomedical & Health Sciences Step I
SAHPC (Stadium)
3200 Regatta Renovations
Clark Kerr Renewal
2007-2008 Deferred Maintenance
2008-2009 Deferred Maintenance
Law Building Infill
Anna Head

Davis
Physical Sciences Expansion
West Village Backbone Infrastructure
Health & Wellness
Graduate School of Management Conference Center
Project Augmentation
Tupper Hall
Hotel Site & Preparation
Building Jl Renovation/Upgrade
Cruess Hall Deferred Maintenance
2007-2008 Deferred Maintenance
Robbins Hall
Coffee House

Irvine
Engineering Unit 3
Social & Behaviorial Sciences
Stem Cell Building Gross Hall

Los Angeles
Life Sciences Replacement Building
Police Station
Hilgard Student Housing
100 Medical Plaza Building
Northwest Campus Student Housing Infill
Lake Arrowhead
Weybum Terrace
Pauley Pavilion

Merced
Merced Campus Parking Lot G & H

Riverside
Health Sciences Surge
Creekside Terraces
Summer Ridge Apartments

San Diego
North Campus Housing Ph 11
Health Sciences Grad Prof Housing
Cogeneration Plant Expansion
Muir Stewart Commons Renovation
Telemedicine
Revelle College Apartments
Muir College Apartments
Health Sciences Biomedical Research Facility II
Marine Ecosystems Sensing. Observation & Model

San Francisco
CVRI
NGMAN
Aldea San Miguel Housing Renovation
2006-2007 Deferred Maintenance

Santa Barbara
North Hall Data Center
Bio Science II Cagewash

Santa Cruz
East Campus Housing Infill
Porter College Phase IIA Seismic
Cowell Student Health Center Expansion & Renovation
2007-2008 Deferred Maintenance

Systemwide
Systemwide State Energy Partnership

FOOTNOTES

[1] UC’s plan to increase tuition-backed borrowing is large—I’ve read through the internal document (which looked like a PowerPoint printout)—but wasn’t allowed to keep a copy or take notes. I was, however, able to handle the document alertly, focusing on specific questions, because I had just written a draft of the present document, based on UC’s bond disclosures. I have, therefore, been able to revise the present document using at least some of the bond-related information that UC is presenting internally, but has yet to disclose. The UCOP handout is my basis for saying that UC is using tuition increases as a revenue source for debt service, and not merely as a pledge. It is also my basis for saying that UC plans to increase this use tuition to both back and pay off bonds.

[2] Since 2004, UC’s “General Revenue Bonds” have been backed by the bond proceeds themselves (of course). But, instead of being backed by the income from bond-funded projects, as most revenue bonds are, they are backed by UC’s “General Revenues.” This is defined by the Indenture (authorized by the Regents in July 2003) as follows:

‘General Revenues’ means certain operating and non-operating revenues of the University of California as reported in the University’ s Financial Report, including (i) gross student tuition and fees; (ii) facilities and administrative cost recovery from contracts and grants; (iii) net sales and service revenues from educational and auxiliary enterprise activities; (iv) other net operating revenues; (v) certain other nonoperating revenues, including unrestricted investment income; and (vi) any other revenues as may be designated as General Revenues from time to time by a Certificate of The Regents delivered to the Trustee, but excluding (a) appropriations from the State of California (except as permitted’ under Section 28 of the State Budget Act or other legislative action); (b) moneys which are restricted as to expenditure by a granting agency or donor; (c) gross revenues of the University of California Medical Centers; (d) management fees resulting from the contracts for management of the United States Department of Energy Laboratories; and (e) any revenues which may be excluded from General Revenues from time to time by a Certificate of The Regents delivered to the Trustee.” (Indenture, p. 11, as quoted in every subsequent bond Prospectus based on it.)

By pledging “General Revenues” as security for each UC revenue bond, the Regents are pledging everything that they can, including tuition. This means that when any source of General Revenue goes up—including student tuition and fees—UC’s ability to borrow on private capital markets goes up, and its dependency on state capital funding goes down, After 2004, any revenues produced by a bond-funded contract would be added to General Revenue (unless this were limited by that contract); but any such projects could also be subsidized by each other, or by revenues from sources such as tuition, student activities, grant “overhead,” endowment, etc.

NB. UC’s use of “General Revenue Bonds” does not preclude access to its traditional source of funding for capital projects, State of California Bonds. Many California bonds must be voter-approved; all are (in effect) approved by the Governor and legislature. UC-issued bonds are authorized only by the Regents, who make bond proceeds available to campus projects they approve.

[3] Yudof, “Why the U. of California Must Increase Tuition” (Chronicle of Higher Education, September 29, 2009).

[4] The General Covenant in the common Indenture for all post-2004 bonds says (See Indenture p. 16, and p. c-16 of the prospectus for UC’s August 11, 2009 bond offering)

[5] General Revenues include, essentially, all UC income that is not legally restricted by obligations to an outside party, such as the state, a contractor, or a donor.

[6] Mark Yudof, “Why the U. of California Has To Raise Tuition,” Chronicle of Higher Education (September 29, 2009).

[7] I didn’t think so, and I served on the UC Committee on Budget and Planning 2003-when it happened, along with Stan Glantz and Chris Newfield .We knew about, and objected to, UC’s agreement with Governor Schwarzengger to make UC increasingly tuition-dependent, but we were never told that the Regents had already voted (in July 2003) to use tuition as collateral for capital projects, which would allow more projects to be funded independently of the state as tuition rose. This The prospect of increasing freedom on the capital side, would have given the Regents a reason to seek tuition-sourced dollars whether or not doing so was part of a viable plan to fund UC’s operating budget.

[8] UC knows the full budgetary cost of federally-funded research. It negotiates the federal overhead rate by demonstrating that it loses money (overall) on this research. It then assures bond-holders that it is free to spend even less than it gets to support that research, so that 100% of its income for overhead can be added to the pledged collateral for new buildings.

Many of UC’s private sector research “partners” pay considerably less in overhead  than the federal government (i.e., they are subsidized more heavily). They are also free to contractually obligate UC not to use whatever research overhead they pay for other purposes. Such contractual restrictions would keep overhead on these projects out of UC’s General Revenue Fund. UC’s private sector partners on the National Labs (Bechtel, et al.) seem to have made such arrangements, as has the DOE in its latest contract with that “partnership.” As far as I know, the terms of these contracts are still kept secret, at the request of UC’s corporate partners. You should demand to know what profits UC makes on these DOE contracts (which have doubled since UC took on corporate partners), and why profits from the lab partnership are not available to fund UC during an “extreme financial emergency” that requires cutting employee pay.

[9] I didn’t make up this argument: I heard it as a private aside from a UC administrator who was arguing in 2003-4 that taxpayers could no longer be expected to pay for higher education now that personal credit was so easily available. Times have changed, but UC has no new ideas.

[10] Bob Reich (“What’s Public about a Public University and Why That Publicness is Important?”)and Wendy Brown (“Why Privatization is About More than Who Pays?) enumerated these priority changes in their brilliant speeches on September 24, now posted on You-Tube. http://www.youtube.com/view_play_list?p=53D65B03FF28A6C7

[11] Remember that your activities fees, housing fees, parking fees, dorm fees etc. are also part of the pledge. Why? Because UC can tell bondholders that these revenues don’t have to be used for the purpose for which they are collected and because it has promised to raise these fees to whatever extent is necessary to maintain its bond rating. As students you can demand to know why your activities are being cut when there has been no reduction in fees, some of which were approved by student vote.

But all fees that have been pledged can be used for purposes other than those that justify them. The General Covenant in the Bond Indenture, repeated in every offering based on it, says that “So long as the Bonds are Outstanding, The Regents shall set rates, charges, and fees in each Fiscal Year so as to cause General Revenues deposited in the General Revenue Fund to be in an amount sufficient to pay principal and interest on the Bonds and …on Ancillary Obligations for the then current Fiscal Year.”

In case you’re wondering, however, I don’t think that all of UC’s activities should bring in enough revenue to pay for themselves. That test is part of privatization, although UC now treats privatization as self-justifying, and rarely turns down sources of revenue because they cost more than they return. I think on the contrary, that UC’s public mission can justify unequal expenditures to provide an equal education. By this standard a student should not pay more in tuition or fees for choosing a major that uses a biology lab rather than a dance studio, or, for that matter, my own traditional lecture room. So, I say “yes” to cross subsidies—but let’s use them for the purpose of promoting exchange and synergy among academic fields that are equally valuable, despite their different cost structures. That’s what great public universities do.

[12] The California Constitution specifically subjects the Regents to “such legislative control as may be necessary to insure the security of its funds” (Art. 9, sec. 9a.)

[13] “Big Man on Campus,” Questions for Mark Yudof, New York Times Magazine, September 27, 2009.