Breaking News
By Peter Taylor, Chief Financial Officer, University of California
There is a persistent myth that the University of California could offset steep reductions in state support by tapping a treasure chest of billions of dollars in unrestricted net assets.
The truth is that all but a fraction of the university’s net assets at the end of each fiscal year are committed, and they reside in tens of thousands of funds and accounts, most of which are controlled by UC’s campuses. They are akin to money deposited in a personal checking account on the 15th of the month, but committed to paying the next month’s mortgage or rent.
The myth is perpetuated in part by the accounting term “unrestricted,” which is often misunderstood to mean uncommitted.
Under generally accepted accounting principles, any funds not subject to externally imposed restrictions on their use must be classified as unrestricted for financial reporting purposes. For example, use of federal contracts and grants is externally restricted to approved research projects, so they are considered restricted funds. Yet substantially all of UC’s unrestricted net assets are allocated – or internally restricted – for academic programs, research initiatives, capital projects, scholarships and other purposes from one year to the next.
And, when audited financial statements for the past fiscal year are completed, it’s expected that net assets will have fallen from $5.3 billion at the end of June 2008 to below $4 billion as of June 30, 2009. This precipitous decline in only one year is a result of the growing demand on the university’s resources, attributable to the growth in unfunded retiree health care and pension obligations, coupled with investment losses and other factors.
No discussion of unrestricted net assets is complete without a clear understanding of the growing claim on the university’s unrestricted net assets represented by unfunded retiree health and pension obligations. Retiree health liabilities are more than $13 billion, and the extent of the unfunded pension liability that will be reported to the Regents in November will be substantial.
Ultimately, it is in the best interest of the university community and those it serves to have a conversation and broad strategic focus on the dangers posed by these kinds of major financial obligations.
In the meantime, a “myths and facts” framework is offered here to aid understanding of unrestricted net assets.
Myth: UC has a $5.3 billion reserve fund it can tap to get through the current funding shortfall caused by deep cuts in core support from the state.
Fact: UC does not have billions of dollars in uncommitted funds that it can use to make up for massive reductions in state support. In fact, the next issuance of audited financial statements in November, summarizing the university’s financial condition as of June 30, 2009, will show a substantial drop in unrestricted net assets to below $4 billion.
The amount that is reported in the university’s financial statements as "unrestricted net assets" – terminology required under generally accepted accounting principles – is money kept in thousands of funds and accounts that each individual campus controls for very specific uses.
Any funds that are not subject to externally imposed restrictions on their use must be classified as unrestricted for financial reporting purposes. The term “unrestricted assets” does not mean uncommitted assets.
In fact, substantially all of these net assets have been committed internally to specific programs and to meet a wide range of needs, such as supporting academic programs and services on a multiple-year basis, research initiatives, approved capital projects, funds already committed (“liened”) for authorized equipment purchases and services that have not yet been expended by the end of the fiscal year, or other purposes. In many cases, transferring funds to other uses would be illegal. For example, funds earned and set aside to compensate physicians for patient services they have performed cannot be diverted to add more language courses at a campus.
The unrestricted net assets are shown as a single line item in the university’s financial statements, but are actually distributed among tens of thousands of financial accounts, both operating and capital. These include more than 10,000 unrestricted fund sources and 48,000 departmental accounts, resulting in more than 76,000 account/fund combinations.
As a routine matter, UC evaluates accounts and funds to make sure dollars are being spent consistent with the university's evolving priorities and needs. If a campus finds it can legally and responsibly transfer money between programs, that decision will be made at the campus level. And campuses will be making these decisions throughout this fiscal crisis.
Myth: UC hasn’t touched these monies during the fiscal crisis of the past year
Fact: The university’s 2009 financial statements will show a large decrease in unrestricted net assets, from $5.3 billion at the end of the 2007-08 fiscal year to less than $4 billion at the end of the fiscal year that ended June 30, 2009.
Some of the highlights from UC’s fiscal closing process to-date include:
• A drop of approximately $300 million in operating cash balances at UC campuses. These accounts – tantamount to UC’s “interest bearing checking account” – are used by campuses to meet expenses throughout the year for core instructional needs. These cash balances are depended on for liens covering purchase orders, contracts and requisitions and other multi-year financial commitments.
• The substantial budget cuts from the state – including those in the middle and end of the 2008-09 fiscal year – hit campus programs so late that all available funds had to be tapped to help bridge over to the current fiscal year.
• This drain on available cash has been severely exacerbated by the state’s “claw back” of $715 million in monies that, after being sent to UC and substantially spent in fiscal year 2008-09, had to be sent back to Sacramento between July and September 2009 because of state budget cuts, as well as the state’s deferral of $750 million in cash payments from the first quarter of fiscal year 2009-10 to the fourth quarter of fiscal year 2009-10, for which UC had to borrow nearly $1 billion in short-term loans in the bond market subsequent to the end of the fiscal year to meet operating obligations.
Myth: These monies are actually just extra funds that the campuses haven’t spent during the “good years” and are now being hoarded.
Fact: Unrestricted net assets include thousands of funds and accounts. Some of the larger amounts included in the 2009 audit:
• Approximately $1.1 billion invested in the university’s endowment. These are monies that annually pay out approximately $50 million to support valuable campus programs, ranging from undergraduate student scholarships, faculty research, alumni fundraising programs and the Education Abroad Program, among other expenditures. Approximately half of these programs are located at campuses, and half controlled by University of California Office of the President. At the President’s request, staff is looking into whether there is flexibility to change or reallocate these monies into programs that reflect the changing priorities of the university.
• Almost $700 million collected from students and their families in the form of fee income, housing and parking payments, in undergraduate programs and graduate and professional schools. It is important to note that student and faculty housing and parking are required to be self-supporting, although campuses are afforded flexibility to charge these enterprise operations a fee for ground rent and other services. Rates for housing and parking are set so they are sufficient to meet debt indenture covenants and near-term capital and maintenance requirements.
• Approximately $950 million for construction projects on campuses that have already been started, or are approved by the Regents to begin in the coming year. University policy requires that all funds necessary to complete the design and construction of a capital project be on deposit at the time a contract is awarded so that full funding is available to complete the project once it is underway; in this way, campuses don’t have projects partially completed without the funds to finish them. In addition to new facilities and infrastructure, the capital projects address seismic safety upgrades, capital renewal and deferred maintenance.
• Approximately $400 million in operating monies for each of UC’s five hospitals to use as their cushion against the substantial variability in their cash flows. It should be noted that, according to the Moody’s rating agency, the appropriate amount of cash reserves for hospitals at the rating category currently assigned to UC is 190 days of cash, which equals more than $3 billion. Hospital cash reserves are substantially below that level, but through the strength of the university’s systemwide revenue pledge structure that recognizes UC’s critical position in California’s health care industry, the hospitals have shown that they can operate successfully with a lesser amount.
September 25, 2009
Furlough Exchange Program Questions Answered
FEP Guidelines (PDF)
SENATE FACULTY MEMBERS
ASTRONOMERS
Dear Colleagues:
I write to provide additional information and to address questions
that have been raised in response to the Furlough Exchange Program
(FEP) guidelines that you were sent on September 18 (attached).
For this specific program, gifts and endowments are included under
extramural funds and could be eligible to be used in the FEP provided
the requirements listed in Section III of the FEP guidelines are met.
For FEP participation deadline information, please review Section II
of the FEP guidelines. The current deadline is September 25, 2009.
There are later deadlines for some of the partial-year FEP periods
(academic-year spring quarter only; fiscal-year winter and spring
quarters).
Tables of participation costs for fiscal-year faculty who also have
appointments as astronomers have been added to the FEP guidelines.
Finally, there have been many questions about why the participation
costs are higher for academic-year faculty participating in the FEP on
a partial-year basis (higher effort percentages and higher number of
furlough days forfeited) than a simple proportionate amount of the
full-year participation costs. A general explanation follows:
To comply with established policies on compensation and effort
reporting for academic-year (9/12) appointees, the Furlough Exchange
Program must occur within one fiscal year (July 1, 2009 through June
30, 2010).
This means that all academic-year faculty members who participate in
the FEP – whether on a full- or partial-year basis – must conclude
participation by June 30, 2010.
Academic-year faculty participating in the FEP on a partial-year basis
are also subject to the systemwide Furlough/Salary Reduction Plan
(Plan), which is effective September 1, 2009 through August 31, 2010.
Given the time constraint of point #1, academic-year faculty who
participate in the FEP on a partial-year basis must realize the full
12 months of salary reduction savings required under the systemwide
Plan between September 1, 2009 and June 30, 2010, a 10-month period.
Therefore, to realize this required salary savings, it is necessary to
increase proportionately the effort charged to the grant(s) during the
partial-year participation periods for academic-year faculty.
Finally, it is important to note that all academic-year faculty who
participate in the FEP (whether full- or partial-year basis) will not
have their July and August 2010 pay reduced like other employees
subject to the systemwide Plan because these faculty will have already
realized the required salary savings for the campus during this fiscal
year (July 1, 2009 through June 30, 2010).
Thank you for your patience as we implement this rather complex program.
Best regards,
--Pamela Peterson
Assistant Vice Chancellor
Academic Personnel
September 23, 2009
Dear Colleagues,
As you may know, a small group of faculty from across the University of California system is organizing a faculty walkout on September 24, the first day of classes at most UC campuses. The stated purpose of the walkout is to express disapproval for actions taken by the UC Office of the President, including cuts in student enrollment, increased class sizes, layoffs, and furloughs. The organizers also feel that the process by which budgetary decisions were reached was inconsistent with the UC system of shared governance. Aspects of this consultation process were summarized in an email that was sent to UCM by Senate Chair Conklin on September 15 2009.
Additional information is available on the UC Faculty Walkout site: http://ucfacultywalkout.com/ . The UCM Academic Senate leadership has elected not to take a position on the proposed walkout. We regard participation in a walkout as a matter of individual conscience, recognizing that our faculty are professionals who will meet their pedagogical obligations to their students.
There is no question that the enormous budget cuts are having terrible effects at UCM. They threaten our ability to grow and develop to fulfill the mission of excellence in teaching, research and service, that are the hallmarks of a mature UC campus. These cuts are creating personal hardships for everyone in our community: students, faculty and staff. The Senate is committed to engaging each of you in efforts over the coming year to mitigate the impact of the budget cuts, to maintain quality educational and research programs, and to ensure that the collective voice of the faculty is heard.
Sincerely,
Martha Conklin
Dear Members of the UCM Academic Senate,
In the past week, as our colleagues have returned to their campuses, there has been a proliferation of letters and policies in response to decisions made over the summer as the UC system plotted a course to deal with the financial crisis. Many UCM Academic Senate members have participated in this process, some by responding to a poll we conducted to ensure your views could be heard in this process. As the UCM Academic Senate’s Divisional Council, we want to keep you up to date on the decisions that have been made as well as some of the reactions within the system to those decisions. The Divisional Council (often referred to as DivCo) is designed to represent the faculty and has formal responsibilities and input in running UCM and the UC system.
There has been a flurry of emails, some from the System Provost, on decisions that were made and a justification for those decisions. Others have challenged those decisions. Below is a summary of actions taken by the administration and reactions that are taking place to those decisions:
Decisions
Due to the CA financial crisis, support to UC was reduced by approximately $800,000,000; the UC system had to adjust operations to reduce expenditures by approximately $600,000,000 in the 2009/10 year. Part of the strategy to reduce costs was to implement furloughs for faculty and staff. Much of what you have been reading is in regard to the decisions made about furlough implementation.
In early summer, the Academic Senate at UCM endorsed the inclusion of instructional days in furlough days, as did the system-wide Academic Council. Subsequently, President Yudof, after consulting with the Chancellors and EVC/Provosts from the ten campuses, members of The Regents, and members of the legislature, decided and announced through Interim Provost Pitts that instructional days may not be taken on furlough days. Interim Provost Pitts followed this with an open letter to the faculty which describes his reasoning for his decision (recently distributed to all faculty per request by Academic Senate Chair Powell).
At least one campus (UC Berkeley) has taken limited steps to partially mitigate the effect of furloughs on faculty compensation, although to do even this requires substantial resources.
Authority to implement furloughs
The Regents have institutionalized the principle of “shared governance” in their Standing Orders. In these Standing Orders they formally designate the responsibilities for the Officers of the University and the Academic Senate. In particular, Standing Order of the Regents 100.4 (qq), recently enacted, gives the President the authority to declare an extreme financial emergency and 100.4 (h) states “The President shall fix the calendar of the University, provided that no session of instruction shall be established or abolished except with the advice of the Academic Senate and the approval of the Board.” These clearly establish the authority of the President to implement furloughs and control the instructional calendar.
UCM implementation of furlough policies
UCM policies on furlough implementation are the least prescriptive of any UC campus with only three days of mandated furlough and university closure. Although DivCo was not consulted by the UCM administration in the development of this policy, throughout the summer we actively informed the administration of faculty preferences and have indicated that the current policy does not adequately protect the research and teaching mission of the institution.
UC faculty reactions to furlough decisions
The UC faculty are divided on the state of shared governance. Since the UC administration’s decision on furloughs is at variance with the Academic Council recommendation, there are a significant number of faculty who feel that shared governance has failed. The most visible manifestations of this movement are the open letter by the group of 16 system-wide faculty members which is supported by several campus-based unions and one by the American Association of University Professors (AAUP). The open letter is a petition that calls for a strike on the first day of classes (September 24th) for most UC campuses. As of September 11th, at least 10 UCM faculty (about 8% of the Academic Senate faculty) have signed the petition.
Another position acknowledges that the President has the authority to make decisions after consulting representative groups. The spirit of shared governance is that there is give and take on issues. There have been two letters advocating that position, one from Academic Council Chair Croughan and others to the UC community, and the Academic Council Chair Powell and Assistant Chair Simmons’ letter in response to the AAUP letter. These letters represent the personal views of our academic leadership and are not letters endorsed by the Academic Council.
The position of the balance of the faculty is likely some mixture of the above positions. For example, many are disillusioned by the furlough, but feel that the problem is the state budget, not UCOP, and that it would be wrong to penalize UC students and their families in the face of the major impending fee increases. There have been discussions of teach-ins, either in the context of class, or open to all students.
Other Issues
Simultaneously, although unrelated to this discussion, UC Berkeley implemented a curriculum change, making the last few instructional days of the semester into “non-podium” days of review and reading (with the maintenance of faculty-student contact), and this proposal has been ruled to be within compliance of President Yudof’s and Interim Provost Pitts’ decision. UCLA is currently preparing plan to make a similar curriculum change. Neither change is in response to faculty furloughs and represents a multi-year process of developing educational policy.
The way forward
As stated in Powell’s and Simmon’s letter, “The recent decision rejecting the advice of the UC Academic Council was, in our opinion, wrong-headed and has led to unfortunate consequences and disillusionment among faculty.” With such a large shock to the system, it is time to re-evaluate our ability to weather multiple years of budget shortfalls and our decision making process. Regent Chair Gould is setting up a Commission on the Future of UC. Something we can all unite behind is the need for adequate funding for the UC system, and for the research and teaching mission of UC Merced. There is an advocacy site for the UC system.
These issues will continue to be discussed this year at Academic Council. Receiving your comments and suggestions will help to inform my contribution to this discussion. Please e-mail your comments to the Academic Senate, senatechair@ucmerced.edu. Already the system is planning ahead for the anticipated budget shortfalls in 2010/2011.
Sincerely,
Martha Conklin
Academic Senate Chair, UC Merced
List of Documents and websites
1. The UCM Senate webpage (currently being upgraded)
2. The University of California Academic Senate Organizational Chart
3. Letter from the Merced Divisional Council to Academic Council Chair: Furlough Plan Implementation (7/7/09)
4. Letter from Academic Council to Provost Pitts: Implementation of Furlough Days on Instructional Days (8/5/09)
5. Letter from Provost Pitts to Chancellors and Academic Council Chair Croughan: instructional days may not be taken on furlough days (8/21/09)
6. Follow-up Letter from Provost Pitts: Open Letter to Faculty (9/10/09)
7. UC Berkeley’s Announcement re Changes to the Fall 2009 Academic Calendar (8/20/09)
8. Letter from Provost Pitts to Divisional Chairs: Non-Podium Instructional Days (9/8/09)
9.UC Regents Standing Orders
10. Chancellor Kang/EVC/P Alley announcement of UCM furlough policies
11. Letter from the Merced Divisional Council to EVC Alley: furlough/salary reduction plan (8/3/09)
12. Letter from the Merced Divisional Council to EVC Alley (9/08/09).
13. Open Letter to UC Faculty: A Correction: From Shared Governance to Collective Action (8/31/09)
14. An Open Letter to UC Faculty from American Association of University Professors (AAUP)
15. Letter from Academic Council Chair Croughan and others to UC Colleagues in support of the Administration (8/31/09)
16. Letter to AAUP from Academic Council Chair Powell and Council Vice Chair Simmons regarding An Open Letter to UC Faculty from the AAUP (9/9/09)
17. Advocacy Support Network for University of California.