Peter Donohue's Economic Report on UC's Finances

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UC's Hidden Wealth: An Analysis
of 10 Years of UC's Financial Reports

A Study for the Coalition of University Employees (CUE)

by

Peter Donohue, Ph.D.
PBI Associates
Portland, Oregon

May 1, 2002

Executive Summary

When the state reduced funding for the University of California this year, UC administrators asked clerical workers to share the burden of the state fiscal crisis by settling for a 1 percent salary increase, even though a 1999 UC salary survey showed clericals were already paid 21 percent below market rates for the same work in the private sector. At the same time, UC administration sought and received authorization to grant 19-25 percent raises to administrators who were already making six-figure salaries. Actions such as this, and a long history of inadequate clerical compensation, led the Coalition of University Employees (CUE), the union representing UC's 18,000 clericals, to hire Ph.D. economist Peter Donohue to investigate UC's true ability to pay fair wages. These are Dr. Donohue's findings.

This report uses UC's audited financial reports to show that, despite repeated public statements to the contrary, the university does have the ability to pay for improvements in UC clerical workers' pay and benefits without harming educational programs. This report further shows that UC's ability to pay is not contingent upon state appropriations, as administrators have repeatedly stated. It demonstrates once and for all that UC's refusal to offer clericals fair wages is not because it can't do so, but simply because it won't. Finally, this report highlights the enormous chasm between the treatment of high-level administrators and the treatment of clericals, and the terrible consequences of this deliberate policy of under-compensating clericals.

• UC's financial data show that its dependence on state appropriations has decreased over time. Unrestricted revenues have grown more rapidly than spending on education and general services. As a result, UC has accumulated a $2.1 billion fund surplus. A small portion of this surplus could be used to improve the substandard pay and working conditions of the more than 18,000 UC clericals. UC simply has chosen not to.
• Since 1991, UC revenues from sales and services have grown 75 percent, far exceeding the state revenue increase of 49 percent in the same decade, thereby reducing UC's dependence on state monies.
• Continuing a trend going back at least ten years, all UC unrestricted revenues in the Current Fund -- money which may be spent "achieving any purpose of the university" -- grew to $9.7 billion in 2000-2001, an increase of 14.3 percent from the previous year. At the same time, unrestricted spending -- Current Fund educational and general spending -- increased only 7.3 percent (to $5.5 billion).
• Unrestricted state monies increased 11.3 percent during 2000-2001. In the same year, UC unrestricted Current Fund revenues from educational, medical, and auxiliary enterprise sales and services increased by 16.2 percent.
• Unrestricted Current Fund spending on academic support fell 9.6 percent from what was spent in 1999-2000.
• The unrestricted Current Fund balance increased $76 million in 2000-2001 to $2.1 billion, triple the 1991 level, despite the fact that UC transferred out nearly $1 billion dollars in otherwise unrestricted funds.
• At the start of 2000-2001, UC's unrestricted "reserve," equal to 21-23 percent of Current Fund unrestricted revenues, was two to four times the recommended level for state-supported universities, as reflected in UC's "AAA" bond rating.
• Although UC has repeatedly linked CUE salaries to state appropriations, UC's own figures show that only 36 percent of CUE salaries come from state monies, less than 3 percent come from student tuition and fees, and 30 percent come from UC's sales and services revenues.
• If a CUE member earning $15 an hour in 1999 had received the same percentage increase as a UC administrator, she would be earning $20.24 an hour today, rather than $15.67. More than half (54 percent) of UC clerical employees leave their CUE-represented positions each year.

Introduction

UC Gets Top Financial Grades from Independent Auditors

Contrary to the impression created by various University of California officials, UC's audited annual financial reports show that the university is in robust overall financial condition. Further, the university's steady improvement over the last ten years can be expected to continue. Moody's Investors Service and Standard & Poor's Ratings Group, two independent agencies that measure the financial health of institution, both give UC's fiscal prospects their highest rating, AAA.

The evidence presented in this report shows that UC has and can expect to have the financial ability to improve CUE-represented workers' compensation and working conditions.

In other words, this report shows that UC pays CUE-represented clerical workers substandard wages -- on average 21 percent less than counterparts outside UC, according to UC's own salary surveys -- as a deliberate policy, not because it can't pay or has legal or outside contractual obligations.

Instead of fairly compensating clericals, UC chooses to transfer unrestricted resources from educational and general services to non-education uses, or to set them aside unused. Furthermore, UC budget terminology obscures how resources available for educational and public service uses, including paying the clerical workers responsible for UC's day-to-day operations, are redirected elsewhere by top UC officials.

Where are the resources that could be used to improve UC clericals workers' compensation and working conditions?

Unrestricted Funds

Unrestricted funds are funds not restricted to specific uses by outside entities through appropriation, contract, grant, or bequest. UC annual financial reports define unrestricted funds as those "which may be used in achieving any purpose of the university" (Source: University of California, 2000-2001 Annual Financial Report, p. 32).

When the UC administration "commits" unrestricted funds for specific uses or accounts, such as authorizing 19-25 percent salary increases for executive vice chancellors (Source: San Francisco Chronicle, Nov. 9, 2001), it is merely enacting an arbitrary policy, not following a law or contractual requirement. It is no different from covering the cost of additional services at UC, including those incurred in collective bargaining.

Restricted Funds

Restricted funds are the other source of funds that can be used to improve pay and working conditions. These are UC fund balances whose uses are restricted. A large share of CUE-covered employees' salaries and benefits are paid from restricted funds.

Nonmandatory Transfers

Nonmandatory transfers are resources shifted from one fund to another at university discretion. Unlike transfers made to meet obligations to outside entities for debt service or capital improvements, transferred unrestricted resources -- if they remain unspent -- are available for use as UC chooses.

Long-Term Outlook for Restricted and Unrestricted Fund Balances

A review of ten years of UC financial history shows a steady growth in the balance of both unrestricted and restricted funds. Because this growth is an annual increase, and not just a one-time bonanza, balances can be expected to grow for the foreseeable future. This suggests that UC has, and can expect to continue to have, the means to accelerate compensation improvements for CUE-represented employees.

Understanding GAAP* Definitions and UC Jargon

• Funds are, simply put, bookkeeping devices -- the university's way of organizing its resources.
• Budgets are forward-looking documents, balancing expected revenues and expected spending. UC adopts two budgets: One uses Current Fund resources for Current Operations, including educational and general services; the other uses Capital Fund resources for Capital Improvements, i.e., construction, depreciation, and debt service.
• UC's statement of Current Fund Revenues, Expenditures, and Other Changes shows the most recent fiscal year's actual revenues, spending, transfers, and fund balances, while its balance sheet shows assets, liabilities, and equity accumulated during the past year.
• What matters is if resources are restricted by outside entities, i.e., their use is limited by law, contract, grant or bequest. Otherwise, they are unrestricted, meaning they can be used as UC chooses.

What Auditors and UC Say

• The auditing firm PricewaterhouseCoopers attests that UC's annual financial reports best show UC's overall financial condition, in conformance with Generally Accepted Accounting Principles (GAAP). In other words, the published UC financial data used for this report have been independently determined to "fairly represent, in all material respects, the financial position of the university" (Source: University of California, 2000-2001 Annual Financial Report, p. 25).

Same Term, Different Meanings

• Following GAAP, UC annual financial statements define unrestricted funds as those which "may be used in achieving any purpose of the university."

In GAAP, restricted funds are those whose use is limited by an outside entity's law, contract, grant, or bequest -- not by UC regents, president, chancellors, or administrators.

But creditors assessing UC's overall financial condition might be confused by the difference between GAAP-informed financial reports' restricted funds and those funds labeled "restricted funds" in UC budget documents, as Professor Charles Schwartz recently pointed out:

Note that in this budget document, the phrase "Restricted Funds" means something different from the phrase "Restricted Funds" as used in UC's accounting reports. In budget language, "Restricted Funds" means money that is outside of the Legislature's control, but still is unrestricted as far as the university's discretion is concerned. (Source: personal communication between Professor Charles Schwartz and report author, November 4, 2001)

• For UC's creditors, lenders, contractors, and vendors, what matters is the unrestricted resources UC has, whether budgeted or not, to meet its financial obligations to them. Those resources not already restricted by outside entities are in fact unrestricted and available to meet those obligations.

Misleading Use of the Term "Lien"

Resources that UC has called "liened" in communications to clerical employees (Associate Vice Chancellor for Human Resources Dennis Shimek to UC Davis Vice Chancellor for Administration, 2001-2002 Salary Communication Summary, December 27, 2001, HR Communiqué #01-002) are actually unrestricted.

The use of resources subject to a lien, a contractual claim on the property of another as security for payment of a just debt, would be restricted by an outside entity. A layperson's understanding of these words is the same. In fact, these are no different from resources that UC calls "dedicated." If these unrestricted resources' weren't available to be used as UC chooses, they would be identified as restricted in UC financial statements.

Conclusion

Among UC's most important creditors are CUE-represented employees whose labor will be compensated under the contract now being negotiated. The true measure of UC's overall financial health and its ability to improve CUE-represented employees' pay, benefits, and working conditions is UC's own Price Waterhouse Coopers-audited financial statement and not UC's budgeting.

The Growth in UC's Unrestricted Revenues

UC's unrestricted funds can be used for any purpose UC chooses. Unrestricted funds -- whether they come from the state or auxiliary enterprises such as parking or hospital services -- have steadily increased over the years.

• While all Current Fund revenues increased 10.8 percent in 2000-2001 [EXHIBIT 1], unrestricted Current Fund revenues rose by 14.3 percent [EXHIBIT 2].
• Growing 40 percent between 1991 and 2000, unrestricted state appropriations increased 19.3 percent in 2000-2001 [EXHIBIT 3]. State appropriations, grants, and contracts pay only 36 percent of CUE salaries [EXHIBIT 3A].
• Unrestricted Current Fund revenues from UC sales and services, including receipts from clinical practices labeled "Educational Activities," have risen 75 percent overall since 1991. Auxiliary enterprises (parking, housing, dining, etc.), unrestricted sales, and services revenues -- which constitute 7 percent of all unrestricted Current Fund revenues -- increased 49 percent over the decade, and were up 5.7 percent in 2000-2001 [EXHIBIT 4]. Sales and services revenue pays 31 percent of CUE salaries, while only 3 percent of CUE salaries come from student tuition and fees [EXHIBIT 3A].
• Separately, since 1991 unrestricted Current Fund UC hospital sales and services revenue increased 93 percent, while spending rose only 88 percent. Although UC charged off all the costs of UCSF's breakup with Stanford to 2000-2001, UC medical centers netted $133 million, a 4.9 percent return [EXHIBIT 5].

Spending on Education and General Services

While UC has been accruing ever-larger amounts of unrestricted revenues, overall educational spending has simply not kept pace. In fact, in 2000-2001, overall academic support spending actually dropped.

• Since 1991, unrestricted Current Fund educational and general spending increased 41 percent -- far less than the 72 percent increase in unrestricted Current Fund revenues. While unrestricted Current Fund educational and general spending rose 7.3 percent in 2000-2001, unrestricted Current Fund revenues were up 11.7 percent that year [EXHIBIT 6].
• Unlike all other educational and general expenditures, unrestricted Current Fund spending on academic support -- including auxiliary enterprises such as UC medical centers, housing, parking, and dining -- fell 9.6 percent ($97 million) in 2000-2001, swamping a small increase in restricted academic support expenditures, so that overall academic support spending dropped 7.6 percent [EXHIBIT 7].
• Current Fund revenues were $16 billion, but only $8.3 billion went to educational and general services, with most of the rest going to UC medical centers and auxiliary enterprises such as UC housing and parking [EXHIBIT 8].

Nonmandatory Transfers: How UC Hides Unrestricted Funds

• Nonmandatory transfers are resources that are shifted from one fund to another at UC's discretion -- unlike transfers made to meet obligations to outside entities for debt service or capital. Unspent, unrestricted resources remain available for appropriation as UC chooses after they are transferred.
• During 2000-2001, UC transferred $229.6 million in unrestricted revenues from the Current Fund to meet mandatory debt service and capital costs. Another $299 million of unrestricted Current Fund revenues were transferred out at the discretion of UC's administration, which had made nonmandatory transfers of $337 million, $247 million, and $304 million, respectively, from the Current Fund the three previous years [EXHIBIT 9].
• In 2000-2001, $299 million in nonmandatory transfers of unrestricted Current Fund revenues wound up in the Plant "Unexpended" Fund for capital improvements, the balance of which ended that year at $787 million, up $336 million from the previous year. Over ten years, an average of $149 million in unrestricted Current Fund revenues have been transferred annually to the Plant "Unexpended" fund. On average, $43 million has gone to the "Renewal and Replacement" fund, which ended 2000-2001 with a $325 million balance [EXHIBIT 10].

Steadily Increasing Unrestricted Fund Balances

UC's unrestricted fund balances have increased dramatically, into the billions of dollars. If UC hadn't made over $1 billion in nonmandatory transfers, the balance would be even higher. Rather than being a one-time aberration, this trend goes back at least ten years.

• Unrestricted Current Fund balances, which are available to be used as UC chooses, have more than tripled since 1991, ending 2000-2001 at $2.1 billion, while all Current Fund balances reached $3.2 billion that year [EXHIBIT 11].
• In 2000-2001, unrestricted Current Fund balances increased $76 million after averaging $125 million increases per year since 1991 [EXHIBIT 12].
• Like UC's 1991-1993 "fiscal crisis," when unrestricted Current Fund balances increased 42.4 percent and 15.9 percent in consecutive years while employees were compelled to take wage cuts, UC's new "fiscal crisis" also features unrestricted Current Fund balances up 4.7 percent (in 1999-2000) and 4 percent (in 2000-2001) while UC demands CUE-represented employees settle for 1 percent salary increases [EXHIBIT 13].
• If UC had not made $299 million in nonmandatory transfers of unrestricted revenues from the Current Fund in 2000-2001, its ending unrestricted fund balance would have been $2.6 billion. If another $889 million of unrestricted revenues hadn't been transferred out over the previous three years, the unrestricted Current Fund balance would have reached $3.5 billion by the end of 2000-2001 [EXHIBIT 14].

Putting the Issue into Perspective: What UC Clericals Really Get Paid

• Between October 1, 1999 and September 30, 2001, CUE-represented employees received cost-of-living increases amounting to less than 7 percent over two years. If a CUE member, earning $15 an hour in 1999 had received same the percentage of increase UC administrators received over that time, she would be paid $20.24 -- not $15.67 -- today [EXHIBIT 15].
• The California Department of Finance expects the Consumer Price Index-Urban (CPI-U) for California to increase 2 percent and 2.5 percent in 2002 and 2003. Factor in recent increased costs for medical plans, and the result for CUE members is an actual cut in pay.
• In 1999, UC's survey of salaries among CUE-represented employees' counterparts outside the university showed that, on average, UC clerical salaries were 21 percent below the average for comparable jobs. (Source: Salary Information Retrieval System [SIRS], Campus Survey Summary, August 1999. Commissioned by UC and published by CUE at http://www.cueunion.org/issues/wagesurvey.php)
• Under these conditions, it is shocking but not surprising that more than half (54 percent) of UC clerical employees leave their CUE-represented positions annually. (Source: Peter Donohue, The Effective Cost of Merit Pay for UC Clerical Employees, March 2002)