Is that clear?

Some advice from the Legislative Analyst's Office to the legislature:

Amend BBL in Item 6440-001-0001 to Clarify 2013-14 Enrollment Target for UC

The Legislature expects the University of California to enroll a total of 211,499 state supported full-time equivalent students during the 2013-14 academic year. This enrollment target shall not include nonresident students and Resident students and eligible nonresident students who are exempt from paying resident tuition shall count toward this enrollment target whereas students paying nonresident tuition and students enrolled in non-state supported summer programs shall not count toward the target. This enrollment target expresses the Legislature’s intent that the University serve no fewer students in 2013-14 than in 2012-13. The University of California shall report to the Legislature by May 1, 2014 on whether it has met the 2013-14 enrollment goal...

Source: http://www.lao.ca.gov/handouts/Conf_Comm/2013/UC-CSU-Enrollment-Growth-060413.pdf

We get the message!

But how many students did you want?

And if it's not perfectly clear, it might help to know that BBL = budget bill language.

The Mystery of Online Ed Courtesy of the LAO

Notice from the Legislative Analyst's Office:
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Expanding the Delivery of Courses Through Technology
 
June 5, 2013:  

This handout was not presented at the Budget Conference Committee and has been removed from the website.
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Source: http://www.lao.ca.gov/laoapp/PubDetails.aspx?id=2789

Everyone loves a mystery!

The Three State Budgets

Last Friday, there was a legislative hearing on the current three versions of the state budget for 2013-14.  There is the governor's "May Revise" proposal and two separate proposals by the state assembly and the state senate.  The two legislative versions rely on a revenue forecast by the Legislative Analyst's Office (LAO) which projects higher tax receipts than the governor's Dept. of Finance (DOF).  However, the two legislative proposals use the extra revenue differently.

From the UC perspective, there is no significant direct effect on the operating budget regardless of which budget is enacted.  However, the assembly version provides for additional scholarship and Cal Grants funding so students have an interest in the final outcome.  The hearing was not exactly a clash of the titans but you can hear testimony I extracted by the Chief Deputy Director of DOF and the Legislative Analyst (excerpt) explaining their differences at the link below.

Not quite

A key point is that due to Prop 98 - which earmarks funding for K-14 by formula - extra revenue (such as seen by LAO) tends to be sopped up by that sector.  The governor's position is that the state should be cautious since revenue projections depend heavily on capital gains tax receipts which in turn reflect the volatility of financial markets.  Maybe the extra revenue that seemed to appear recently will prove to be a temporary blip, etc.  The Legislative Analyst acknowledges that concern but he notes that the risk that the extra revenue will evaporate is largely dealt with in the two legislative proposals by making K-14 spending partly contingent on the actual arrival of the funding and by putting some of the money into the reserve.  It might be noted that if there were an outright economic downturn, none of the proposals would avert a return to a budget crisis.

The governor has a line-item veto and so could trim spending if the legislature enacts a budget he considers excessive.  He could also veto the entire budget and throw the issue back to the legislature.  In theory, the Democrats in the legislature could override such actions using their two-thirds supermajority.  Whether all Dems would go along in that situation is uncertain.  Minority Republicans now support the governor's cautious approach.  The legislature must enact a budget by June 15 or forfeit pay for each day thereafter that they haven't done so.  However, it is essentially up to the legislature to determine what defines an enacted budget.  So there will surely be something by June 15 although there may be loose ends to tie up beyond that date.

You can hear the DOF and LAO testimony below:

The LAO prepared a summary of the three budget proposals for the hearing available at:
http://lao.ca.gov/handouts/Conf_Comm/2013/Conference-Overview-53113.pdf

New LAO Report on (More) State Revenues

The Legislative Analyst's Office has released a commentary on the governor's May Revise budget proposal.  It's headline feature is that LAO expects higher revenues than the governor projects.  That extra money is not pure gravy since it interacts with the Prop 98 formulas for K-14.  Nonetheless, the report will become part of the legislative process and negotiations which will go on between the governor and legislature.  The governor wants to be cautious and his way of doing it is to tilt toward less optimistic revenue projections.  LAO has a lot of cautionary notes in its report - things that could happen which would cut into revenues - but does not choose, as the governor did, to convey that message via its best guess on revenue projections.

One thing that may help UC in its attempt to pry more pension fund contributions out of the legislature is some combination of the governor saying there is a "wall of debt" that needs to be paid off (including pensions) and the legislature getting a message that there is more money around.  In effect, other things held constant, the more that the legislature puts into the UC pension, the more there is effectively in other resources for UC.

You can find the LAO report at:
http://lao.ca.gov/reports/2013/bud/may-revise/overview-may-revise-051713.pdf

The contrast between the revenue and transfers forecasts for the governor and LAO can be seen below (in $billions):

Fiscal Year | Governor    LAO
------------------------------
2012-13     |   $98.2    $98.9
2013-14     |   $97.2   $100.0
2014-15     |  $104.5   $107.0
2015-16     |  $110.2   $112.3
2016-17     |  $116.1   $118.9
------------------------------
Source: Page 12 of the LAO report.

NASBO

Are you against efficiency?  Of course not!  Do you think goals should be achieved? Of course you do! Do you think higher ed could be improved if it became more efficient and achieved its goals? So far, you totally agree.

The National Assn. of State Budget Officers (NASBO) has issued a report on public higher ed, a system which nationally, as well as in California, is under budgetary strain. I don't know for sure how much circulation the report got pre-publication. I suspect, however, it reflects the general scuttlebutt among budgetary types that evolved in the aftermath of the Great Recession. You see similar ideas coming from the Legislative Analyst here in California, for example.

But there is a problem with the report once you get beyond the motherhood-and-apple-pie stuff. There is lots of Good Government lingo - performance metrics, etc. But when you take all of higher ed together - from community colleges to research universities everywhere in the U.S. - the one common element is that all institutions have students who (hopefully) get degrees. So the metrics end up focusing on dollars/student, degree completion rates, etc.

For high-quality research universities, however, more goes on than degree production.  At UC, roughly one dollar out of ten in the budget is coming from the state.  That dollar is roughly matched by tuition (some of which is paid by out-of-state students). So what happens to the activities that are reflected in the other eight dollars if you focus only on the state dollars/degree type "metric"?  At UCLA, we could run the place as Cal State Westwood or Westwood Community College and undoubtedly improve the dollars/student metric. Is that what the state wants?  Does the state know what it wants? 

The report also tends to have a silo approach, isolating "cost drivers" without looking at interrelationships. That tendency is notable when it comes to compensation.  Benefits are rising in cost relative to cash pay, the report notes. So cut benefits! But wait.  If you cut benefits wouldn't you have to raise other pay? Or can you just cut total compensation (cash pay + benefits) without any consequences?

Similarly, the report suggests that undergrads' tuition cross-subsidizes grad students. Let's assume that is true.  If you cut undergrad tuition to marginal cost, what happens to grad student education?  Can you have a research university without subsidized grad students?  That is the kind of question the silo approach can't address.

As this blog has noted many times, there are indeed issues about cost and efficiency at UC.  We have pointed out the problem with the limited ability of the regents to review and evaluate capital projects.  There are really big bucks involved there, but not the dollars that get directly into dollars/student metrics.

What needs to happen is not magical thinking about "delivery systems" (a.k.a. online higher ed) and metrics but for something like the old 1960 Master Plan review.  At that time, UC president Clark Kerr directed that review and presented the Plan to the then-governor, Jerry Brown's dad.  We are about to bring in a new UC president. Whoever is ultimately selected should be someone capable of doing what Kerr did including persuading the governor that a new Master Plan is what is needed. That's the metric the regents in making the selection should be using.

The NASBO report is at http://www.nasbo.org/sites/default/files/pdf/Improving%20Postsecondary%20Education%20Through%20the%20Budget%20Process-Challenges%20and%20Opportunities.pdf

For the Record

Back in mid-December, the Legislative Analyst’s Office (LAO) produced a report saying all was well with UC faculty compensation, despite concerns about pay lags.  No one seems to have paid much attention to the LAO report so far, which is a Good Thing, since the report was poorly done. It is unclear what suddenly motivated the LAO to issue the report just when UC was entering intersession and the ability to respond was limited. In any event, the University Committee on Faculty Welfare (UCFW) prepared a response which was recently posted on the Academic Senate website.  For the record – because you never know when someone might haul the LAO report out - here are some excerpts from UCFW’s rebuttal to LAO report: [Links to the full UCFW report and the LAO report are below.]

The UC Systemwide Committee on Faculty Welfare (UCFW) carefully studied the recent report on faculty salaries, recruitment, and retention released by the Legislative Analyst's Office (LAO). The LAO's major conclusions are the following: 1) total UC compensation is competitive with top universities; 2) few faculty members leave, and reasons other than salary are responsible for most faculty leaving; 3) the small number of tenured associate professors who leave shortly after receiving tenure is not a concern; and 4) UC continues to hire its top-choice candidates. UCFW questions the accuracy of these conclusions...

(P)rior to 2000, UC salaries closely matched the Comparison Eight average but started to lag behind the Comparison Eight universities shortly after 2000... The lag continues to grow. UC salaries now lag the Comparison Eight by more than 11%...

The LAO makes (an) error by relying upon UC's most recent, but outdated, analysis of total remuneration from 2009. At that time, although faculty salaries lagged the Comparison Eight by about 10%, the value of UC's retirement benefit partially compensated for the salary lag. This was entirely because employees were not required to make contributions to their retirement plan and not because the retirement benefits themselves were overly generous.  The LAO overlooked the predictions in this study, as well as and the update to examine the competitiveness of the "New Tier" retirement plan, that the UC retirement plan would become uncompetitive when faculty made a 5% contribution to retirement, as they are doing in 2012-13... If employee contribution rates rise even higher (6.5% for current employees in July, 2013 and higher thereafter), then UC benefits will not compensate for below-market UC faculty salaries whatsoever...

The LAO concluded that "most faculty do not leave UC or reject UC job offers due to compensation" on the basis of some exit surveys performed in the mid-2000's and summarized in ... the LAO report. The LAO noted that several reasons were given. "Salary" was cited by 33% of those who rejected UC offers and by 37% of those who left UC.  UCFW notes, first, that "salary" was the most prevalent reason for both categories. Secondly, an increase in salary could certainly mitigate concerns about "housing problems" (cited by 22% of those who rejected UC offers and by 13% of faculty who left) and "cost of living [besides housing]" (cited by 11% of those who rejected UC offers and by 7% of those who left). Taking into account not only the issue of "salary" but also the separately enumerated issues that an increase in salary could mitigate, then salary-related issues could account for up to 66% of the reasons for rejecting UC offers and up to 57% of the reasons that faculty leave UC. This is quite the opposite conclusion of the LAO...

UCFW is uncertain what point the LAO attempts to make with the data on the fate of Assistant Professors hired in 2000-01. These data have no reference point, either from when UC was in a more favorable economic environment than in 2000-01, or from other universities when the UC data were collected. In contrast to the LAO, UCFW believes that a 10% rate of departure of young professors after receiving tenure is of great concern. UC heavily invests in assistant professors, especially in science and engineering, by providing them with start-up packages worth several hundred thousand dollars each...

UCFW members, based on their experiences on search committees in their home departments, question whether the data provided to LAO by the UC administration concerning the top choices in faculty searches is truly representative of the current competitive job market.  ...(T)he data are almost 10 years old and do not reflect the current economic conditions in which UC competes for new assistant professors...

The full UCFW report is at: http://senate.universityofcalifornia.edu/committees/ucfw/UCFWreLAOFacultyRecruitmentandRetentionMarch2103.pdf 

The December LAO report is at: http://www.lao.ca.gov/laoapp/PubDetails.aspx?id=2675

And - for the record - we'll try to maintain a sunny attitude and be optimistic that the LAO will do better next time:

Grading the LAO Report on Higher Ed

We summarized the Legislative Analyst's report on higher ed funding in a post yesterday and provided a link to the document.  One thing that faculty do is evaluate and give grades.  In this case, the grade for the report would have to be an "incomplete."

Pensions: The LAO continues its assertion that the state has no legal liability for the UC pension.  It wants the legislature to say so.  The legislature can say the Moon is made of green cheese if it wants.  But the Moon will be what it is.  The question of state liability is a legal matter and no legal analysis is provided.  It is a legal matter that extends beyond the state into the federal constitution.  If the LAO wants to be serious about this issue, it could start with the history of the UC pension written by the UCLA Faculty Association's Executive Director, Susan Gallick, and then get some outside legal advice from constitutional experts.  As the governor and the legislature continue to discover about the state prisons, it is the courts that ultimately decide issues of constitutionality, regardless of state pronouncements.

What is odd is that after its assertion of no liability, the LAO goes on to say that someone is going to have to fund the pension and says the legislature should do so.  It suggests that the UC pension should be compared to the recent state pension enactment for other public pensions and then the legislature should pay in some sense what the others get.  UC's pension was omitted from the pension bill because the legislature and governor were persuaded that the pension changes enacted by the Regents in 2010 approximated what was later proposed for other public pensions.  What the cost implications are will vary from plan to plan, even with the same provisions.

Costs.  In loose terms, UC and CSU get comparable amounts from the state.  But UC has fewer students so the dollars/student ratio is going to be higher - which is what you expect in a research university.  There is little analysis in the report of what California gains by having a research university.  There is no analysis of what other states such as Michigan and Virginia have done once they concluded that they couldn't afford, or didn't want to afford, a research university. 

Pay for Performance.  As personnel directors can tell you, this is a slogan - maybe even a concept - but specifics are needed as to how you do it.  Is this year's budget going to be based on a formula?  Transfers - dropouts + course loads + completion in Y years = X?  What?  Personnel directors can also tell you that you can get perverse results.  Quantity over quality is a prime example, but only one.

Capital Costs.  There is concern in the report about the handling of capital costs but the concern seems to be confined to state-paid capital costs.  At UC, as we have noted repeatedly on this blog, the Regents - members of a part-time unpaid board - are routinely asked to approve large and expensive capital projects which are said to be paid for from future revenues.  But the Regents have no independent capability to review such projects or to follow up on whether the promised revenues actually materialized.  If the revenues prove inadequate, like the pension, somehow the deficiency will be paid; the campuses don't default.  The issue of Regental oversight and governance needed to be discussed regarding all capital projects, not just state-paid.

==
The rule at UCLA is that if you get an incomplete, you have one quarter to finish the work or the grade goes from incomplete to F.  There is an out from that rule in this case, however.  LAO can join us in what we have recommended in prior posts.  It is clear that we have arrived at a point in California where a new Master Plan needs to be developed to deal with the issues above and others.  To get there, we need to set up a review of the three segments - a process in other words rather than off-the-cuff "solutions" from the governor, the LAO, or anyone else.  The annual budget cycle doesn't work when a fundamental review is needed.  It was done before under Pat Brown and it can be done again.
==
Of course, we'll have to wait.  A process takes awhile to complete.  But in the meantime, we have just the selection to go with an incomplete report:

LAO Critique of Governor's Higher Ed Budget Proposals

The Legislative Analysts’ Office (LAO) has a new report out critiquing the governor’s higher ed budget proposals.  It comments on his online higher ed proposals but relative to all the attention paid to that topic at the most recent Regents meeting, it appears that the LAO doesn’t see them as the solution to budget problems for higher ed)  Much of the report involves recommendations that the legislature base future funding increments on meeting performance targets.  Because most of the report deals with all three segments of higher ed, the target discussion largely is focused on concerns involving CSU and community colleges such as time to degree, etc.  On retirement funding, LAO repeats its assertion that the state isn’t responsible for the UC pension, but then seems to acknowledge that if the state doesn’t pay, the cost will come out of tuition or some university programs.  It seems to suggest funding UC’s pension at the same rate as other state public pensions.  Excerpts and a link to the full report are below:

...Governor’s Overall Approach Unlikely to Improve System

Justification for More Funding and Less Legislative Involvement Unclear. Although we believe the Governor’s budget plan has drawn attention to some notable problems, we have serious concerns with several of his specific budget proposals. Most notably, by providing the segments with large unallocated increases only vaguely connected to undefined performance expectations, the Governor cedes substantial state responsibilities to the segments and takes key higher education decisions out of the Legislature’s control. We recommend the Legislature reject the Governor’s proposals relating to unallocated base increases, combining the universities’ capital and support budgets, allowing the universities to restructure their debt, and eliminating enrollment targets. Instead, we recommend the Legislature allocate any new funding first to meet the state’s highest existing priorities, including debt service, employee pension costs, and paying down community college deferrals. If more funding is provided than needed to meet these existing funding obligations, we recommend the Legislature link the additional funding with explicit enrollment and performance expectations.

Extended Tuition Freeze Likely Would Have Negative Long-and Near-Term Consequences. We also have serious concerns with the Governor’s extended tuition freeze proposal, as it very likely would result in steep tuition increases during the next economic downturn and reduced accountability in the near term. Moreover, tuition levels and students’ share of cost currently are low. After accounting for state and institutional financial aid, the average share of cost paid by California students is about 30 percent at UC and CSU and 6 percent at CCC.

Some Good Ideas but Associated Proposals Need Reworking

Some Problems Likely Addressed by Redistributing Rather Than Increasing Funding. In some cases, we think the Governor’s basic ideas are worthwhile but likely could be implemented within existing resources. For example, increasing the availability of required courses while reducing the amount of excess course-taking could be done within existing resources. Likewise, the segments could leverage an existing repository of online courses developed by faculty and enable students to more easily access those courses largely, if not entirely, within existing resources.

Higher Education Funding Models Up for Redesign. We also think revisiting the ways the state allocates funding to the segments is worthwhile, but we again have concerns with the Governor’s specific proposals. The Governor’s approach for the universities appears to fund neither student access nor success whereas his approach for the community colleges focuses only on one poor measure of student success. We envision a better funding model that balances the state’s dual goals of access and success. Under a redesigned system, instead of basing funding entirely on enrollment or on vague performance expectations, the Legislature would establish clear expectations in areas such as program completions, degrees earned, research activity, and cost reductions…

==

(LAO is) concerned with the absence of a proposal relating to UC retirement costs…

==

Weak Rationale for Proposed Changes to Capital Outlay Budget Process. The administration

indicates the motivation for combining the universities’ capital and support budgets is to provide the universities with more flexibility, given limited state funding. The administration, however, has not identified specific problems associated with the current process used to budget the segments’ capital projects, nor identified any specific benefits the state might obtain from the proposal. As a result, both the problems the proposal is intended to address and the benefits that the proposal offers are difficult to ascertain.

==

Recommend Rejecting (Debt) Restructuring Proposal. Given that restructuring debt would cost more money in the long term and constrain future budget choices, we recommend the Legislature reject the Governor’s debt restructuring proposal for the universities. If the Legislature is concerned that the universities would lose the short-term savings associated with the debt restructuring, it could consider other strategies for the universities to increase revenue or reduce costs.

==

(Pension) Payment Obligation. The state is not legally obligated to provide funding for the university’s retirement costs. Nevertheless, current retirement costs are largely unavoidable obligations for the university. Not addressing them means the university would incur significantly greater costs in the future...

Recommend Designating $67 Million for UC Retirement. For these reasons, we recommend the

Legislature specify $67 million of UC’s proposed 2013-14 base budget increase for pension costs...

In addition, consistent with the approach taken by the state in 2012-13, we recommend the Legislature include language in the budget reiterating that the state is not obligated to provide any additional funding for this purpose moving forward. Such language is intended to reinforce that the state is not liable for these costs.

Future Considerations for Universities’ Retirement Costs. The Legislature recently enacted pension-related legislation that could significantly reduce long-term retirement costs for nearly all public employers. In the future, the Legislature may want to consider the universities’ retirement costs in light of this legislation. This consideration would be useful since UC was specifically exempt from the legislation... In the future, the Legislature could consider providing the universities with funding for retirement costs comparable with costs incurred by other public employers...

==

Online Education Can Promote Access, Efficiency, and Student Learning. Online education has been found to have numerous benefits, including making coursework more accessible to students who otherwise might not be able to enroll due to restrictive personal or professional obligations and allowing campuses to serve more students without a commensurate need for additional physical infrastructure...

Need for New Funding to Create More Courses Is Questionable. We do not see a justification, however, for earmarking $10 million each for UC and CSU and up to $16.9 million at CCC for the development of additional online courses...

Full report at http://lao.ca.gov/analysis/2013/highered/higher-education-021213.pdf

Cosmetic Adjustments to the State Budget

At the governor's media conference last Thursday where he presented his budget proposal for 2013-14, some reporters asked about the discrepancy between the proposal - which said that at the end of this year we would have a positive reserve in the general fund - and an earlier estimate by the Legislative Analyst that there would still be a negative reserve.  Basically, the answer - from the budget director (Brown begged off on answering) - was that the governor's budget involved different assumptions.

Actually, the difference between slightly positive ($785 million) and the Leg Analyst's negative (-$1.9 billion) isn't all that large, given the noise in predictions for a budget that this year is an estimated $93 billion.

As Brown's estimate now has it, we started this fiscal year (July 1, 2012) with a negative reserve in the general fund of -$1.6 billion.  The budgets presented by the governor and enacted by the legislature use a fuzzy "accrual" approach to accounting.  There is an alternative cash budget reported by the state controller.  You can see it summarized on the figure below:

The general fund reserve was positive in 2005-06 (thanks to Schwarzenegger's borrowing plan - another issue) but then the state ran deficits (outflow > inflow) for the following three years (particularly in financial crisis year 2008-09), producing a negative reserve of -$11.9 billion. After that year, for the next two years, a combination of economic recovery and temporary taxes (enacted in Feb. 2009) produced budget surpluses (inflow > outflow) that whittled down the negative reserve.  Brown was unable to get legislative Republicans to go along with tax extensions so the budget went into deficit (outflow > inflow) and the negativity in the reserve increased.  So at the beginning of this fiscal year (2012-13), the reserve was a negative -$9.6 billion.  No official reconciliation is available between the governor's -$1.6 billion on accrual and the -$9.6 billion on a cash basis.  But the $8 billion discrepancy is not exactly chicken feed.  Moreover, to get into positive territory by the end of this fiscal year (June 30, 2013), the cash budget for this year would have to run a surplus (inflow > outflow) of at least +$9.6 billion.  That's a lot.

None of this analysis means that the state will run out of cash and start issuing IOUs as it did in 2009.  The controller can continue internal borrowing from state funds outside the general fund and go to Wall Street for short-term loans.  But it does suggest that the state's position remains precarious in the sense that some untoward negative economic development could adversely affect the budget outlook. Standard economic forecasts don't predict anything other than a slow continued economic recovery.  But predicting financial panics is not something for which standard economic forecasting models are very good.  One could, for example, imagine the various "cliffs" that Washington, DC now faces tripping off such an event.

Legislative Analyst Says Everything's OK With UC Faculty Pay

Legislative Analyst's summary:

In this report, we assess UC’s ability to recruit and retain tenured and tenure-track faculty. We find that (1) UC has been hiring candidates who have received their highest degree from some of the most selective universities in the nation, (2) UC has a long history of hiring its top choice faculty candidates, (3) most new entry-level faculty stay at UC long enough to earn tenure, (4) less than 2 percent of faculty resign from UC each year, and (5) UC’s faculty compensation is competitive with other top universities. These findings indicate that UC generally has been successful in its faculty recruitment and retention efforts. In light of these findings, coupled with the continuing need to prioritize limited state funding, the Legislature will need to assess the relative trade-offs between providing funding for faculty salary increases and other competing budget priorities involving faculty and higher education more generally.

Full report at http://lao.ca.gov/reports/2012/edu/uc-faculty/uc-faculty-121312.pdf

So not to worry!!

Good News and Bad News

The Legislative Analyst's Office (LAO) has issued a report on the state budget outlook. The good news is above.  Adding in the effects of Prop 30 (and 39), in the out-years the state begins to run surpluses as shown by the rising positive bars on the right side of the chart above.  Lots of uncertainty, of course, about what might happen to the underlying economy.  It is likely that the governor will be making statements, given the report, about the need for caution.

And there is bad news also seen on the chart above on the left side or the table below.  There is a deficit projected - absent some policy changes - for 2013-14.  So in the short term - the time frame for which the governor has been promising a "balanced" budget - there is not likely to be a shower of money on UC.  Listen to the audio on our prior post or read the summary there to get a sense of the governor's attitude.

(The reserve shown on the top chart has a fixed extra margin added to it compared to the "fund balance" above.)

The report itself is at:

http://www.lao.ca.gov/reports/2012/bud/fiscal-outlook/fiscal-outlook-2012.pdf