caledinsider.org: The Budget Literacy Project

Did you know that spending per student actually has little to nothing to do with how much the university actually spends on each student, or that the UC’s investments function on a different plane than it’s funding of student services? These are things I learned during the committee on investments meeting, which was the very last open session of the Wednesday portion of the regents’ meeting, after waiting through hours of closed session Wednesday afternoon.

The meeting was particularly interesting in that it was so much more relaxed and intimate than other open sessions. The committee met in a small conference room as opposed to the large auditorium used for the better part of the day and those in attendance were relaxed enough to joke around and show their personalities. Magnifying the intimacy was the fact that I was also the only non-administrator or consultant there by the time the meeting ended at 7:30. With the exception of one photographer, all other journalists had left when the closed session portion of the day began.

Seeing regents and others so laid-back was a bit bizarre for me, since they were stone-faced during all the other meetings. Also, the regents in particular have a reputation for being inaccessible. As interesting as the session was from an anthropological perspective, I understood little of the content discussed by the committee. I don’t know a lot about finances or investments—yet. I’m learning. Fortunately, after the meeting I had an opportunity to speak with some UC administrators: UC Chief Investment Officer Marie N. Berggren, Managing Director of Investment Risk Management for UC Jesse Phillips and UC Chief Financial Officer Peter Taylor.

Question and Answer

Q: Berggren spoke about spending per student at one point during the session. How does spending per student factor into the UC’s investment performance?

A: “Spending per student” actually has little to nothing to do with how much the university spends on each student, Phillips said. Rather, the number is the quotient of endowment spending per year divided by the number of students in the UC system—it’s a ratio.

Q: How do UC’s investment strategies compare to those of other universities?

A: In the past, universities like Harvard and Yale far out-performed the UC in their investments because they engaged in high risk investing, which has the potential to yield higher returns. The UC keeps its liquid assets, or assets that can easily be converted into cash, separate from its investments.

Berggren illustrated this comparison by explaining that some universities took portions of their general operations funds—i.e. the money that’s spent to make a university run for a year—and put those portions in the endowment. When those universities’ endowments declined in 2008, they didn’t have enough money to cover their operating budgets.

Tayor described UC investment strategies as “very conservative” compared to other higher education institutions, mentioning that big, Ivy League-level universities were calling up his banker friends asking for $50 million loans to cover their payrolls when their endowments dipped.

Currently, Berggren says, there is a survey floating around asking universities what proportion of their operating budgets they invest in endowments. Responses range from none to 20 percent.

Q: If UC’s investments are doing so well, why is UC doing so poorly financially?

A: The answer to this question is not exactly intuitive to me. Phillips said investments and finances are not one and the same and the UC’s investments function somewhat separately from UC finances as a whole.

What the separateness of investments and overall finances means for the UC is that, when the investment market is doing well, UC investments do well, even if the economy is doing poorly. I think this is a bit too simple of an explanation, but it’s a start.

The administrators described the process of learning about UC’s financial model with a metaphor about blind men feeling an elephant: one feels the elephant’s tail and says the elephant is a rope, another feels the elephant’s leg and asserts that the elephant is in fact a tree. If you approach the UC from one angle, you’ll only get one part of the overall explanation of how the whole, big animal works. The challenge is approaching the UC from as many angles as possible and figuring out how the pieces fit together.

Some extra background and random tidbits:

• The UC will be investing in real assets such as timber in the future.

• The UC has three types of investment funds: pension fund, endowment fund, short-term investment pool (“cash”)

• Money in investment funds is legally bound for certain uses, at least most of the time. (I don’t know if there may be exceptions to this rule.) For example, endowment money is earmarked and legally bound for certain uses such as the funding of endowed chairs. The pension funding can’t be used for anything but pensions.