caledinsider.org: The Budget Literacy Project

People involved the University of California budget crisis controversies fall into three categories: the Hell-raiser who disagrees with seemingly all of the university’s financial decisions, the standpatter who defends those decisions like they’re his lifeline, and the peacekeeper trying to reconcile apparent opposites, which usually results in even more Hell-raising and fervent standpatting than before.

Okay, that’s oversimplifying things a bit—there’s a lot more nuance to these people than I’m admitting here. People change roles. The standpatter archetype best fits the stereotypical reactionary administrator, but some administrators dip their toes into peacekeeper or even Hell-raiser territory when they point out areas of improvement for UC. Likewise, the Hell-raiser sometimes finds common ground with the standpatter and emerges as a peacekeeper.

Still, there’s a grain of truth in these archetypes and they loosely fit people debating the crisis. Let’s apply them to this week’s episode of the Faculty Seminar on UC’s Financial Future*: the Meister Controversy. But first, some background information:

What is the Meister Controversy?

In October, UC Santa Cruz Professor Bob Meister wrote an open letter to students titled, “They Pledged Your Tuition,”** which stated that student fee hikes increase the university’s capacity to sell bonds, drawing an association between the university’s debt capacity and the debt taken on by students and their families.

“UC recently sold more than $1.6B in highly rated bonds one month after declaring an ‘extreme financial emergency,’ ” Meister wrote, adding, “[Student] 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 … Because UC pledges 100 percent of tuition to maintain its bond rating, it has also implicitly assured bond financiers that it will raise your tuition so it can borrow more.”

Meister’s assertion that student fees are pledged as collateral for bonds inspired students, faculty and others to question whether the UC ever actually used student fees to service bond debt. UC Berkeley Professor Emeritus Charles Schwartz (physics) summarizes this response in the write-up that accompanied his presentation Tuesday:

Student Fee revenues are put at risk, through the General Revenue Bonds program, to support construction projects throughout the University of California (UC); and top UC officials appear stubbornly negligent regarding their oversight responsibilities. When we asked whether students’ Educational Fees have ever been spent to pay for campus construction projects the official answer came in two contradictory parts:

a) To the best of our knowledge, there has never been such an occasion.

b) The University does not record the data needed to answer that question.

An overview of the meeting

The seminar was moderated by UC Berkeley Associate Vice Chancellor for Budget Erin Gore and started off with tame (but informative) presentations by Schwartz and UC Berkeley professors Stanley Klein (optometry) and Bob Jacobsen (physics).

UC Chief Financial Officer Peter Taylor was the last scheduled speaker and focused on claims that the UC may use student fees to service bond debt, which he attributed to UCSC Professor of Political Science Bob Meister’s paper. After he spoke, Meister was given an opportunity to respond.

“The Meister Controversy is about a controversy I didn’t actually raise because there is no data,” Meister said, explaining that the focus of his paper was on the relationship between the debt capacity of the UC and debt expectations for students and families, not on whether student fees might be used to finance construction.

Yes, those last two portions of the meeting were just as intriguing they sound.

Here I will summarize each presentation separately, in the order it was given. I advise you to read the summaries of Taylor’s and Meister’s presentations together because those speakers responded to each other.

The Peacekeepers

UC Berkeley Professor Emeritus Charles Schwartz (physics)

Schwartz’s presentation focused on the Meister Controversy and served as an introduction for the presentations that followed. (See his write-up, which contains all the information he shared.) He and Klein presented proposals for how the university manages financing for construction projects. (Professor Alan Schoenfeld (education) co-authored the proposal. Klein wrote the amendment to proposal 2 at the bottom of the page.)

Read the proposals here:

Seeing Schwartz in the position of peacekeeper is surprising for anyone familiar with his reputation for (very loudly) blowing the whistle on non-transparent UC practices. Taylor, who said he agreed with parts of the professors’ proposal, observed this change of tone and remarked to Schwartz, “Either I’m getting old or you’re getting more mellow.” I doubt Schwartz is going be pigeonholed as a peacekeeper, though.

UC Berkeley Professor Stanley Klein (optometry)

Klein presented on the dilemma of trying to balance transparency with fungibility, or the ability to transfer funding between different expenses. (See his power point presentation here.)

Klein asserted that fungibility and transparency are not mutually exclusive. (This is completely the opposite of what Schwartz said during the Transparency 101 presentation in seminar a few weeks ago.)

According to Klein, fungibility can be a good thing because having fewer funds that apply to more purposes saves money by necessitating fewer administrators to oversee funding allocation than would be needed if university finances were split up into a greater number of funds.

He added, however, that fungibility can lead to confusion. For example, pledged external sources, or collateral for debt, are not the same as repayment sources for debt.

“When there’s confusion there are problems,” he said.

Klein presented the proposals he, Schwartz and Shoenfeld came up with as a way of finding equilibrium between transparency and fungibility and thus get faculty and administrators “on the same page.”

“There might be ways that we can have our cake and eat it too,” he said.

In addition to the two proposals, Klein suggested an amendment that included tapping into endowments to fund some construction projects and taxing high-salaried employees.

UC Berkeley Professor Bob Jacobsen (physics)

Jacobsen found information about the entire life cycles of nine construction projects at UC Berkeley. He presented on how renovations of Barrows and Stanley hall were funded and executed. (See his power point presentation here.)

In his presentation, Jacobsen emphasized the high degree of detail in the UC’s documents related to construction.

“They don’t stint on this stuff,” he said, explaining that whenever the regents use state money, they say exactly where it is coming from and who has pledged it.***

Jacobsen explained different types of funds that go toward construction (further explanation in his power point):

• University Opportunity Fund—an agreement with the state that dictates how federal reimbursement funds for construction must be allocated.

• Research Overhead—reimbursement money from the state for research conducted in a building and as a result of its construction can go toward funding that construction project

• Funds that function somewhat like endowments—i.e. they are invested the way endowments are but the principal part of the fund (the non-interest part) can be spent by the university.

The Standpatter and the Hell-raiser

UC Chief Financial Officer Peter Taylor

See Taylor’s power point presentation here for data about bonds and construction and other interesting points of information.

Taylor has been CFO of UC for about 11 months now. The UCLA alumnus said he spent 17 years as an investment banker before coming to UC.

Taylor complained about people taking “pot shots” at the UC without giving administrators a chance to respond, but added that Schwartz is diligent about trying to get the facts right.

Then he dug into Meister.

“Let me be crystal clear for probably the 800^th time,” Taylor said. “We do not use student tuition to pay for construction debt service.”

Taylor said student fee hikes and increases in bond debt are not interdependent, later adding that Meister never used any evidence to prove student fees are used to pay for construction.

“Why is this paper posted on the web giving students and parents wrong information?” he asked.

Taylor explained that student payments go toward debt accrued by auxiliary enterprises such as housing and parking, but clarified that those payments are not student fees. I think he was referring to students paying to live in the dorms, etc.

The CFO went on to defend the university’s construction projects in response to claims that money spent on them could be allocated elsewhere. He said that if capital projects aren’t built, the university won’t gain revenue from them.

“It is inaccurate to say that 80 percent of those revenues [from building projects] are going to show up without building those projects,” he said.

I’ll have to ask for some clarification about the building revenue arguments. I think he was responding to claims that money spent on buildings could go elsewhere by explaining that the money that would, theoretically, go elsewhere is actually the revenue from the projects once they are fully built and in use.

Taylor ended his presentation by addressing transparency issues. He said Schwartz, Klein and Schoenfeld’s proposal for “regular, detailed reporting regarding debt service coverage” (quoted from the proposal) was satisfied by an item passed by the UC Regents about a year ago. According to Taylor, the item**** will be implemented by no later than the July UC Regents meeting.

“Going forward [the capital projects approval process] will be clearer and easier to understand,” he said. “Through additional transparency people will feel a little more comfortable and at ease.”

UCSC Professor Bob Meister

Meister’s main beef was that a controversy was being attributed to him that he claims he didn’t start.

“I never said that there was data showing how construction funds were actually serviced,” he said. “My interest is in the relationship between UC’s debt capacity, which is necessary in order to privatize the way it wants to, and individual student and family debt capacity in society.”

Meister called this relationship the “kernel of privatization”:

“UC’s financial plan for growth is a reflection … of what is wrong with that model of financing education.”

Meister spoke extensively about the Bond Indenture authorized by the UC Regents in July 2003 that went into effect in 2004. In his paper, he writes:

By pledging “General Revenues” as security for each UC revenue bond, the Regents are pledging everything that they can, including tution. This means that when any source of General Revenue goes up—including tuition and fees—UC’s ability to borrow on private capital markeys 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.

“Students get it. Students get that that was the point of my article and that’s what I would like the Meister Controversy to be about,” he said Tuesday.

Meister also addressed transparency issues.

“We don’t know how student fees are being used,” he said. “They are not tracked and we don’t know how debt service is being paid.”

Complicating UC’s assertions that it will not use student fees to service bond debt, he says, is a policy passed at last week’s regents’ meeting. The policy clarifies the student fee policy to say that the regents have total authority to set fees at any level and that student fee policies are not contracts with students.*****

Meister described the policy as part of a “complete circle”: the student fee policies were the reasons the regents weren’t doing things like spending student fees on construction and bond debt and “now that we’ve asked them to show they weren’t violating their own policy, they’ve changed their policy going forward.”

*Faculty Seminar on UC’s Financial Future, an open seminar organized by UC Berkeley Professors Stanley Klein (Optometry), Alan Schoenfeld (Education) and Charles Schwartz (Physics), devoted to research into topics such as construction finance and how the University of California contributes to the state’s economy. The seminar meets Tuesdays from 5-7 p.m. in 489 Minor Hall on theUC Berkeley campus.

**Other commentary and analysis addressing UC finances can be found on my “Commentary and Analysis” page. http://caledinsider.org/faculty/

***Meister said in an e-mail that the projects Jacobsen presented on were completed before 2004, thus exempting them from the Bond Indenture. See the portion of this blog post about Meister’s speech during the seminar.

****I will have to look up what the exact item was.

*****Taylor said this policy was in response to the UC losing a lawsuit by former students who claimed they had read on a UC Web page that fees at their professional schools would not increase while they were in school, but that they experienced fee hikes anyway.