Archive for August, 2012

UCLA’s chief financial officer makes sense of budget complexities

Friday, August 10th, 2012

 

State funding for the UC system has been slipping for many years, accelerating in the past four years. Difficult to understand under normal circumstances, UCLA’s budget picture has gained a new measure of complexity because of several factors, including the placement of Gov. Jerry Brown’s Proposition 30 on the Nov. 6 ballot, a UC Office of the President “tax” on campuses to help fund operations in Oakland, and unfunded mandatory cost increases. UCLA Vice Chancellor and Chief Financial Officer Steve Olsen is responsible for making sense of this fluid situation and keeping the campus on solid financial footing. In this Q&A with UCLA Today’s Cynthia Lee, he explains how we got here and where we are headed.
  
Let’s start with some context. Generally, how has state support for UC and UCLA changed over the years?

 
When the California Master Plan for Higher Education of 1960 was created, the university was envisioned as being primarily state-supported. State funding flows to the UC Office of the President, which distributes it to the campuses.

 
But over the last five decades, state funds for the university have been substantially reduced, especially during the last 20 years as the state’s financial difficulties have worsened.

 
Janss Steps fountain

Shapiro Fountain. Photos by Stephanie Diani.

In 1990-91, the state was spending an average of $16,720 per student. (See page 13, Display 6.) That’s dropped sharply over the years. In 2011-12, it was at $6,770 per student, a decrease of 59 percent. At the same time state funding for UC has been falling, student enrollment at UC campuses has risen 51 percent since 1990-91.

 
At UCLA, state funding has been in a very rapid decline over the last four years. It has gone down precipitously from $642 million in 2007-08 to $380 million in 2011-12. In this fiscal year, it could range between $340 and $389 million, depending on what happens November.

  
How is state funding utilized?

 
State support makes up about 7 percent of our total revenues of about $5 billion. But it accounts for more than a quarter of the revenues that pay for our general operating costs, and a good portion of those costs cannot be covered by revenue from other sources. State funds pay for the basic academic program, the operation of academic departments, core administrative needs, the police department, utilities and so forth. In other words, state funds pay for the things required to keep UCLA’s doors open.

 
So clearly, state funding is essential to the university’s well-being because three-quarters of the revenue UCLA receives through other sources cannot be used to pay for faculty salaries and the general operating costs of the university. Revenue from housing, the medical enterprise, research grants, gifts made for specific purposes, UCLA Athletics, ASUCLA and other sources also cannot be used to pay for these essential needs.
 
That’s why the university is so reliant on state funds. And that’s why UCLA has had to find other ways to fill this gap.

 
 
How have the UC system and UCLA adjusted to these new funding realities?

 
To maintain academic quality, the regents have had no choice but to increase tuition. Tuition paid by our students now exceeds revenue from the state. But those tuition-generated revenues only cover roughly 50 percent of the cost of educating a student.

 
students.outsideSo we’ve all had to work harder, doing more with less. To fill the gap in state funding, we have had to generate new types of revenue and increase revenue from existing sources. At UCLA, nonresident tuition, which had been a relatively minor portion of our operating budget, is now contributing more than $100 million a year to pay for UCLA’s core operations. And that must continue to increase if state funding continues to drop. The higher tuition paid by out-of-state and international students helps to ensure that we can continue to deliver high-quality education to students from California, many for whom UCLA receives nothing from the state.

 
We’ve also established new forms of student tuition for some professional degree programs and certificates. And the campus has slowed hiring and left vacant many positions as well. In 2009-10, more than 100,000 UC faculty and staff endured pay cuts because of a systemwide furlough. Administrative units, including UCLA’s Office of Research Administration, the Graduate Division and Information Technology Services, have been restructured. And we’re ramping up fundraising. UCLA has collected an average of more than $400 million in gifts annually for the past several years. But while philanthropy is critical to UCLA’s future, fundraising cannot replace major cuts in state funding, which covers the university’s general operating expenses. Gifts usually are given by donors with specific goals in mind — whether it’s to support specific research, fund student scholarships or assist faculty members in their teaching and research.

  
Has UCLA been able to save money by being more efficient?

 
We have had to consolidate and gain efficiencies where we could, and those strategies have produced millions of dollars in savings. We’ve pioneered improvements in our purchasing activity. UCLA-based Strategic Sourcing initiatives saved the university about $12 million last year. Energy-saving measures will save us $33 million annually once they are fully implemented. We’ve invested in information technology to enhance our overall productivity and reduce our reliance on manual processingin our business operations.

 
We stopped accepting VISA for tuition payments and began accepting electronic checks, saving $9 million a year in bank fees. We are continuing to look carefully at all aspects of our operation for savings. There’s more for us to do.

 
 What does our budget situation look like in 2012-13?
 
In order to understand the challenges we face, we need to look at three components: cuts in state funding, a new tax from the UC Office of the President and unfunded mandatory costs.

 
UC’s state funding will depend on the voters’ decision on the governor’s tax initiative, Proposition 30. If it passes, UC will receive an increase of $94 million, which will essentially offset last year’s $100 million midyear budget cut. Other UC campuses will benefit more than UCLA from the new funds, so we anticipate a minor loss of state money.

 
UC’s budget agreementwith the state also would provide UC with $125 million in 2013-14 on the condition that voters pass the governor’s Proposition 30 tax initiative and that UC holds tuition steady for 2012-13.

 
Powell cupolaIf Proposition 30 fails, UC’s 2012-13 budget would be cut by another $250 million — UCLA’s share would be a $50 million cut. In addition, the $125 million for 2013-14 would go away. So the total impact on UC if Proposition 30 fails is a loss of $375 million.

 
If voters approve Proposition 30, UCLA and the other UC campuses will avoid a $375 million loss, and students will avoid the 20 percent increase in tuition that UC President Mark Yudof has said would be necessary to cover the loss if voters reject Gov. Brown’s tax initiative.

 
 
What is this new tax that will affect UCLA’s budget?

 
Under a plan devised by the UC Office of the President (OP), campuses will retain more non-state revenue, such as tuition and research overhead costs. But, in exchange, UCLA and the other campuses will have to pay a tax to support UC systemwide operations and programs. The bottom line is this: The fee that UCLA will pay this year exceeds the new revenue the campus would receive by $50 million. It’s a tax on our operations.

 
Discussions among senior leaders, deans and vice chancellors have been going on since February on how the campus should pay this. I expect we will settle on a strategy within the next few months.

 
 How will rising mandatory cost increases affect the campus this year?
 
In 2012-13, these unfunded mandatory cost increases add up to $130 million and will have a larger impact on our operating revenues than either the OP tax or the loss of state funding.

 
These mandatory costs include faculty merit raises, employer contributions to the retirement plan, increased costs for health benefits, salary increases for represented staff and shortfalls in purchased utilities, among other costs. The campus has no direct control over these costs because they are the result of decisions made and actions taken systemwide.

 
Currently, there are insufficient funds available at UCLA to pay these annual costs. So they are being absorbed by the departments. And the departments have had to reduce their spending, generate new revenue or both in order to pay them.

 
 So what’s the bottom line in terms of the UCLA budget for this year and next?
 
For 2011-12, the year that just ended, are projecting a $57.5 million operating loss in the general fund. In 2012-13, the projected operating loss is $8.9 million. But if Proposition 30 fails, we would have to figure out how to absorb another $50 million cut.

 
If Proposition 30 passes, we would start to see modest operating gains beginning in 2014-15.

 
If it is not approved by the voters, our budget challenges will worsen. We won’t have an answer until the dust settles on Nov. 6.

 
In the meantime, senior leaders will continue to monitor and evaluate our situation and identify strategies that will help us balance the budget and address these shortfalls. We’re confident that we’ll be able to cope with these fiscal problems as we have previously through the years. As always, our primary focus will be preserving UCLA’s academic excellence.

 © 2012 UC Regents