Financial Crisis and Late Budget Risk UC Funds

A University of California Regents finance committee meeting was held to approve next year’s budget plan on Tuesday, Oct. 21. Due to the national economic crash and its effect on the state’s budget, the regents can conclude one thing: tuition for UC students will not be cheap.
According to D’Artagnan Scorza, a student regent currently working towards his graduate degree at UCLA, the UC system is short “about $1 billion total” for the budget next year.
When the new budget was written, UC schools were given $3 billion per campus. Although this seems like a great sum, Scorza thought otherwise.
The $148 million budget gap within the UC system translates to about a $14 million budget gap for UC Irvine. In terms of the credit crisis currently plaguing America, Scorza stated that students are sure to feel the affects.
“There will be a significantly detrimental impact for the students,” Scorza said.
The shortage of money flowing from the states will raise tuition. However, this brings false hope. Student fees, though entirely necessary, cannot fill the gap, even if raised 15 percent.
“We should be a lot worse off than we are now,” Scorza said, “but we’re not in a good position nonetheless. We’re basically maintaining a bare minimum.”
Despite Scorza’s feelings, increased student fees, which have already changed significantly over the past few years, are still a primary method of compensating for the lack of income. According to reports made by the California Postsecondary Education Commission, UCI’s California resident student charges in the 2003-2004 school year totaled $5,537. Today, the same student would pay $8,774.50.
“The master plan is that the UCs are supposed to be free,” Scorza said. “You, as tax payers, are paying for this university, so the goal is for it to be free for you to go here. However, this isn’t so, and so we, as students, really need to be asking why. It’s our responsibility as students to remind them of that.”
Another method of dealing with the deficit is through cuts. At UCI specifically, the cuts will be small ,but will affect multiple programs. Richard Lynch, the associate vice chancellor in the budget office, explained the cuts in full detail.
“What we’ve done so far is we’ve distributed budget cuts to make about $10 million of that go to campus units,” Lynch said. “About two weeks ago, we learned about an additional cut which was a mid-year cut that the state announced, and we’re expecting $3 or $4 million from that. We distribute those cuts … to academic units, to academic support units and to nonacademic units. The differential cuts, academic units, and degree granting units received about a 2.5 [percent] cut to their base, academic support units received about a 3.5 percent cut to their base and other campus support units received about a 4.5 percent cut to their base.”
However, though a significant portion of the UCs’ deficit is due to lower state funding, it is not the sole explanation. The UCs themselves are losing money in the stock market crash.
On Oct. 10, 2008, the University of Southern California’s newspaper, The Daily Trojan, published an article concerning its decision to pull investments from a popular fund. While this move left the school’s money relatively safe, hundreds of other universities that did not follow suit found themselves in a devastating situation.
A UC’s financial standing is distinct from such universities as USC. For example, it does not receive money the same way private schools do; about 20-21 percent of UC money is comprised of the tuition that students pay, and the remainder is given to the schools by the state. After the state gives the school money, the money is then redistributed into various accounts that cover different costs for the university itself.
However, this decision deals with only direct student-related issues. As of June 30, 2007, the UC treasury department had around $73.4 billion in invested assets, including defined contribution plan funds such as the UC Retirement Plan (UCRP), endowment funds and short-term investment pool funds.
According to the Investment Performance Summary done in July 2008, around 40 percent of the $42 million invested in the UCRP is in U.S. equity (stock). The problem here is that the benchmark component used to measure the value of U.S. equity for UCI is pegged to the value of Russell 3000 TF whose stock is currently down almost 18 percent.
When retirees go to pull their money out of their funds, UCs will have to compensate for their loss, thus dragging them further in to debt.
However, Lynch commented on the fact that while the economic crisis was currently hurting UC investments, endowment funds were made to have long-term benefits.
“The performance quarter to quarter shouldn’t affect it that much,” Lynch said. “The distributions that are made from endowment funds are made on the basis of the average market value over a 60-month period so that kind of equates; it smooths out the activity. The current market conditions are not good for the endowment fund, but they should not have an immediate effect. Based on our asset application, the long-term performance is expected to be achieved.”
Also, with further expansion and construction occurring at UCI, one question was whether that too would be affected by the economic problems. Lynch explained that while the possibility is not out of the question, it is improbable.
“To date, the budget cuts have been specific to the operating budget,” Lynch said. “There was a little blip because the state did not fund all of UC’s capital budget requests for ‘08-09. Just by coincidence, UCI didn’t have any significant projects or additional funding that we needed to complete the projects that are underway in the ‘08-09 budget.”
However, delays due to the state’s ability to grant money or sell bonds to make money for projects scheduled for 2009 to 2010 are worrying the financial offices.
“These are difficult financial times for not only UCs but for the country,” Lynch said, “and I feel confident that the University of California will weather this period and that the state of California will also figure out how to best deploy and maintain their financial status.”