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Bottom line on the Berkeley budget
With the UC system facing a $417 million shortfall from the state, the campus strives to keep the pain to a minimum

| 23 April 2008

In January, Gov. Arnold Schwarzenegger — citing state-budget shortfalls of $3.3 billion in the current fiscal year and $14.5 billion in the one that begins July 1, 2008 — declared a “fiscal emergency” and proposed 10 percent funding cuts to most government programs starting in March. While the UC system was exempted from those initial, across-the-board reductions, it won’t be spared when the Legislature enacts a final budget later this year.


Nathan Brostrom (Peg Skorpinski photo)
 

The precise size of the cuts to UC and the Berkeley campus won’t be known for several months, and could still be in doubt when the fall semester gets under way. Campus administrators, however, are already weighing their options for limiting the short-term impacts of the inevitable 2008-09 budget shortfall, and developing long-term strategies to cushion the blow from state-mandated belt-tightening in future years.

To give members of the campus community a better idea of what to expect in the weeks and months ahead, Nathan Brostrom, Berkeley’s vice chancellor for Administration, spoke with the Berkeleyan last week in his California Hall office.

Although Gov. Schwarzenegger’s 2008-09 budget proposal calls for deep cuts in funding to the UC system, the state often doesn’t finalize its budgets until well into the fall. What do we know now about what lies ahead?
The best place to start is with the governor’s January budget proposal, which cut $109 million to the UC system compared to last year’s budget. That’s on a base budget of roughly $3 billion. But that only tells half the story. The real shortfall that we’re looking at is the difference between what the governor proposed and what the regents proposed in November in their budget for 2008-09. The difference there is $417 million. So that’s a much bigger shortfall that we as a system have to grapple with.

Where was that money destined to go?
About 75 percent of that shortfall affects three main areas. The largest is compensation. In keeping with the governor’s compact, the regents had proposed a 4 percent compensation increase for faculty and staff. That constitutes more than half of the shortfall.

And the rest?
The other two major areas are student fees and enrollment growth. The regents had in essence proposed no increase in student fees, since their budget anticipated the state adding funds in lieu of additional fees. At this point, an increase in fees, which the regents will consider at their May meeting, will decrease the systemwide shortfall. We do know the UC system has committed to enrollment growth for next year, which is unfunded. We’re about 4,200 students over-enrolled as a system, and a lot of those are on the Berkeley campus. For each additional student, we will get his or her registration and educational fee; this, however, does not cover the full cost of educating a student. In this budget cycle, we will not get that additional amount, called the “marginal cost of instruction.”

Before we delve into the impacts on Berkeley, can you give us a quick overview of the state budget picture?
Sure. In his budget, the governor had identified a $14.5 billion budget shortfall in the upcoming ’08-09 fiscal year. In addition, there was a $3.3 billion shortfall in the current fiscal year, ’07-08 — that’s based on tax receipts being lower than they’d anticipated and expenditures being higher. He’s taken care of some of that through mid-year budget cuts for most state entities, though fortunately UC was exempted from those. Since then, many economic analyses have indicated that the budget situation has worsened by anywhere from $2-$3 billion, based on the continuing crisis in the housing markets and the way the credit crisis has affected corporate and personal tax receipts. So all told, the state could be looking at a structural deficit, minus the mid-year cuts, in the range of $10-$12 billion. In fact, one recent estimate projects the state’s deficit at $14 billion after the proposed cuts.

And that’s not likely to change in the short-term?
There aren’t a lot of the gimmicks and other accounting measures available that there were in previous years. So you’re really looking at either cuts to programs or new revenues. And while we’re hopeful that the Legislature will take up some potential revenue increases, right now the governor is saying that he doesn’t want any increases in taxes or other revenues. So that’s why we find ourselves in this hole.

And higher education is in the hole along with everything else that relies on state funding.
That’s right. While higher education — UC, CSU, and the community colleges — is being cut, and cut in ways that will really hurt us, a lot of other critical needs are being cut, too, so it’s hard to see how we’re going to get that restored. I mean, with $4 billion in proposed cuts to K-12, or cuts to health and human services that would have some fairly drastic impacts on vulnerable populations — we’re advocating pretty strongly to have our cuts restored, and making the case for UC’s role in driving economic progress in California, but within the overall framework of other state priorities, it’s a tough environment.

We shouldn’t hold out hope for a last-minute reprieve from the governor, then.
We’re not giving up. There is a concerted plan among the three higher-education systems to get our message out about the impact of these cuts, particularly on students. But unless there is a significant revenue increase — through an increase in the sales tax, for instance, which has the most support in the Legislature — it seems unlikely that we’re going to be spared.

Let’s assume the UC system does have to absorb a $417 shortfall. Where does that leave Berkeley?
We get about 27 percent of our funds from the state; 30 years ago we got over 50 percent. That’s largely been made up by big increases in research funds, student fees, and private philanthropy, including not only gifts but grants and contracts. The good news is that that has made us somewhat less vulnerable to state cuts, in that we have more robust funding sources. The bad news is that the bulk of the state funding goes to our core mission.

Sounds like the bad news more than outweighs the good news.
Well, if you look at the things that the state is funding, it’s primarily teaching and learning — our instructional budget — and within that, there are huge numbers that can’t be cut: incumbent-faculty salaries, debt service, payments for utilities, and other fixed costs. So when you get down to what you can cut, it’s a much smaller base.

So in deciding where we apply the knife to our own budget, we’re limited to the areas for which these state funds are earmarked?
We’re taking steps to change that. One of our big initiatives on campus is to try to be more fungible with our revenues — that is, to achieve the flexibility we need to apply money from other revenue sources to our core mission — and we’re making a lot of progress. A key feature of last year’s Hewlett Foundation grant, for example, was not only the size of it [$113 million] but the fact that about 75 percent of the earnings from the endowment will be released for faculty salaries and graduate-student support — money that normally would come from the state. When that gets fully implemented, that will be $8-$10 million of new discretionary money that we will be able to direct as we need.

What else are we doing on that front?
One other area that is just going into practice now, that I’ve been working on since I came to campus, is looking at our short-term investment pool [STIP] — funds that we hold largely for liquidity purposes. They’re all accounted for — they’re used for faculty startups or research funds, for example — but they’re held in a fund that’s basically invested for liquidity, and that last year earned 4.2 percent for our campus. But we don’t need that kind of liquidity on a daily, weekly, or monthly basis. So, working with the Office of the President, we’re developing a new investment pool which, ironically, has about the same risk as the short-term one, but will yield anywhere from 2 to 2.5 percent more. That’s another $8-$10 million in discretionary resources that the chancellor can invest in areas that now depend on state funds.

How soon might we see the fruits of these kinds of improvements?
We’ll see some impact in this coming budget year. There are a number of ways that we’re moving, both in the short term and the long term, to mitigate the impact of the immediate cuts but also to try to build a financial structure that is less vulnerable to the volatility of state cuts.

Let’s look back for a minute. Whatever happened to the compact with the governor, which was supposed to guarantee us a certain level of funding?
As you know, when Gov. Schwarzenegger came into office, one of the things the UC system did was to negotiate a compact with him and his staff to try to give us a more stable and predictable funding base. So the governor approved a compact for the whole UC system that basically assured 4 percent growth through the first three years; this year was going to be 5 percent, to help us overcome the shortfall in faculty and staff salaries, for example, and a lot of the deferred-maintenance and infrastructure challenges that we face.

The state did meet the target in the first three years of the compact. This year, what’s ironic about the governor’s budget proposal is that he says he’ll honor the compact, meaning we get a 5 percent increase — but then, just like every other state agency, we have to take a 10 percent cut off of that. What we’re actually doing is taking a 10 percent cut off a higher base.

Some pain is inevitable, then. Where is Berkeley most likely to feel the pinch?
The trouble with all this is that it adds to all these ongoing challenges that we already face. We’re in fierce competition with our private peers for top faculty and graduate students. In certain staff areas, salaries are at a discount from private markets. And then we have a number of needs in deferred maintenance, facilities, and IT that we really need to maintain our excellence. So this just increases the challenge to us as a campus, not only this year but in the years to come.

How do we prioritize all those needs in the face of state budget cuts?
Let me first address what’s happening at the systemwide level, because there are a number of ways that we can mitigate the impacts. I mentioned the $417 million shortfall. There are ways we can bring that number down in order to mitigate what is essentially an unallocated cut to every campus. OP is looking at lower levels of faculty- and staff-compensation increases, for example — that would be a big one. They’ve built in 4 percent, but if they were to reduce it to 2 percent, for example, that would cut the amount in half.

We also anticipate that the regents will take some action on student fees. If it’s a 7 percent increase, that yields about a $68 million mitigation of that budget cut after return-to-aid [funds that go into the financial-aid pool to cover increases for low-income students]. If they approve a 10 percent increase, which some of the regents have talked about, that’s greater than $90 million.

But even if pay increases are scaled back and student fees are raised, we’re still probably looking at an unallocated cut of at least $200 million.

What’s Berkeley’s share of that, and what’s our plan for coping with the reduced funding?
Depending on the choices that are made at OP, this campus faces an unallocated cut of anywhere from $25-$40 million.

The approach that the chancellor is taking, and which I think is quite strategic and appropriate, is that we’re looking not only at cuts, but at a number of different ways to develop resources far beyond the cut we would need to take. In our budget calls, we’ve asked every unit to look at a 7 percent cut in their budgets, and also to look at a 7 percent cut in any multi-year grants and in the block grant that the chancellor gave the previous year. But then we’ve also asked for a 4 percent tax on carry-forward — these are funds that are assigned to a specific activity, but represent an asset that we could use for short-term relief. Then, finally, for one year the earnings on the short-term investment pool would be taken into central campus funds as part of the budget process.

How does all that affect our ability to absorb the likely cuts?
All those things combined would give us anywhere from two to three times the resources that we need to address any cut, depending on how big the cut is. In addition, we’ve asked every unit to say what impact these cuts, or suspension of the dollars, would have on their programs. This will enable the chancellor, George [Breslauer, Berkeley’s executive vice chancellor and provost], me, and the cabinet to look at all these items and figure out what we can do to meet these cuts with the least harm to the campus, especially to our core mission of teaching and research and public service.

I’m very pleased with the results that we’ve seen. People are being very creative in finding ways they can either take cuts or look at other funding sources to supplement some activities.

Should staff and faculty be worried about their jobs?
I think it’s understandable in this environment that people are anxious, because we’re all uncertain about what the future holds. I would say that at this juncture, we’re looking for any kind of administrative improvements or productivity gains that we can use to help offset the budget impact. I don’t think it’s strategic at all to do wholesale or arbitrary layoffs, because that can do a lot more harm to the campus than we could gain in budget savings. I do think that people should be looking at their own practices, and identifying areas that could be consolidated, for example. That could mean people doing different jobs, or being used more effectively in a given unit.

I think the worst way to approach this would be to say that in order to meet this we need to cut, say, 200 people campuswide. It’s the responsibility of every administrator to look at their areas and see if things are being done most effectively and efficiently. In some cases, maybe that does involve laying someone off. But it should be done in the interest of providing the best services at the best cost, rather than strictly for these budget savings. In many cases that might just mean eliminating a position that hasn’t been filled.

So we’re looking to cut the fat before we get to the bone?
The campus has absorbed so many cuts over the last decade that we’re actually quite efficient right now. By and large, there’s not a lot of fat to cut out of the system. That’s why I think we have to look at all these different measures, including using temporary resources — such as sweeping the earnings off of STIP for the year, or taking the tax on carry-forward — to help cushion the impact of the cuts.

We should be clear that those will have an impact, because deans and other units are using a lot of these funds for their programs. But a lot of them are in the nature of reserves, and if there ever was a rainy day, this is it.

And what’s your financial forecast for the weeks and months ahead?
It looks like we’ll have word from OP by the end of May. All of our budget meetings here on campus are in the next couple of weeks, and then we’ll be having a cabinet budget retreat to go over a lot of this in mid-May. So I think there will be things to report out to the campus in early June or so. The ultimate resolution of the state budget is anyone’s guess — I think this could drag into October.

Meanwhile — based on what we know at this moment — how do things look from where you sit?
Based on the reactions of people in charge of campus units, I know that asking them to look at all these different measures — it seems draconian at first, because we’re asking for two or three times what we’ll ultimately need. But hopefully in the end it will be less draconian, because we’ll be able to combine temporary revenues and cuts in a way that minimizes the impact on the campus.