LAO Report on Higher Ed Contains Significant Pension Recommendations

The state’s Legislative Analyst has released a lengthyreport on funding higher education which covers UC, CSU, and the communitycolleges (as well as CalGrants).  Thereport is essentially a response to the governor’s January budget proposal withregard to higher ed.

Generally, the report tends to disagree with the governor’sapproach which the Legislative Analyst views as giving too much autonomy to UCand the other segments with regard to enrollment and other matters.  On the other hand, it documents the trendtowards reduced state funding and thus seems to continue the pay-less/say-moreapproach which is odd on its face.

The Legislative Analyst does raise questions about thetrigger cuts proposed by the governor in case his tax initiative does not passin November.

There is a lengthy section on pension matters, especiallyfor UC which has not received explicit state funding for its pension for overtwo decades and which has had to divert other funding to deal with resumedpension contributions.  The report seemsto favor some state funding for the UC pension and – significantly - does notcondition it on UC being covered by the statewide plan proposed by thegovernor.  That is a step in the rightdirection if followed by the legislature in the final budget.  The report favors somewhat less of a pensioncontribution than UC has requested.  However,establishing the principle of some state responsibility would be an advance.

Excerpts from the pension portion are below:

Retirement Costs

The Governor proposes major changes to the way in which some retirementcosts are funded for higher education. For CSU, the Governor proposes to nolonger make base adjustments to reflect changing retirement costs. For UC, theGovernor proposes (1) a $90 million base augmentation that could be used forpension costs or other purposes, and (2) no out–year adjustments for retirementcosts. The budget proposes no changes to the way retirement is funded for CCC.

Background

CSU Pension Benefits. CSU employees are members of theCalifornia Public Employees Retirement System (CalPERS)—the same retirementsystem to which most state employees belong. Funding for this system comes fromboth employer contributions and employee contributions. Each year, as is thecase with other state departments, CSU's employer contributions to CalPERS arecharged against its main General Fund appropriation. The employer contributionis based on a percent of employee salaries and wages that is determined byCalPERS and specified in the annual budget act. The Governor's budget annuallyadjusts CSU's main appropriation to reflect any estimated changes in theemployer contribution. For example, the Governor's budget reduces CSU's mainappropriation by $38 million due to a lower employer rate and lower payrollcosts in the current year. The CSU is expected to contribute $404 million toCalPERS in 2012–13.
UC Pension Benefits. Employees of UC (and Hastings) aremembers of the University of California Retirement Plan (UCRP). This retirementplan is separate from CalPERS and under the control of UC. Prior to 1990, thestate adjusted UC's General Fund appropriation to reflect increases anddecreases in the employer's share of retirement contributions for state–fundedUC employees. Starting in 1990, however, UC halted both employer and employeecontributions to UCRP because the pension plan had become"superfunded." Specifically, the plan at that time was enjoyingexceptionally strong investment returns, resulting in assets that exceededliabilities by more than 50 percent. This "funding holiday" lastednearly 20 years until the plan's assets had declined considerably andcontributions once again became necessary. In April 2010, both UC and itsemployees resumed contributions to the plan. The state, however, has notprovided UC with any additional funding specifically for that purpose.

Governor Proposes New Approach To Funding Retirement Costs

The Governor proposes two major changes related to funding for universityretirement plans:

• A $90 million base budget augmentation for UC that, according to the administration, "can be used to address costs related to retirement program contributions." The administration emphasizes that this funding is not being provided specifically to fund costs for UCRP. Rather, UC could use it for any purpose related to its state–related programs—including, but not limited to, UCRP.
• A new policy that the segments' budgets no longer be adjusted for changes in retirement costs in the future. Instead, state–related retirement costs would be funded entirely from the segments' unrestricted base appropriations.

Unclear Which Retirement Costs Are Affected. The Governor'sproposed language refers simply to "retirement costs." At the timethis analysis was prepared, the administration had not provided sufficientclarity on whether this would include costs for retiree health and dentalbenefits. For example, funding for CSU's retiree health care costs arecurrently bundled together with funding for other CalPERS retiree health carecosts. Since the administration has not yet indicated how it would split outfunding for CSU, we are unsure whether the proposal applies to these costs. Theadministration also was unable to provide information regarding base fundingfor retiree health costs for UC. For these reasons, our budget analysis onlyfocuses on funding for pension costs for UC and CSU.

UC Proposal Has More Merit,But Raises Several Questions

The request for pension–related funding for UC is more difficult andcomplicated than that for CSU. This is because (1) the state currently is notproviding any pension–related funding to UC, and (2) UC has full control overits pension system. To address the Governor's proposal, the Legislature shouldconsider the following questions:

• What is the main justification for the state to provide funding for UC's retirement costs? In other words, why is funding for these costs a state responsibility?
• Given that UC controls its own pension plan, are UC's pension benefits reasonable? How do they compare to the pension benefits the state provides state employees?
• How much funding should the state provide UC in 2012–13? More specifically, what methodology or calculations support the request for $90 million?
• Finally, should the state lock in the pension amount provided UC at the 2012–13 contribution level or provide UC with budget adjustments for pension costs in future years? …

Pension Costs Should Be Funded as Part of Workload Budget. Thestate currently provides funding for pension–related costs for all other stateagencies as part of a normal, workload budget. In other words, the stateprovides funding to state agencies for the salaries and benefits (includingpension benefits) related to their budgeted positions. Given that the stateprovides UC with funding for the salaries and benefits of some of itsemployees, it would make sense from a standard, workload budgeting perspectiveto also provide funding related to pension costs. As noted earlier, the statedid provide such pension–related funding to UC for many years prior to thepension holiday that began in 1990. (As we discuss in the nearby text box, thestate has repeatedly deferred a final budget increase for pension costs sincethat time.) Given that the university has had to restart its contributions toits pension plan in recent years, we find justification in its request that thestate also resume providing pension–related funding.
UC Pension Benefits Similar to State Employee Pension Benefits. Althoughthe state does not control UC's pension system, actions taken to date by theRegents have largely mirrored recent changes to state employee pensionbenefits. For example, the Regents have taken action to reduce pension costs inthe long term by increasing the minimum retirement age for new employees. Inaddition, …the Regents have approved increases to employee contribution ratesthat are beginning to bring them in line with state employee contributionrates, which are now generally 8 percent. (Some of UC's proposed employeecontribution increases are still subject to collective bargaining.) Additionalcontribution increases beyond July 2013 will also likely be necessary to reducethe plan's significant unfunded liability that has accrued due to thedecades–long pension funding holiday and recent market downturns.

UC's Estimate of State's Share of 2012–13 PensionCosts Is Overstated. The $90 million that UC requested from theadministration is only a fraction of the $255.6 million that UC estimates to bethe state's share for 2012–13. The UC states it requested the lower amount inrecognition of the state's severe fiscal shortfall. The university furtherindicates that it will likely seek the full amount of what it estimates to bethe state's share (which it calculates could rise to roughly $450 million) infuture years...

We find two issues that the Legislature should carefully consider withrespect to how the university has estimated the state's share of UC retirementcosts.

• First, we find that the request for $90 million in 2012–13 is overstated. …UC's estimate of the state's share of its 2012–13 retirement cost increase totals about $78 million. The UC appears to be requesting a greater amount because it believes that the state should provide contributions to account not only for incremental retirement costs in 2012–13, but also for part of the cost increases in the two prior years. We take a different view. The UC has managed—by both redirecting internal resources as well as increasing student tuition—to fund all of its employer contributions in both 2010–11 and 2011–12. If the Legislature were to provide funding related to prior years, the funding would in effect free up existing UC base funding for other purposes. In our view, given the state's fiscal shortfall, such an augmentation would be unwise.
• Second, the university's calculation of the state's share of retirement contributions includes employer costs related to tuition–funded salaries. From a workload budgeting standpoint, the state portion of retirement costs should only be related to state–funded payroll costs. Given, however, that the Governor's budget assumes no increases for tuition in 2012–13, the Legislature may wish to consider providing the funding for pension costs related to tuition–funded salaries in 2012–13. In future years, higher pension costs—just like any other UC cost—presumably would be covered by the General Fund and tuition fees in proportion to their current funding levels.

Timing Not Right to Lock In Base Funding for Pensions. Aswith the CSU proposal, now would be a poor time to choose to lock in a basefunding level for UC pensions, given that the Governor is separately proposingto modify public employee pensions to reduce costs in the long run. Inaddition, as noted earlier, UC intends to increase its employer contributionsover the next few years, although it has not yet reached agreement with all ofits union–represented employees on the employee contribution rate. In our view,the Legislature should carefully evaluate future requests from UC for pensionfunding on a year–by–year basis in the context of the university's currentpension benefit and contribution structure. In the long term, however, it couldmake sense to expect UC to fund its pension costs out of its base budget, giventhat the university's retirement system is separate from the state's. Thiscould only work once a reasonable funding level has been identified andcontribution amounts have stabilized.

Recommendations

…Recommend Restarting Budget Adjustments for UC. Asdiscussed above, we find that there is sufficient justification on a workloadbudget basis to provide UC with an augmentation that the university could useto address its pension costs. We recommend, however, that the Legislature onlyprovide funding for the incremental change in 2012–13 in UC's pension costs forstate– and tuition–funded employees—which we estimate to be $78 million. Thiswould mean reducing the Governor's request for $90 million in General Fundsupport by $12 million. In addition, we recommend that the Legislature adoptintent language in the budget specifying that in the future funding for UCretirement costs (1) shall be determined annually by the Legislature, (2) shallbe contingent on such factors as the comparability of UC's pension benefits andcontributions to those of state employees, and (3) shall not necessarilyinclude funding for tuition–supported employee pension costs or pension costsincurred prior to 2012–13.

The full report is at http://lao.ca.gov/analysis/2012/highered/higher-ed-020812.pdf

A video presentation of the report highlights is availablebelow:

Plenty of Nothing

Here is a quote from the governor’s recent budget proposal: "The University of California (UC) willreceive an increase of $90 million General Fund for base operating costs, whichcan be used to address costs related to retirement program contributions."

Question: What does it mean?  Answer: Nothing.  UC has always been free to take its generalrevenue and put it into the pension fund. Indeed, since the state has so far refused to resume paying the employercontribution for state-funded employees into the pension fund, that is what UChas been doing.

Question: If it means nothing, why are you discussingit?  Answer: It appears that some folksup in Oakland view this statement as a kind of recognition of a stateliability for the UC pension.  As we havedocumented repeatedly, before the two-decade pension contribution “holiday,” the stateroutinely paid its contribution, even putting in IOUs when it was short ofcash.  When the state paid in, whether in cash or in IOUs, that action allowed UC to collect from non-state sources, currently roughly $2 fromnon-state for every $1 of state.

 

Earlier in the state budget crisis, then-GovernorSchwarzenegger put a token $20 million in his budget proposal for the UCpension.  But the legislature – acting onadvice of the Legislative Analyst – deleted the $20 million and insertedbudgetary language that there was no state liability.  That perverse language was later removed, butsince then there has been zero progress in getting state recognition of itsliability.  Note that CSU, which is partof CalPERS, does not have this burden since the state does not dispute itsliability to the giant CalPERS system.

If UC depicts the governor’s non-statement as amounting tomore than nothing, we will continue to get just that: nothing.  As we have noted before, if the state wantsto privatize UC, not taking responsibility for the pension liability is a goodway to do it.  The Regents can’t createmoney.  They cannot raise taxes.  They can only keep raising tuition.

So let’s not pretend nothing is something.  This song sums it up nicely:

The quote from the budget is at http://www.ebudget.ca.gov/StateAgencyBudgets/6013/6440/department.html

A history of UC pension funding by Faculty Association Executive Director Susan Gallick is at http://www.uclafaculty.org/FASite/Home_files/UCRPCAPolicyOpt2012%20.pdf

UC Like a Flea on an Elephant in Latest LAO Budget Report

Maybe the biggest lesson to take away from the LegislativeAnalyst’s Office latest report on the state budget – responding to the governor’sbudget proposal – is that UC is a flea on the back of an elephant.  We are hardly mentioned, other than a referenceto possible trigger cuts next year if Governor Brown’s tax initiative isn’tpassed by voters.

Much of the report focuses on the world of Prop 98, i.e.,K-14 schools, not surprisingly since that is such a large chunk of the budget.

The LAO is concerned about possible over-optimism in Brown’sbudget projections.  Just a few days ago,however, the Brown projections were criticized by a highly-regarded privateforecaster as too pessimistic.  Thedivergence underscores the point made in an earlier post on this blog on the budget:forecasting cannot be precise.

 

Editorial comment: The uncertainty over budget forecastsshould give pause to various do-good groups who think our budgetary problemswould be solved by going to a two-year budget. Note that in the current one-year regime, we have considerableuncertainty forecasting 18 months ahead (since the budget year begins July 1,2012 and ends June 30, 2013).  Theproposed two-year regime would require a forecast 30 months ahead,substantially raising the level of uncertainty.  

Editorial prediction: It should give them pause, but it won’t.

The LAO report is at http://lao.ca.gov/reports/2012/bud/budget_overview/budget-overview-011112.pdf

Comments on the Brown budget proposal by forecaster Chris Thornberg are at http://blogs.sacbee.com/capitolalertlatest/2012/01/economist-says-jerry-browns-budget-underestimates-revenue.html

LAO seems to really miss CPEC now that it's gone

As readers of earlier blog posts will know, Governor Brownline-item vetoed CPEC (California Postsecondary Education Commission) out ofexistence by eliminating its funding in the current year state budget.  CPEC was created to coordinate and evaluatethe provision of higher ed in California under the Master Plan – public andprivate.

Now the LAO (LegislativeAnalyst’s Office) thinks that some kind of replacement for CPEC is needed tomonitor higher ed.  LAO seems to wantperformance standards, much of which deals with flows into and out of higher edinstitutions.

It is interesting that the state generally, not just theLAO, feels that the less the state pays for higher ed, the more it should havea say in what goes on there.

Anyway, you can find a new LAO report on this matter at http://www.lao.ca.gov/reports/2012/edu/ihe/improving-higher-education-010612.pdf.

This development may be part of the you’ll-miss-me-when-I’m-gonesyndrome:

Audio of Legislative Hearing on Public Pensions

Audio of Dec. 1, 2011 hearing by the legislative Conference Committee on Public Employee Pensions on Gov. Jerry Brown's proposals for state and local public pensions in California.

Click on link above. If you don't want to listen to the full four and a half hours, scroll towards the bottom to hear the governor's testimony and UC's testimony.

Testimony by representatives of the Dept. of Finance, the Legislative Analyst's Office, Gov. Jerry Brown in person, CalPERS, CalSTRS, State Assn. of County Retirement Systems, University of California pension system, Employer groups (League of California Cities, California State Assn. of Counties, California Special Districts), Employee union groups (CTA, California School Employees Assn., Professional Engineers & Scientists, AFSCME, Peace Officers Research Assn.), Public Comments. See earlier post for agenda of this hearing. Gov. Brown was not on the original agenda.

Dept. of Finance: The governor’s 50-50 sharing of contributions idea refers to the normal cost, not the unfunded liability. The 75% notion is not a cap but a kind of goal. There was vague reference to a dollar cap. But much was unclear. It was said that the Dept. of Finance would be hiring a consultant to work out details. There would be a minimum early retirement age but it is not clear what that will be. There was an allusion to a 6-month period to get an actual hybrid plan in shape. There was some discussion of legal issues surrounding “impairment of contracts” but again there was fuzziness. It came up in the context of what the governor wanted to put on the ballot in the way of constitutional changes. The only clear cut response was that it would be necessary for voters to approve changes in the CalPERS board.

Legislative Analyst’s Office (Jason Sisney): Noted there are thousands of pension plans and occupations so putting together a plan will be complicated. There was reference to the total compensation idea (if you cut pensions, other forms of compensation may need to rise so the savings may be offset). The details are not yet in the governor’s plan. Legal doubts raised about changes for current employees, even changes in contributions. Recommended not fiddling with current workers. Thus, changes would be for new hires so there would be little short term savings. Specifically cautioned about high paid workers and need to be competitive, particularly university professors who are recruited in a national market.

Gov. Brown: Philosophized about debt, Greek financial crisis, Europe. At one point, referring to a statement by CalPERS that freezing its plan would cut off incoming contributions from new hires, said that seemed like a Ponzi scheme. That is, if a plan depended on new people coming in, it sounded like a Ponzi scheme. This remark could be a media sound bite. Told the Democrats that there will be taxes on the ballot they would like voters to pass but unless there is a pension reform also on the ballot, the taxes won’t pass. So there needs to be compromise, balance, etc.

Note: The Ponzi scheme quote has already hit the news:

http://blogs.kqed.org/capitalnotes/2011/12/01/browns-pension-musings-from-ponzi-to-castor-oil/

CalPERS: Prefers pure defined benefit to hybrid of defined benefit and defined contribution. The latter is more expensive to administer and will earn less. Said the proposed ban on contribution holidays when plans become overfunded could violate tax rules and lead to loss of tax-exempt status. Tried to respond to governor’s Ponzi comment without using the word Ponzi. Said what was meant was that if a pension plan such as CalPERS is frozen (closed), it no longer gets cash from new hires and it needs cash for paying benefits. Need for cash flow would cause it to invest in assets that throw off a lot of cash and therefore have lower rates of return. The answer was not great since if the plan were really 100% funded, you could in theory freeze it and pay off the obligations. CalPERS problem (and the reason for the governor’s proposal) is largely a matter of unfunded liabilities.

CalSTRS: CalSTRS is recognized as the most problematic state plan. Spokesperson noted that the governor’s plan doesn’t deal with CalSTRS’ unfunded liability. Complained about fuzziness in governor’s plan as to who pays for the defined contribution component. But polite language that the governor’s plan was a good “starting point.”

County Systems: Noted that there were many plans. They are already negotiating two-tier arrangements and other features such as increased contributions similar to the governor’s plan. Doubts raised about hybrid proposal. Total compensation point made (if you cut pensions, you have to raise something else).

University of California: (Nathan Brostrom and Gary Schlimgen) Some history of the UC system. Discussed the two-decade contribution holiday. The other sources of funding are paying but not the state. Regents have been ramping up contributions but must pay for state share out of operating budget funds. Defined benefit model helps retain mid-career faculty but encourages retirement so that there is faculty renewal at older ages. Discussion of Regents’ pension changes of 2010 after PEB report. Many features of the governor’s plan have already been adopted by UC such as two tier. We already have 3-year HAPC to prevent spiking. UC doesn’t offer “airtime” purchases of past service unlike CalPERS. Regents are not plan members so no conflict of interest in serving as plan trustees. UC doesn’t make retroactive improvements. UC is less generous than the state on retiree health care. UC has problems with 50-50 contribution proposal for current employees. Hybrid model is problematic. 75% replacement target is too low for retention/recruitment. Some UC unions have already agreed to two tier. The constraints in the governor’s plan would make collective bargaining more difficult. UC plan has the right balance. (Note: brief break in audio stream towards end.) In Q&A period, pointed to current projection of full funding by 2039. Notes that contributions of current employees are rising as part of that projection.

Local Employer groups: There was again reference to the idea that the tax status of plans could be at risk if an overfunded plan could not have a contribution holiday.

State and Local Employee groups: No unexpected points.

Public comment: Included some external groups pushing pension reforms.

Part 1 of Gov. Brown's testimony

Part 2 of Gov. Brown's Testimony


Part 1: UC Testimony

Part 2: UC Testimony

LAOmission

Our previous post deals with the Legislative Analyst's Office (LAO) report on the state budget. Quote from page 41 of the report:

"...because the state is not required under current law to contribute additional funds to UC to address its unfunded pension and retiree health liabilities, the forecast assumes no General Fund resources to assist UC for these purposes."

It Sure Looks Like the Trigger Is Going to be Pulled

There is an advance report from the Sacramento Bee that the Legislative Analyst later today will be announcing that projections of revenue will fall sufficiently short of assumptions to fire the budget trigger – which further chops the UC budget this year. By itself, just the LAO projection does not fire the trigger but it is part of the mechanism. The LAO report is not yet posted.

From the Bee:

California would impose $2 billion in mid-year "trigger" cuts next month, mostly through K-12 school reductions, under a new revenue forecast issued this morning by the nonpartisan Legislative Analyst's Office… The analyst's report is not the sole determinant of whether the state will impose those cuts, but it is one of two tools the Department of Finance must rely upon before deciding whether to slash spending. The finance department will issue its own forecast in December. The Analyst said the state will not receive $3.7 billion of the $4 billion revenue bump that Gov. Jerry Brown and lawmakers optimistically relied upon to help close the budget in June. The enacted budget projected the state would receive $88.5 billion in revenues and transfers; the analyst says it will only get $84.8 billion…

Full story at: http://blogs.sacbee.com/capitolalertlatest/2011/11/legislative-analyst-2-billion-of-mid-year-cuts.html

Of course, if the legislature could corral enough votes, it could stop the trigger. Let’s hope everything works out OK:

UPDATE: The LAO report has now been released. You can find it at

http://www.lao.ca.gov/reports/2011/bud/fiscal_outlook/fiscal_outlook_2011.pdf

As usual, the report - following the great state tradition of fuzzy language - uses "deficit" in a way that mixes up past debt (a stock) and flows. It also follows the great state tradition of including "transfers" with revenues which has an obscuring effect.

What the report basically says - but not in the language below - is that last year 2010-11 the state ran a surplus of about $2.8 billion (which included temporary taxes that are now gone). But that surplus was not enough to reduce the negative reserve in the general fund to zero or get it into positive territory. Cuts in spending were made for the current year and a revenue trigger was included which fires if optimistic revenue assumptions are not met. It looks as if the trigger will fire. The state will run a deficit (revenues and transfers < expenditures) of about $500 million in 2011-12, which makes the general fund reserve that much more negative. Next year - if nothing is done (which won't happen) - the state would have another deficit (revenues and transfers < expenditures) of $9.7 billion.

The task of the legislature starting in January will be to begin making further cuts, apart from what the trigger produces, unless someone comes up with a way of obtaining a substantial increase in revenue beyond what assumed economic group would produce. (Don't even think about what would happen if there were a double-dip recession!)

UC will experience a trigger cut of $100 million this year. Had the Regents meeting not been cancelled, President Yudof would have given the board a budget request to the state that all of this info more or less guarantees would not have been adopted by the legislature. Since the Regents meeting has been postponed, the folks at UCOP might well want to reconsider what to present whenever that meeting is reconvened in the light of the LAO report.

LAO Video on Report:

Further update: CSU approves 9% fee hike amid raucous protests
See http://blogs.sacbee.com/capitolalertlatest/2011/11/csu-approves-9-fee-hike-amid-raucous-protests.html

LAO Report on UC and Other Public Pensions

The Legislative Analyst has just released a report on the governor’s proposal for public pensions. The report states that the “Governor’s Proposal Is a Bold, Excellent Starting Point” and then goes into a detailed analysis. Most of the report is not about UC, although it does note that changing the UC plan might well involve amending the constitution. But it does have a section on UC reproduced below:

What About UC?

UCRP Also Has a Major Funding Problem. From 1990 to 2010, UC and its employees enjoyed a remarkable two–decade pension funding holiday due principally to (1) substantial overfunding of UCRP during the 1980s by the state and the university and (2) very strong investment returns for UCRP during the 1980s and 1990s. The state also benefited from the funding holiday, since it had contributed to UCRP regularly in prior decades and used the elimination of contributions as a budget solution during the fiscal crisis of the early 1990s. Given that UCRP continued to enroll new employees and provide additional service credit to existing employees, it would have been impossible for such a funding holiday to continue forever. The investment market downturn of 2008 caused the already dwindling surplus in UCRP to fade away, and now the system has an unfunded liability.

Unlike other systems, however, UC and its employees are struggling to find a way to cover normal costs, as well as unfunded liabilities, given that neither of them had contributed to the system for two decades. The university and its employees have already moved to change certain benefit commitments for current and future employees, and they continue to engage in hard talks on how to increase contributions to cover the costs of both past and future benefit commitments. The university, however, believes that it may have to raise tuition more or cut student services or other employee costs in order to fund its entire share of pension costs in the future. As a result, UC seeks several hundred million dollars of additional annual state funding beginning within a few years so that it can cover normal costs and retire unfunded liabilities over the next several decades. The state has no apparent legal commitment to provide such additional funding, and the state does not directly set benefit levels for UC employees. To date, the Legislature has chosen not to provide additional funding to UC for this purpose, despite the university’s requests.

UC May Well Need Additional State Funding for Retirement Costs. The magnitude of UC’s unfunded liability costs not covered from other funding sources (such as enterprise units and the federal government) is so large—hundreds of millions of dollars per year—that the university will face very difficult decisions in the coming years about how to cut costs or raise tuition further if the Legislature does not provide additional funding related to UCRP. Extending the Governor’s proposed pension changes for other public employees to UC employees as well may reduce UC’s future personnel costs and help the university address the UCRP funding problem over the long term. In the short run, however, costs to address existing benefit commitments will remain very difficult to address within existing resources of the university.

We urge the Legislature to consider the long–term funding strategy for UCRP during these legislative discussions on overall pension policy. Specifically, the Legislature could resubmit a request to UC that it provide a comprehensive, detailed proposal for a long–term funding strategy. (That same request was included in the 2010–11 Budget Bill, but was vetoed by Governor Schwarzenegger.) It will be very difficult for the state to consider a long–term UCRP funding policy without such a detailed proposal being submitted and without firm agreement on the plan from all UC employee groups.

The full report is at http://lao.ca.gov/reports/2011/stadm/pension_proposal/pension_proposal_110811.pdf

A video summary is at:

LAO’s Proposed Path for UC

In the Sacramento Bee’s article on the Regents meeting (see prior post), we find:

…No one at the (Regents) meeting raised the possibility that UC might not need to increase spending as much as it has proposed. That view, however, could be found in the Capitol, where budget analysts said they were frustrated by the regents' conversation. "UC is in effect saying that it plans to spend hundreds of millions of dollars more each year … at a time that inflation is at historic lows, when demographic growth in the college-age population is near zero and when most public agencies are spending less money, rather than more money," Steve Boilard, director for higher education at the Legislative Analyst's Office, said in an email…

Boilard, the state budget analyst, said he disagreed that UC must maintain quality by getting "into a bidding war with the most prestigious universities in the country."

"Every other sector of the government is looking at near-zero increases in salary, and a lot are still going in the negative direction. So I just question how necessary it is at this time to be going through a multiyear salary increase plan," he said…

Full article at: http://www.sacbee.com/2011/09/16/3914375/uc-regents-debate-need-for-16.html

What path would LAO have UC follow? Maybe this one:

On the way to trigger

The Legislative Analyst’s Office (LAO) released the following statement on its most recent projection of California state revenue.

Translation: So far, it looks like the budget trigger will be pulled (which means more cuts for UC).

Below is the text:

Despite today’s weak national employment report for the month of August, preliminary reports from California's tax agencies on personal and corporate income tax receipts for the month tell a “good news/bad news” story. On the one hand, the tax data indicates that the California economy is continuing to recover from the recession, albeit very sluggishly. This slow recovery is essentially in line with that projected in the state's most recent economic forecasts, which were released around the time of the May Revision. On the other hand, income taxes in August do not appear to have been enough to cover the portion of the $4 billion “unallocated revenue increase” (included in the 2011-12 state budget package) attributed to the month in administration forecasts. Sales and use taxes (SUT) and other General Fund revenues—data for which will be available in the coming days—will have to perform above expectations for overall August revenue targets to be met.

The Good News. California’s income tax bases are performing essentially as expected in the most recent economic forecasts of our office and the Department of Finance (DOF), both of which were released in May. Based on very preliminary information from the state's tax agencies, net personal income tax (PIT) collections (including Mental Health Fund revenues) for August were about $100 million (3 percent) above the 2011-12 Budget Act forecast prepared by the administration. Corporation tax (CT) collections were about $35 million (40 percent) above the monthly administration forecast in August. (August, it should be noted, is not a major collection month for either income tax.) The data suggest that job and wage growth in California has continued to be sluggish, but slightly positive, as projected.

The Bad News. The bad news is that, in order for the state to hit its overall budgetary targets for 2011-12, PIT, CT, and other tax receipts need to exceed monthly forecasts by $4 billion over the course of the fiscal year. This is because $4 billion was added to the budget plan by the Legislature and the Governor as an unallocated revenue increase (meaning it was assumed to be received by the state during this fiscal year, but was not allocated to particular tax sources).

The administration’s budget act forecast allocates $236 million of the $4 billion unallocated revenue increase to August. As described above, PIT and CT receipts were about $135 million above forecast. Accordingly, if SUT and all other General Fund revenues perform exactly as forecast for the month, overall General Fund revenues for the month will be about $100 million below the budget act target. Preliminary agency cash data concerning SUT will be received from the State Board of Equalization (BOE) in the coming days, followed by DOF’s monthly Finance Bulletin around mid-September.

In July, General Fund revenues were $541 million (9 percent) short of the monthly budget act forecast prepared by the administration, due to timing issues and the inability of revenues to keep up with the $229 million portion of the unallocated revenue increase attributed to July.

Methodology. The PIT and CT data above is based on daily Franchise Tax Board and Employment Development Department agency cash information. This data is preliminary and will change somewhat in the coming weeks as estimates for the month are finalized and reviewed. Only agency cash data—not “Controller’s cash” data—is used for state budgetary forecasting and reporting purposes. Agency cash differs from Controller’s cash (which is reported in the Controller’s monthly state cash flow statements) based principally on the timing of receipts. The monthly Finance Bulletin from DOF is the authoritative monthly source on General Fund budgetary revenues.

Source: http://www.lao.ca.gov/laoapp/budgetlist/PublicSearch.aspx?Yr=2011&KeyCol=457

There’s just no way of understating what Trigger can do:

LAO Report on Infrastructure Includes Higher Ed and UC

UCLA's Westwood Campus under construction in 1927

------------------------------------------------------

The Legislative Analyst's Office (LAO) has issued a report on state spending on infrastructure. Most infrastructure spending goes for programs other than higher ed such as K-12 and transportation. However, the higher ed segment of the report is reproduced below. Some portions of the text are in bold indicating they are of special interest. Note: There are some charts in the original that are not reproduced below. Go to the link at the bottom of this item to see the whole report including the charts.

Higher Education

California's public higher education system enrolls over 2 million students annually in three segments: the University of California (UC), California State University (CSU), and California Community Colleges (CCC). The three segments have approximately 150 million square feet of facility space, which include instructional space, faculty and administrative offices, and research space as well as dormitories, performance halls, athletic and recreational facilities, and other student support space. The specific mix of facilities differs by segment due to the distinct missions assigned to each. For example, UC has significant space dedicated to research because of its role as California's research university.

Funding Trends

From 2000–01 through 2009–10, we estimate the three segments spent about $41 billion on infrastructure. Support for higher education infrastructure comes from state and non–state sources. The state has traditionally provided infrastructure funding to support the segments' core academic missions. For CSU and CCC, this is mostly limited to instructional and administrative space, while the state supports those functions as well as research space at UC. The Legislature has direct control over state–funded projects because each is funded through an appropriation in the annual budget act. Through this process, the state spent $10.1 billion on higher education infrastructure in the last ten years. …The spending varied by segment, with UC receiving the most support.

State Support Almost Entirely From Bonds. Almost all of the spending from state sources was provided from bonds—with 80 percent coming from general obligation bonds and an additional 19 percent from lease–revenue bonds. Bond spending on infrastructure has more than doubled higher education debt–service costs over the last ten years, from about $516 million in 2000–01 to an estimated $1.1 billion in 2010–11. Most of the general obligation bond spending was from bonds approved by voters in 1998, 2002, 2004, and 2006. In general, the state provides less funding to higher education projects when the balance of general obligation bonds is exhausted. In the case of UC and CSU, the state typically offsets some of this reduction by funding some projects with lease–revenue bonds. Community colleges, in contrast, have not pursued lease–revenue bonds in recent years because repayment counts toward their Proposition 98 funding allotment (and therefore comes at the expense of other CCC programs).

Local Bonds Provide Significant Amount of Community College Funding. Few community college projects are funded exclusively with state funds. Local community college districts typically contribute part of the cost for state–funded projects and pay for many projects without state support. For example, districts may choose to build instructional and administrative space without applying for state funds. Additionally, districts must pay for non–academic space (such as parking garages) with local funds because such projects are not eligible for state funding. The primary source of this local financing is voter–approved bonds. Prior to 2000, local bond measures for educational facilities required two–thirds voter approval. Passage of Proposition 39 in 2000 lowered the threshold for approval to 55 percent. Since that time, voters have approved 86 percent of local community college bond measures and at least one bond measure in 65 of the state's 72 community college districts. In total, these bond measures authorized $22.8 billion for community college infrastructure. (Because these bonds are administered locally, we do not have complete data on how much of this bond authority was spent over the last decade. While some districts quickly spend bond proceeds, others plan for each bond measure to support the district's capital outlay program for 10 to 15 years.) Based upon available information, we estimate that CCC districts spent about $12.6 billion in local funds on infrastructure from 2000–01 to 2009–10—more than three–times the amount spent from state funds on CCC infrastructure.

Non–State Funds Provide Significant Amount of University Funding. The universities rely on non–state funds to support certain types of non–academic infrastructure that the state does not typically support. Non–state sources include fees for residence halls, parking fees for parking garages, and medical center revenues for medical center space. Students also periodically vote to increase student fees in order to pay debt–service costs for the construction of student support space such as student unions and recreational facilities. Overhead fees from research grants and gifts are also used to fully finance projects or augment state–funded projects. Over the last decade, UC spent about $13 billion and CSU about $4.5 billion of non–state funds on infrastructure.

Spending Outcomes

Segments Have More Space… Each segment has more space than a decade ago—UC's academic and research space increased by approximately 25 percent, CSU's academic and administrative space by 15 percent, and CCC's academic and office space by 19 percent. As projects funded in the last few years are completed and put into operation, the segments will have more new space.

...But Is That Space Sufficient? …The growth in space over the last decade has closely matched or outpaced enrollment growth. Each segment, however, indicates that its campuses are still operating above capacity and that the new space has not been able to accommodate new demands and address pre–existing space deficiencies. Even though minimal enrollment growth is expected in the next few years, the universities' five–year plans include projects to increase capacity for meeting "existing enrollment needs." Measuring whether the segments' amount of existing space is sufficient and appropriate is difficult. The segments measure capacity using space and utilization standards, which together determine the amount of academic space needed to meet programmatic demands. There is no consensus on the appropriateness and reliability of the standards for determining actual capacity. For example, CSU and CCC continue to use space standards that are over 30 years old, while UC uses more generous space standards developed in 1990, but never formally approved by the Legislature. Additionally, large amounts of space classified as nonstandard or "other space" are excluded from the capacity calculations. There are also some questions regarding the utilization standards, such as facility use during off–peak periods including evenings, weekends, and the summer term.

Investments in Existing Infrastructure Have Improved Some Facilities. Infrastructure spending on existing facilities has resulted in fewer seismically unsafe buildings at each segment as well as some updated facilities. For example, UC has retrofitted 74 percent of the space it identified as needing seismic upgrades since 1979. Renewal and replacement needs, however, are still significant. For example, CSU identifies 39 buildings requiring seismic retrofitting. Additionally, UC reports that over 50 percent of its state–funded facilities are more than 35 years old and CCC reports that 47 percent of its inventory is over 40 years old. As a result, the segments' facilities renewal needs are likely to increase as the systems in these buildings reach of the end of their useful life.

Identified "Needs" Continue to Grow. Despite the state's investment and the improvements described above, the segments' self–identified infrastructure needs are greater than ever. The segments' five–year plans identify state infrastructure spending exceeding $24 billion—in other words, the segment's five–year plans identify state spending that is more than double the amount spent over the last ten years. It is important to note, however, that the segments' plans include new initiatives to expand enrollment or create new programs and that many of the projects identified do not appear to be vital to the existing operation of the colleges and universities.

Issues for Legislative Consideration

Given other pressures on the state budget, the state likely will not have the resources to sustain the level of higher education infrastructure spending undertaken in the last decade, let alone the greater demand forecasted by the segments' five–year plans. In response to this challenge, the Legislature could consider other alternatives for addressing higher education's increasing infrastructure demand. Possible alternatives include reducing the demand for higher education facilities and targeting available resources to the greatest priorities.

Prioritize Spending to Most Critical Areas. The segments have identified infrastructure needs covering many purposes—including accommodating enrollment growth and initiating new programs. Given the state's limited resources, the Legislature could consider a more targeted funding approach that focuses on existing core academic facilities. Such an approach would be more cost–effective, stretching the state's spending further while encouraging the segments to use space more efficiently. Main elements of a prioritized spending approach could include:

• Focus on Renovation and Maintenance of Existing Facilities. The state could focus on ensuring that existing facilities are adequately maintained and fully utilized prior to constructing new facilities. As renovation needs alone will likely exceed the state's total resources for higher education infrastructure, the Legislature could consider significantly reducing—or eliminating—allocations for new space. Renovation projects typically cost less than new construction projects, and usually do not require additional ongoing resources for maintenance and operation.
• Reconsider Types of Space That Are State Supportable. The Legislature could also consider reducing the scope of space that the state supports. For example, state funding could focus exclusively on core instructional space—classrooms and limited faculty and administrative space. The Legislature could also require UC to take a greater responsibility for the funding of research space through the indirect cost reimbursements for facility expenses that are usually included in each research grant. The Legislature may also wish to reconsider state support of facilities for professional schools—such as business and law schools—which have a greater ability to raise outside funds. For example, the law school at UC Berkeley recently financed a $90 million addition entirely through donor gifts and student fees.
• Reconsider Level of State Support for Community College Infrastructure. As described above, the vote requirement for local bond measures was reduced to 55 percent and voters have already approved more than $22 billion in local bond measures for CCC infrastructure. In light of this improved funding capability by local districts, the state might want to reconsider the level of the state's responsibility to provide infrastructure funding for community colleges.
• Consider Policy Changes to Free Up Space for Critical Programs. The Legislature could also prioritize its programmatic support for higher education to create space for state priority programs. This could mean limiting support for professional schools or new initiatives in order to focus on undergraduate and graduate education. Or the Legislature could consider narrowing the core missions of the community colleges to exclude many physical education and other personal enrichment courses.

Segments Could Adopt Strategies to Reduce Infrastructure Demand. Adopting the above policies would represent a departure from current practices and encourage the segments to reconsider how they plan for and manage space. In our view, there are a number of reasons higher education's infrastructure demand could decrease. For example:

• Enrollment Pressure Expected to Ease. Demographic forecasts show a decline in the college–age population through the next decade. This should reduce enrollment driven pressure to expand higher education facilities. In addition, due to budget constraints, enrollment levels at CSU and CCC are well below peak levels from a few years ago. As a result, campuses have unused capacity to accommodate additional students as enrollment returns to previous levels.
• Utilization of Existing Facilities Could Improve. Each segment has unused capacity that could accommodate additional students. Virtually all campuses could accommodate more students during the summer term. …During the summer each segment enrolls less than 30 percent of the students enrolled during the traditional academic terms. In addition, some campuses could make fuller use of their existing space and accommodate more students during the traditional academic year by scheduling more early morning, evening, and weekend classes.
• Distance Education Could Reduce Demand for New Space. Distance education—education delivered mainly over the internet or television—also could reduce infrastructure demand. By educating online those students who would have otherwise attended class in person, the segments could reduce the need to build new infrastructure.
• New Initiatives Could Be Curtailed. The segments could also limit new off–campus centers, schools, and programs. There are often alternatives that could meet the goals of the new programs more efficiently or at a lower cost, such as increasing enrollment in existing programs or using distance–education technology to allow programs to share resources across campuses. Alternatively, the Legislature could require the institutions that establish a new program to eliminate, consolidate, or reconfigure existing programs in order to create space for the new priority program.

Complete report with charts at http://lao.ca.gov/reports/2011/stadm/infrastructure/infrastructure_082511.aspx