University of California, San Diego

July 28, 1994
For your information, below is a summary, released by the Office of the President, of part 1 of Provost Massey's remarks to the Regents related to the 1994/95 University of California budget.
Margaret F. Pryatel
Assistant Vice Chancellor
_ On an annual basis, State revenues are exceeding
expenditures and that is very good news for the long run. The problem is the accumulated deficit from the past--and that has been acknowledged and addressed in the budget that was recently signed. _ The State has adopted what is essentially a two-year budget
plan. The plan assumes that the $2 billion budget deficit that exists at the end of 1993-94 will be retired over the next two years, with $1 billion eliminated in 1994-95 and another $1 billion rolled over for elimination the following year. _ The 1994-95 State General Fund budget is $40.9 billion,
which is an increase of 4% over last year.
The budget now assumes $760 million of new federal money in 1994-95 instead of over $3 billion--although $2.8 billion is assumed for 1995-96. _ The budget has been balanced largely through cuts to health
and welfare programs, the counties, and State government. Education is generally protected; prisons receive a large increase. _ The budget also reflects some decisions on tax issues: The
renters' credit is suspended through fiscal year 1995-96; higher tax rates for high-income individuals are allowed to sunset in 1995-96.
_ Despite adoption of a balanced two-year budget plan, the
State of California must borrow $7 billion to address a cash flow problem. In order to satisfy lenders, who are insisting that they be protected in the event the State's cash condition deteriorates further, a trailer bill to the budget bill includes a mechanism that could lead to automatic budget cuts. Language in the trailer bill sets forth the following process for 1994-95:
_ On November 15, 1994, the State Controller will report
on the cash condition of the State General Fund. _ By January 10, if the Controller's report has
identified a cash problem greater than $430 million, the Governor must propose legislation to reduce expenditures, increase revenues, or both.
_ By February 15, if the Legislature has not enacted this
or similar legislation, automatic budget cuts will be triggered. _ Constitutionally protected programs such as K-14 education
are exempted from the automatic cuts; debt service and expenditure items required by federal statute are also exempted. All other State-funded programs, including UC and CSU, are included. _ Under the circumstances, prudent management requires the
University to establish a budget plan that recognizes the fiscal uncertainty.
_ We propose, therefore, to make salary actions related to the
COLA contingent on there being no mid-year budget cut.
_ We propose to make the fee reduction similarly contingent.
_ If we get safely past the trigger point in 1994-95, we still
have to face the same uncertainty in 1995-96, when the process is due to repeat itself. On the other hand, a year from now there will be a new and different budget for 1995- 96, and there is reason to hope that the State's fiscal situation may have improved by then. _ The impact of the trailer bill language on UC's budget is
something we can only speculate about for the moment. The State's fiscal condition could change significantly over the next several months: revenues could decline; expenditures for prisons and health and welfare programs could rise; natural disasters could occur. Many informed observers in Sacramento, including the Department of Finance, do not believe the trigger will be pulled. They believe, first, that the problem will be no worse than $430 million, in which case no action is required; but that if it is worse, then the Governor and Legislature will work out some mutually agreeable plan. Given the history of the past several years, however, it is certainly within the realm of possibility that the State's fiscal condition could deteriorate beyond anyone's current expectations and that agreement about what to do would not come easily. _ To give you some idea of what could happen, one pessimistic
scenario is this: If the State's fiscal condition is $1 billion worse in November than is now assumed, the first $430 million would be cushioned from a cut. For the remainder of the problem, if the Governor and Legislature agreed to a plan, there is no way to predict what UC's share might be. However, if the trigger is pulled and automatic cuts go into effect, UC's share of the problem would be a $44 million cut in mid-February. _ I will provide the details of our proposal to deal with such
a contingency as I review the University's 1994-95 State- funded budget. _ The Regents' January budget plan remains largely intact
with respect to what we can spend. The Budget Act provides an increase of about $101 million, which is approximately $10 million less than The Regents' plan. About $5 million of the difference relates to changes in the salary COLA and the remainder is essentially a reduction in the general operating budget.
_ There are significant differences in the way the budget is
funded, however. The budget now includes a lesser amount of both State General funds and student fee income, but a new funding source has been added: revenue bonds for deferred maintenance.
_ Student fee income, net of financial aid, has been
reduced from over $60 million to about $38 million. _ However, State revenue bonds for deferred maintenance
now provide $25 million of funding for the budget--a source not contemplated in the Regents' plan.
_ If you include State General funds, student fee income net
of financial aid, and revenue bonds for deferred maintenance, the University's 1994-95 budget increase is 4%- -the same as the increase in the State of California's General Fund budget. _ Under the two-year budget plan, UC is tentatively projected
to receive a more normal budget increase next year. _ The major changes to The Regents' January budget plan
involve the timing and amount of the salary COLA and the level of student fees. _ With respect to student fees, we were fortunate in being
able to reach an agreement with the Governor and the Legislature that would allow us to lower next year's fee increase while also meeting our basic needs as set forth in The Regents' budget plan. _ The final budget is built around a compromise that involves
a shift of deferred maintenance costs from the University's General Fund budget to State revenue bonds. General funds released by the cost shift are used to substitute for student fee income, thereby allowing a reduction of the fee increase from $620, as approved by The Regents in January, to $345 per year, or from 18% to 10%. An item seeking your approval of this reduction has been presented. _ With your approval, we will be in a position to implement
this action as soon as it is clear that there will be no mid-year budget cut. Alternatively, if the Controller's November 15 report indicates the possibility of a mid-year budget cut, we will return to The Regents at the November meeting with a revised proposal. In our discussions with the Governor and the Legislature, we have consistently made the case that student fees can only be reduced if The Regents' budget plan remains essentially intact.
_ I should note that the process of collecting fees for the
fall quarter and fall semester began some time ago, and that we have been charging the higher fee level approved in January. We were not in a position to reduce fees until the State budget was signed and we had your approval. Students who have already paid the higher fee level will be compensated through a fee reduction in the winter and spring quarters and the spring semester, with financial aid adjusted as appropriate--again assuming no mid-year cut. _ Whatever the fee increase, financial aid will be provided to
help maintain access for needy students. The budget approved by the Legislature and signed by the Governor provides for a financial aid increase equal to 33% of new fee income, which is the historic proportion. The budget also fully funds Cal Grants for eligible UC students, assuming a 10% fee increase.
_ The Legislature generally approved UC's long-term policy
regarding professional school fees, but expressed intent that fee increases should be distributed equally across both new and entering students. This would mean a 1994-95 fee increase of $600 for all students rather than $2,000 for new students only, as approved by The Regents. The amount of revenue generated is the same either way; the issue is one of phasing. We are currently reviewing the issues involved and plan to return to The Regents with a multi-year phasing plan later this year. For now, however, we are not recommending any changes from the fee level already approved by The Regents for 1994-95.
_ With respect to faculty and staff salaries: The Budget Act
includes funding equivalent to 3% of salaries for range adjustments, or COLAs, effective October 1, 1994, and 2% of salaries for merit increases effective July 1, 1994, for faculty and January 1, 1995, for staff. _ The Governor's Budget and The Regents' January budget plan
both proposed funding for a 5% COLA on January 1, 1995. The change to 3% on October 1, 1994, reflects the Legislature's concern, which we shared, over the cost of annualizing the COLA the following year. While the change makes a difference of only about $4.6 million in 1994-95, it reduces the 1995-96 annualization cost to $13 million, which is substantially less than would have been required under the original plan.
_ The salary COLA provided in the Budget Act represents the
first such increase for faculty and staff in four years. Even with a 3% COLA and merit increases, our faculty salaries are projected to lag more than 9% behind salaries at our comparison institutions; a similar market lag is projected for staff salaries, on average. Moreover, State of California employees will have received an 8% COLA--5% in January 1994 and 3% in January 1995. For all of these reasons, faculty and staff salary increases are a high priority.
_ Although we have developed a salary plan, implementation is
contingent on there being no mid-year budget cut. Implementation is also subject to appropriate notice to employees and collective bargaining requirements under the Higher Education Employer-Employee Relations Act.
_ If we learn by November 15 that there will be no mid-year
budget cut, we will implement payment in January, retroactive to the effective date of the salary increase, as appropriate.
_ Effective dates of these salary increases, and timing of
payments, will vary among personnel programs because some require merit-based increases only while others separate merit increases from COLAs.
_ Let me note that with respect to executive compensation, the
Budget Act reflects the University's agreement that senior executives such as the President, Vice Presidents, Chancellors, and Principal Officers of The Regents will receive no increase next year. For other members of the Executive Program, the Budget Act provides funding for merit salary increases averaging 1.25%. These increases will be effective October 1 but, as for other employees, will not be paid before January--and then only if there is no budget cut. _ In the event a mid-year budget reduction does occur, we are
nonetheless committed to implementing the merit fund portion of the salary plan for eligible staff employees other than executives. _ Eligible faculty have already received a merit increase
beginning July 1, 1994. It is anticipated that the effective date of any faculty range adjustment, or COLA, will be delayed for several months, subject to appropriate notice and other obligations under HEERA, in order to generate funds that will be used to make a one-time payment to eligible academic employees that is equivalent to the academic merit increase that was awarded in 1991-92 but not funded until 1992-93. The Academic Council recommended and continues to endorse this plan, and we have previously discussed it with The Regents. _ As usual, salary actions for exclusively represented
employees are subject to the terms of the applicable collective bargaining agreement.
_ Again: Implementation of our salary plan depends on what we
learn on November 15. If there is the possibility of a mid- year budget cut, we will develop an alternative salary plan- --depending upon the magnitude of the cut.
_ On the subject of UC's teaching hospitals: During budget
negotiations, we reached an agreement to shift $18 million of State-funded Clinical Teaching Support from our hospitals to the University's general operating budget on a one-time basis. Clinical Teaching Support, or CTS, constitutes traditional State support of the hospitals that is intended to ensure a medically diverse patient population for teaching purposes. The one-time shift of CTS to other purposes recognizes temporary net gains at the hospitals as well as an urgent need for funds elsewhere. Under the agreement, the shifted funds are to be used to help meet one-time needs in several critically underfunded areas-- deferred maintenance, instructional equipment replacement, and library books.
_ Although the shift temporarily reduces CTS from $50 million
to $32 million, our hospitals receive additional State funds from SB 855, which appropriates funds to hospitals that provide a disproportionate share of care to Medi-Cal and low-income patients. UC hospitals are estimated to receive approximately $45 million from SB 855 in 1994-95.
_ We have agreed with the Legislature that we will study the
hospitals' needs for working capital, capital outlay and equipment, as well as a prudent reserve, and that we will develop a proposal specifying net gains that the hospitals must retain in order to fund these needs. There has been continuing controversy on this point over the past two years.
_ Depending upon the conclusions reached in our report, there
could be another one-time shift of Clinical Teaching Support funds from the hospitals to the general operating budget next year.