SUBJECT:

94/95 Budget - Provost Massey's Remarks #1

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

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

REGENTS' MEETING                PRESIDENT J. W. PELTASON
SAN FRANCISCO                 PROVOST WALTER E. MASSEY
JULY 14-15, 1994

            University of California

          1994-95 BUDGET OUTCOME

            (PROVOST MASSEY)

_  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.