SUBJECT:

UC State and Federal Budget

For your information, the following are President Atkinson's and Associate
Vice President Larry Hershman's remarks related to the 1996-97 State budget
and the Federal budget.

If you have any questions concerning this notice, please call Robert Brents
at 534-3619.

Margaret F. Pryatel Assistant Vice Chancellor

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President Atkinson and Associate Vice President Larry Hersman made the
following remarks today (May 17), regarding UC's state and federal budgets,
at the Regents meeting in San Francisco.

Mike Lassiter
Director, News & Communications

REGENTS' MEETING         PRESIDENT RICHARD C. ATKINSON
MAY 17, 1996
SAN FRANCISCO

BRIEF REPORT ON STATE AND FEDERAL ACTIONS
RELATED TO THE UNIVERSITY'S 1996-97 BUDGET

We want to update you briefly on the events taking place in Sacramento and
in Washington as they affect the University's budget.

At the State level, we have been participating in Assembly and Senate budget
hearings for the last two months and they have generally been going very
well. The Governor is expected to release revised revenue projections and
budget changes next week.

At the federal level, agreement was reached on 1996 funding levels for those
agencies whose regular 1996 appropriations bills were not previously
enacted. These include many of the federal programs of greatest importance
to the University. The agreement deals only with the current fiscal year --
which began seven months ago. There is no agreement on a longer term
budget plan on how to balance the federal budget within 7 years. This
remains of concern to us because of the implications for the University.

I would like Associate Vice President Hershman to address the details of the
1996-97 State budget and the federal budget.

ASSOCIATE VICE PRESIDENT HERSHMAN

1996-97 STATE BUDGET

As President Atkinson indicated, the Governor is expected to release the May
Revisions to the budget next week. The May Revisions will include an
updated projection of State revenues, which for the first three months of
the year have been consistently higher than projected. We remain optimistic
that revenues for the current budget year, and next, will exceed the
projections included in the Governor's January budget.

The May Revise will tell us also how the Governor proposes to spend any
additional revenue. Under the constitutional requirements of Proposition
98, over half of any increase in State revenue will go to K-12 schools.

While we are pleased with the trend in revenues, there are major issues to
be resolved. The Governor has made a number of statements suggesting the
potential need to reduce the budget he proposed in January.

The context for these statements is important.

The Governor's budget is dependent on a number of actions occurring at the
State level and at the Federal level. These include actions such as
permanent elimination of the renter's credit; reductions in health and
welfare programs; increases in federal funding related to illegal
immigration; Medicaid reforms; federal welfare reform. The Governor also
has proposed a 15 percent reduction in individual and business taxes to be
phased in over three years. To date, many of the outcomes upon which the
Governor based his January budget have not materialized.

The subcommittees in each house still have much work to do.

Generally, the Senate and Assembly seem headed toward supporting different
priorities. While we, at this time, anticipate the Assembly budget looking
much like the Governor's proposal the Senate budget is likely to focus on
different priorities. The Senate seems inclined to support lesser cuts in
health and welfare and is unlikely to support the Governor's full tax
reduction proposal. The Senate is likely to augment the budget for selected
programs during the subcommittee process.

We expect the subcommittees to finish their work by the end of next week as
is normal. Action will then shift to a joint Assembly-Senate conference
committee and negotiations among the leadership.

Major differences between the Senate and the Assembly will be resolved
during the conference committee. We remain hopeful that there will be a
State budget in place by July 1st.

With respect to the University's budget -- the subcommittees have been
holding hearings since late February. Generally, the hearings are going well.

In addition to supporting the Governor's January budget (honoring the
compact and buying out the proposed student fee increase), the Senate budget
subcommittee has augmented our budget as follows:

-- $5 million to increase funding for President Atkinson's initiative to
expand Industry-University Cooperative Research Programs. The President
previously indicated his intent to provide $3 million to launch this program.

-- $7.5 million to increase building maintenance with the expectation that
the University will develop a multi-year plan to address the serious
problems of deferred maintenance.

-- $4 million to expand University outreach efforts to develop and
strengthen the academic skills of students in K-12 and the community
colleges in preparation for admission to UC.

-- $2 million for the Drew University of Medicine and Science program which
is run in conjunction with the School of Medicine at UCLA.

The Senate budget subcommittee also adopted supplemental language requesting
that a statewide work group be created to develop a plan to deal with the
financial problems facing the University's teaching hospitals. The work
group also would address options to pay for the costs of providing a medical
education in a clinical setting.

And, finally, the subcommittee augmented the CalGrant budget by $10 million.
This is in addition to the $10 million increase proposed in the Governor's
January budget. Almost $5 million would be used to backfill federal cuts.
The remaining $15 million would be used to increase the level of grants as
well as the number of grants.

While the Assembly budget subcommittee has held many hearings, they have not
yet taken any actions to change the original Governor's budget.

We will keep you posted at the June and July Regents' meetings.

I want, now, to make a few brief remarks about the current state of play in
Washington regarding federal funding for the programs that provide support
to the University.

FEDERAL BUDGET

It wasn't until just last month, seven months into the current fiscal year
and after two unprecedented federal government shutdowns, that Congress and
the White House agreed upon the 1996 funding levels for many of the federal
programs of greatest importance to the University.

As we discussed at the January Regents meeting, what held up final funding
decisions for these programs was a fundamental debate between Congress and
President Clinton on how to balance the federal budget. The outcome of this
debate has been an agreement to balance the budget in seven years. There
has also been agreement to use the Congressional Budget Office estimates as
a basis for planning. The plan will include reductions in the growth of the
Medicare and Medicaid programs, welfare, and in domestic discretionary v spending as well as some tax relief.

No agreement was reached on the level of reductions; or the trade-off
between cuts in programs and tax relief. And, major differences remain on
whether to provide block grants to states for Medicaid and welfare programs.

The University remains very concerned about the unresolved issues
surrounding entitlement program reforms. Substantial savings from these
programs is an integral part of the plan to balance the budget in seven
years. Therefore, if an eventual agreement on entitlement reforms is
reached that does not yield enough savings, there will be pressure to
further reduce domestic discretionary spending, the portion of the budget
from which UC gets most of its federal funds.

The final funding picture for fiscal year 1996 shows little growth in
overall federal support for research. The National Institutes of Health was
the only major research agency to receive an above inflation increase, at
nearly 6 percent over last year's funding level. The National Science
Foundation, Department of Defense, and Department of Energy each received
below-inflation increases for research, as well as suffering substantial
cuts to some specific programs. Funding for the National Endowment for the
Arts and the National Endowment for the Humanities was reduced by almost 40
percent. These cuts are significant since the two programs are the single
largest source of support for arts and humanities activities nationwide.

Both the Congress and the President are committed to reductions in domestic
discretionary program spending in order to balance the budget in seven
years. As a result, for planning purposes, we are assuming a continued
trend of flat funding for basic research during this period. When estimated
inflation is taken into account, this means there could be a reduction in
purchasing power of as much as 25 to 30 percent.

Overall, student financial aid funding is held to relatively flat levels.
Most campus-based aid programs were frozen at 1995 levels. Funding for many
graduate fellowship programs and some of the smaller student aid programs
were consolidated or eliminated in favor of maintaining funding levels for
the need-based programs. A slight increase was provided to raise the
maximum Pell Grant award from $2,340 to $2,470, and no changes were made to
the Direct Student Loan Program, in which eight of our nine UC campuses are
participants.

Since there was no agreement reached on Medicare and Medicaid program
reforms, there were ultimately no significant changes in the policies
dictating the funding received by our teaching hospitals.

For 1997, we expect a debate over balancing the budget similar to the one
this year. The President's 1997 budget request adheres to a seven-year
balanced budget path, including reforms in entitlement programs and
reductions in discretionary spending, and follows many of the funding
outlines set during the budget negotiations last winter.

The budget request proposes a 1 percent overall increase for
University-based research, which is well below the rate of inflation.
Within the total proposed funding, some research programs do considerably
better than others. NSF research receives an increase nearly double the
rate of inflation. The Department of Energy and Environmental Protection
Agency research both receive increases slightly above inflation. On the
other hand, funding for research at the Department of Defense and NASA is
relatively flat while funding for NIH is held at just below inflation levels.

The President's request for student financial aid continues to place a
priority on the need-based aid programs and takes the majority of cuts
needed to balance the budget from the student loan lending community. The
budget request also continues the trend from grants to loans as the primary
means for assisting students with their college educations. The President
again proposes to increase the Pell Grant maximum award and to further
consolidate or eliminate funding for many smaller aid programs, including
the State Student Incentive Grant program which provides some support for
the State's Cal Grant Program.

The budget request includes little detail on funding for the Medicare and
Medicaid programs. The President proposes to reduce the rate of growth for
Medicare and Medicaid spending over seven years at the same level of
reduction proposed in earlier budget negotiations with Congress. Congress
has also signaled its intent to introduce a series of budget related bills
later this year, two of which will address reforms in the Medicare and
Medicaid programs. We will keep you informed as details of these proposals
become clearer.

Congressional reception of the President's budget request has been
predictably cool; and Congress will soon come out with its own version.

It is difficult to project, with any certainty, the outcome of the federal
budget debate this year. This is a presidential campaign year and budget
issues are highly politicized already. This volatility is likely to yield
dramatic debates that may cause some of the fundamental decisions regarding
the course of federal funding to be put off until after the November
election; thus becoming the work of the next Congress.

I would be happy to answer any questions after President Atkinson's closing
remarks.

PRESIDENT ATKINSON

Before concluding this presentation, I want to thank all the members of the
University community--including Regents, members of the President's Office,
Chancellors and other members of the campuses, and alumni-- who have been so
instrumental in helping our Washington office present the University's case
during the many long and difficult discussions that have been occurring with
regard to the federal budget negotiations. I will now turn to Vice
President Baker to talk briefly about these efforts.