To better understand the impact of the state's declining fortunes on UC and UCLA, and what may lie ahead, UCLA Today editor Cynthia Lee talked with Vice Chancellor of Finance and Budget Steven A. Olsen, who is monitoring negotiations as the Assembly and Senate work on a compromise budget and is consulting with academic leaders as they await the final outcome.

Q: Does it appear that the Legislature will adopt Gov. Davis' May Revision?
A: As of late June, both houses and the conference committee have accepted the governor's proposed budget cuts. So we can expect the state is going to eliminate about $120 million in funding from UC's budget. Fortunately, the reductions affect proposed new funds, not existing funding. About $90 million in this funding would have been permanent while $30 million would have been one-time funding. That $90 million amounts to 3% of UC's $3-billion state funding.

We hope that there will be no further reductions, but the governor and key legislators are asking for higher state budget reserves. If the Legislature agrees, they will have to find that additional money somewhere.

Q: Doesn't the Partnership Agreement protect UC from budget cuts?
A: No. Given the state's economic problems, it is not in a position to meet the terms of the partnership. State revenues have already begun to shrink because of lagging economic growth, reduced personal income and the effects of the stock market. We're now looking at an economic slowdown in California that may last a couple of years. The state is in this predicament primarily because its revenue base has been excessively dependent on the taxation of capital gains and stock options. But the technology bubble has deflated.
The Department of Finance is forecasting a 4.1% reduction in state revenues next year. So the state is going to have to reduce spending. While many state programs are protected by law, such as K-14 education and federally mandated health and welfare programs, the university is not. It has to rely on political support and the political process. The Partnership Agreement has been a key element of that support. But when there is a very sharp downturn in state revenues, UC remains vulnerable.

Q: How does this impact UCLA?
A: We are now in the second year of the four-year Partnership Agreement, in which the state agreed to provide new funds to cover enrollment growth, to maintain student fees at their current levels and to provide other increases, most notably a 4% increase in our base budget, which covers range and merit increases for faculty and staff as well as other costs, such as the increased cost of health benefits. That 4% increase would have amounted to about $120 million for UC. In his May Revision, the governor reduced that to a 2% increase. That's a loss of around $12 million for UCLA.

As it now stands, the total pool of money available for range and merit increases for faculty and staff is likely to be no more than 2%. That is about the best outcome we can expect at present. That's not the level of increase we'd like to see to stay competitive in recruiting and retaining faculty and staff, especially in light of enrollment growth and anticipated faculty turnover. UCLA needs to hire nearly 1,000 new faculty members over the next 10 years, more than 700 to replace those who retire or leave and about 220 new faculty.

The reduction from 4% to 2% also means that a few key programs will lose funding. I'm most concerned about a program initiated by the Office of the President to provide additional teaching resources to improve undergraduate instruction. We allocated $690,000 this year to the College of Letters & Science, which has put those funds to good use to further develop and expand its General Education Initiative. We had hoped for additional funds over the next several years to continue that process. Now it appears that money is gone.

The partnership also provided for a 1% increase in base funding for core needs, for instructional equipment, instructional technology, maintenance and libraries. That was eliminated, representing a $30-million loss systemwide and a $5.7-million loss for UCLA in permanent funds. The May Revision also eliminated $20 million in one-time monies for these same items, of which UCLA would have received around $4 million. The loss of these funds will hurt.

Q. How does Davis' budget proposal affect research initiatives?
A: Fortunately, the governor's proposal continues the second installation of $100 million in total funding for construction of the California NanoSystems Institute. Davis has been a strong supporter of this program, a central component of our research strategy. These funds will be used to construct two buildings on campus, one in the Court of Sciences and the other as a component of the Engineering 1 replacement, as well as a new research building at UC Santa Barbara, our partner in this project.

But UC lost $10 million in one-time funds, not required by the Partnership Agreement, for engineering and computer- and environmental-science research. The money would have essentially covered start-up costs, not ongoing research costs. The governor's revised budget proposal also cuts $5 million in permanent funds for K-12 professional-development institutes and $1.5 million in proposed new funds for graduate and professional outreach.

Q: Is there any good news in the governor's revision?
A: The good news is that bad things didn't happen in certain critical areas. A key UC initiative to obtain state funding for Summer Sessions remains intact. UCLA received $5.1 million this year to reduce summer fees. We expect to receive an additional $5.9 million next year so that Summer Sessions can continue to grow.

The budget continues to provide UC with $65 million to support enrollment growth of 7,100 students. UCLA has requested funds for 800 new student FTEs, many of whom will be attending this summer. That's a key source of new money to hire new faculty and to provide more support for our instructional costs. It is clear that expanding undergraduate access is the Legislature's primary focus right now. The Legislature especially wants UCLA and UC Berkeley to maintain and expand access to undergraduate instruction.

The May Revision also contains $100 million in funding to help campuses pay for energy costs and capital projects to reduce peak-period electrical demand. We've had huge increases in our energy bills, primarily due to the cost of natural gas to run the cogeneration plant, which generates 80% of our electricity. By the time June 30 rolls around, we will have overspent our budget for natural gas purchases by about $28 million. We don't have funding for that, so the $100 million will be a welcome relief, although we don't yet know how much of that UCLA will receive.

Q: What lies beyond the next fiscal year for us?
A: I'm concerned that this may be the first in a series of tough years ahead for the state and the university. For 2002-03, the regents will most likely ask that funds be restored to the levels in the Partnership Agreement. But no one knows whether or not the state will be able to do so in the foreseeable future.

The other wild card is the energy situation. The governor's budget strategy is predicated on the successful sale of state bonds in August to repay the General Fund for the cost of energy purchases the state has been making on behalf of utilities since January.

It's clear that the campus faces some tough choices. We've experienced several good years in a row during which we have been able to support a number of local initiatives. Over the next several years, however, we're going to have to concentrate instead on funding campuswide priorities, such as our libraries, support for graduate students and our development program to continue Campaign UCLA.

At this point, I don't foresee a repeat of the early '90s when severe cuts were made to UC's budget. What happened then was the result of some very fundamental restructuring of the state's economy, largely due to sharp reductions in prime defense contracts awarded to California firms.

Notwithstanding California's current technology and energy woes, most economists believe the state's economy remains fundamentally strong.