May 30, 2008 4:03 PM

UCLA prepares for budget cuts of 5% to 10%; Leaders explain root of funding problem

As state legislators clash over how to resolve a projected $15 billion to $16 billion shortfall, leaving a cloud of uncertainty over the 08-09 state budget, the ultimate impact on UCLA's own budget is still unknown.

The battle in the Senate and Assembly — and the requirement for a two-thirds majority in each house to pass the budget — is very likely to be a protracted one as the Democrats dig in their heels against tax cuts to the neediest in the state while the Republicans pledge to fight tax increases.

"So you have gridlock," explained UCLA Assistant Vice Chancellor Keith Parker, head of government and community relations, during an information-packed Town Hall meeting hosted May 29 by Staff Assembly at Lenart Auditorium in the Fowler Museum. "You've got to have some movement toward the center by both Democrats and Republicans." And that won't be easy to achieve.

But UCLA will not wait for the legislative gridlock to break, said Vice Chancellor Steve Olsen, the senior administrator in charge of finance, budget and capital programs and chief financial adviser to Chancellor Gene Block.

"Notwithstanding what happens in Sacramento, we're going to make timely decisions on the budget," Olsen told the Town Hall audience. "We have found ways of planning around the uncertainty regarding state funding. We tend to be conservative and hedge against the possibility that the outcome will be more difficult than we would hope."

More than 200 staff members received a detailed update about what's happening in Sacramento from Parker and Olsen, who also gave their perspectives on why state revenues are inherently unstable, why state funding — although declining — is so critical to UCLA and how staff members can influence the final budget outcome.

Since January, when Gov. Arnold Schwarzenegger announced his intention to cut UC's budget by 3%, leaving the system $417 million short of its own budget request, UCLA's deans and vice chancellors have been conferring with Olsen. He has advised them to prepare to pare down their budgets by 5% to 10%.

"We have a lot of information as to the potential impact of those reductions," he said. In addition to the chief financial officers and CAOs on campus, his office has consulted broadly with faculty, student and staff leaders. Since UCLA operates in a relatively decentralized manner, Olsen said, "it's not a decision that is made entirely in the Chancellor’s Office."

One of the most challenging problems UCLA faces is how to find revenue to pay for the increase in students that will be admitted this fall following a systemwide decision to impose no limits on enrollment, even though the governor offered no funding for additional students.

Final decisions on reductions have not been made, Olsen said. "But we will be communicating to the deans and vice chancellors budget decisions on or around July 1." Information will be entered into the campus budgeting system in August.

There has been no "plan, interest or discussion involving salary reductions," explained Associate Vice Chancellor Lubbe Levin, the head of Campus Human Resources, in response to a question from the audience.

WHY THE STATE IS IN TROUBLE

The boom-or-bust cycles that have caused so much turmoil in state funding stem from a number of problems that contribute to instability, Olsen explained. Take, for one, California's general fund revenues, which offer the most flexibility to address priorities in the budget. They total an estimated $103 billion for 2008-09. "What we've seen in the last six to nine months," noted the budget chief, "is the beginning of a significant contraction of state revenues that are derived from the income tax."

Here's why:

Personal income tax, which makes up more than 51% of general fund revenues, is based on a formula that dictates that the smallest number of high-income taxpayers pays the largest amount of personal income tax.

These taxpayers "don't derive most of their income from wages and salaries," Olsen said, but from business income, stock market earnings and stock options, among other sources. "And that income tends to be very volatile. The way I like to describe this is: When California's economy sneezes, the state treasury gets pneumonia."

The price the state pays for structuring personal income tax this way is that state revenue can fluctuate widely as it did in the '90s with the technology boom and bust that "had a catastrophic effect on state revenues," Olsen explained.

These fluctuations, along with the fact that the state sales tax is based on a revenue source that has not grown as much as the overall state economy, puts the state's revenue system on shaky ground.

"This is a weak revenue structure from the standpoint of being able to generate revenues in a consistent manner," Olsen said. "Anytime there's a change in economic circumstances, it's magnified greatly in the way that the state collects revenue."

WHY HIGHER EDUCATION IS VULNERABLE

California has expenditures of roughly $100 billion, 75% of which is earmarked for local school districts and governments, Medi-Cal providers and low-income individuals, among others, leaving 25% to support such entities as state offices, prisons and higher education.

The largest share of the money goes to K-12 education (41%) and health and human services (29%), and legislators have very limited control over what’s spent in these areas, Olsen said.

Proposition 98, approved by voters, provides a funding guarantee for K-14 education (90% of which goes to K-12) so that the first 41 cents out of every dollar in the state general fund go to support these programs, which account for the most costly item on the state’s tab.

The second largest slice goes to health and human services, most of which are administered in conjunction with the federal government. "Generally these programs are entitlement programs, which means if you qualify for services, then the state does not have the ability, when revenues are falling short, to reduce the services available or to decide that you are not going to receive these services," Olsen explained.

California's prison system is an area, like higher education, where legislators have more control over funding. But in reality, this expenditure has doubled over the last decade, from 5% to 10%, due to a number of reasons. Not only have lawmakers passed stricter sentencing laws that have increased the prison population, but the bargaining units representing correctional officers have a powerful voice in Sacramento.

"It used to be that higher education received significantly more in support than corrections," Olsen observed. Now they are on equal footing, with UC and CSU receiving 3% each and community colleges 4%.

In contrast to K-14, the budgets for UC and CSU lack protection under state law. Instead, higher education leaders depend on a compact agreement with the governor to help protect its funding. But that compact is a "handshake" agreement, not a contract, Olsen said.

What happens with higher education's funding ultimately depends on the ability of leaders in the university community — faculty, staff, students and supporters — to "persuade our elected officials of the priority of higher education, compared to other priorities in the budget," Olsen noted.

STATE FUNDS SHRINKING, BUT STILL CRITICAL

Over time, state funds to UCLA have dwindled to the point where they now account for only 13% of UCLA's total revenue, which stands at $4.05 billion in 2007-08. "When I came here, I was certainly surprised to learn that," Olsen told the audience. "I would have thought perhaps just about half, or certainly no less than a third of the money came from the state."

While state funding has shrunk, it is still vitally critical to the operation of the campus. The money pays for faculty salaries, basic operation of all academic and administrative departments (from the philosophy department to the police department) and other core necessities that rely on this revenue.

"The state funds are what make UCLA go," Olsen said. "It is a vital core of what makes UCLA possible as a public university." That critical piece of revenue enables the university to leverage other revenue sources, such as contracts and grants, sales and services, and the UCLA Medical Center, UCLA's largest source of revenue.

While private universities rely on large endowments and higher tuition for such support, UCLA's endowment is much smaller. "And the overwhelming majority of our endowment is restricted," he said, and can’t be used to support the general operation of the university.

EMPLOYEES' ROLE IN THIS BUDGET PREDICAMENT

Parker called on staff members to write a personal letter to tell their state legislators how critically important UCLA and UC are to California's economic recovery and economic growth.

The latest economic impact report shows that for every $1 the state invests in UCLA, $15 in economic activity occurs, he said. "That’s a $9.3 billion overall economic impact on the Los Angeles area from our spending. … We've made the argument [to state lawmakers] that we're giving you a tremendous return economically … in terms of ideas [and] innovation that stimulate new businesses, that help existing businesses grow." UC also serves as a pipeline for an educated workforce for California's future, he said.

"We can't be silent," Parker urged. "We have to continually reach out and reinforce our messages." The final budget will evolve from negotiations among the "Big Five" decision makers: two Republican leaders in the Senate and Assembly; the speaker of the Assembly and the president pro tem of the Senate, both Democrats; and Schwarzenegger.

"If you live in Culver City, Baldwin Hills, the Crenshaw area — your Assembly person is Speaker Karen Bass. She's a member of the Big Five. All of us who work here at UCLA work in the 47th Assembly District," her district, Parker noted. "She represents us. The Assembly speaker needs to hear from us in terms of the value that public higher education provides, particularly UC. We're the biggest employer in her district. We generate more economic output than any other entity in her district. We are her General Motors, her Ford."

To find out who your representatives are, Parker advised, go to advocacy.ucla.edu and put in your home zip code in the "Write Your Legislators" box.

"In the Los Angeles area, we have a number of key members that are going to be engaged in those decisions that get made at the end of the day," Parker said.

The letter you write, he said, should "start with the important line: 'I'm a constituent of yours. I work for UCLA. … We're an engine that helps to stimulate the economy.'"

Also from the advocacy Web site, you can join Bruin Caucus, UCLA's advocacy organization, presenting opportunities to advocate on behalf of UCLA at the annual UCLA Day at City Hall, UCLA Day in Washington D.C., UC Day Conference in Sacramento and other events.

1