Phony Budget Solutions Are Suffocating the Public University

Destructive cuts in health and education are being imposed in 46 of the 50 states, creating unnecessary misery and delaying economic recovery.
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American politicians seem to have replaced Keynes, the economic theorist of stimulus, with Herbert Hoover, the disastrous Depression prophet of austerity. Destructive cuts in health and education are being imposed in 46 of the 50 states, creating unnecessary misery and delaying economic recovery.

Unfortunately for the majority of voters who want to maintain public investment in health and education, austerity has become the foolish wisdom of both parties. The Democratic governor of California, Jerry Brown, is cutting at least as deeply as his Republican counterparts in other big states, and with the same absence of developmental vision. Enormous cuts are directed at that cornerstone of upward mobility for working- and middle-class people, our public colleges and universities. Texas is cutting 5%, George 7%, New York 10%, Washington 26-30% over two years, and California is cutting 16% this year after a 20% cut in 2008-09.

Sacramento is hardly different from the rest of the country. Although the Democrat-controlled state Senate budget committee opposed many of Jerry Brown's proposed cuts in various essential public services, they accepted Brown's $500 million cut for University of California and California State University, plus $400 million more carved from the community colleges. Why does higher education do so much worse than other segments (Display 6)?

Health care advocates reversed some of their cuts in legislative committee by laying out the full extent of the damage cuts would cause. One committee's own chair warned that a cap on the number of prescription drugs Medi-Cal patients would make the committee a "death panel." Closing health centers for the elderly would fracture families, another group proclaimed. Medical advocates brought regular Californians to legislative meetings to lay out the concrete human impacts of the cuts.

UC's state budget has long grown more slowly than any other public segment, and the state had already slashed public investment in UC students by half even before the Schwarzenegger and Jerry Brown rounds (also Display 13). So you would think that public colleges and universities could roll back at least part of this latest thoughtless whacking of a few more branches off the tree of knowledge.

UC president Mark Yudof did provide the legislature with eloquent testimony of likely damage of further cuts, and set up a website allowing citizens to express support for education. But higher ed leaders do not define instruction and research as "life and death" over time, do not shout bloody murder, and do not actually oppose the cuts or call on legislators to oppose them too.

UC took two 20% public funding hits over 3 years, first in the early 1990s and then in the early 2000s. Now 20% cuts occur in a single year -- this time twice within three years. The poor results of higher ed's resignation speak for themselves.

False Revenue Alternatives

Making matters worse is the difficulty public research universities have getting their funding story straight. While health advocates tell a simple budget tale in which no money = no service = suffering and decline, higher ed leaders say two conflicting things at once. First, we need more public money. Second, we have been getting lots of new private money, and we will keep doing so.

For example, UC Berkeley's chancellor, Robert Birgeneau, speaking to California Watch, described an admirable two-thirds expansion in research funding as a major revenue increase for the campus. His readers would naturally conclude that research revenues can be booked as income like state general funds, and used to support general campus operations. Birgeneau suggested this by saying that the growth in federally-supported research funding means that Berkeley is becoming a "federal university."

Though Birgeneau's frustration with the state is understandable, his revenue claim is not correct. A university's gross revenues are one thing (and what it publicizes). Net research revenues are quite another.

If you say your gross salary is $55,000 per year, everyone knows that doesn't mean you have 55,000 new dollars you can use to build a new room for your kids or buy a sports car. You need to pay for your "overhead" - taxes, rent, insurance, car payments, utilities, food, and everything else.

The same is true for universities, only more so. Outside funders of research never pay the full costs of conducting that research. It's as though you were expecting a baby, and your aunt hears that you are having to spend $1000 on furniture, clothes, and various new baby equipment. She sends you a one-time gift of $1000 to cover this. But you can't call this $1000 in additional revenue You have additional expenses that it must cover: your net new revenue is at best zero. In fact, your overall net is even less, since the extra child means more overhead - food, utilities, more equipment, and at some point perhaps more space.

Acknowledging these operating costs, UC has calculated that its extraordinary gross research revenues of $3.5 billion in a recent year yielded a $720 million net loss on research funding. In other words, UC spent money designated for conducting research on conducting the research, and then needed to come up with $720 million of its own money to cover the costs of supporting this research.

Where do public universities like UC get the money to cover this structural gap? They have only two large sources -- state funding and student tuition. Research is obviously necessary to society, and given all of our problems we need more of it rather than less. But research is a cost and not a profit center. State funding supports research, not the other way around, and state cuts endanger research just as they endanger everything else.

The Limits of Philanthropy

A second false budget solution is philanthropy. For public universities that haven't been around for two hundred years, endowments are small as a proportion of operations. They are also restricted to special projects -- in UC's case about 97% restricted. Specific gifts may support advanced work on autism or macular degeneration or hydrogen fuel cells or graduate scholarships in advanced material science -- all intrinsically important -- but they do not fund general instruction or research.

This means that the funds available to replace unrestricted state funds have to be taken from the investment returns on about 3% of the total endowment. For example, UCLA has a campus budget (excluding the medical center) of $2.8 billion and an endowment of $1.3 billion. The annual payout on the endowment is $55 million, or about 2% of campus expenditures. Unrestricted returns would be 3% of that, or $1.65 million. Compare that to the campus's state revenues of $606 million, and you can see that philanthropy, while funding many good things, cannot replace unrestricted state funding for UCLA's campus operations.

UC's centrally-managed endowment is somewhat under $6 billion. How could it replace UC's total shortfall of billion dollars (counting new costs) in just 2011-12? To yield a billion dollars at about 4%, UC would need an unrestricted endowment of $25 billion. It would, in other words, need to nationalize all of Harvard University's 400-year-old endowment, the biggest in the world, and move it to California - just to fill in the new budget shortfall that Sacramento created in 2011-12. In short, replacing lost state funds with endowment money, even factoring in great recent gifts, is mission impossible. Private funding builds great gated communities, while public funding builds whole cities.

This leaves exactly one source of private money that can replace cut public funds - student tuition. UC has been forced to go back to this well again and again - with 32% increases in 2008-10, past and future annual increases of 7-10% minimum, and an overall record of tripling tuition during the previous decade.

Even these huge increases are not enough, in part because of efforts to maintain solid financial aid. Were UC to make up for all of the $500 million Jerry Brown cut next year, tuition would need to go to $16,900, for a one-year increase of 39%. To use student tuition to make up for the one billion Mark Yudof identifies as the actual shortfall, next year's in-state tuition would be $21,279.

Nobody wants to see anything like these kinds of tuition hikes. And yet our austerity consensus is delivering the worst of both worlds: still-painful annual tuition increases of triple the inflation rate, and massive campus cuts in instructors, courses, sections, and related forms of essential support.

Higher ed leaders are going to have to bite the bullet and put private funding it its place - a positive but secondary place. This will allow them finally to offer straight talk about the absolute necessity of strong public funding for high quality public colleges and universities. Higher ed leaders will need to identify and demand a timeline for public funding recovery. And we, the voters, will need to give them an opening by rejecting the austerity consensus as the death-spiral we can no longer afford.