Capitol Alert

UC kept secret $175 million reserve as it raised tuition, state audit finds

The University of California’s central administration has systematically overcharged campuses to fund its operations, spent excessively on employee compensation and hidden $175 million in secret reserves in recent years.

Those were the conclusions of a blistering state audit released Tuesday that slammed UC’s Office of the President for misleading budgeting practices – and for interfering in auditors’ efforts to determine whether its expansive duties and nearly 1,700 employees could be slimmed down.

State Auditor Elaine Howle said that her report calls into question the university’s recent decision to raise tuition this fall for the first time in six years when it has additional financial resources available, more than one-half of which is sitting in a discretionary fund.

“Why did we need to increase tuition if the Office of the President has $175 million in reserve that nobody knew about?” Howle said.

She added that UC “inhibited” her office from completing a key component of the audit: to assess what functions are completed by the Office of the President and whether campuses find value in them. Surveys sent independently to each of the university’s 10 campuses, she said, were first reviewed by the Office of the President and then submitted to the auditor with substantial revisions that reflected more positively on the administration.

“That would have been our intent: to look at all of those services and determine whether there are places to streamline and eliminate costs,” Howle said. “And we couldn’t get there.”

In a letter to Howle included with the audit, UC President Janet Napolitano said she welcomed the “constructive input,” but she countered that “the report fundamentally and unfairly mischaracterizes UCOP’s budget processes and practices.” A 35-page addendum disputes many of the facts in the audit and the conclusions Howle drew.

Napolitano said most of the $175 million identified is already committed to university initiatives, ranging from improving its cybersecurity and addressing global hunger to research grants and an academic program for students in Washington, D.C.

“The elimination of these programs would be contrary to UC’s longstanding roles as an engine of social mobility for students from a wide range of backgrounds and circumstances and as a driver of innovative and research-based solutions to some of the State and nation’s most challenging issues,” she wrote.

The university added that it only reviewed the campus surveys to “get the auditors accurate information and ensure that the information they received was from the individual best-positioned to respond to a particular issue on behalf of the given campus.”

But in a scathing denouncement, the audit said that UC’s conduct during the process cast doubt on “whether it will make a genuine effort to change.” Howle recommended that the Legislature directly appropriate funding for the Office of the President, thereby forcing the administration to annually justify its budget and require the university’s governing board to hire an outside watchdog that could assist in monitoring a corrective plan.

The Board of Regents responded that it was “deeply troubled” by the finding, which could impinge the autonomy UC was granted in the California Constitution to insulate it from political influence.

“We have great confidence in UCOP leadership and hope that overriding fact does not get lost in our discussion of this report,” Chair Monica Lozano and Charlene Zettel, who heads the board’s compliance and audit committee, wrote in a letter.

Yet Assemblymen Phil Ting, D-San Francisco, and Kevin McCarty, D-Sacramento, said all options are on the table. The lawmakers, who chair the Assembly Budget Committee and the panel’s education subcommittee, jointly requested the audit last August to determine if growth in staffing and spending at the Office of the President resulted in savings for campuses or duplicated work.

At a press conference, Ting and McCarty lambasted the office’s $175 million in reserves as exemplary of UC’s “mission creep” away from its primary focus on serving students. They said the money would be better redirected toward opening new enrollment slots, especially as the university returns to the Capitol each year seeking more funding.

“Here we are sitting with this pot of money hidden under the desk over here that we could be using for Californians,” McCarty said, noting that UC has estimated its share of educating an undergraduate at $10,000.

Ting added, “We don’t have to have this false dichotomy to have an unlimited number of out-of-state or foreign students to pay for these in-state students.”

Surging nonresident enrollment – and UC’s aggressive recruitment of those students because they pay additional fees that supplement the university’s budget – has become a contentious issue in California. Another state audit last year blasted the tuition policy for disadvantaging resident applicants and displacing many of them from the UC system. The university mounted a $158,000 publicity campaign to refute those claims.

The audit released Tuesday found that the Office of the President amassed $175 million in reserves by June 2016 by annually requesting approval from the university’s governing Board of Regents for budgets that significantly exceeded how much it was likely to spend. Those surpluses were carried over into funds that the president’s office subsequently spent on projects of its choice, without including them in the annual budgets it disclosed to the public and the regents.

A large portion of the money comes from assessments placed on the 10 UC campuses, which increased in two of the four years that the audit reviewed, even though the Office of the President had not spent all of the previous year’s funds. The audit suggested that at least $32 million could be returned to the campuses and used for other purposes.

UC strongly disagreed with how the audit presented its reserves. Napolitano said the Office of the President was sitting on only $38 million, a “prudent and reasonable” amount, because the rest of the money identified had already been committed to projects that reflect university priorities.

Those programs were reviewed and approved by the president, UC said, and were never hidden from the public, pointing to dozens of regents meetings, press releases and news stories where the initiatives were announced or discussed. Yet none of those described how the projects were being paid for, the audit noted.

Howle was also critical of staffing levels at the Office of the President, which increased more than 11 percent in six years. The audit said they “exceed those of the central administration at comparable university systems, such as the University of Texas.”

Many positions earn far more than their counterparts at state agencies, because UC bases its salaries on private companies and universities. Howle said the Office of the President could lower its costs significantly – $3.2 million alone from 10 top executives and 10 top administrative staff – by realigning their compensation with other public entities.

Alexei Koseff: 916-321-5236, @akoseff

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