Construction, Collateral, and Crisis [Updated]

We wanted to draw your attention to a few recent articles from the Daily Cal that caught our eye as they were published but together offer an insight into the priorities of the UC administration. Not that we need any help at this point -- we've read our Meister. But what the hell.

First, this article from last Friday that our compañeros at thosewhouseit caught as well. In it, UC President Mark Yudof declares that tuition could double if no tax increases are incorporated into Governor Jerry Brown's budget:

UC President Mark Yudof had a simple message to deliver Friday morning when he testified before the state senate's budget committee: If the legislature opts for an all-cuts budget to fill its remaining $15.4 billion deficit, "all bets are off" at the University of California.

If the $500 million cut already made to the university earlier this spring were to double to $1 billion under an all-cuts budget, Yudof said the 10 campus system would be put on a path that could lead to a mid-year tuition increase next January, employee layoffs, program closures throughout the university and -- ultimately -- a doubling of tuition to $20,000 a year.

[...]

Friday's committee meeting marked the first time Yudof has publicly acknowledged what the consequences of a $1 billion cut could look like, though Gov. Jerry Brown had predicted in April that tuition could rise to $20,000 or $25,000 under an all-cuts plan. Yudof agreed, saying to the committee that he had looked at the numbers until he was "blue in the face" and that "the governor is not far off in his prediction."

At this point, it's hardly news that the state has cut funding for higher education -- they've been doing it for decades. But this isn't about speaking out against cuts. It's about positioning. Yudof testified to the state senate's budget committee that "the system can absorb the initial $500 million cut" -- the one that has already been programmed into the UC budget for this year -- "but if the state increases the size of the cuts the university will have little choice but to raise tuition 'geometrically' and cut services." In addition to erasing the violence of austerity ("Don't worry about it, we'll be fine... as long as you only cut $500 million." Um, really?), this strategy charts a path of rhetorical retreat. Obviously this isn't a rousing defense of public education. But it leads to another danger: every time the budget is cut, it's a "disaster"... until the cuts go through. At that point it becomes the new normal. In effect, it represents an attempt to limit political struggle to a relatively minor question about what's currently on the table -- everything else simply disappears.

Now take a look at this article published in today's paper. It reports on the results of an audit of UC finances that shows the system's increasing liabilities relative to its assets. Of course, the UC administration isn't having any of it. UC spokesperson Steve Montiel, always ready for a vapid soundbite, tells the paper that "financially, the university is pretty strong." Thanks, Steve. But then we get this:

The report also states that capital spending -- funding that goes towards long-term assets that help in the production of future goods and services -- throughout the UC continues at a "brisk pace" in order to provide the facilities necessary to support the university's teaching, research and public service mission and for patient care.

Facilities include academic buildings, libraries, student services, housing and auxiliary enterprises, health science centers, utility plants and infrastructure and remote centers for educational outreach, research and public service.

[...]

Additionally, in 2010, $2.8 billion of debt was issued to finance and refinance facilities and projects at various UC campuses, though the report did not specify those projects.

Wherever there's a budget crisis, there's capital projects. The Daily Cal does an interesting job of translation here, with that little clause to tell us what "capital spending" is: it's spending, they say, that leads to accumulation. Another way of saying it would be it's spending that transfers the burden of debt from the university to the student. As Bob Samuels recently wrote, "In this modified credit swap, students are forced to take out subprime student loans, often charging 6 per cent interest, so that the university can borrow money at a reduced rate." And then there's that short sentence at the bottom on construction bonds, the debt issued by the UC to engage in further construction projects. Another $2.8 billion. And as usual there's little transparency -- no mention of where that money is going. Will it be used to pay for important renovations? Or new stadiums and laboratories? All we can do is guess, but at this point we have little reason to trust the UC administration's word on any of this. [Update Wednesday 5/11: The Chronicle just published a relevant article on the UC's maintenance backlog: "the university predicts it will need nearly $2 billion over the next five years to address capital renewal and deferred maintenance." There's not much analysis in the article about why this is the case, but it does note: "Money for capital projects at UC or CSU is often earmarked for specific projects, such as the $321 million bond for renovation of Cal's Memorial Stadium. None of that money can be used, for example, to repair the stairwell at the life sciences building." But presumably the administration could sell bonds dedicated to repairs -- the real question is why they don't. But in reality it's not much of a question at all.]

Once again, Steve Montiel: "'We've got great ratings services. The university has really high ratings from many ratings services,' Montiel said. 'I don't know there is any need to reduce liability.'" What ratings is he talking about? Bond ratings. As Bob Meister wrote back in October 2009,

Why haven’t you been told that UC has been using your tuition as collateral to borrow billions of dollars? The obvious reason is that tuition increases are justified (to you) as a way to pay instructional expenses that taxpayers refuse to pay. If that’s why they’re being imposed, it’s natural to assume that tuition increase will be used to minimize cuts to education. But when UC pledges your tuition to its bond trustee (Bank of NY Mellon Trust), it’s really (legally) saying that your tuition doesn’t have to be used for education, or anything in particular. That’s why it can be used to back UC construction bonds, and why the growth in tuition revenue, as such, is enough to satisfy UC’s bond rating agencies (S&P and Moody’s), whether or not UC can pay its bills. The effect of UC’s pledge is to place a new legal restriction on the use of funds that it must first say it could have used for anything, including education. Thereafter, construction comes ahead of instruction.

Some of UC’s new, and self-imposed, constructions costs will come off the top of its annual budget, despite this year’s “extreme financial emergency.” When UC chose t0 take on $1.35B in new construction debt for 70 projects in August 2009 -- one month after imposing employee furloughs that “saved” $170M -- it committed to spending $70-80M in extra interest payments for years into the future -- they’ve just released the interest rates for each new bond series. Earlier in the year, UC had already issued $.8B in tuition-backed bonds in spring 2009, only some of which were for refinancing older projects at lower interest rate. It’s thus likely that the interest due on new projects funded during 2009 alone will have eaten up more than half of UC’s “savings” from the furloughs. Would the furloughs have been “unavoidable” if UC were not secretly planning to incur additional interest expenses for new bond-funded construction?

Note that the graphic above shows that $2.5 billion of the UC's short-term liabilities are classed as "securities lending collateral." We're not entirely sure what this means, but it might refer to the $2.8 billion in construction bonds mentioned by Montiel. Why the $300 million difference?

Now that we once again have the UC administration's obsession with construction over instruction in mind, take a look at another article out of today's Daily Cal. This one is about the ongoing process of developing a plan for renovating and redesigning Lower Sproul Plaza at UC Berkeley, a project that's budgeted at $223 million. And guess what:

As the exact design of the new Lower Sproul Plaza continues to form, an estimate of the cost for the current design is over budget by about $10 million.

The money for the project comes from a number of sources: "contributions from the campus, the UC Office of the President and student fees approved . . . in the 2010 ASUC General Election." In other words, not only are students paying directly for the project -- after all, we voted for it! Democracy in action! -- we're paying for it indirectly as well, through tuition increases that have already taken place (that money goes into the general fund) and the promise of future tuition increases that the UC now owes the bond raters.

This isn't about budget cuts -- it's about priorities.