Monday, July 11, 2011

Footing the Bill [Updated]

A few months ago, we wrote about a number of construction projects that are on the horizon at the UC and specifically about the way these projects are funded. As usual, the UC sells its highly rated construction bonds to raise the capital to carry them out. And ever since Professor Bob Meister published his now-infamous essay "They Pledged Your Tuition," we've known that student tuition, along with the promise of future tuition increases, are critical to the university's ability to maintain its high bond rating. As he wrote in the fall of 2009, "since 2004, UC’s highest priorities have been set by bond raters, and not by the State of California."

To be fair, sometimes there are other sources of revenue, but these cases are the exceptions. One of the examples we cited in the earlier post was the development project in Lower Sproul Plaza at UC Berkeley. The reason it came up at the time was that, even before the project had gotten underway, it had already gone $10 million over budget. Funding for that project comes, as the Daily Cal reported, from "contributions from the campus, the UC Office of the President and student fees approved . . . in the 2010 ASUC General Election." As we wrote at the time:
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.
Today, the Daily Cal reports that this same construction project, which will take many years to complete, is already showing a negative cash flow. The article draws on a presentation given by an outside consulting firm, Brailsford & Dunlavey, which is based in Washington, DC. (It's not entirely clear how much the firm is charging for its services, but it's possible that we might be seeing a repeat of the scandalous Bain & Company contract worth $7.5 million.)

The consulting firm's presentation is noteworthy, though not in the sense that Messrs. Brailsford & Dunlavey were hoping for. For example,
A deficit as high as $800,000 may occur between 2019 and 2022, after an expected bump in revenue due to increased student fees in 2018, according to the presentation.
Either the consultants are privy to information about future tuition increases that the rest of us aren't or they're just making shit up (in which case why is UC Berkeley hiring them?). It's important to remember that privatization is not a response to immediate crisis but a long-term strategy. Tuition hikes, it appears, are plotted out years in advance. While they are adjusted to take immediate political concerns into account (like state budgets, for example), these adjustments are little more than slight deviations here and there from the original projections. [Update 7/12 10am: Our mistake. The comment below is correct on this point, that the fees in question are not actually tuition but rather the student fees approved in the vote. However, this doesn't change the fact that the construction project is still financed through multiple sources, including the sale of construction bonds backed by student tuition as collateral. In any case, you can find the schedule for increased student fees for the project here. Further update 7/14 12:39pm: For a full discussion of what the vote actually approved, and why the earlier comment isn't exactly right, check out the comment from Zach Williams below.]

But most important are the comments from Assistant Vice Chancellor for Physical and Environmental Planning Capital Projects Emily Marthinsen:
“If the students are footing the bill for things that are not only the students’ responsibility, then those things have to be very defensible,” Marthinsen said.
If the students are footing the bill... From her isolated office in the A&E Building, Marthinsen can't understand the full implications of her words. Because what Meister shows us is that as students we foot all the bills: "Because UC pledges 100% of tuition to maintain its bond rating, it has also implicitly assured bond financiers that it will raise your tuition so that it can borrow more. Since 2004, UC has based its financial planning on the growing confidence of bond markets that your tuition will increase." Defensibility, furthermore, performs an interesting function here. What administrators find defensible is obviously not defensible for the rest of us -- students, workers, faculty, those of us who use the university. But beyond that, the logic of defensibility is the logic of the liberal technocrat, the enlightened bureaucrat who cannot be held accountable for decisions and as such offers little more than explanations and well-formulated "defenses" -- at best -- that lock the rest of us into decades of debt.

From our perspective, however, the administration's drive toward privatization is simply not defensible. There is little use in appealing to their hearts or letter-writing campaigns or attending glossy presentations by highly-paid consultants. These are the administration's bureaucratic fortresses, sites designed specifically to be highly defensible. And paradoxically, our participation only makes them stronger.


  1. The students passed a special fee assessment that rises through future years. That the 'fee' being discussed, not tuition.

    And another tin-foil har conspiracy theory falls to facts...

  2. Thanks for the tip. Got mixed up by the obscure language of "fees," which used to be tuition, but they just changed it last year. See correction above.

    In any case, the broader point is still valid.

  3. Actually, anonymous is incorrect.

    While half of the Lower Sproul project is funded by the special fee, 13 million is funded directly by campus funds. Most of that 13 million is from fees and resources earmarked for infrastructure and safety improvements.

    But there's more to the story than that. The rest of the project (actually, the entirety of the project) will be funded by external financing. The UC is seeking 200 million is external financing for the project, half of which will be supported/backed by the special fee increase.

    The other 100 million lacks a source of repayment. The anticipated source is future state funding the form of a General Obligation Bond. Of course, the same UCOP piece which optimistically hopes for more State funding also laments the decline in voter approved GO bonds and state approved Lease Revenue bonds.

    So how, actually, will the loan be repaid? My increasing UC revenue, which, as external creditors repeatedly note, is best through oh so flexible UC tuition dollars. That's what external lenders expect to pay for the loans they give to the UC. And as we are all painfully aware, if anyone knows where the money is going and how to get it, it's Wall Street.

  4. Sorry for the typos in that post, of which there are a few.

    'seeking 200 million *in* external'

    'state funding *in* the form'

    '*By* increasing revenue'

  5. Thanks Zach for that clear explanation. We've included a link to your comment in the body of the post.

  6. Thanks. I dug into this a bit more and figured out I was technically incorrect about the UC expecting a state General Obligation bond. I confused state GO bonds with General Revenue bonds. GOBs are voter approved bonds by which the state loans money to the UC. GRBs are bonds the UC issues on the private market - the sort of bonds that Fitch recently rated, as detailed by Bob Samuels.

    So the UC's plan to finance its external financing is... more external financing.

    Now, the UC also explicitly states what supports repayment of GRBs, and this is nothing other than the UCs reserves, from student fees, auxiliary reserves, and so on. I've started putting this sort of stuff in blog form. I wrote up what I could figure out about Lower Sproul here: