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University of California Response | California State Auditor's Comments

Response to the Audit

University of California

March 8, 2016

Ms. Elaine M. Howle
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Dear Ms. Howle:

Introduction

As leaders of the University of California, the Board of Regents, Chancellors, and I have one overriding responsibility: to protect and strengthen this great institution for the benefit of current and future UC students and the State of California as a whole. This responsibility includes not only the provision of undergraduate educa-tion, but also graduate and professional education, research, and public service. And it extends beyond the contingencies of a single year or budget cycle to the long-term financial and academic sustainability of a public university system that has consistently been the nation’s leader in combining academic excellence with access for students from all socioeconomic backgrounds.

In carrying out this responsibility, we welcome collaboration with our state’s elected leaders. Ours is a shared responsibility and California’s Legislature and Governor are valued partners and supporters. Accordingly, the University of California approached this audit process in a spirit of cooperation, transparency, and goodwill. University and campus leaders and staff devoted thousands of hours and hundreds of meetings to explaining University policies and practices to CSA staff, compiling data and documents, and providing written responses.

Unfortunately, the draft report that has been shared with us makes inferences and draws conclusions that are supported neither by the data nor by sound analysis. The audit’s subtitle, for example, presupposes a conclusion that University of California “admissions and financial decisions have disadvantaged California resident students.” An alternative and more objective subtitle would be, “faced with unprecedented budget cuts, the University of California made every effort to sustain in-state enroll¬ment, while maintaining academic quality and holding tuition flat.” Put another way, to suggest from the outset that UC decisions regarding admissions were designed to “disadvantage Californians,” as opposed to mitigate the impact of a 33 percent budget cut, is a rush to judgment that is both unfair and unwarranted. We would have preferred a constructive set of recommendations that could help move the University and the state forward. We are deeply disappointed at this lost opportunity.

The following paragraph is also referenced in our rebuttal point number 1.

In the remainder of this letter, I address the larger context and facts the draft report either misstates, misinterprets, or ignores. The attachment briefly addresses each recommendation.

FACT: UC has consistently met--and in fact, exceeded--its responsibilities under the Master Plan

The Master Plan spells out clearly UC’s obligation to California undergraduates: the University is to establish minimum systemwide eligibility criteria that capture the top one-eighth of California high school graduates and to find a place at UC for every California applicant who meets those requirements. This is a commitment we have consistently met: in fact, UC’s eligibility criteria arguably capture a larger pool than required under the Master Plan. Nonetheless, even in the leanest of budget years--and in years when other California institutions turned away tens of thousands of eligible Californians--UC has continued to offer admission to every California applicant who meets our criteria.

The following paragraph is also referenced in our rebuttal point number 2.

We believe the University is also obligated to enroll every California student for whom the State provides enrollment funding. And, once again, UC has not only met, but exceeded, this goal, enrolling thousands of California students for whom we did not receive enrollment funding. To suggest, in this context, that UC has “disadvantaged” California students is entirely unfounded.

A consistent theme in the draft report is that UC has enrolled students from outside the state at the expense of Californians. This is also unfounded. If anything has constrained the enrollment of California students, it has been reductions in state funding. Nonresidents pay the full cost of their education--and more.

The State of California faces a dilemma that the draft report does not fully acknowledge. To maintain the quality of a public university system that virtually all agree is the finest in the world, sufficient funding must be found. Sources for this funding are limited. They include (1) State funds--for which competition from other deserving state agencies is fierce; (2) student tuition--increases in which are extremely unpopular; and (3) nonresident tuition--the burden of which falls entirely on non-Californians.

Other sources, including efficiencies and cost savings, are important. The audit report acknowledges many of the University’s efforts in these areas and recom-mends we do more, a recommendation entirely consistent with the University’s own direction and plans.

But the savings that can be achieved through these means pale in comparison to the amount of revenue provided to California and its residents by non-California UC students. The State has given no indication that it is prepared to redirect $728 million in State funds to UC to cover the amount of nonresident tuition revenue cited in the draft report. Had the University not increased undergraduate nonresident enrollment as it did in recent years, the lost revenue would be equivalent to an additional $2,400 per year in tuition for California undergraduates--a 20 percent increase.

California’s situation is not unique. Nearly every state in the nation has faced this Hobson’s choice, and they have all reached the same decision: open doors to out-of-state students in order to keep the doors open for in-state students. In fact UC greatly lags other public flagship universities in the percentage of its under¬graduates who are not state residents. For example, Purdue and the Universities of Oregon, Iowa, and Michigan each enroll more than 40 percent out-of-state students and Penn State, Iowa State, Indiana University, Georgia Tech and the Universities of Wisconsin, Georgia, Virginia, and Arizona enroll more than 30 percent. By com¬parison, as a system UC enrolls 15.5 percent nonresidents and even at the UC cam¬puses that enroll the most nonresidents, those percentages remain below 25 percent.

The following paragraph is also referenced in our rebuttal point number 2.

Perhaps the greatest missed opportunity in this draft report is that it chooses to posit enrollment of Californians versus enrollment of non-Californians as an either/or proposition, suggesting that enrollment of nonresidents somehow diminishes opportunity for Californians. While this conclusion is superficially appealing, the opposite is true. In-state enrollment is directly related to state funding. This year is a good example. Funding for enrollment growth has resumed--albeit at a reduced rate. Accordingly, UC is enrolling 5,000 additional Californians this year, nearly half of whom UC plans to enroll on the very campuses that also enroll the most nonresidents: Berkeley, UCLA, and UC San Diego. If indeed nonresidents were displacing residents, we would see that California growth concentrated on campuses less in demand from out-of-state students.

We also strongly reject the premise that underrepresented minorities are disadvantaged by increases in nonresidents. The facts are otherwise. Even in a period when overall enrollment of California undergraduates has remained relatively steady, the proportion of underrepresented minorities has continued to increase. UC can, and must, continue its efforts to enroll a student body that more closely reflects California’s diversity. As UC President, I am deeply committed to this goal. With the additional State support that allows us to add 5,000 Californians this year, we see 2016-17 as a year of enhanced opportunity for all our California applicants and, especially, for minority and disadvantaged students.

FACT: The University accelerated its plans to achieve equity in per-student state funding across the campuses and will have devoted $255 million to rebenching and to previously unfunded California residents.

The initial impetus for this audit was concern that State resources were not being equitably distributed across the campuses on a per-student basis. As UC President, I am committed to equitable per-student funding, and I did not wait for the audit findings to address this. Specifically, this year I committed to:

(1) Fund 7,000 previously unfunded California residents, an action that will direct approximately $50 million in additional funding to campuses that con-tinued during the recession to increase enrollment despite the lack of State funds to support growth. Several of these are also campuses that enroll higher proportions of low income and underrepresented students. For example, UC Riverside, with 41 percent underrepresented minority students, will receive an additional $25 million in State funding over and above the additional funding they receive for enrolling more Californians next year.

The following paragraph is also referenced in our rebuttal point 13.

(2) Accelerate the reallocation of per-student funding. In 2012, UC implemented a new resource allocation formula designed to ensure that per student alloca-tions of State general funds will be equivalent for each student across the University. Since this new approach--known as “rebenching”--was imple-mented, UC has allocated $111 million to reduce disparities in per-student student state funding across the campuses. I made the decision to accelerate rebenching, allocating a combined $94 million in 2015-16 and 2016-17, so that full per-student equity will be achieved by 2016-17.

FACT: UC took bold action to control costs, remain affordable to California residents, and protect quality during the biggest financial crisis since the Great Depression

In assessing the fiscal crisis the University of California has experienced in recent years, the Public Policy Institute of California observed:

“Over the past 15 years, per student General Fund allocations have fallen by more than 40 percent at CSU and by more than 50 percent at UC. These cuts have not been the result of a deliberative process that reprioritized the state’s goals. Rather, state policymakers have had to put out budget fires, and the General Fund’s higher education component is relatively unprotected by statu¬tory, judicial, or federal requirements. Recent increases in General Fund allo¬cations have not made up for the previous cuts.”

To address this reality, the University has taken a number of actions designed to reduce its cost structure and protect quality while remaining affordable for California resident students. By conflating growth at UC medical centers with the undergraduate campuses, and by failing to consider growth in staff relative to growth in the size of our student body, the draft report seriously understates the reduction in the University’s per-student cost structure. In fact, according to public policy expert Henry Brady:

“On a per-student basis, the UC’s increases in net tuition have been less than cuts in state funding. The UC’s have not replaced state funding dollar for dollar – instead they have found ways to economize and to decrease their spending per student so that net tuition increases could be less than declines in state funding. Far from being profligate, the UC’s have been doing more and more with less and less.”

Examples of UC’s efforts to reduce cost include the following:

The following paragraph also references our rebuttal point number 14.

Between 2007 and 2014, the University reduced the number of general campus staff supported by State funds and tuition by over 3,500 full-time equivalent employees. Any growth in staff during that period was entirely funded by alternative sources such as research funds, federal support, and by the University’s self-supporting auxiliary enterprises, such as its medical centers. For example, during this time period employees in the University’s medical centers and health sciences programs grew by 14 percent.

The following paragraph also references our rebuttal point number 14

During this same period, faculty and other academic employees grew by 3,958 full-time equivalent employees. This growth allowed UC to continue to serve an expanding number of students without diminishing the quality of a UC education.

The University’s Working Smarter initiative has reduced costs by over $660 million.
Nonresident undergraduates provided an estimated $420 million in revenue in 14-15 above and beyond the funds needed to educate these students--funds available to better support California students.

UC has frozen systemwide tuition for California students for the past five years. That stability, which is a particular boon to students from middle-income families not eligible for financial aid, was made possible by the cost-savings efforts and other revenues described above.
In 2015-16, UC estimates that California resident undergraduates received over $60 million in need-based grants funded by nonresident students’ tuition and fees. This provided about $600 to each California resident receiving a UC grant, on average, which is equivalent to reducing a California resident’s need to borrow by about $2,400 after four years.

FACT: UC’s mission and contribution to the state extends far beyond undergraduate instruction

California’s Master Plan for Higher Education charges the University of California with three primary missions: teaching, research, and public service. State funding, tuition, and the revenue UC generates from other sources combine to support all of these functions, many of which are closely interrelated, and all of which benefit California students and the state overall. The University’s research programs bring billions of dollars to the state and have created whole new industries. Our public service activities bring the benefits of the University’s expertise and programs to all Californians. Yet many of the draft report’s recommendations focus only on costs that support undergraduate instruction, as if any expense that cannot be shown to have a direct impact on undergraduate education cannot be justified. The University places major emphasis on ensuring that access, affordability, and quality are preserved for its instructional program, and no other institution in the country has been as successful at combining both access and excellence. But to fulfill our broader mission and purpose we must ensure that the University’s research enter¬prise and public service functions are also successful.

FACT: UC is committed to transparency and publicly reports extensive data about its finances and operations

The University of California highly values transparency and accountability and continues to identify new ways to expand our efforts in these areas. Our annual Accountability Report provides detailed information on topics of interest to the public and the Legislature. Data underlying this report is available for down-loading and analysis and our Accountability website contains numerous tools and reports addressing topics such as affordability, student outcomes, and employment of UC graduates. The University’s annual Regents budget contains an extensive narrative explaining how funds are spent and highlighting the major issues the University faces. Additional data about campus expenditures posted annually on the University’s website provides fine-level detail on how campuses spend their funds. Annual financial statements provide audited information about the financial status of the University’s various enterprises. And each year, UC submits and publicly posts dozens of reports requested by the Legislature. In fact, the most recent CSA audit conducted of the University’s finances, published in July 2011, found that, “The University of California Office of the President maintains extensive accounting records in its corporate financial system that document the university’s annual financial operations.”

In light of what the University already produces, the new reporting requirements proposed in the draft report are burdensome, of little value, and would entail signifi¬cant new expense to install new technology and prepare even more documentation. It is contradictory to suggest, on the one hand, that the University should reduce the number of administrative staff and, on the other hand, to recommend even more reporting requirements than currently exist. The University is committed to being fully transparent. But we believe the benefits of these new proposed reporting mechanisms should be carefully balanced against the significant cost and time they would require.

Conclusion

The following paragraph also is referenced in our rebuttal points, numbers 1 and 2.

This simple cover letter does not do justice to the serious deficiencies in the draft audit. Indeed the draft audit understates and undermines the efforts of thousands of UC faculty and staff who have sustained the University’s reputation, accessi-bility, and affordability during a period when state funding was cut by about one third. The University is always open to constructive recommendations, and desires to work with you as you prepare the final report. As it currently stands, however, the draft audit is neither accurate nor helpful and thus requires major revision.

I appreciate your attention to the concerns I have raised. Thank you.

Yours very truly,

Janet Napolitano
President

Attachment

cc: Provost Aimée Dorr
Executive Vice President and Chief Financial Officer Nathan Brostrom
Senior Vice President and Chief Compliance and Audit Officer Sheryl Vacca
Senior Vice President Nelson Peacock
Associate Vice President Steve Juarez

Attachment

The University of California’s Responses to Recommendations in the California State Auditor’s Report “The University of California: Its Admissions and Financial Decisions Have Disadvantaged California Resident Students”

The draft version of the California State Auditor (CSA) report that was shown to the University contained several recommendations for action with which the University agrees, but also a significant number of characterizations, conclusions, inferences, and recommendations to which the University of California strongly objects. Below are responses to each of the report’s recommendations.

Chapter 1 Recommendations:

Recommendation #1: To meet its commitment to California residents, the university should do the following:

Replace its "compare favorably" policy with a new admission standard for nonresident applicants that reflects the intent of the Master Plan. The admission standard should require campuses to admit only nonresident students with admissions credentials that place them in the upper half of the resident students it admits.
Amend its referral process by taking steps to increase the likelihood that referred resident students ultimately enroll.

The following paragraph is also referenced in our rebuttal point number 4.

UC strongly disagrees with the interpretation of the Master Plan contained in the report and with the suggestion that the University is not meeting its commitments to California residents. Even in the depths of the fiscal crisis, the University has consistently offered admission to every California student who meets its criteria and continues to enroll every California undergraduate for whom the state provides enrollment funding. Moreover, with additional State funding, the University will enroll more California students, as evidenced by the fact that, as soon as the Legislature agreed to provide additional funding for enrollment, UC made plans to increase the enrollment of California residents by 5,000 students in 2016-17. Along with this planned growth, the University is currently engaged in multiple efforts to increase the likelihood that students admitted through the referral pool will accept their offers of admission.

Recommendation #2: To ensure that campuses' interpretation of admission standards do not adversely impact resident students, the university should implement a thorough process to annually evaluate the qualifications of students who apply and students who are admitted. These evaluations should highlight instances when campuses admit nonresident students who are less qualified than residents and should include corrective action steps. Moreover, this evaluation should include resident and nonresident undergraduate enrollment in majors at each campus. The university should make the results of this evaluation - including details of the academic qualifications of students who applied and who applied and who were admitted - publicly available.

UC objects to the implication that its interpretation of admission standards adversely impacts resident students. As noted earlier, the University guarantees a place in the system for all qualified resident applicants. The University already publishes extensive data each year on the qualifications of students who apply and are admitted to its campuses. In addition, the Academic Senate each year issues its Annual Report on Undergraduate Admissions Requirements and Comprehensive Review (http://senate.universityofcalifornia.edu/committees/boars/reports.html), which provides extensive data tables summarizing the outcomes of the previous year’s undergraduate admissions process. This report also includes a narrative description of the admissions process at each campus. The University will continue to make these data publicly available.

Recommendation #3: To ensure that it has accurate information upon which to make funding decisions, the Legislature should consider amending the state law that requires the university to prepare a biennial cost study. The amendment should include requirements for the university to differentiate costs by student academic levels and discipline, and to base the amounts it reports on publicly-available financial information. In the absence of legislative action, the university should conduct a cost study every three to five years and ensure that it is based upon publicly-available financial information. The university should use the results of the cost studies as a basis for the tuition it charges and for the proposed funding needs that it presents to the Legislature.

While this is a recommendation for the Legislature, nevertheless the University notes that it will continue to complete the report on expenditures for instruction required by the Legislature. However, the level of detail that this recommendation suggests would be expensive, burdensome, and in some instances is simply unavailable. The University does provide a calculation of the average cost of instruction that is reliable, based on publicly available information, and uses a methodology developed with the Department of Finance, the Legislative Analyst’s Office, and other state staff. Moreover, that report or any report focused on expenditures for instruction or other cost studies can only be one of many factors the University must consider in setting tuition and justifying its budget request. Other factors that must be considered include the availability of revenue from the state and other sources, as well as cost pressures such as mandatory cost increases and other high priority needs that must be funded.

Recommendation #4: To ensure that the university does not base future decisions on the revenue that students generate, the Legislature should consider amending state law to limit the percentage of nonresident students that the university can enroll each year. For example, the Legislature could require that the university limit nonresident enrollment to 5 percent of total undergraduate enrollment. To accomplish this, the Legislature should consider requiring that the university's annual appropriations be based on it enrolling agreed-upon percentages of resident and nonresident students.

The following paragraph is also referenced in our rebuttal point number 2.

Although this is a recommendation for the Legislature, the University notes that it appears to be based on the erroneous assumption that enrollment of nonresident students negatively impacts the enrollment of resident students. The enrollment of nonresidents does not displace California resident students. The ability of the University of California to expand enrollment for California residents is reliant on sufficient state funding to support enrollment growth. The University has serious concerns about any possible legislative action to establish a limit on nonresident enrollment and the impact it would have on access, tuition, and program quality for all students without a commensurate increase in state support to offset the considerable revenue loss.

Recommendation #5: To ensure that the university meets its commitment to resident students and to bring transparency and accountability to admissions outcomes, we believe a reexamination of the university's adherence to the Master Plan is necessary. Specifically, the Legislature should not consider the students that the university places in the referral pool as admissions as defined by the Master Plan until the percentage of students who enroll through the referral process more closely aligns with that of the other campuses.

The last sentence of the following paragraph is also referenced in our rebuttal point number 4.

The state is currently undertaking an eligibility study that will document that the University is meeting its commitment under the Master Plan. The University objects to the suggestion in the report that offers of admission provided through the referral pool should not be considered admission offers because many students do not accept them. The referral mechanism (endorsed repeatedly by the Legislature in reviews of the Master Plan) is essential for meeting the Master Plan requirement that UC provide a place for all eligible students. The acceptance of an admission offer is entirely the choice of an applicant.

Chapter 2 Recommendations:

Recommendation #6: To improve its internal operations and promote cost savings related to the $13 billion it spent on staff salaries in fiscal year 2014-15, the university should conduct a systemwide assessment to identify ways to streamline and reduce its employee costs.

The following paragraph is also referenced in our rebuttal point number 15.

The University of California currently and consistently engages in a wide array of efforts to reduce costs—including through initiatives such as Working Smarter, at all campuses and medical centers—and will continue to do so. UC is successfully instituting a common payroll and human resources system that will improve internal operations. The University also conducts annual reviews of employee trends, both in terms of the number of full-time-equivalent employees and salaries, which inform its hiring and compensation practices.

Recommendation #7: To ensure the reasonableness of the compensation the university pays its executives, it should consider - to the extent possible - all items of compensation when setting or adjusting salaries and benefits and when conducting surveys, studies, and comparing the compensation packages of its executives to those in similar positions outside the university.

The University conducts regular studies of its compensation practices, applying a higher standard than that suggested in the report. UC annually compares compensation for positions at the University to comparable positions at other institutions and organizations with which it competes for qualified faculty and staff. UC already has agreed to add local and state government positions to its analysis. However, the University strongly disagrees with the contention in the report that positions at UC are always comparable to state employees.

Recommendation #8: To ensure that its process for establishing and revising salaries for its top executives is documented, thorough, and consistently applied, the university should implement the five outstanding recommendations from its 2013 internal review report by August 2016.

This documentation will be completed by August 2016.

Recommendation #9: To improve the transparency and timeliness of its annual compensation report, the university should streamline the process it uses to prepare the report to allow its issuance by April of each year.

UC will continue to streamline and automate processes so that delivery of the compensation report is more expeditious. UC will continue to target release of all compensation information and disclosures to be no later than July of each year, consistent with reporting practices for all state agencies.

Recommendation #10: To ensure that the home loan program is the best use of the university's investment funds, it should conduct a cost benefit analysis that factors in the opportunity costs of investing in the home loan program as opposed to other higher returning assets.

The Mortgage Origination Program is a valuable recruitment and retention tool that greatly benefits the University because the high cost of housing near several of the University’s California work locations has made it increasingly difficult to recruit and retain faculty. The Office of Loan Programs continuously evaluates the need for new products and services and for program modifications, including researching and expanding opportunities for partnerships with financial institutions.

Recommendation #11: To maximize the savings and new revenue from the Working Smarter initiative and ensure that the university uses [these funds] for its academic and research missions, the Office of the President should take the following actions:

Immediately require that the campuses fully participate in all projects unless they can provide compelling evidence demonstrating harmful effect.

UC believes that opportunities exist to increase participation in various projects, which will result in additional revenues or cost savings. However, since every component of the Working Smarter initiative differs in its level of decentralization, the University must consultatively evaluate each systemwide project roadmap in the context of campus priorities and work in progress.

By June 30, 2016, to the extent possible, implement a process to centrally direct these funds to ensure that campuses use them to support the core academic and research missions of the university.

Campuses will be provided with additional direction to use new revenues or savings from these initiatives to advance the University’s core missions. This will be done in the annual allocation letters that are typically distributed after the state budget is adopted, so it is most efficient for the University to comply at that time.

Ensure that it substantiates that projects are actually generating savings and new revenue and that it can demonstrate how the university uses these funds.

The Working Smarter initiative concluded its planned 5-year lifespan in 2015, although individual projects and programs in progress continue. It is not always possible or practicable to directly link cost avoidance in one area to increased investment in another area. Nevertheless, the University will do so where feasible.

Recommendation #12: To ensure its recruiting efforts benefit residents, the university should prioritize recruiting residents over nonresidents. In particular, the university should focus its recruiting efforts broadly to ensure that it effectively recruits resident underrepresented minorities. For example, the university could establish a limit on the amount of funds it dedicates to nonresident recruiting. Further, it should develop a process to better track its nonresident and resident recruiting expenditures.

The report correctly indicates that the University spends most of its recruiting budget to recruit California residents, and in particular, recruits broadly to reach historically underserved populations. However, the University strongly disagrees with the suggestion in the report that it does not currently prioritize the recruitment of California residents. The University will continue to ensure that recruiting expenditures for nonresident students are in line with the success of these efforts.

Chapter 3 Recommendations:

Recommendation #13: To determine if the campuses are using funds to further the goals of the University of California system and the Legislature, the Office of the President should begin regularly monitoring and analyzing how campuses are using both state funds and nonresident supplemental tuition. If, after the close of the fiscal year, the Office of the President determines that campuses are not using state funds and/or nonresident supplemental tuition in accordance with those goals, the Office of the President should take steps to correct the campuses' spending decisions as soon as possible.

The Office of the President will develop and implement a process to regularly evaluate campus expenditures from core funds – e.g., state general funds, nonresident supplemental tuition, other UC general funds, and student tuition and fees – and will continue to take appropriate measures to ensure that those expenditures are aligned with the University’s core missions.

Recommendation #14: To ensure it spends state funds prudently for programs that do not directly relate to educating students, the university should do the following:

Track spending from state funds for programs that do not relate to educating students.

Reevaluate these programs on an annual basis to determine whether they continue to be necessary to fulfill the university's mission.

Explore whether the programs could be supported with alternative revenue sources.

The University has a tripartite mission – teaching, research, and public service. It is committed to ensuring that state funds are used appropriately within all three of its defined missions. The University strongly disagrees with the suggestion that that programs that do not directly relate to the instructional mission but relate to one of the two other core missions should be subjected to a different level of scrutiny.

Recommendation #15: To increase its transparency and help ensure that it can justify its spending decisions, the university should make publicly available the amounts of state funding it allocates toward per-student funding, as well as the amounts it or campuses spend for programs that are not directly related to educating students. The university should publicly present the ranges of per student funding based upon the amount of funding excluded from the formula.

The Office of the President will make campus state general fund allocations available on its website in a manner that is more easily accessible than figures that appear in the University’s audited financial statements and campus financial schedules, which are already available on its website. Allocations will include a breakdown of funds that are allocated on a per-student basis (along with the resulting per-student funding level at each campus) as well as state funds that are allocated on a different basis.

Recommendation #16: To ensure that its rebenching efforts lead to equalized per-student funding among the campuses, the university should do the following:

Include actual enrollment numbers in its rebenching formula.

Adopt a methodology that it can use to, at least every three to five years, update its weighting system to ensure the weight factors take into account campuses' actual costs of instruction, using the cost study that we recommend in Chapter 1 and other revenue sources if necessary.

Exclude all state funding it uses for programs that do not directly relate to educating students from its rebenching calculation. The university should exclude these programs only after it has evaluated them in accordance with the recommendation we made previously.

Include stakeholders such as students, legislative and executive branch staff, and student groups, in future discussions of rebenching to ensure that it considers their viewpoints and to increase transparency regarding its funding decisions.

The University will use a methodology based on targeted enrollment, rather than actual enrollment as suggested in the report, because this approach gives campuses an incentive to manage their enrollments and meet agreed upon enrollment targets. The University will review the weighting factors used in its allocation methodology every five years, but not more often as there needs to be consistency in allocations. The University disagrees with the recommendation in the report to exclude all state funding it uses for programs that do not directly relate to educating students; it is inconsistent with other parts of the report that imply that too much funding is being excluded from the per student calculation. The University regularly consults with students, legislative and executive branch staff, and others about a wide range of budgetary matters and will include these groups in any future discussions of rebenching.

Comments

California State Auditor’s Comments on the Response From the University of California

To provide clarity and perspective, we are commenting on the University of California’s (university) response to our audit. The numbers below correspond to the numbers we have placed in the margin of the university’s response.

We conducted this audit according to generally accepted government auditing standards and the California State Auditor’s thorough quality control process. In following audit standards, we are required to obtain sufficient and appropriate audit evidence to support our conclusions and recommendations. As is our standard practice, we engaged in extensive research and analysis for this audit to ensure that we could present a thorough and accurate representation of the facts. Furthermore, we note that the university’s response does not indicate any factual errors with our draft report, but rather a different interpretation of the same facts. During the course of our fieldwork, we met with the university on numerous occasions to discuss our audit results; however, the university declined our repeated offers to meet and discuss any concerns, questions, or comments about our draft audit report during the five-day response period.

We follow generally accepted government auditing standards in conducting our work. These standards do not permit us to base conclusions on suppositions, but rather on facts. Facts led us to our conclusion that the university’s admissions and financial decisions have disadvantaged California residents. Thus, we stand by the report’s title, which is based on clear and convincing evidence—some of which we highlight below. Taken alone, any one of these pieces of evidence might be considered an anomaly, but when reviewed together they demonstrate that the university’s strategic decision to increase the enrollment of nonresidents has had a detrimental impact on California residents. Some of this evidence includes the following:

From academic years 2005-06 through 2014–15, nonresident undergraduate enrollment increased 432 percent while during the same time period resident enrollment increased only 10 percent. In academic year 2014–15, nearly one-third of the students the university admitted were nonresidents.
During academic years 2012–13 through 2014–15, after the university lowered its admission standards for nonresidents, the university admitted nearly 16,000 nonresidents whose test scores were below the median scores for admitted residents on every grade point average, SAT, and ACT score we evaluated.
During the past 10 years the university has denied increasing numbers of resident applicants admission to the campuses of their choice. In contrast, nonresidents, if admitted, are always admitted to at least one campus of their choice.
Between academic years 2010–11 to 2014–15, the five most popular majors that the university offers have seen significant increases in nonresident growth at Berkeley, Irvine, Los Angeles and San Diego—about 1,100 to 2,100 students, coupled with generally declining resident enrollment—about 800 to 1,200 students at three of the four campuses.
Our concern regarding the displacement of resident students by nonresidents is in part derived from the university’s own opinion. Specifically, the university’s Commission on the Future report published in 2010 states that without a limit on nonresident enrollment, the university is at risk of displacing funded resident students. The report recommends a 10 percent nonresident enrollment limit.
Since fiscal year 2007–08, when the university began to allow campuses to retain the nonresident tuition they generate, the number of nonresidents enrolled and the amount of associated revenue skyrocketed from $248 million in fiscal year 2007–08 to $728 million in fiscal year 2014–15.

The university’s position is unfortunate and we would have hoped it would be more accepting of constructive criticism. Our recommendations are intended to improve the university’s operations, which, if implemented, would allow it to more fully demonstrate its commitment to California residents.

The university exaggerates its fulfillment of the Master Plan because it fails to consider that one of its admission policies—denying admission to more than 15 percent of qualified residents to the campus of their choice—results in most of these residents choosing to either defer their education or to enroll in another university system. Specifically, we note in Table 7 that the enrollment rate for residents referred to the Merced campus was only 2 percent in academic year 2014–15 compared to 55 percent for residents admitted to a campus of their choice. Thus, the university is absolutely correct when it states in its response that “the acceptance of an admission offer is entirely the choice of an applicant.” However, by denying residents admission to the campus of their choice, the university is not‑so‑subtly suggesting that these residents enroll elsewhere. In fact, the university acknowledged publicly on page 79 of its 2015–16 Budget for Current Operations that it took action to slow enrollment growth by admitting fewer residents to the campus of their choice and instead referred them to an alternate campus. Finally, it is important to note that nonresidents, if admitted, are guaranteed admission to at least one campus of their choice; however, the university does not offer all admitted resident students that same guarantee. Thus, while the university’s current referral process may meet the letter of the Master Plan, we question whether it meets its spirit.

The university’s response fails to acknowledge the role that its decisions played in constraining resident enrollment. We do not diminish, in any way, the substantial cuts in state funding that the university faced. In fact, we note the effect of these funding cuts in the following areas of our report: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j). However, as we note in Chapter 2, we believe that the university did not sufficiently reduce its costs before increasing tuition and nonresident enrollment. Further, we note here and in Table 17 that the university continues to use a significant amount of state funding—$45.4 million—for programs that it has determined could be funded from other sources.

The evidence upon which the university bases its assertion that “nonresidents pay the full cost of their education—and more” is unknown. As we state, the university has not conducted a usable analysis of the cost to educate its students, thus we question how the university can support this theory. In fact, in one of our preliminary exit conferences with university staff, we asked the university for a metric of the number of undergraduate residents that the tuition revenue from nonresident undergraduates allows it to bring in; however, the university did not provide an answer to this question. Moreover, as we note, the total resident enrollment at the university actually decreased by more than 2,200 students—or 1 percent—from academic years 2010–11 through 2014–15 while total nonresident enrollment increased by more than 18,000 students, or 82 percent.

The university’s response that these savings would “pale in comparison to the amount of [nonresident revenue]” demonstrates the university’s failure to appreciate its own ability to generate savings. As specific examples, we note that the university’s 2009–10 furlough plan, in which it furloughed employees for 10 to 26 days during those 11 months, saved $236 million. However, in the following year, the university negated this one‑time cost savings when it increased its spending on employee salaries by $526 million. Had it continued the furlough program at even less than half the fiscal year 2009–10 savings rate, it could have saved an additional $100 million per fiscal year. Additionally, as we note, the university asserted that it could have saved an additional $9 million from further campus participation in one of its 13 Working Smarter projects. Using the university’s assertion of needing $10,000 to fund each additional undergraduate resident, as we note, the $109 million from these two actions alone could have enrolled an additional 10,900 California residents. Finally, we do not recommend that the university cease to admit nonresidents as it implies by citing the need to redirect $728 million of state funds to it to replace the total amount of nonresident revenue received in fiscal year 2014–15, rather we only recommend that the Legislature limit the percentage of nonresidents that the university enrolls.

Based on the university’s response, it appears that the university is facing a crisis of identity and purpose: to maintain a public university system that virtually all agree is the finest in the world—as stated in the university’s response—or to serve primarily the needs of California residents, as we note in our report. The university’s response suggests that, at this point in time, these two purposes are mutually exclusive. This is the true choice that faces the State and the university who collectively must determine whether both of these purposes can exist together, or whether one takes priority over the other. Until such time as the university’s purpose is clearly mandated or defined, we stand by our conclusion that the university’s actions have disadvantaged residents.

While we agree that “California’s situation is not unique” in terms of budget reductions during the recession, the university operates under circumstances that are unique among its peers—specifically the Master Plan commits it to admit qualified California resident students. Furthermore, and perhaps most importantly, these comparator institutions have a significantly smaller and less diverse population of public high school graduates from which to draw compared to California. In contrast, as the largest state in the nation, California has a large and diverse population from which to select. The university’s statement is also either disingenuous or poorly informed. In particular, our review of available data on enrollment trends indicates that over the past 10 years these comparator universities have consistently enrolled high proportions of nonresident students—averaging 26 percent nonresident enrollment in academic year 2005–06 and now averaging 34 percent nonresident enrollment. Thus, the Legislature will need to decide whether it agrees with the Hobson’s choice that the university made to enroll additional nonresidents to increase its revenue, but to the detriment of California residents.

We agree entirely with the university’s assertion that “if indeed nonresidents were displacing residents, we would see that California growth concentrated on campuses less in demand from out-of‑state students” because this displacement did, in fact, occur. We state that the Legislature required the university to enroll an additional 5,000 residents in fall 2016 as a condition of receiving $25 million in state funds, and the university subsequently asserted that it will enroll nearly half of these students at the Berkeley, Los Angeles, and San Diego campuses, which it repeats in its response. Prior to this agreement, however, nonresidents were displacing residents at these campuses. Specifically, as shown in Table 15, the university enrolled 5,400 fewer resident students at the Berkeley, Los Angeles, and San Diego campuses from academic year 2010–11 compared to academic year 2014–15—85,700 residents compared to 80,300 residents. These three campuses also had the highest growth rate in nonresident enrollment during this time period and have the highest current nonresident enrollment.

The university misses the point. As noted, the Legislature and university have clearly articulated the desire that the university enroll a student body that mirrors the cultural, racial, geographic, economic, and social diversity of California. Although the university has increased the percentage of underrepresented minorities enrolled, this growth has been hampered by its efforts to increase enrollment of nonresidents, who are predominately not from underrepresented minorities. As Table 9 illustrates, domestic nonresident undergraduates have a far smaller proportion of underrepresented minorities¹, with only 11 percent from underrepresented minorities, in comparison to 30 percent of California resident undergraduates in academic year 2014–15. Therefore, even though the university is correct that the proportion of underrepresented minorities has continued to increase, this increase has been stunted and slowed by the university’s increased enrollment of nonresidents who are predominately not from underrepresented minorities.

To achieve equal per-student funding, the university will need to not only continue to work on the equitable allocation of state funding among the campuses but also address the effect of increased revenue from nonresident tuition. As we show in Figure 11, the increasing and varying levels of nonresident revenue that the campuses received have amplified inequities in per-student funding among the campuses because the university allows campuses to retain the nonresident revenue they generate. Figure 11 also shows that the highest-funded campuses when we include nonresident revenue are generally the campuses with the lowest percentage of underrepresented minorities. For example, the highest‑funded campus—Berkeley—is also the campus with the lowest percentage of underrepresented minorities. As a result, these funding disparities have disproportionately affected underrepresented minorities, which echoes a finding from our July 2011 report that the campuses with the most underrepresented students were also the lowest‑funded campuses on a per‑student basis.

The university’s statements related to rebenching are misleading. Specifically, the university is not allocating additional funding to campuses, but rather it is accelerating the allocation of funds it previously planned to allocate to the campuses through rebenching. Further, we believe it is important to point out that the university did not make the decision to accelerate its rebenching process until after we raised concerns that it had sufficient state funding to complete it sooner.

As noted, since fiscal year 2011–12, when the university began its rebenching process, it had available state appropriations of $362 million to allocate through rebenching. Nonetheless, over the past three years, the university allocated only $111 million toward rebenching. If the university had allocated just another $111 million of the remaining $251 million in available state funding to rebenching, it could have completed the rebenching process before fiscal year 2015–16, three years earlier than it planned. After we questioned the university about its failure to shorten the rebenching time frame, its chief financial officer stated that the university planned to accelerate the rebenching process by one year—completing rebenching in fiscal year 2016–17 instead of fiscal year 2017–18—because it recognized that it had sufficient state funds to complete the process sooner.

We did not conflate growth at the university’s medical centers with the growth at campuses, but rather we present the university’s own perspective on the growth in employees from 2007 to 2014. As we describe, the university’s analysis attributes 60 percent of this growth to health science employees and the remaining 40 percent employee growth to the campuses and the Office of the President. However, we take issue with the university for failing to consider the cost related to the growth in employees, because as shown in Table 11, between fiscal years 2005–06 and 2014–15, the gross earnings of the university’s employees increased by 64 percent, from $8 billion year to $13 billion a year. We believe it was remiss on the university’s part to simply analyze the change in the number of employees, without understanding why earnings for its employees have grown by $5 billion during the same period.

The university’s assertion that the “Working Smarter initiative has reduced costs by over $660 million” is dubious. As we state here and here, we attempted to validate the $664 million of savings or new revenue the university claimed for these 13 projects, but the Office of the President was unable to provide information to substantiate any of these amounts. Rather, it was only able to provide us a disorganized set of spreadsheets and miscellaneous documents, none of which were supported by accounting reports to demonstrate that the claimed amounts of savings and revenue actually occurred.

The university’s implication that it independently froze student tuition is inaccurate. The reason the university did not raise tuition during this period was because beginning in fiscal year 2013–14 it agreed to the governor’s proposal to provide an increase in state funding in exchange for not raising tuition, as we describe. Moreover, the university neglects to mention that it had proposed a 5 percent tuition increase for fiscal year 2015–16, which it rescinded after student protests and reaching an agreement with the State for additional funding. Furthermore, the university fails to acknowledge that from academic years 2005–06 through 2011–12 it doubled the mandatory fees—base tuition and student services fee—that resident students pay from $6,141 to $12,192, as we show in Figure 9.

Contrary to the university’s assertion, our recommendations in Chapters 2 and 3 impact the budget for the entire university. We focused the majority of our analyses on undergraduate students as they represent the majority of the university’s student body, which was the intent of the audit request. Our findings and recommendations also state that the university needs to be more conscientious with its spending—which impacts all aspects of its mission. Finally, the university is incorrect as nowhere in our report do we state or conclude that “any expense that cannot be shown to have a direct impact on undergraduate education cannot be justified.”

We do not dispute that the university makes publicly available a wide variety of information about its operations; however, our report found several shortcomings. For example, as noted, the university was nearly six months late publishing its annual report on executive compensation for 2014. Although the university makes public a variety of information regarding its finances, much of that information does not provide the level of detail to understand how the university funds its operations. As we state, even though the Office of the President collects high-level financial information it does not know how campuses use state funds with any specificity. Additionally, as noted, when we spoke with the Department of Finance (Finance), it indicated that it had embarked on efforts to understand how the university spends tuition and fee revenues, particularly nonresident tuition. However, Finance asserted that it encountered difficulties in determining the university’s spending of tuition and fees because the university does not account for its expenditures in sufficient detail. In particular, the university’s spending of nonresident tuition is not distinguishable from its spending from other revenue sources in its financial documents—including its audited annual financial reports, campus financial schedules, and expenditure reports from the Governor’s Budget for fiscal year 2015–16—because it presents its spending by activity rather than revenue source. Therefore, there is clearly an interest by Finance, as well as the Legislature when it requested this audit, to identify and monitor how the university spends nonresident supplemental tuition revenue.

The university misconstrues the findings from our July 2011 report by quoting a sentence from it out of context. Specifically, the sentence that it quotes from our July 2011 report is from the summary of Chapter 3, which is titled “Although the University Has Numerous Processes to Provide Detailed Accountability for Various Types of Funding, It Could Improve the Transparency of Its Financial Operations.” That chapter discusses our concerns that the university’s financial statements and campus financial schedules are not sufficiently detailed or formatted to determine the financial performance of individual components of the university and that the Office of the President was not properly monitoring campuses’ accounting practices, resulting in the campuses’ sloppy accounting practice of recording $6 billion over five years as “Miscellaneous Services.” Thus, contrary to the university’s suggestion that our July 2011 report was complimentary of its accounting practices, that report contained significant criticisms. As noted in the Appendix, the university has yet to implement four of the eight recommendations from our July 2011 report.

We are perplexed as to why the university asserts that it would need to install new technology to respond to our recommendation to make publicly available how it allocates state funding to the campuses and other programs. The university was readily able to provide to us this information in several spreadsheets, which we reformatted into Figure 10.

We do not suggest that the university should reduce the number of its administrative staff. As we report, we simply state that the university could have achieved additional savings to offset its loss of state funding had it continued its salary reduction and furlough plan at less than half of the savings rate achieved in fiscal year 2009–10 for another fiscal year. Therefore, we stand by our recommendation that the university should conduct a systemwide assessment to identify ways to streamline and reduce its employee costs.

It is unfortunate that the university strongly objects to many of our recommendations despite clear evidence that improvements are needed. In its response, the university agrees to implement only seven of our 21 recommendations. For the remaining recommendations, the university either disagreed or failed to address the recommendations in its response.

We look forward to reviewing and determining whether the actions the university is taking will increase the enrollment percentages of referred residents from the current rate of 2 percent to be closer to the enrollment rate of 55 percent for resident applicants that it admits to the campus of their choice, as we show in Table 7.

Contrary to the university’s assertion, it does not publish extensive data each year on the qualifications of students who apply and are admitted to its campuses. At no point during our audit did the university provide a publicly-available report that includes detailed information comparing the academic qualifications of resident and nonresident applicants and those admitted, similar to the data we present in Figure 6, Table 5, and Table 6. Further, the January 2015 Annual Report on Undergraduate Admissions Requirements and Comprehensive Review that the university mentions does not include any data on the academic qualifications of residents compared to nonresidents. As we recommend, a thorough and public process that annually evaluates the qualifications of students who apply and students who are admitted, by residency status, will help ensure that campuses’ interpretations of admission standards do not adversely impact residents.

As we state, the university cautioned that decision makers should not use this cost study report it submitted to the Legislature as a solid rationale for making policy decisions or allocating resources because the assumptions, estimates, and proxies for data it had used to calculate the costs it reported could result in unreliable estimates. Thus, our recommendation is intended to ensure that the university develops and submits a report to the Legislature that can be used to make policy decisions and to allocate resources. Moreover, contrary to the university’s statement, as we state, the university’s cost study is problematic because the source of the data it uses is not apparent, and it does not tie the costs and funding it reported to readily available and public financial data, such as its annual financial audit. Lacking a basis in actual financial data, the report is not much more than a theoretical exercise.

While the university indicates that it conducts annual reviews of employee trends to inform its hiring and compensation practices, this is not a substitute for a systemwide assessment at the Office of the President and the campuses to identify ways to streamline and reduce employee costs. As we describe here and here, the university increased spending on employee salaries in eight of the last nine fiscal years, despite the State’s fiscal crisis beginning in 2008. Moreover, we note that the only fiscal year in which the university decreased its spending on employee salaries was in fiscal year 2009–10, when it implemented a one-year salary reduction and furlough plan (furlough plan) for faculty and staff from September 2009 to August 2010. However, it negated its one-time cost savings of $236 million from the furlough plan in the following year when it increased its spending on employee salaries by $526 million. Therefore, we stand by our recommendation that the university should do a systemwide assessment to identify ways to streamline and reduce its employee costs.

Contrary to the university’s assertion, our audit found that it does not conduct regular executive compensation studies and has not been proactive in assessing the total value of the benefits it provides to its top executives and managers. Specifically, we report that while a university consultant performed an analysis in 2009 to value the competitiveness of certain elements of the university’s executive compensation packages, the study is nearly six years old and excluded many perquisites the university provides. Therefore, we stand by our recommendation that when setting or adjusting salaries and benefits and when conducting studies and surveys to compare the compensation packages of its executives, the university should not only include the value of the base salaries, health benefits, and retirement, but all forms of compensation and perquisites that the university provides.

We do not conclude “that positions at [the university] are always comparable to state employees.” Rather, as noted, effective June 2015, state law requires the university to include, at a minimum, comparable positions in state government when establishing salary ranges for its top executives. Even though the university broadened the required comparison to include other government entities, we found that the university’s progress in fulfilling this requirement has been limited. Specifically, as we discuss, by February 2016 the university had only been able to match 32 of its 92 total senior management group positions to positions existing within state government, the California State University, and local governments.

We stand by our recommendation to the university to publish the annual report on executive compensation (annual compensation report) by April of each year. The intent of this report is to provide timely and transparent salary and benefits paid to certain of the university’s highly compensated employees. Because these employees must file their taxes by April of each year, we believe that this date is also a reasonable time for the university to publish its annual compensation report.

The university’s response does not address our recommendation. Although the University of California Home Loan Program Corporation (home loan program) may be a valuable recruitment and retention tool for university faculty, as of June 2015, there were 96 university executives who also benefitted from this program. Moreover, as we discuss, because the home loan program is financially dependent on the university, it ties up more than $252 million in a long-term, relatively low yield investment that the university could use elsewhere. Therefore, we stand by our recommendation that the university should assess whether the home loan program is the best use of the university’s investment funds.

We fail to understand why the Office of the President does not mandate full campus participation in the Working Smarter initiative. As we note, the Office of the President believed that the Working Smarter initiative would have better results if the campuses’ participation was voluntary and if the campuses were rewarded for participation. However, for the one program that the Office of the President did monitor and set participation goals, the Managed Travel Program (travel program), it garnered only 46 percent participation in 2014—well short of its goal of 80 percent participation. The Office of the President estimates that by failing to meet the 80 percent participation goal, the university lost the opportunity to save an additional $9 million for fiscal year 2014 alone. Because the Office of the President does not mandate campus participation in all Working Smarter projects, the amount of missed savings and revenue would certainly be much greater.

We acknowledge that it might not always be practicable for the university to directly link cost avoidance in one area to increased investment in another area. However, the university has publicly claimed that the Working Smarter initiative has generated savings and new revenue, the majority of which it asserts to have transferred to its core academic and research missions. Because we found that the university was unable to substantiate any of the $664 million in claimed savings or revenue, it will need to implement this recommendation to assure stakeholders of the veracity of any similar claim it makes in the future.

The university misstates our findings on its undergraduate recruiting efforts. Our concern, as noted, is that the university’s nonresident recruiting expenditures have increased by 400 percent over the past five years. This increased spending reflects the university’s increasing emphasis on recruiting nonresident students which, as we state, diverts already limited resources from the recruitment of residents and therefore we believe it negatively impacts the campuses’ ability to recruit students who mirror the diversity of the State. Moreover, because campuses do not accurately track their spending between nonresident and resident recruiting, we were unable to conclude whether campuses were spending more of their budgets on nonresident or resident recruitment.

We do not expect the university to subject these programs to different levels of scrutiny, but rather to the same level of detailed scrutiny all state funds should receive. In particular, we are concerned, as we state here and here, that the university has committed a sizable portion of state funding—$337 million in fiscal year 2014–15 alone as shown in Table 17—to programs that the Office of the President does not actively monitor or evaluate. As we note, our audit found that the university was aware that it could find other sources of funding for three of these programs, which received $45.4 million of state funds in fiscal year 2014–15, yet it continued to fund them with state funds. Therefore, to ensure that the university uses state funding in the most effective manner, we recommended that it better track and annually evaluate the funding of these programs—rather than allowing them to receive state funding indefinitely. Moreover, as we note here and here, the governor eliminated most dedicated funding from the state budget to give the university additional flexibility to manage budget reductions during the fiscal crisis; however, the university did not take advantage of the additional financial flexibility to evaluate whether to reduce or eliminate the use of state funding to support these programs.

The university is not correct when it describes the recommendation as inconsistent with other parts of our report. As stated here, we agree that the university can justifiably exclude the state funding that it uses for certain programs from the rebenching calculation. However, we stated that the university fails to make clear that nearly one-third of state funds it receives—$886 million—are not counted in the per-student funding calculation. Further, we reference the university’s own logic when we recommend excluding all funding for programs that do not directly relate to educating students from its rebenching calculations, rather than excluding only a few. As we state, the university stated that it excludes these types of programs to avoid making certain campuses appear better funded than others.

Footnotes

¹ The university considers underrepresented minorities to be Chicanos/Latinos, African Americans, and American Indians. Go back to text