Report Number: 2016-130

University of California Office of the President
It Failed to Disclose Tens of Millions in Surplus Funds and Its Budget Practices Are Misleading

Introduction

Background

The Legislature founded the University of California (university) in 1868 as a public, state-supported, land-grant institution. It currently consists of 10 campuses, five medical centers, and its headquarters—the Office of the President. It is also involved in the management of three national laboratories. The university’s mission is to serve society as a center for higher learning through teaching, research, and public service; and the university states in its accountability reports that access and affordability for California undergraduate students is among its highest priorities. As Figure 1 shows, out of the total of $32.5 billion in operating expenses for fiscal year 2015–16, the university spent about $6.7 billion (21 percent) on instruction, $4.6 billion (14 percent) on research, and $630 million (2 percent) on public service. Most of the remainder of its spending related to the operation of its medical centers, national laboratories, other auxiliary enterprises, and to its provision of administrative support and student services.

Figure 1
The University of California Had Operating Expenses of $32.5 Billion
Fiscal Year 2015–16
(in Millions)

Overseen by a Board of Regents, the University Is Constitutionally Autonomous

The California Constitution establishes the university as a public trust to be administered by the University of California Board of Regents (regents), an independent governing board with full powers of organization and government subject to limited legislative controls. The text box shows the composition of this governing board. Through orders and bylaws, the regents establish basic policies that guide the overall direction of the university. They also appoint the president to administer the university’s affairs and operations, and they regularly review and approve the university’s policies, financial affairs, tuition, and fees. The regents’ committee on finance reviews the Office of the President’s annual budget and recommends approval to the full board of regents, typically in July of each year. In addition, a body of university faculty representatives called the Academic Senate has responsibilities that include approving courses and determining the requirements for student admission.

The university is subject to legislative oversight only in limited circumstances. California courts have stated that the broad powers the state constitution confers upon the university provide it general immunity from legislative regulation. However, the Legislature can specify provisions that the university must meet before it can spend state appropriations. As Figure 2 shows, appropriations from the State’s General Fund constituted 10.2 percent of the $30 billion the university received in total revenue in fiscal year 2015–16. Although state appropriations as a percentage of the university’s total revenues have been in decline over the last decade, this $3 billion is second only to tuition and fee revenues in terms of discretionary revenue because much of the university’s remaining revenue is restricted either by grant and contract provisions or by commitments to its medical centers, laboratories, and auxiliary enterprises.

Figure 2
The University of California Had Revenues of $30 Billion
Fiscal Year 2015–16
(in Millions)

Source: The University of California’s fiscal year 2015–16 annual financial report (unaudited Facts in Brief from the management discussion and analysis).

The Office of the President Provides Central Administrative Services and Manages Systemwide Initiatives on Behalf of Campuses

As the systemwide headquarters of the university, the university’s Office of the President, which employed 1,667 staff in fiscal year 2015–16, serves two distinct functions for campuses: it provides certain central administrative services, and it manages systemwide initiatives that benefit multiple campuses. Examples of central administrative services include reporting at regents meetings, managing the university’s retirement programs, and developing the university’s budget. The Office of the President asserted in its Budget for Current Operations that the centralization of these administrative services creates efficiencies by eliminating the need for campuses to individually provide them. Examples of systemwide initiatives—which the university sometimes refers to as systemwide programs—include the university’s Education Abroad Program and online education platform. These initiatives are available to university students across multiple campuses.

The Office of the President also has a third role, referred to as Office of the President Operations. Essentially, this function encompasses a number of administrative tasks that the Office of the President performs to support its staff. These tasks include overseeing human resources, providing information technology assistance, and preparing and administering its own budget. To administer its day-to-day operations and serve the campuses, the Office of the President has organized its staff into 11 divisions. As an example, the chief operating officer’s division oversees the Office of the President’s operations as well as information technology services and human resource services for the entire university system.

The Individual Campuses Conduct Additional Administrative Activities

Although the Office of the President manages certain administrative functions centrally, the individual campuses also conduct administrative activities. Figure 3 shows the university’s levels of administration. Each campus has a chancellor’s office, which—with the support of various vice chancellors, provosts, and deans—oversees three broad categories of administration: institutional support, academic support, and operation and maintenance of plant (operations).

Figure 3
The University of California Has Multiple Levels of Administration

The university adopted these categories as a result of the uniform accounting structuring it uses, which is prescribed by the National Association of College and University Business Officers (NACUBO), a membership organization representing a variety of colleges and universities across the country. The NACUBO uniform accounting structure helps ensure accounting consistency among the university’s campuses and also allows for standardized reporting of financial information from institutions of higher education nationwide. Despite its benefits, however, the NACUBO uniform accounting structure has some limitations. Specifically, it does not clearly define what should constitute a university’s administrative costs, as we discuss in Chapter 3. As a result, accurately determining each campus’s administrative costs is difficult, if not impossible.

To Pay for Its Discretionary Activities, the Office of the President Levies an Annual Financial Assessment on All University Campuses

To support its operations, the Office of the President requires campuses to pay an annual assessment that constitutes the majority of the Office of the President’s discretionary revenue. The origin of the assessment is the Office of the President’s 2011 Funding Streams Initiative, which aimed to simplify the university’s financial activities, improve transparency, and create incentives for campuses to increase their revenues. Before the Funding Streams Initiative, the Office of the President collected campus revenues such as tuition and student fees, pooled that money with the annual state appropriation, and redistributed these funds to the campuses and itself. Under the Funding Streams Initiative, campuses generally keep their own revenues, and the Office of the President only distributes the state appropriation. However, the campuses must each pay an assessment that is intended to approximate its use of the systemwide services the Office of the President provides.

The Office of the President determines the assessment amount each campus must pay by first determining the total amount it needs to collect to support its operations and then multiplying this total by a particular percentage for each campus. The Office of the President determines the percentage it will use to calculate the amount each campus must pay by using three equally weighted factors:

• Total expenditures: The campus’s percentage of the university’s total campus expenditures.
• Total number of employees: The campus’s percentage of the university’s total number of employees.
• Total number of students: The campus’s percentage of the university’s total number of students.

Because the Office of the President gives campuses discretion to choose what sources they will use to pay the annual assessment, campuses may use a number of revenue sources for this purpose, including their allocations from the State’s General Fund. As Figure 4 shows, the Legislature provided—and the Office of the President allocated to the campuses—about $3 billion from the State’s General Fund in fiscal year 2015–16. The Los Angeles campus chose to pay the majority of its $63 million fiscal year 2015–16 assessment with its share of this appropriation, while the Davis campus paid its $45 million assessment with a mix of revenue from the State’s General Fund, tuition and student fees, endowments and private gifts, and sales and service income. In total, the Office of the President collected $288 million in assessments from the campuses in fiscal year 2015–16, of which up to 37 percent—about $106 million—was paid using the State’s General Fund appropriation.

Figure 4
In Fiscal Year 2015–16, Campuses Paid the Office of the President $288 Million From Many Funding Sources

The Office of the President uses the campus assessment to pay for its discretionary activities, which include its administrative services and the systemwide services and programs that it provides as the headquarters of the university. As Figure 5 demonstrates, the campus assessment funded roughly 90 percent of the Office of the President’s discretionary activities, which totaled $322 million in fiscal year 2015–16; and the remaining funds came from the university president’s endowment and two smaller funds. In contrast, the Office of the President budgeted $316 million for restricted activities in the fiscal year 2015–16 budget it presented to the regents. It funds some of these activities using restricted sources such as grants that have corresponding conditions—grant funds may only be used for the grant’s purposes—in order to receive the revenue. For example, the Office of the President receives funds from a tobacco tax that are to be used only to administer a breast cancer research program.

Figure 5
The Campus Assessment Comprised 90 Percent of the Office of the President’s Actual Discretionary Revenue in Fiscal Year 2015–16
(in Millions)

The Board of Regents Recently Approved a Student Tuition Increase

As numerous media outlets have reported, university students, stakeholders, and lawmakers have criticized the regents’ recent decision to increase student tuition. Specifically, between academic years 2006–07 and 2011–12, the university nearly doubled resident tuition, from $6,141 to $12,192 per year. After keeping resident tuition relatively steady for the last five years, the president recommended a 2.7 percent increase in tuition and fees for academic year 2017–18, which the regents approved in January 2017. Some stakeholders have criticized this decision because they believe that the Office of the President has not done enough to cut administrative costs. The Public Policy Institute of California (PPIC) published a survey of California residents in December 2016, and the results echo these concerns. Specifically, when asked how to improve California’s higher education system, 85 percent of survey respondents indicated that higher education should use its funds more wisely. As the text box shows, the majority of these individuals coupled spending wisely with increasing state funding.

As we discuss in Chapter 1, the portion of its budget that the Office of the President discloses to the regents for approval increased by nearly $100 million (about 17 percent) from fiscal years 2012–13 through 2015–16. Given that the campuses fund many of the Office of the President’s activities through the annual assessment, this significant budget increase has likely contributed to the university’s need to raise student tuition. The remainder of this report examines the Office of the President’s budget, including its budget preparation and approval process, as well as the university’s personnel costs.

Scope and Methodology

The Joint Legislative Audit Committee (Audit Committee) directed the California State Auditor to conduct an audit of the Office of the President’s budget and staffing processes. The analysis the audit committee approved contained nine separate objectives. We list the objectives and the methods we used to address them in Table 1.

Table 1
Audit Objectives and the Methods Used to Address Them

Audit Objective		Method
1	Review and evaluate the laws, rules, and regulations significant to the audit objectives.	Reviewed relevant laws, regulations, and other background materials applicable to the Office of the President’s budget and staffing levels.
2	Identify the number and cost of the Office of the President staff—and any other costs related to its administrative functions—over at least the past five fiscal years. Obtain and assess the methods that the Office of the President uses to determine its budget and staffing levels. Determine what factors have influenced its budget and staffing levels over at least the past five fiscal years.	Obtained and analyzed staffing data from fiscal years 2010–11 through 2015–16. Assessed employee staffing costs such as pensions and travel expenses. Interviewed Office of the President staff regarding its processes for developing its annual budget and staffing levels. Obtained and analyzed the Office of the President’s budget and expenditures from fiscal years 2012–13 through 2015–16. The Office of the President implemented its budget development system in fiscal year 2012–13. Before it implemented this system, the Office of the President tracked its budget on spreadsheets it did not retain. Tested a selection of undisclosed budget expenditures to determine whether Office of the President management approved them.
3	Identify whether any organizational restructuring has taken place at the Office of the President over at least the past five fiscal years. Assess how these changes affected its budget and funding structure and whether these changes have met the goals of the restructuring, such as budget transparency and simplifying the overall funding structure.	Identified two organizational restructurings—the Funding Streams Initiative, which the Office of the President implemented in fiscal year 2011–12, and an internal reorganization that it implemented in fiscal year 2014–15. Determined the goals of the organizational restructurings and assessed the Office of the President’s status in meeting those goals. Assessed the impact these two restructurings had on staffing levels, the Office of the President’s budget, and its funding.
4	Assess the methods that the Office of the President uses to determine the budget and staffing levels for systemwide initiatives. Determine whether budget and staffing decisions for systemwide initiatives affect other areas of its budget and staffing levels.	Requested a list of systemwide and presidential initiatives and compiled the total number of initiatives from this list and other sources such as University of California Board of Regents (regents) minutes, interviews, and the Office of the President’s budget data. We had to estimate the total number and cost of initiatives because the Office of the President does not systematically track them. Interviewed Office of the President staff regarding the steps it has taken to develop a workforce plan. Assessed separately the budget and staffing levels for two systemwide initiatives: Agriculture and Natural Resources (ANR) and the Education Abroad Program (EAP). The EAP’s budget became part of the Office of the President’s budget in fiscal year 2014–15, while ANR was included in the Office of the President’s budget for the entire audit period. Both ANR and EAP track their budgets separately from the Office of the President, present budget to actual comparisons, and maintain strategic plans. ANR budgets expenditures from the campus assessment. In the report, we describe ANR’s best practices because of their applicability to the Office of the President’s practices. Note that we base our text and recommendations on the Office of the President’s processes and not the separate processes for these initiatives, unless otherwise noted.
5	Review a selection of position descriptions, job duty statements, and salaries over at least the past five fiscal years to assess whether the number of staff employed at the Office of the President, and their respective cost, is justified. Review the reasonableness, in terms of cost and need, of the services that the Office of the President provides to the campuses.	Analyzed staffing data to see changes in the number of staff and staff salaries since fiscal year 2010–11. Note that staffing analyses exclude the Agriculture and Natural Resources employees unless otherwise noted. Selected 10 executive level staff positions and compared them to comparable state and California State University (CSU) executives. Selected 10 administrative staff positions and compared them to comparable state and CSU employees. Assessed the Office of the President’s process for establishing salaries. Interviewed Office of the President staff regarding the steps it has taken to develop a workforce plan. Sent two surveys to each of the University of California’s (university) 10 campuses. The first survey asked campuses whether they used Office of the President services and programs. Next, the survey asked the campuses to rate the quality of those services and programs. The second survey asked campuses about the annual assessment they pay the Office of the President and whether the amount of the assessment was justified. However, because of the Office of the President’s interference in our survey, audit standards prohibit us from using this work to inform findings or conclusions.
6	For a selection of university campuses, to the extent possible, over at least the past five fiscal years, determine the following for each: (a) The total cost and staffing levels related to administrative activities. (b) Whether there is a correlation between changes in campus administrative activities, including budget and staffing levels, with changes in the Office of the President’s administrative activities. (c) If applicable, the number and type of administrative functions that are duplicative of the Office of the President’s functions, and the cost of those duplicative functions at the campus and the Office of the President.	Interviewed staff at the Berkeley, San Diego, and Santa Cruz campuses regarding how they define and track administrative activities. Consulted the National Association of College and University Business Officers to define administrative costs. Compared administrative costs at the 10 campuses to the Office of the President. Intended to use survey results to interview campus staff about potentially duplicative services. However, because of the Office of the President’s interference in our survey, audit standards prohibit us from using this work to inform findings or conclusions. Compared staffing levels at the 10 campuses to those at the Office of the President.
7	Assess whether the oversight provided by the Office of the President ensures that campuses spend funds in accordance with legislative, statewide, and/or university priorities.	Interviewed campus and Office of the President staff regarding oversight of campus spending. Reviewed administrative expenditures reported by campuses. Obtained information from campuses that showed the fund sources they used to pay the campus assessment. Reviewed budget allocation letters the Office of the President sent to campuses. These letters contain general guidelines for how campuses should spend their funds; however, the Office of the President asserted that campuses can generally spend their unrestricted fund sources as they see fit.
8	To the extent possible, compare administrative costs and functions at the Office of the President with those of comparable public universities.	Analyzed the Office of the President’s budget and staffing data, and used publicly available information to compare the cost of central administration offices at other higher education institutions.
9	Review and assess any other issues that are significant to the audit.	Interviewed the Office of the President’s independent financial auditors. Assessed the budget information the Office of the President provides to the regents, the Legislature, and the public. Reviewed government and higher education budgeting best practices.

Sources: California State Auditor’s analysis of state law, planning documents, and information and documentation identified in the column titled Method.

Assessment of Data Reliability

In performing this audit, we obtained electronic data files extracted from the information systems listed in Table 2. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer-processed information that we use to support findings, conclusions, or recommendations. Table 2 describes the analyses we conducted using data from these information systems, our methods for testing, and the results of our assessments. Although these determinations may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.

Table 2
Methods Used to Assess Data Reliability

Information System	Purpose	Method and Result	Conclusion
University of California Office of the President’s Corporate Data Warehouse and Decision Support System Employee appointment and earnings history for fiscal years 2010–11 through 2015–16	To determine the number of Office of the President employees, their positions, and their earnings.	We performed data‑set verification and electronic testing of key data elements and did not identify any significant issues. To gain some additional assurance, we compared the total number of full-time equivalent employees in the data to the total number of employees the Office of the President reports on its public website and found no material differences. However, we did not perform full accuracy and completeness testing of these data because they are from partially paperless systems, and thus, not all hard‑copy documentation was available for review. Alternatively, following U.S. Government Accountability Office guidelines, we could have reviewed the adequacy of selected system controls that include general and application controls. However, because it was cost‑prohibitive, we did not conduct these reviews.	Undetermined reliability for this audit purpose. Although this determination may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.
IBM Cognos TM1 Budget Development System The Office of the President’s budgeted and actual expenditure data for fiscal years 2012–13 through 2015–16	To determine the Office of the President’s total expenditures, and to compare budget allocations to actual expenditures.	We performed data‑set verification procedures and electronic testing of key data elements and did not identify any significant issues. We did not perform accuracy and completeness testing on these data because the system is a paperless system. Alternatively, following U.S. Government Accountability Office guidelines, we could have reviewed the adequacy of selected system controls that include general and application controls. However, because it was cost‑prohibitive, we did not conduct these reviews. To gain some assurance over the budget allocation data, we compared the total amount of the disclosed budget for each fiscal year to the Office of the President’s restated budget total presented to the Board of Regents and found some immaterial differences in the total budget amounts. To gain some assurance over the expenditures data, we reconciled expenditures data for one fiscal year from the budget development system with expenditures reported through the University of California’s (university) corporate financial reporting system, which is used to prepare the university’s audited financial statements, and found some immaterial differences. However, some systemwide expenditures were reported at the same location as the Office of the President’s expenditures in the university’s corporate financial reporting system, creating some difficulties in distinguishing between the Office of the President’s expenditures and systemwide expenditures. We discuss this issue in Chapter 1.	Undetermined reliability for these audit purposes. Although this determination may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.
University of California, Los Angeles’ Financial System The Office of the President’s general ledger transaction data for its unrestricted funds for fiscal years 2011–12 through 2015–16	To make a selection of financial transactions from the Office of the President’s general ledger. To determine expenditures related to selected travel expense claims. To determine the amount of meal expenses paid for by the Office of the President’s campus assessment fund.	We did not perform accuracy and completeness testing on these data because the system is a paperless system. Alternatively, following U.S. Government Accountability Office guidelines, we could have reviewed the adequacy of selected system controls that include general and application controls. However, because it was cost‑prohibitive, we did not conduct these reviews. To gain some assurance over the accuracy of the financial system, we judgmentally selected 21 high‑dollar value transactions and found that the selected transaction values matched to the amounts in source documentation.	Undetermined reliability for these audit purposes. Although this determination may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.
University of California Office of the President’s Corporate Financial Reporting System	To determine the amount of ending fund balances for funds used in the Office of the President’s budget for fiscal years 2011–12 through 2015–16.	We performed data-set verification procedures and electronic testing of key data elements and did not identify any significant issues. We did not perform accuracy and completeness testing on these data because the system is a paperless system. Alternatively, following U.S. Government Accountability Office guidelines, we could have reviewed the adequacy of selected system controls that include general and application controls. However, because it was cost prohibitive, we did not conduct these reviews. We have some assurance over the data because it was extracted from the same information system used to prepare the University of California’s audited financial statements.	Undetermined reliability for these audit purposes. Although this determination may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.

Sources: California State Auditor’s analysis of various documents, interviews, and data obtained from the university.

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