Report 2016-130 All Recommendation Responses

Report 2016-130: The University of California Office of the President: It Failed to Disclose Tens of Millions in Surplus Funds, and Its Budget Practices Are Misleading (Release Date: April 2017)

Recommendation for Legislative Action

To ensure that the Office of the President's actions align with the university's primary mission, the Legislature should appropriate an amount directly to the Office of the President through the annual state budget process that eliminates the need for a campus assessment. Based on the Office of the President's actions as it implements its three-year plan, evaluate the amount of the direct appropriation annually. Once the Office of the President has completed the three-year plan, evaluate the necessity of a continued direct appropriation after assessing the strength of the Office of the President's new budget, accounting, and staffing policies, as well as its demonstrated commitment to ongoing transparency.

Description of Legislative Action

Assembly Bill 97, the Budget Act of 2017, appropriates $296 million to the Office of the President and provides that the funds may only be encumbered if the President certifies in writing to the California Department of Finance that there will be no campus assessment for support of that office for the 2017-18 fiscal year and overall campus revenues will be greater in the 2017-18 fiscal year than in the previous fiscal year.

Legislative Action Current As-of: November 2017

California State Auditor's Assessment of 6-Month Status: Legislation Enacted

Legislation Enacted

Recommendation for Legislative Action

To ensure that the Office of the President's actions align with the university's primary mission, the Legislature should do the following:

From the funds appropriated, require the regents to contract with an independent third party that can assist the regents in monitoring the three-year corrective action plan for the Office of the President. The Legislature should hold annual hearings that include a status report by the independent third party regarding the Office of the President's progress, challenges, and barriers to success in implementing the three-year corrective action plan.

Description of Legislative Action

Legislation was not introduced to address this recommendation; however the Office of the President entered into a contract with an independent third party to assist in monitoring the three-year corrective action plan.

Legislative Action Current As-of: November 2017

California State Auditor's Assessment of 6-Month Status: No Longer Necessary

No Longer Necessary

Recommendation #3 To: University of California

To determine the amount of money that it can reallocate to campuses and to ensure that it publicly presents comprehensive and accurate budget information, by April 2018 the Office of the President should document and review the restrictions on its funds and fund commitments to determine whether it can reallocate any of these funds to its discretionary budget for eventual reallocation to campuses.

Annual Follow-Up Agency Response From October 2018

The implementation of this recommendation has been completed:

The FY2018-19 UCOP budget, approved by the UC Regents in May 2018, includes the detail of fund balances as of June 30, 2017 and projected balances as of June 30, 2018. All funds have been categorized according to the approved fund categories: restricted, unrestricted-designated, and unrestricted-undesignated.

Details of UCOP's review of fund balances, reserves and commitments are included in Part 2 of the budget item (pgs. 15-18). This section provides the specific amounts for the FY2018-19 budget related to forecasted fund balances, fund commitments and amounts available for systemwide use. The restricted fund balance as of June 30, 2017, and forecasted June 30, 2018 balances are provided in Figure 14. Unrestricted-designated balances and projections are provided in Figure 15. Unrestricted-undesignated funds are detailed in Figures 16a and 16b. These tables provide key information related to balances, commitments and reserves held both at UCOP and in systemwide funds.

UCOP's approved budget begins to reallocate funds back to campuses, ahead of the stipulated timing in the CSA recommendation. Redirected funds include $10M for the UC Riverside School of Medicine and $30M ($3M per campus) to address housing strategies ($14.5M from the Housing Loan Program and $15.5M from GO Bonds).

Completion Date: May 2018

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

The Office of the President presented its fiscal year 2018-19 budget to the Regents on May 24, 2018. We compared summary in formation in the Office of the President's fiscal year 2018-19 budget to detailed data from its budget development system and did not identify any issues. Because we were able to verify information reported to the Regents and because the fiscal year 2018-19 budget includes a list of fund commitments, we determined this recommendation is fully implemented.

As indicated in its response to this recommendation, the Office of the President has begun taking steps to return some funds to campuses—approximately $40 million. Furthermore, it has committed to reviewing and reallocating funds to campuses on an annual basis. Given the magnitude of the Office of the President's reserves and fund balances, which we discuss more specifically in our assessment of recommendation 5 below, it remains critical that the Office of the President—and the Regents—ensure that the maximum amount of funds are reallocated to campuses each year.

1-Year Agency Response

Categories and definitions for fund restrictions were created based on the University's accounting policies and generally accepted accounting principles. All of the funds on the general ledger for the Office of the President were reviewed and assigned an appropriate fund restriction category. The results of this process were presented to the Regents Finance and Capital Strategies Committee on March 14, 2018. The fund restriction working group recommended that 68 funds with total balances of $74.7 million as of June 30, 2017 be reclassified as unrestricted and undesignated. The Regents item F10 contains supporting documentation, including a table in Attachment B, summarizing the Office of the President funds and their classification based on the definitions can be found at the link below.

http://regents.universityofcalifornia.edu/regmeet/mar18/f10.pdf

UCOP has provided the CSA with documentation supporting its analysis of fund restrictions.

Completion Date: March 2018
Response Date: April 2018

California State Auditor's Assessment of 1-Year Status: Partially Implemented

We assessed this recommendation as partially implemented because the Office of the President did not provide us information regarding its reviews of fund commitments. According to the fund balances the Office of the President presented at the March Regents meeting, the Office of the President had $404 million in total fund balances which are composed of:

-$43 million in restricted funds according to generally accepted accounting principles (11 percent of total funds)

-$361 million in unrestricted funds (89 percent of total funds)

--$223 million designated (62 percent of unrestricted funds)

--$138 million undesignated (38 percent of unrestricted funds)

The $223 million in unrestricted designated funds are funds to be used for a specific purpose. For example, the Regents designated $75 million for its home loan program. Therefore, the amount that is unrestricted and undesignated amounts to $138 million or 38 percent of unrestricted funds; however, the president has the ability to also designate these funds as committed. Because the Office of the President did not provide us the data that supports its fiscal year 2018-19 budget, as discussed in recommendation 5, it is unclear how much of these unrestricted and undesignated funds it will determine are committed and therefore unavailable for reallocation to campuses for student or campus priorities.

By applying new fund definitions, the Office of the President increased the number of unrestricted and undesignated funds from 13 funds to 81 funds. In other words, the amount of unrestricted and undesignated funding increased by $75 million from $63 million to $138 million.

6-Month Agency Response

The workgroup formulated a project scope and workgroup charter . The group has identified a list of funds used within the UCOP budget (500+) and created a file to track them , along with their respective key attributes.

Next steps in the review include identifying funds with external restrictions and subsequently validating this information with departments and divisions across UCOP.

The workgroup will then review the restrictions and evaluate any opportunities to relieve restrictions to support unrestricted budget categories, with the input of key subject-matter experts and the Executive Budget Committee.

Estimated Completion Date: April 2018
Response Date: October 2017

California State Auditor's Assessment of 6-Month Status: Pending

The status of this recommendation is pending the Office of the President's review of fund restrictions. The Office of the President plans to report on its fund restrictions, commitments, and balances by April 2018. According to the Office of the President's working list of restricted funds, there are 521 active restricted funds. The Office of the President asserts that only 136 of those funds are restricted for Office of the President budget purposes, but not restricted per the university's financial audit or generally accepted accounting principles. Therefore, the Office of the President has discretion to make the policy decision to remove the restrictions on these funds.

60-Day Agency Response

A fund restrictions work group has been formed and is meeting twice monthly. The work group consists of staff members from UCOP and systemwide finance, and will draw on subject matter experts as required (e.g. Office of General Counsel). The work group has identified the scope which includes: (1) Review all restricted funds, (2) Evaluate use of fund categories to separate based on least / most restrictive definitions, (3) Apply a materiality methodology to focus on the largest opportunity areas, (4) Develop comprehensive documentation for future use and regular reviews, and (5) Establish where fund restrictions can be removed or modified.

The work group has finalizing a work plan and is launching the analysis and documentation phase. This involves identifying all funds and any existing documentation. It includes understanding the restrictions as well as identifying how or who made the initial restriction (e.g. Federal Research grant vs. UCOP restriction). In addition, the work plan includes assessment of existing best practices and benchmarks.

Estimated Completion Date: April 2018
Response Date: June 2017

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #4 To: University of California

Annual Follow-Up Agency Response From April 2019

The approved UCOP FY18-19 Budget included four pages of detailed reporting on UCOP's fund balances, reserves, and commitments including a plan to redistribute available fund balances to UC campuses. As confirmed through the review and approval process with multiple stakeholders including the UC Regents, this level of detail provided transparency and simplified reporting of available balances, reserves and commitments. UCOP will continue to incorporate this level of detail in future budget reporting.

In March 2019 UCOP reviewed comprehensive Reserve Guidelines with the UC Regents for all UCOP reserves, including programmatic and non-operating reserves. Since presenting to the Regents in March, the document has been improved and refined.

The UCOP Reserve Guidelines leverages best practices; clearly defines reserves, commitments, and fund balances; clarifies the difference between reserves and fund balances; provides guidance on funding, using, monitoring, and reporting; sets target funding levels for all UCOP reserves, and establishes the process for allocating fund balances and funds in excess of reserves.

To develop the guidelines UCOP conducted best-practice research and industry benchmarking from over 38 institutions including GFOA, NACUBO, federal, state, and local governments, and higher education institutions such as CSU. The research was helpful in informing the development of the guidelines despite the fact that it indicated there is no one, agreed-upon best practice. Rather, each organization has a unique business model, risk exposure and financial circumstances; therefore, the level of assets that are set aside to mitigate against risks appropriately vary by organization and reserve type.

The UCOP Reserve Guidelines are available at: https://ucop.edu/ucop-budget/_files/ucop-reserves-guiding-principles.pdf. Per these guidelines, UCOP will continue to report on all reserves as part of the annual budget process and after year-end fiscal close.

Completion Date: March 2019

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

We are rating this recommendation as fully implemented due to the Office of the President's published reserve guidelines that establish policies for the programs that did not have policies during our last review and identify the purpose, minimum targets, and maximum targets for each reserve. The Office of the President stated it developed target minimums and maximums after considering best practices, benchmarking at peer institutions, and its own risk analysis. We also noted that the Office of the President shared the reserve guidelines with the Regents.

We discuss our conclusions related to the current size of the Office of the President's reserves and fund balances in recommendation 22.

Annual Follow-Up Agency Response From October 2018

Implementation of this recommendation is complete based on the FY18-19 budget presentation to the Regents which added more information than was included in the budget prototype and provides not just reserve balances but also fund balances and commitments in a way that attempts to be both comprehensive and transparent.

Pages 15-18 of the budget item describes actions taken over the past year to identify, define, and forecast balances, commitments and reserves. The differentiation between fund reserves and fund balances is clarified:

-Fund balances result from either savings relative to the budget or timing of mulit-year funding and expenses across fiscal years

-Reserves are funds intentionally accrued from the operating budget over a period of time or specifically designated or restricted for a purpose such as maintaining assets in good working order, managing risk, or in anticipation of periodic large expenses such as preparing an RFP response for the Department of Energy.

Two types of reserves are presented and defined in this section of the budget item: a Central Operating Reserve, and program-specific reserves. The Central Operating Reserve is held in the principal of the systemwide President's Endowment Fund and as such is not maintained as a separate fund balance.

Program-specific reserves, commitments and fund balances are organized by fund type to make it easier to understand and explain how balances, commitments and reserves are managed for each type.

The Strategic Priorities Fund is not considered a reserve. As of FY18-19 it is a line item in the operating budget used to fund emerging priorities and initiatives.

Completion Date: May 2018

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

We rate this recommendation as partially implemented because the Office of the President could not provide policies for all seven of its program specific reserves that totaled $122 million in its fiscal year 2018-19 budget. Additionally, we are still concerned about the lack of sufficient transparency related to fund balance amounts in the Office of the President's budget for fiscal year 2018-19, which we discuss in our assessment of recommendation 5.

Perhaps of greater concern, the absence of sufficient reserve policies allows the Office of the President to retain and maintain virtually an unlimited amount of fund balances and reserves. In particular, the Government Finance Officers' Association (GFOA) recommends that, generally, an entity retain at least two months of its total operating expenses in its unrestricted fund balance as a reserve. Additionally, GFOA recommends that entities develop a policy for how to handle unrestricted fund balances above the policy requirements. Without policies that identify for each reserve at least the purpose, minimum amounts or proportions, maximum amounts or proportions, and descriptions of how it intends to handle unrestricted or excess fund balances, the Office of the President and UC stakeholders will find it difficult to assess what portion of the fund balances could potentially be allocated to the campuses. Therefore, the Office of the President's fund balances and reserves do not conform with GFOA's recommendations, and it is unclear how the Office of the President intends to spend its unrestricted fund balances in future years.

1-Year Agency Response

UCOP has completed its analysis and determined appropriate operating reserve requirements. As a result, a Regents policy governing UCOP's Central Operating Reserve was developed and subsequently approved by the Regents at the January 2018 Regents meeting. The policy can be found here: http://regents.universityofcalifornia.edu/governance/policies/5104.html. Implementation guidelines detailing how the Central Operating Reserve should be implemented are documented in the approved Presidential Guidelines here: https://policy.ucop.edu/doc/3000673. The Presidential Guidelines were included in the item approved by the Regents at the January 2018 meeting.

UCOP has also reviewed historical practices for short-term strategic priorities funding. Presidential Guidelines governing the amount and spending guidelines for the Strategic Priorities Fund were developed, approved by the President, and reviewed by the Regents. The approved Presidential Guidelines covering the Strategic Priorities Fund can be found here: https://policy.ucop.edu/doc/3000674.

Completion Date: February 2018
Response Date: April 2018

California State Auditor's Assessment of 1-Year Status: Partially Implemented

We assessed this recommendation as partially implemented because although the Office of the President has developed two reserve policies, it is difficult to determine the Office of the President's total reserve amount, which we do not believe addresses the intent of our recommendation for it to develop comprehensive budget information that promotes transparency. Specifically, to understand the Office of the President's total reserve amount stakeholders would need to add together three different types of reserves—only two of which are included in its budget prototype. Since one reserve type is not included in the presentation, stakeholders cannot determine the total reserve amount from the information the Office of the President plans to present in its annual budget presentation. Moreover, without extensive knowledge about the Office of the President's budget processes, most stakeholders likely would not understand that they need to add together the two reserve types listed below to more fully understand the Office of the President's total reserve amount.

The Office of the President has three reserve types: central operating reserve, strategic priority fund, and restricted and project reserves. At the January 2018 Regents meeting, the Regents approved a policy that requires the Office of the President to maintain a central operating reserve to support its operations in the event of an unanticipated disruption in planned funding. Presidential guidelines effective July 1, 2018 further require a central operating reserve of $15 million or three and a half percent of applicable funds, whichever is greater. The president can also supplement the central operating reserve up to an additional $100 million or three months of applicable funds, whichever is greater. Some funds are not covered by this reserve, including restricted funds and programs with self-funded reserves; the policies for these reserves vary by fund. The central operating reserve is funded by the President's Endowment fund and the president must approve all transactions from the reserve and notify the Regents before any funds are drawn. Expenses beyond $15 million require approval from the majority of three Regents: the chair of the board, the chair of the finance and capital strategies committee, and the chair of the compliance and audit committee.

The Office of the President also issued guidelines governing its strategic priorities fund. This fund is similar to what we described in our report as the undisclosed budget and was supported with reserve funds at the time of our audit. The strategic priorities fund is for one-time or limited-term strategic priorities and is supported with unrestricted funds. The target budget for the strategic priorities fund is $30 million, but is variable based on the Regents' annual approval via the budget process. Additionally, the Office of the President established three internal approval processes that it uses depending on the total amount of the request and the type of the request.

6-Month Agency Response

An analysis and summary of existing UCOP reserve practices and balances and a stakeholder analysis have been completed and reviewed by UCOP leadership. This process included benchmarking and research of reserve practices and policies of other universities and organizations in the non-profit/government sector.

A forecasting model for reserve-requirements scenarios with related assumptions for a central operating reserve is being developed. The workgroup will use it to model various reserve-requirements scenarios. A review of historical practices for strategic-priorities reserves is in progress to support projections and scenarios for future reserves requirements.

Estimated Completion Date: April 2018
Response Date: October 2017

California State Auditor's Assessment of 6-Month Status: Pending

The status of this recommendation is pending the Office of the President's development of a reserve policy. The Office of the President plans to present its recommended reserve policy to the regents in late January 2018.

60-Day Agency Response

The reserve policy work group, which includes both UCOP and campus representatives, has been formed and is currently meeting weekly to define our scope, determine our research and benchmarking methodologies, and develop a more detailed workplan. Current objectives have been defined as: 1) complete a review of current UCOP reserve practices and existing reserves ("set the baseline"); 2) conduct research / benchmarking to document best-practices; 3) develop a formal UCOP Reserves policy and obtain stakeholder agreement and Regental approval; and 4) develop and approve how the reserves will be funded.

Research and benchmarking efforts are already underway and will include: higher education institutions (e.g., CSU, Big 10, SUNY, etc.), industry associations (e.g., NACUBO, EAB, GFAO, etc.), as well as other industry and government entities.

Estimated Completion Date: April 2018
Response Date: June 2017

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #5 To: University of California

To determine the amount of money that it can reallocate to campuses and to ensure that it publicly presents comprehensive and accurate budget information, by April 2018 the Office of the President should implement our recommended budget presentation shown in Figure 11 on page 40. Specifically, the Office of the President's budget presentation to the regents should include a comparison of its proposed budget to its actual expenditures for the previous year. It should also include all its expenditures and identify changes to the discretionary and restricted reserves. The Office of the President should combine both the disclosed and undisclosed budgets into one budget presentation.

Annual Follow-Up Agency Response From October 2022

The University of California prepares its consolidated annual budget each fall, and it is presented to the UC Regents in November. This total amount is inclusive of any amount that would be subsequently allocated to UCOP under a campus assessment for the operations of the Office of the President. The University's timeline is consistent and aligned with other California State agencies. This process allows ample time to inform the Governor's budget released in January.

The UCOP campus assessment is best established with knowledge of the level of support from the State of California. This approach allows the University to optimize allocations across the system's key priorities. Further, this timing allows the university to effectively leverage year-to-date actual expenditures used to guide develop of annual budgets at the Office of the President. The UCOP May Regents item provides a comprehensive and transparent presentation of expenditures for the forthcoming fiscal year which commences annually on July 1st.

Finally, UCOP has been incorporating the CSA Figure 11 format in its annual budget proposal for several years.

Completion Date: January 2020

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Additionally, the information UC includes about the Office of the President in the consolidated annual budget it references does not provide budget information for the upcoming fiscal year and instead only includes information from the prior fiscal year which we continue to believe is insufficient. As we have stated before, we do not understand why UCOP cannot follow a similar process so that its budget information will be available earlier in the state budget process.

Auditee did not address all aspects of the recommendation

Annual Follow-Up Agency Response From October 2021

The University of California prepares its consolidated annual budget each fall, on a timeline consistent and aligned with other California State agencies. The total UC budget request is inclusive of funding for the Office of the President. This process meets the critical needs of the Governor, the Legislature and the Department of Finance to make informed decisions regarding UC's portion of the state budget. After considerable evaluation, UC recommends no change to the current timeline for the UCOP budget. Additionally, UCOP has adopted the CSA presentation and satisfied all the requirements of Recommendation 5, and seeks continuous improvement opportunities each year.

UCOP's current budget has a higher degree of accuracy and transparency resulting from this audit. The May Regents timeline enables the office to highly leverage actual expenditures and a mid-year forecast to improve overall budget quality. The now well-established Executive Budget Committee continues to review and make recommendations for programs, services and new priorities to set the plan for the forthcoming year. The FY21-22 UCOP budget was approved unanimously by the UC Regents in May with the support of the campuses. Notably this year, the Regent's approved the Office of the President's budget in May 2021, prior to the final State Budget Act, and with current processes in place, UCOP believes this will occur annually.

Across the UC system, there has been widespread support to return to the campus assessment funding stream model to fund UCOP's budget. Campus assessment enables the campuses and UCOP to optimize the budget as a system in a unified, collaborative manner. For FY21-22, UCOP has been restored to a campus assessment, and this model should be allowed to continue for the future limiting the risk of more disruption to the campuses, students and other key budget stakeholders.

Completion Date: July 2019

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

The timing of the Office of the President's budget presentation does not align with the budget processes other state agencies follow, including the process that UC follows when developing the budget for the system. Most state agencies begin developing their budgets in the summer and fall in preparation for the Governor's budget released in January. Additionally, the information UC includes about the Office of the President in the consolidated annual budget it references does not provide budget information for the upcoming fiscal year and instead only includes information from the prior fiscal year which we believe is insufficient. As we have stated before, we do not understand why UCOP cannot follow a similar process so that its budget information will be available earlier in the state budget process.

Auditee did not address all aspects of the recommendation

Annual Follow-Up Agency Response From April 2020

Consistent with other State agencies, the University of California prepares its consolidated financial plan and budget in the fall, presents it to the Regents, and then provides it to the Department of Finance in time for the preparation of the Governor's January budget. The UCOP budget represents less than 2.5% of total University expenditures, and UCOP's direct appropriation is less than 1%.

The University's budget includes assumptions that form the basis for developing the budgets for each campus and UCOP. Each location's budget process progresses through the spring in parallel with the State's deliberations and takes into consideration any changes to the financial outlook from the State or the University. Campus budgets are finalized in May and are adjusted if needed once the University's appropriations are finalized in June.

As directed by the Regents, UCOP presents its budget to the Regents at the May meeting. Current year Q3 forecasts and fund balances are included in the presentation which provide greater accuracy and transparency.

The CSA recommended the State directly appropriate UCOP's budget, and it has done so, holding the appropriation flat at the FY16-17 level for four years including FY20-21. During that time UCOP has managed the flat appropriation by reducing costs and utilizing fund balances. As reported in November 2019, UCOP has reallocated $166.3M to the campuses over the past three years, and eliminated all unrestricted fund balances. The FY19-20 budget included 55 pages of information and 12 different, detailed schedules, reflecting significant and genuine efforts over the past three years to meet all of the CSA's budget, accounting and staffing policy recommendations and provide greater transparency and accountability.

Completion Date: July 2019

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

We assessed this recommendation as partially implemented because, after three years, the Office of the President still has not changed the timing of its budget process to align with the timing of the state budget process. As we have previously noted, the failure to do so may hinder the Legislature, Governor, and Department of Finance when making decisions regarding the UC's portion of the state budget. This is a critical recommendation that, if successfully implemented, will significantly improve stakeholders' ability to hold the Office of the President accountable. Not completing the budget recommendation on time remains a significant deficiency in the Office of the President's response to the audit.

Unlike UC campuses, the Legislature funds the Office of the President via a direct appropriation; therefore, it is important for its budget information to be available for consideration during the state budget process. However, for the second year in a row, the Regent's will approve the Office of the President's budget after the Governor has signed the State's budget. The Budget Acts of 2017, 2018, and 2019 stated that it is the intent of the Legislature that providing state funding directly to the Office of the President will provide more legislative oversight of the office. Nonetheless, last year budget information was not available in time for an Assembly budget subcommittee hearing on May 1, 2019 that included a discussion of the Office of the President's budget. Additionally, the Regents did not pass the Office of the President's fiscal year 2019-20 budget until three weeks after the Governor signed the state budget. Because the Office of the President presents its budget so close to the start of the new fiscal year, it gives decision makers limited time to consider the efficacy of the request and to assess that request against other state or university priorities.

We recommended that the Legislature directly appropriate the Office of the President's budget until it has completed our three-year plan and that the Legislature evaluate the necessity of a continued direct appropriation after assessing the strength of the Office of the President's new budget, accounting, and staffing policies, as well as is demonstrated commitment to ongoing transparency. We recognize the Office of the President's resource investment and progress made thus far in implementing our recommendations by improving its fiscal, staffing, and systemwide initiative processes. However, the Office of the President still needs to fully implement key recommendations to successfully address the concerns we identified in our report.

Annual Follow-Up Agency Response From November 2019

Per the CSA's assessment, the FY19-20 budget included further improvements such as the CSA's recommended Figure 11.

The University agrees with the CSA that, as with most State agencies, the University begins developing its budget in the fall in preparation for the Governor's January budget. The Regents approve the University budget in the fall, which includes critical budget assumptions that govern the entirety of the University's budget. These assumptions form the basis for developing UC location budgets, including each campus and UCOP. Each location's budget process progresses through the spring in parallel with the State's deliberations. All budgets are adjusted as needed once the University's has been finalized.

The timing and preparation of the UCOP budget is similar to the budget process of the University's campuses and other locations. UCOP did attempt to address the concerns of the CSA by submitting Budget Change Proposals to the Department of Finance in advance of the April deadline. However, the proposals submitted were not approved.

The CSA recommended the State directly appropriate UCOP's budget for three years, and it has done so, holding the appropriation flat to FY16-17 levels. UCOP has managed the flat appropriation by reducing costs and utilizing fund balances while also reallocating funds to the campuses. UCOP staff have invested thousands of hours implementing the CSA's recommendations and actively engaged the Regents, Chancellors and Executive Budget Committee in setting UCOP's priorities within the context of the University's. Sjoberg Evashenk has independently monitored and reported on the audit recommendations.

Completion Date: July 2019

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

We assessed this recommendation as partially implemented because, although the Office of the President has improved its budget presentation, it did not develop its budget by April 2019. As we have previously noted, the failure to do so may hinder the Legislature, Governor, and Department of Finance when making decisions regarding the UC's portion of the state budget. This is a critical recommendation that, if successfully implemented, will significantly improve stakeholders' ability to hold the Office of the President accountable. Not completing the budget recommendation on time remains a significant deficiency in the Office of the President's response to the audit.

The Regents did not approve the Office of the President's fiscal year 2019-20 budget until July 2019, two months after the May Revise and three weeks after the Governor signed the state budget. Unlike the campuses, since the Legislature funds the Office of the President via a direct appropriation, it is important for its budget information to be available for consideration during the state budget process. Moreover, the timing of the Office of the President's budget presentation does not align with the budget processes other state agencies follow, including the process that UC follows when developing the budget for the system. Most state agencies begin developing their budgets in the summer and fall in preparation for the Governor's budget released in January. We do not understand why UCOP cannot follow a similar process so that its budget information will be available earlier in the state budget process.

Finally, we did not recommend the Legislature directly appropriate UCOP's budget for three years, but rather that the Legislature directly appropriate UCOP's budget until it has completed our three-year plan. Then we recommended that the Legislature evaluate the necessity of a continued direct appropriation after assessing the strength of the Office of the President's new budget, accounting, and staffing policies, as well as its demonstrated commitment to ongoing transparency.

Annual Follow-Up Agency Response From April 2019

In May 2018, UCOP presented a detailed FY18-19 budget to the UC Regents which significantly surpassed the level of detail required in the CSA's Figure 11 and was approved unanimously by the Board in May 2018. The item is available at: http://regents.universityofcalifornia.edu/aar/mayb.pdf.

In response to feedback from the CSA, UCOP replicated, adapted and included a representation of Figure 11 in the March 2019 Regents presentation of the UCOP FY18-19 Mid-Year Budget and Second Quarter Forecast. UCOP is also including Figure 11 in the Executive Summary of the FY19-20 and subsequent budget items.

In response to the concerns that fund balance and reserves data was contained in the narrative rather than the schedules, UCOP discussed with the CSA in December 2018 the inclusion of a new schedule for the FY19-20 budget presentation. New schedules for fund balances and reserves have been drafted and will be presented in the FY19-20 budget.

UCOP will continue to present the budget to the UC Regents in May to align with the scheduled cadence of meetings so that the full board is available to review and take action. This also allows appropriate time to complete second and third quarter forecasts, incorporate critical external budget factors including the Governor's January budget, and review the budget internally and with the President, Executive Budget Committee, and Chancellors.

The UC Regents, Executive Budget Committee, third party monitor Sjoberg|Evashenk and other key stakeholders support presenting the UCOP budget at the May Regents meeting. What UCOP has done differently this year is to provide the Department of Finance with Budget Change Proposals for each UCOP budget-related line item (general OP budget, UC Path, and ANR). These proposals were presented to DOF on April 8th.

Agenda items for the May Regents meetings will be publicly available on the Regents' website in the first week of May, shortly after the CSA's April 25th deadline.

Completion Date: May 2018

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

We assessed this recommendation as partially implemented because, although the Office of the President made improvements to its budget presentation as we discuss in recommendation 22, for the second year in a row the Office of the President did not implement the State Auditor's recommendation for developing its budget by April. The failure to do so may hinder the Legislature, Governor, and Department of Finance when making decisions regarding the UC's portion of the fiscal year 2019-20 state budget. This is a critical recommendation that, if successfully implemented, will significantly improve stakeholders' ability to hold the Office of the President accountable. Not completing the budget recommendation on time is a significant deficiency in the Office of the President's response to the audit.

The Office of the President publishing and seeking approval for its budget in May does not provide state policy makers adequate time to assess its operations and funding requests. For example, the Office of the President's budget was not available for the California Assembly Budget Subcommittee #2 on Education Finance (assembly budget subcommittee) hearing on May 1, 2019, which included a discussion of the Office of the President's budget. Additionally, the Office of the President posted its budget online on May 6, 2019, and the Regents will not approve the budget until May 16, 2019. This did not give the Governor adequate time to review the Office of the President's budget and make any necessary adjustments to the May Revise which the Governor released on May 9, 2019. Because UCOP presents its budget so close to the start of the new fiscal year, the Office of the President gives decision makers limited time to consider the efficacy of the request and assess that request against other state or university priorities.

Moreover, the timing of the Office of the President's budget presentation does not align with the budget processes other state agencies follow, including the process that UC follows when developing the budget for the system. Most state agencies begin developing their budgets in the summer and fall in preparation for the Governor's budget released in January. For example, unlike UCOP, the UC system passed its fiscal year 2019-20 budget for current operations—the budget for the entire system—in November 2018. As such, we do not understand why UCOP cannot follow a similar process so that its budget information will be available earlier in the state budget process.

Auditee did not address all aspects of the recommendation

Annual Follow-Up Agency Response From October 2018

UCOP engaged in a project to simplify, clarify, and present a transparent annual operating budget to the Regents. UCOP revised the FY2018-19 budget presentation format in compliance with:

-GFOA and NACUBO budgeting best practices

-State systemwide budget presentations, formats and trends in higher education, and professional presentations

-Feedback from the Executive Budget Committee, Sjoberg/Evashenk and the Regents

-The CSA's recommended budget format in Figure 11 of the audit report

-Outcomes from other related workstreams

The proposed prototype was reviewed with the Regents in March 2018 and is available here: http://regents.universityofcalifornia.edu/regmeet/mar18/f11.pdf . Per Attachment 4, the format was updated to include:

-A single item format

-Operating and one-time expenses in one comprehensive budget

-A "Sources and Uses" schedule

-Fee-For-Service and Pass-Through reporting

-Budgets based on projected actuals

-Fund restrictions designations and fund balance reporting

-Cause of Change analysis

-Strategic Priorities Fund budget that reflects commitments and an uncommitted allocation

Per the agreed upon timeframe of the UC Board of Regents, UCOP presented the FY18-19 budget to the full board for their review and approval on May 24th. The best-practice budget passed without any dissent. The item is available at: http://regents.universityofcalifornia.edu/aar/mayb.pdf

The UCOP Budget Manual was also provided to the CSA and documents the policies, guidelines, procedures, and analyses associated with the annual budget process. This manual is not intended to be a static document and will continue to be updated as additional improvements are identified and made.

UCOP submitted several supporting documents to the CSA in response to their intiial review and subsequently held discussions with the CSA on September 13th and 17th.

Completion Date: May 2018

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

We rate this recommendation as partially implemented because although the Office of the President's fiscal year 2018-19 budget largely incorporated certain elements of our recommended budget presentation, it continues to lack sufficient transparency that would allow the Governor and the Legislature to understand what fund balance awards are available to reallocate to campuses. Specifically, it did not include summary lines in its financial schedules that displayed the total restricted and discretionary reserves and fund balances, which, as we described in the status summary on the home page of our website, totaled $321 million. Instead, the Office of the President included summary information as part of graphics in an earlier, narrative portion of the budget document. According to the Office of the President, it originally considered including fund balances in Schedule A—the part of its budget that depicts our recommended budget presentation. However, the Office of the President believed that the column structure did not work well for communicating the different commitments, reserves, and fund balances by fund type.

To meet the intent of our recommendation—which is to clearly display the amount of surplus funds it has at the end of each fiscal year available for reallocation to the campuses in the following budget year—the Office of the President should present its restricted fund balances, unrestricted fund balances, and program-specific reserves at the end of Schedule A. These amounts should result logically from the difference between its annual revenues, expenditures, and beginning fund balances. The Office of the President should also present the central operating reserve on a separate line because it is not supported by fund balances. In addition, the Office of the President should ensure that it lists its prior year fund balances as a carryover in the following year. These changes to its budget presentation would meet the intent of our recommendation and the concepts underlying Figure 11 on page 40 of our report.

In addition, the Office of the President confirmed to us that it plans to release its fiscal year 2019-20 budget in May 2019 as opposed to April 2019. As we indicated in our one-year assessment for this recommendation, by releasing its budget in May as opposed to April, the Office of the President may hinder the Department of Finance, the Legislature, and the Governor as they make decisions regarding the UC's portion of the state budget.

We also performed a high-level review of budget, actual, and fund balance data to ensure that the budget presentation was accurate. Additionally, we assessed the reasonableness of the budget system's vacancy data and verified the supporting documentation for the strategic priorities fund. We did not identify any issues in these areas.

1-Year Agency Response

UCOP engaged in a project to simplify, clarify, and present a transparent annual operating budget to the Regents. UCOP revised the FY2018-19 budget presentation format by:

- Reviewing GFOA and NACUBO budgeting best practices

- Surveying state systemwide budget presentations, formats and trends in higher education, and professional presentations

- Gathering feedback from the Executive Budget Committee, Sjoberg/Evashenk and the Regents

- Incorporating the CSA's recommended budget format in Figure 11 of the audit report

- Incorporating outcomes from other workstreams

The proposed prototype was reviewed with the Regents in March 2018 and is available here: http://regents.universityofcalifornia.edu/regmeet/mar18/f11.pdf. Per Attachment 4, the format was updated to include:

- A single item format

- Operating and one-time expenses in one budget

- A "Sources and Uses" schedule

- Fee-For-Service and Pass-Through reporting

- Budgets based on projected actuals

- Fund restrictions designations

- Cause of Change analysis

- Strategic Priorities Fund budget that reflects commitments and an uncommitted allocation

A UCOP Budget Manual has been drafted and is being provided to the CSA that documents the policies, guidelines, procedures, and analyses associated with the annual budget process. The manual will be updated as improvements are made.

UCOP is finalizing the FY18-19 budget for the May Regents meeting using the revised format. The April 25th CSA deadline precedes the submission of the budget to the Regents. UCOP has provided the CSA with documented budget formats, enhancements, supporting policies and guidelines, and will send CSA the item when it becomes available to the Regents.

UCOP is making all feasible changes this year and planning improvements over the next two years as recommended by the CSA, including updates to BDS as a gap measure until a new financial and planning system is implemented. A roadmap for BDS replacement has been provided to the CSA.

In reference to the CSA comment at 6 months about the $12M change to the temporary budget from the November item, this was an error that was corrected in the March budget to actual item which reconfirmed that the FY2017-18 approved budget was $39 million and that actuals to date were below the budget.

Completion Date: April 2018
Response Date: April 2018

California State Auditor's Assessment of 1-Year Status: Pending

We assessed this recommendation as pending because the Office of the President did not implement the State Auditor's recommendation for developing its budget by April 2018. The failure to do so may hinder the Department of Finance, the Legislature, and the Governor when making decisions regarding the UC's portion of the fiscal year 2018-19 state budget. This is a critical recommendation that, if successfully implemented, will significantly improve stakeholders' ability to hold the Office of the President accountable. Not completing the budget recommendation on-time is an important deficiency in the Office of the President's response to the audit.

Moreover, the Office of the President was not forthcoming about its decision to delay providing us with its budget information. Specifically, beginning with its 60-day response to our audit in June 2017, and again with its 6-month response in October 2017, the Office of the President indicated that it would implement this recommendation by April 2018. In addition, at a meeting with us in February 2018, the Office of the President committed to providing us with the budget information that is necessary for us to assess the Office of the President's progress in implementing this recommendation. However, the Office of the President informed us on April 11—two weeks before the deadline—that it would not provide us with the budget information until May 2018 because it was still in the process of finalizing the budget and therefore it would be premature to provide the materials we requested until the president, Chair of the Regents, and others had reviewed it.

Additionally, the supporting documentation and data would have allowed us to review the accuracy and completeness of its draft budget. For example, we could have verified that the draft budget contained all expenditures—an expectation that is outlined in our recommendation—through a review of the Office of the President's supporting data. Reviewing the Office of the President's budget not only would have allowed us to gain some assurance that the presentation was complete and accurate, but also may have helped the Office of the President improve its budget presentation by addressing any errors or areas needing clarification that we identified in our review. However, all the Office of the President has provided to us is a prototype budget with no actual numbers.

Finally, although we recognize that the Office of the President has made progress by formalizing its budget policies and procedures in a single manual and by seeking feedback from the Regents on its budget prototype, it ultimately failed to develop its budget in a timely manner that would allow it to be assessed as part of the state budget process.

6-Month Agency Response

The budget presentation work group has met regularly to address the California State Auditor's budget format as detailed in figure 11, page 40, of CSA's audit report. The final FY2017-18 budget presentation in July 2017 incorporated CSA audit format and the team is focused on additional improvements to further enhance the nuances and clarity of the UCOP budget.

The work group completed its charter and stakeholder analysis review with COO Nava. The Executive Budget Committee (EBC) has reconvened and meets monthly. The October-through-December EBC meetings will include reviews of UCOP FY2017-18 budgets, including activities and associated costs.

The work group reviewed financial system functionality with partner UC campuses. UCOP awaits additional information from partner campuses before making a recommendation. New system solutions are expected to mitigate existing gaps between current capabilities and best practices, and include specific requirements to further adhere to the format presented in figure 11 of the CSA's report.

Estimated Completion Date: April 2018
Response Date: October 2017

California State Auditor's Assessment of 6-Month Status: Pending

We have concerns regarding the Office of the President's 2017-18 budget. On the Office of the President's website, it states that it has partially implemented this recommendation. However, we disagree based on a review of the Office of the President's data and its supporting documentation. Our concerns are regarding the budget's accuracy and the fact that the Office of the President did not seek the regents' approval for $12 million in additional budget expenditures. Overall, although the Office of the President used our recommended budget format, we found that it could not adequately substantiate the amounts it used in the presentation.

Because the Office of the President expedited its budget process by two months, it developed its budget "offline" using questionable methods. For example, for expenditures from what we called the undisclosed budget— which the Office of the President presented to the regents as the strategic priority reserve in May of 2017—it used estimates from staff as opposed to financial data. Moreover, even though its 2016-17 vacancy rate was 15 percent, the Office of the President also built $25.4 million in one-time salary savings back into the 2017-18 budget. In response to our audit, the Office of the President stated that its reserves stem from vacancies and other unexpected events that create one-time savings and that these are not permanent savings and cannot be used to support permanent expenditures. The Office of the President has consistently budgeted many more positions than it has actually filled. Since fiscal year 2013-14 the Office of the President's vacancy rate has been between 10 and 15 percent. While a small vacancy rate is reasonable, we have concerns because the Office of the President's high vacancy rates translate into recurring one-time savings that help to build its reserve. Our workforce planning recommendation should help the Office of the President better align its staff and lower its vacancy rate. The budget director stated that although the budget office made its best projections in the time available, it would not use the 2017-18 budget methods for future budgets.

In November 2017, the Office of the President also failed to receive the regents' approval for a $12 million increase in multi-year commitments paid for from its reserves and did not adequately describe its planned use of these funds. When asked by the regents, the budget director confirmed that the $12 million increase in multi-year commitments was the result of increased costs for a number of projects that were originally added as placeholders in the Office of the President's May budget proposal. This was despite the Office of the President's claim in its May budget proposal that projects from the reserve undergo a rigorous review prior to consideration for final approval and funding by the President. Moreover, based on our review of the Office of the President's documents, a significant amount of these increased costs relate to information technology projects including updating its financial and budgeting systems. The director of budget and finance stated this increase was presented as an informational item—meaning the regents did not vote on the increase—because of time constraints related to other high priority items for the regents to consider at the November meeting. The chief operations officer stated the Office of the President did not seek approval for this spending because the numbers were still very preliminary. However, we believe the regents should approve the $12 million increase and that the Office of the President should transparently present changes in funding for review by the Legislature, the regents, and the public.

Because of our concerns with the accuracy and budget process that the Office of the President used, we have rated this recommendation as pending. For its 2018-19 budget, we expect the Office of the President to be able to better justify the numbers in its budget and the process it used to develop its budget. We also recommend that the Office of the President seek the regents' approval on the $12 million increase in planned spending for multi-year commitments at the January 2018 regents meeting.

60-Day Agency Response

The budget presentation work group has been formed and meets regularly to incorporate the State Auditor budget format as detailed in Figure 11, page 40 of the State Auditor's audit report. Included in the FY17-18 Regents budget presentation were the following elements: (1) Incorporation of the FY16-17 forecasted actual expenditures compared with budget, (2) Detail of all expenditures including projections of fund balances, and (3) A combined comprehensive view of Permanent and One-Time spend including systemwide programs and initiatives. All of the above elements are included in the work plan.

The work group has already begun development of improved reporting, and will provide budget to actuals on a quarterly basis to the regents. Reporting improvements are also expected to provide visibility to all expenditures and reserves. The work group has initiated a project to evaluate current financial systems including the Budget Development System to identify gaps and evaluate improved systems with robust functionality, including reporting.

Estimated Completion Date: April 2018
Response Date: June 2017

California State Auditor's Assessment of 60-Day Status: Pending

The status of this recommendation is pending.The Office of the President presented the regents with more robust budgets during the last two regents' meetings that included forecasted actual expenditures and fund balances. However, as discussed during the regents' meetings, further improvements to the budget presentation are necessary to ensure transparency and clarity of the Office of the President's expenditures. The Office of the President plans to present its new budget presentation to the regents in May of 2018. In addition, we will conduct an analysis of the Office of the President's budget system to verify the amounts presented to the regents.

Recommendation #6 To: University of California

To determine the amount of money that it can reallocate to campuses and to ensure that it publicly presents comprehensive and accurate budget information, by April 2018 the Office of the President should increase opportunities for campus stakeholder involvement in the budget development process by reconvening the campus budget committee and establishing an agreed-upon charter that describes the committee's scope, role, and protocol for reviewing and providing comments on the Office of the President's annual budget.

6-Month Agency Response

President Napolitano has reconvened and expanded the scope of the UCOP budget Executive Budget Committee (EBC). The EBC has completed its charter describing the committee's role and protocol for reviewing and providing input on the Office of the President's annual budget. In its critical advisory capacity to the President, the EBC consists of leaders from every campus, Academic Senate representatives, and UCOP leadership . The EBC met in August and September and plans to continue meeting regularly, with meetings occurring monthly for the remainder of 2017.

Completion Date: October 2017
Response Date: October 2017

California State Auditor's Assessment of 6-Month Status: Fully Implemented

The Executive Budget Committee Charter (charter) establishes a process in which the Office of the President and campus representatives are engaged in the Office of the President budget process. Specifically, the charter requires the Executive Budget Committee (committee) to review, advise, and make recommendations to the President on the development of the Office of the President's budget including the budget process and presentation. The charter requires monthly meetings during the budget development process and the committee must report on its activities at least annually.

60-Day Agency Response

A budget process work group has been formed and meets regularly. In connection with this recommendation, UCOP did conduct a review of the FY17-18 budget with campus stakeholders (VCPBs) on May 5th, prior to the May Regents presentation. Moving forward, the work group is focused on (1) expanding the involvement of key stakeholders, (2) documenting processes, and (2) formalizing governance for UCOP budget development.

The President has reconvened and expanded the scope of the UCOP budget Executive Budget Committee (EBC), and a charter is being developed to include governance of the UCOP budget. The EBC consists of campus leaders from every campus, Academic Senate representatives, and UCOP leaders, and will serve in an advisory capacity to the President. Its first meeting is being scheduled for August 2017.

Estimated Completion Date: April 2018
Response Date: June 2017

California State Auditor's Assessment of 60-Day Status: Pending

The status of this recommendation is pending the Office of the President's development of a charter for the Executive Budget Committee. The current Executive Budget Committee charter provided by the Office of the President does not adequately define the committee's scope, role, and protocol for reviewing and providing comments on the Office of the President's annual budget.

Recommendation #7 To: University of California Board of Regents

To ensure the ongoing accountability of the Office of the President, the regents should require it to implement our recommendations and report periodically on its progress.

Annual Follow-Up Agency Response From April 2020

The Office of the President provided regular updates to the Regents on its progress towards implementing the audit recommendations during the three-year recommendation implementation timeline.

Completion Date: April 2020

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

We are rating this recommendation as partially implemented because after three years, the Office of the President has not fully implemented key budget recommendations. As we discuss in our assessment of recommendations 5, 22, and 32, we continue to have concerns that the Office of the President still has not changed its budget process to align with the state budget process. The Regents will not approve the Office of the President's fiscal year 2020-21 budget until July 2020 after the Governor has already approved the state's budget. The failure to present the budget by April of each year may hinder the Department of Finance, the Legislature, and the Governor when making decisions regarding the UC's portion of the state budget. This is a critical recommendation that, if successfully implemented, will improve stakeholders' ability to hold the Office of the President accountable.

We recognize the investment the Regents have made thus far to oversee the Office of the President's efforts. Regardless, we believe ongoing oversight from the Regents is warranted since the Office of the President has not fully implemented key budget recommendations.

Annual Follow-Up Agency Response From October 2019

The Office of the President continues to provide regular updates to the Regents on its progress towards implementing the audit recommendations.

Estimated Completion Date: April 2020

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

We assessed this recommendation as partially implemented based on the ongoing oversight the Regents provided since we released our audit. Full implementation is pending the Regents' ongoing oversight of the Office of the President's implementation of our recommendations.

Annual Follow-Up Agency Response From April 2019

The Office of the President continues to provide regular updates to the Regents on its progress implementing the audit recommendations.

Estimated Completion Date: April 2020

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

This recommendation is partially implemented based on the ongoing oversight the Regents provided since we released our audit. Full implementation is pending the Regents' ongoing oversight of the Office of the President's implementation of our recommendations.

Annual Follow-Up Agency Response From October 2018

The Office of the President continues to provide regular updates to the Regents on its progress implementing the audit recommendations.

The following reports were provided by UCOP to the Regents since our one-year update:

At the May 2018 meeting:

-To the Full Board: Fiscal Year 2018-19 Budget for the Office of the President

-To the Compliance and Audit Committee: Update on One-Year Status Report on Implementation of Recommendations from State Audit of University of California Office of the President Administrative Expenditures

At the September 2018 meeting:

-To the Compliance and Audit Committee: Update on Implementation of Recommendations from State Audit of University of California Office of the President Administrative Expenditures

-To the Governance and Compensation Committee: Plan for Narrowing University of California Office of the President Non-Represented Staff Salary Ranges

Additionally, a Regents working group met in August 2018 to review the plan for narrowing UCOP non-represented staff salary ranges before the plan was presented to the Governance and Compensation Committee for endorsement in September.

Estimated Completion Date: April 2020

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

This recommendation is partially implemented based on the ongoing oversight the Regents provided since we released our audit more than one year ago. Full implementation is pending the Regents' ongoing oversight of the Office of the President's implementation of our recommendations.

1-Year Agency Response

As reported previously, the Office of the President has confirmed to the Regents that it will implement all of the State Auditors recommendations from this audit. The Regents have identified the following reporting schedule and structure for updating the Board on the status of implementing the recommendations from this audit:

-Reports on status of implementation of recommendations at 60 days, 6 months, one year, and annually thereafter to the Compliance and Audit Committee. Work Plan oversight will be governed by a working group of the board composed of the Chair and Vice Chair of the Board and the Chairs of the Finance, Compliance and Audit, and Governance and Compensation Committees. The Chair of the Compliance and Audit Committee will report overall progress to the Board of Regents no less than every 6 months.

-To the Finance Committee: Reports of budget to actuals at the November, March and July meetings and biannual reports on Presidential Initiatives budgets.

-To the Governance and Compensation Committee: Reports on recommendations regarding staffing at the November, March and July meetings.

The following reports were provided by UCOP to the Regents since our six-month update in October 2017:

At the November 2017 meeting:

-To the Compliance And Audit Committee: Update on the status of implementation of recommendations at 6 months

-To the Finance and Capital Strategies Committee: Report of budget to actuals for the Office of the President

-To the Governance and Compensation Committee: Update on recommendations regarding staffing

At the January 2018 meeting:

-To the Full Board: Report on overall progress by the Chair of the Compliance and Audit Committee

-To the Finance and Capital Strategies Committee:

oAdoption of UCOP reserve policy (action) and discussion of related guidelines

o Update on the UCOP budget process

At the March 2018 meeting:

-To the Finance and Capital Strategies Committee:

oOffice of the President fund restrictions

oReport of budget to actuals for the Office of the President

oUpdate on the UCOP budget process and budget presentation prototype

oBudget categories and definitions: systemwide programs an initiatives

-To the Governance and Compensation Committee:

o Approval of Market Reference Zones for certain senior management group positions (action)

o Update on staff-related implementation workstreams

o Amendment and rescission of certain Regents' and other policies pertaining to senior management group compensation (action)

o Update on workforce planning

Additionally, a Regents working group charged with developing a comprehensive policy on executive compensation discussed salary setting methodology for leadership positions over a series of four meetings in January and February 2018.

Completion Date: April 2020
Response Date: April 2018

California State Auditor's Assessment of 1-Year Status: Partially Implemented

This recommendation is partially implemented based on the ongoing oversight the Regents provided since we released our audit one year ago. Full implementation is pending the Regents' ongoing oversight of the Office of the President's implementation of our recommendations. During multiple meetings in January and March, the Regents received multiple reports on the Office of the President's progress towards implementing our recommendations including new policies related to its fund restrictions, reserve, budget, and salaries for senior managers that the Office of the President asked the Regents to approve. The Regents also requested additional information and action from the Office of the President. For example, during the January Regents' meeting, Regent Park requested that the Office of the President clarify the terms restricted because she was unclear as to whether it was restricted externally or by the Office of the President. In March, the Office of the President returned with more in-depth definitions of its restrictions.

6-Month Agency Response

The Office of the President has confirmed to the Regents that it will implement all of the State Auditors recommendations from this audit. The Regents have identified the following reporting schedule and structure for updating the Board on the status of implementing the recommendations from this audit:

-To the Finance Committee: Reports of budget to actuals at the November, March and July meetings and biannual reports on Presidential Initiatives budgets.

-To the Governance and Compensation Committee: Reports on recommendations regarding staffing at the November, March and July meetings.

At the July 2017 Regents meeting, the Regents received an update on the status of implementation of recommendations at 60 days.

At the November 2017 meeting, the following reports will be provided to the Regents:

-To the Compliance And Audit Committee: Update on the status of implementation of recommendations at 6 months

-To the Full Board: Report on overall progress by the Chair of the Compliance and Audit Committee

-To the Finance and Capital Strategies Committee: Report of budget to actuals for the Office of the President

-To the Governance and Compensation Committee: Update on recommendations regarding staffing

Estimated Completion Date: April 2020
Response Date: October 2017

California State Auditor's Assessment of 6-Month Status: Pending

The status of this recommendation is pending the regents' ongoing oversight of the Office of the President's implementation of our recommendations. During the November meeting, the regents received multiple reports on the Office of the President's progress towards implementing our recommendations. The regents also requested additional information and action from the Office of the President. For example, Regent Perez was concerned regarding the board's oversight involvement in determining if funds are truly restricted. The chief operating officer responded to this concern by committing to bring the results of the Office of the President's analysis to the regents to ensure it aligns with their expectations.

60-Day Agency Response

- Reports on status of implementation of recommendations at 60 days, 6 months, one year, and annually thereafter to the Compliance and Audit Committee. Work Plan oversight will be governed by a working group of the board composed of the Chair and Vice Chair of the Board and the Chairs of the Finance, Compliance and Audit, and Governance and Compensation Committees. The Chair of the Compliance and Audit Committee will report overall progress to the Board of Regents no less than every 6 months.

- To the Finance Committee: Quarterly reports of budget to actuals and biannual reports on Presidential Initiatives budgets.

- To the Governance and Compensation Committee: Quarterly reports on recommendations regarding staffing.

Estimated Completion Date: April 2020
Response Date: June 2017

California State Auditor's Assessment of 60-Day Status: Pending

The status of this recommendation is pending the regent's ongoing oversight of the Office of the President's implementation of our recommendations.

Recommendation #8 To: University of California Board of Regents

To ensure that the Office of the President's spending aligns with the needs of campuses and students, the regents should hold a public meeting to discuss the results of the Office of the President's review of its fund restrictions and funding commitments, as well as its proposal to reallocate funds to campuses.

Annual Follow-Up Agency Response From October 2018

The FY2018-19 UCOP budget, discussed and approved by the UC Regents in May 2018, includes the detail of fund balances as of June 30, 2017 and projected balances for June 30, 2018. All funds have been categorized according to the approved fund categories: restricted, unrestricted-designated, and unrestricted-undesignated.

Details of UCOP's review of fund balances, reserves and commitments are included in Part 2 of the posted budget item (pgs. 15-18). This section provides the specific amounts for the FY2018-19 budget related to forecasted fund balances, fund commitments and amounts available for systemwide use. Fund balances as of June 30, 2017 and projections are provided in Figures 14, 15 and 16. These tables provide key information related to balances, commitments and reserves held both at UCOP and in systemwide funds.

Completion Date: May 2018

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

The Office of the President presented its fiscal year 2018-19 budget to the Regents on May 24, 2018, which included the results of the Office of the President's review of its fund restrictions and funding commitments. Additionally, the Office of the President committed to review its undesignated, uncommitted balances and submit a plan to reallocate funds to campuses for the Regents consideration no later than the March 2019 Regents' meeting. The Regents approved the budget.

1-Year Agency Response

In March 2018, the Regents Finance and Capital Strategies Committee discussed the results of the Office of the President's review of its fund restrictions and funding commitments in a meeting open to the public. During this meeting, UCOP recommended that 68 funds with total balances of $74.7 million as of June 30, 2017 be reclassified as unrestricted and undesignated.

As this work continues next year, UCOP will focus on the additional recommendations from the State Auditor related to fund restrictions for 2019 and 2020. This work will include performing additional analysis of the funds by obtaining input from the Executive Budget Committee and other stakeholders on suggestions for future use of the funds, modifying the budget system to support reclassification of the funds, updating the budget presentation, and clearing and closing funds with small balances and limited or no activity.

Estimated Completion Date: April 2020
Response Date: April 2018

California State Auditor's Assessment of 1-Year Status: Partially Implemented

This recommendation is partially implemented due to the meetings the Regents have held to discuss fund restrictions. Full implementation is pending additional Regents' meetings regarding Office of the President's fund restrictions and commitments. We confirmed with the systemwide deputy audit officer that the Regents believe prior meetings satisfy the commitments for a July 2018 meeting made in the 6-month status report. However, to date the Regents have not had a meeting to discuss fund commitments and how those commitments relate to the fund restrictions the Office of the President has identified.

6-Month Agency Response

The Regents will review the results of the Office of the President's review of its fund restrictions and commitments in a public meeting by July 2018.

Estimated Completion Date: July 2018
Response Date: October 2017

California State Auditor's Assessment of 6-Month Status: Pending

The status of this recommendation is pending the regents' July 2018 meeting regarding Office of the President's fund restrictions and commitments.

60-Day Agency Response

The Regents will review the results of the Office of the President's review of its fund restrictions and commitments in a public meeting by July 2018.

Estimated Completion Date: July 2018
Response Date: June 2017

California State Auditor's Assessment of 60-Day Status: Pending

The status of this recommendation is pending the regents' meeting regarding Office of the President's fund restrictions and commitments.

Recommendation #9 To: University of California Board of Regents

To ensure that the Office of the President's financial safeguards are adequate, the regents should require the Office of the President to engage in a financial audit of only the Office of the President's operations.

Annual Follow-Up Agency Response From April 2019

The remaining action to fully implement this recommendation, a third party review of UCOP's reserve and budgeting internal controls, has now been completed. Deloitte was engaged to perform this review and issued its report in December 2018. The report concluded that the controls tested appeared to be operating effectively based upon the associated evidence reviewed and the samples tested. The following observation was identified: formal processes and controls for timely approval by the Regents for material forecast adjustments have yet to be fully designed and implemented. UCOP developed an action plan to address this observation which was presented to the UC Regents as part of the Mid-Year Budget to Actuals item in March 2019.

Completion Date: December 2019

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

We are rating this recommendation as fully implemented because a third party firm completed its review of the Office of the President's reserves and budgeting internal controls. After we released our report, we had multiple meetings with the Regents and Office of the President executives to discuss this recommendation and determine the most efficient way for the university to address our concerns within a reasonable cost. We determined three steps—described in detail in prior assessments below—that would allow the Regents to efficiently complete this recommendation. We had previously rated steps 1 and 2 as complete. The independent review by Deloitte completes the final step of our agreement.

Deloitte completed its independent assessment of the Office of the President's budget and reserve internal controls. It found that the internal controls tested appeared to be operating effectively. For other internal controls that Deloitte determined were too new to test, it determined that the Office of the President designed the safeguards appropriately. We look forward to assessing any additional reviews performed by the Office of the President related to our recommendation due in April 2020, which requires the Office of the President to evaluate its budget process to ensure it has efficient and adequate safeguards.

Annual Follow-Up Agency Response From October 2018

The following is the current status of the agreed-upon additional actions to fully address this recommendation:

1. Present to the Regents a schedule of UCOP funds, fund balances, and fund restrictions, including reserve balances.

Status: Complete as of May 2018. A schedule of UCOP funds, fund balances and fund restrictions was presented in March 2018: http://regents.universityofcalifornia.edu/regmeet/mar18/f10.pdf. UCOP reserve balances were presented to the Regents as part of the Fiscal Year 2018-19 UCOP budget presentation in May 2018: http://regents.universityofcalifornia.edu/regmeet/may18/b1.pdf.

2. Present to the Chair of the Regents and the Chair of the Compliance and Audit Committee a schedule of revenue and expenses for UCOP showing significant departments within UCOP in separate columns.

Status: Complete as of June 2018. On June 28, 2018, a schedule of revenue and expenses for UCOP showing significant departments within UCOP in separate columns was sent to the Chair of the Regents and the Chair of the Compliance and Audit Committee.

3. Engage a third party firm to conduct a review of UCOP's reserve and budgeting internal controls after the fiscal year 2018-19 budgeting process is complete, to allow time for new controls over reserves and budgeting to be implemented (by September 2018)

Status: Deloitte has been engaged to complete this internal controls review. Fieldwork is now complete and the final report is expected to be issued by end of October 2018.

Estimated Completion Date: October 2018

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Since we released our report, we have had multiple meetings with the Regents and Office of the President executives to discuss this recommendation and determine the most efficient way for the university to address our concerns within a reasonable cost. We came to an agreement that the Regents could meet this recommendation by completing the following steps:

1. Present to the Regents a schedule of Office of the President funds, fund balances, and fund restrictions, including reserve balances.

2. Present to the Chair of the Regents and the Chair of the Compliance and Audit Committee a schedule of revenue and expenses for the Office of the President showing significant departments within the Office of the President in separate columns.

3. Engage a third party firm to conduct a review of the Office of the President's reserve and budgeting internal controls after the fiscal year 2018-19 budgeting process is complete, to allow time for new controls over reserves and budgeting to be implemented.

We have determined that items 1 and 2 above are complete. The Office of the President presented a schedule of Office of the President funds, fund balances, and fund restrictions, including reserve balances to the Regents as part of its fiscal year 2018-19 budget presentation. In June 2018, the Office of the President presented a schedule of fiscal year 2016-17 revenue and expenses for UCOP showing Agriculture and Natural Resources, University of California Press, Department of Energy Laboratories, University of California Education Abroad Program, University of California Washington Center, and California Digital Library in separate columns to the Chair of the Regents and the Chair of the Compliance and Audit Committee. However, as of October 2018, the third party review of the Office of the President's reserve and budgeting internal controls has not been issued. Therefore, this recommendation is partially implemented.

1-Year Agency Response

At the November 2017 Regents meeting, PricewaterhouseCoopers (PwC) presented the results of its audit of the statement of revenues and expenses for the Office of the President. PwC issued a clean opinion on the report.

In response to concerns raised by State Auditor regarding the scope of this audit, and to provide additional information to the Regents for its oversight of UCOP finances, UCOP will take the following additional actions:

1. Present to the Regents a schedule of UCOP funds, fund balances, and fund restrictions, including reserve balances (complete as of March 2018)

2. Present to the Chair of the Regents and the Chair of the Compliance and Audit Committee a schedule of revenue and expenses for UCOP showing significant departments within UCOP in separate columns (by June 2018)

Estimated Completion Date: September 2018
Response Date: April 2018

California State Auditor's Assessment of 1-Year Status: Partially Implemented

Since our 6-month assessment, we had multiple meetings with the Regents and Office of the President executives to discuss this recommendation and determined the most efficient way for the university to address our concerns within a reasonable cost. The items the Office of the President outlines above reflect an agreement we came to during a meeting in February that included the chair of the compliance and audit committee, the systemwide controller, and the chief compliance and audit officer. As we stated as part of recommendation 3, we reviewed the information the Office of President provided to the Regents regarding fund restrictions and did not identify any issues. However, we were unable to review the Office of the President's reserve balances because it did not provide us with that data as discussed in recommendation 5. Additionally, this recommendation is pending the Regents and the Office of the President completing items 2 and 3. Therefore this recommendation is partially implemented.

6-Month Agency Response

The financial audit of the Office of the President is in process. The audit is being conducted by the University's external auditor, PricewaterhouseCoopers (PwC) with support from Internal Audit. PwC will issue an opinion on a report showing Office of the President expenditures and the sources of funds used to pay those expenditures, including the campus assessment. PwC will present this additional report at the November 2017 Regents meeting along with the other external audit reports.

Estimated Completion Date: November 2017
Response Date: October 2017

California State Auditor's Assessment of 6-Month Status: Pending

Although the Office of the President presented the regents with a financial audit in November 2017 titled "Financial Statement, June 30, 2017" (audit), this audit does not implement our recommendation. Specifically, the audit was limited to only the Office of the President's revenues and expenditures for fiscal year 2015-16. Because of the audit's limited scope, it omits the Office of the President's reserve balances. We expected the audit to include an assessment of reserve balances because in our report we found that the Office of the President had failed to disclose the amount and nature of these reserves to the regents and to the public. In addition, the audit did not evaluate the Office of the President's internal controls. We expected an assessment of the Office of the President's reserve and budgeting internal controls because in our report we determined there were significant deficiencies in these areas. While a financial audit of the Office of the President that was similar in nature to university's systemwide audit would have addressed these areas, this November 2017 audit is too limited in nature to satisfy our recommendation.

Finally, another shortcoming of the November 2017 audit is that it includes several large entities under the Office of the President's control, such as the Division of Agriculture and Natural Resources and the Education Abroad Program. Although it is acceptable to include these entities in the audit, the Office of the President should place their financial activities in separate columns to allow for full transparency of the Office of the President's financial activities. Because the report does not show these entities' operations separately from the Office of the President, it does not fully address this recommendation.

We shared our concerns with the Office of the President and Regent Zettel and committed to future coordination to ensure this recommendation is fully implemented.

60-Day Agency Response

The audit scope for 2016-17 for the University's external auditor, PricewaterhouseCoopers, has expanded to include a separate report on the results of operations for the Office of the President. UCOP's Internal Audit department will support this audit by conducting its own review of Office of the President expenditures. PwC will issue an opinion on a report showing Office of the President expenditures and the sources of funds used to pay those expenditures, including the campus assessment. PwC will present this additional report at the November 2017 Regents meeting along with the other external audit reports. In the future, when the Office of the President presents its budget for approval, the Regents will have confidence that the actual expenditures presented are correct since those amounts and underlying transactions will have been audited by Internal Audit and PwC.

Estimated Completion Date: November 2017
Response Date: June 2017

California State Auditor's Assessment of 60-Day Status: Pending

The regents' response implies that it has already expanded the scope of these audits. However, according to the systemwide deputy audit officer, the Office of the President is still in the process of developing these documents and therefore it did not provide any additional information.The status of this recommendation is pending completion of the financial audit and the Office of the President's planned internal audit.

Recommendation #10 To: University of California

To ensure that its staffing costs align with the needs of campuses and other stakeholders, by April 2018 the Office of the President should develop a method for weighing comparable public and private sector pay data when establishing salaries for all positions.

1-Year Agency Response

On March 15, 2018, the Regents adopted a methodology, as recommended by the Regents' Working Group on Executive Compensation, for weighing public and private sector data to create the new Market Reference Zones for Senior Management Group (SMG) members as displayed in the documents found at the link below. The Regents also adopted a methodology to reflect our competitive labor market, and include data from the State and CSU for operational staff and academic administrative positions at UC. As a result, approximately 85% of UC administrative SMG positions and 50% of academic SMG positions were matched to State or CSU positions.

The same methodology for evaluating and weighing public and private sector data has been adopted for non-SMG staff compensation (Career Tracks), including establishing a minimum weighting of 12.5% for State data, and matching UC positions to CSU positions. This methodology will govern data collection and analyses to amend the Career Tracks salary ranges for all non-represented staff, including those at UCOP.

The link to the Regents item below provides details on the new methodology and revised MRZs.

http://regents.universityofcalifornia.edu/regmeet/mar18/g2.pdf

The link below provides the Regents' approval of the item:

http://regents.universityofcalifornia.edu/aar/marg.pdf

A more detailed document on the Overview of Methodology for Staff Jobs excluding SMG and Represented Staff is being submitted to the CSA with this one-year update.

Completion Date: March 2018
Response Date: April 2018

California State Auditor's Assessment of 1-Year Status: Fully Implemented

According to documentation provided by the Office of the President, effective April 2018 its compensation unit will adopt a methodology to weigh public and private sector data that will include comparable positions from various state agencies and CSU. Based on the methodology, when the Office of the President identifies a comparable position, state salaries will receive a minimum weight of at least 12.5 percent and CSU salaries will receive a variable weight. According to the March Regents' presentation, the Office of the President matched 70 percent of all operational/administrative senior management positions to state positions. Additionally, the Office of the President's independent consultant reported in January 2017 that it had matched 40 percent of all of the university's positions with marketplace matches to state positions. The Office of the President has implemented this methodology not only for its own staff, but all university employees. To gain some assurance that the Office of the President fully implemented this recommendation, we reviewed the underlying salary data for five senior management positions. We found that the Office of the President identified a CSU and a state position match for four of the five positions we reviewed. The variable weights for the CSU positions ranged from .8 percent to 1.4 percent.

Although state positions were given a higher weight than they had been given when we conducted our audit, which we have determined implements our recommendation, we noted that the Office of the President added an additional 15 to 20 percent "size" premium to almost all of the non-state positions it matched, thus increasing the influence non-state positions have on the final salary for those positions and increasing the overall salary ranges.

6-Month Agency Response

Additional surveys are being reviewed to assess their underlying data management methodology, data viability, and survey participants.

The work group is reviewing practices at other public and private AAU institutions to determine how each define their competitive labor markets; the methodologies they use for including public, private and other data; and, the surveys they use for analyzing markets, among other considerations.

Systemwide data is being reviewed to identify the organizations that comprises UC's recruiting and retention activity.

Survey sources are being reviewed for analyzing and updating Market Reference Zones for Senior Management Group positions.

Analysis of UCOP salary ranges is being conducted.

Estimated Completion Date: April 2018
Response Date: October 2017

California State Auditor's Assessment of 6-Month Status: Pending

The status of this recommendation is pending the Office of the President's development of a method for weighing comparable public and private sector pay data. As of November 13, 2017, the Office of the President has not yet established survey sources, data sources, survey protocols, and survey methodologies. Moreover, it has made no changes to its current process for establishing salaries for executive staff. It claims that it will identify these items by the April due date.

However, we are concerned that the Office of the President does not intend to take genuine steps to implement this recommendation because it continues to contend that university employees are not comparable to state employees. Specifically, an Office of the President document analyzing its labor market concludes, "State positions are not comparable to UC positions, the State is not a competitor with the University, nor are their compensation practices and programs aligned with market practices..." It goes on to state, "CSU, often cited by CSA as a comparator to UC, is not comparable to UC." As we describe in our audit report, in the Budget Act of 2016, the Legislature required the regents to consider compensation for comparable state positions when evaluating the salaries of executives. The Legislature reissued this requirement in the Budget Act of 2017. In our report, we also acknowledge that while the Office of the President's assertion that the higher education environment necessitates higher pay for its staff for certain positions, this argument has less merit for administrative staff who perform similar duties no matter where they work.

The Legislature required the Office of the President to demonstrate a good faith effort to implement all of our recommendations; however, we do not believe that the Office of the President's response to this recommendation meets that requirement. The conclusions of the analysis above is in conflict with these directives and disregards our audit findings that the Office of the President—even when factoring in a cost-of-living adjustment—pays its staff significantly more than public employees as demonstrated in Figure 13 and Table 8 of our report. Furthermore, the Office of the President did not share adequate details with the regents Governance and Compensation committee regarding the work it has performed and its preliminary conclusions. When we shared this recommendation with the chief operating officer, she stated that this analysis was a preliminary look at the marketplace and that the regents and the president still need to weigh in on these conclusions. She also stated that the Office of the President is not necessarily going to align its salaries with the market and that it is taking this analysis very seriously. However, we recommend that the regents and their independent consultant invest additional efforts into holding the Office of the President accountable for implementing this recommendation.

60-Day Agency Response

A work group has been formed for the two projects related to staff salary ranges (OP and system). The work group members are compensation experts from OP and campuses/medical centers. Meetings occur weekly. A project plan has been finalized. A call with CalHR Compensation is scheduled for information collection regarding the State's approach to market pricing/data management processes and salary ranges. Possible additional survey sources focusing on public employers have been identified for the staff positions and the survey protocols and methodologies are being reviewed and data is being tested to determine integrity, adequate number of benchmark matches, etc. Once data sources are selected, a method for weighing comparable public/private pay data can be established.

An additional work group has been formed to address the project related to the review of leadership salary ranges (Market Reference Zones), systemwide. The work group members are compensation and Human Resource experts from OP and campuses/medical centers. Meetings occur twice monthly. A project plan has been finalized. Additional survey sources or alternate methods of data collection are being identified/reviewed that would support proper benchmark matching and data collection. A call with CalHR is scheduled for information collection regarding the State's approach to market pricing/data management processes and salary ranges. An advisory group comprised of Chief Human Resource Officers from campuses/medical centers has been created to review and provide input throughout the process. Once data sources are selected, a method for weighing comparable public/private pay data can be established.

Revised guidelines have been developed for the semi-annual equity/promotion process. At this time the semi-annual equity/promotion process scheduled for July 2017 has been suspended to continue to look at ranges and the weighting of market data.

Estimated Completion Date: April 2018
Response Date: June 2017

California State Auditor's Assessment of 60-Day Status: Pending

The status of this recommendation is pending the Office of the President's development of a method for weighing comparable public and private sector pay data. Because the Office of the President's response implies it has identified additional survey sources, data sources, survey protocols, and survey methodologies, we requested the Office of the President provide additional documentation to support these statements for its 6-month response.

Recommendation #11 To: University of California

To ensure that its staffing costs align with the needs of campuses and other stakeholders, by April 2018 the Office of the President should determine how to restructure salary ranges to make certain the ranges encourage employee development and ensure pay equity.

Annual Follow-Up Agency Response From October 2018

On September 26, 2018, the Regents Governance and Compensation Committee endorsed the plan adopted by the President and COO for narrowing the University of California Office of the President Salary Ranges as described in the documents found at the link below. The plan, which was initially reviewed with the Regents' Working Group on UC Office of the President Salary Ranges (previously the Regents' Working Group on Executive Compensation), also includes an adjustment of the UCOP salary midpoints based on overall labor market salary movement using the approved method for weighing comparable public and private sector pay data for non-executive staff. UCOP has not moved their salary ranges during the last two years, leaving them behind the labor market in salary range movement. The approved method includes the incorporation of salary data from the State and CSU for operational staff and academic administrative positions at UC.

The link below provides the Regents' item that was presented for endorsement:

http://regents.universityofcalifornia.edu/regmeet/sept18/g9.pdf

Additional details are provided in the" UCOP Non-Represented Staff Salary Range Review" Presentation used to gain the Regents' endorsement.

Completion Date: October 2018

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

On September 26, 2018, the Office of the President presented its plan for narrowing their non-represented staff salary ranges to the Regents Governance and Compensation Committee. The plan fulfills our recommendation that the Office of the President determine how to restructure its salary ranges. The Office of the President contracted with a third party vendor to compare their salary structure to comparable universities. The review agreed with the analysis in our audit report and found that the Office of the President's current salary structure had a wider range between the minimum and maximum salary for its pay grades than comparable universities. For example, the Office of the President's lowest pay grade ranged from a minimum of $30,400 to a maximum of $61,800 for a range width of 103 percent. The Office of the President's highest pay grade ranged from $127,100 to $351,500 for a range width of 177 percent. Under its proposed plan, the Office of the President will reduce the width of its salary ranges to comply with best practices. For example, the new plan reduces the size of its lowest pay grade to 60 percent and the size of the highest pay grade to 105 percent.

1-Year Agency Response

Career Tracks is the UC classification and grade structure that provides staff with: a clear and transparent system for charting and understanding options for a career path anywhere in UC; details of the job requirements of their current position and any other position they might be interested in pursuing; and online access to all job descriptions, job requirements and salary ranges.

Career Tracks uses a market-based salary structure, meaning that external labor market salaries for a position are the primary basis for establishing job value which drives assignment of salary ranges. Salary data for comparable positions at the State and CSU will be included in this market analysis, as described in recommendation #10, and as approved by the Regents. This market-based structure promotes pay equity and is legally defensible because ranges are linked to external factors rather than to individual employees or internal pay practices. The majority of salaries will fall at or near the 50% percentile (midpoint), but the breadth of the salary range accommodates a range of skill levels for a job: those just beginning their career receive a salary in the lower portion of the range, and those who have deep relevant knowledge, skills and technical expertise greater than the "average" worker could, in a given role, be paid higher in the salary range, above the midpoint.

Additional details are provided in the Overview of Methodology for Staff Jobs excluding SMG and Represented Staff submitted to the CSA, and the Regents item:

http://regents.universityofcalifornia.edu/regmeet/mar18/g2.pdf. The methodology described above will be the basis for narrowing the salary ranges by the April 2019 CSA recommendation. UCOP has begun identifying several possible scenarios for narrowing ranges based on the Regents' approved method for weighing comparable public and private sector pay data for non-executive staff. Analysis of the possible scenarios will begin in the next fiscal year.

Completion Date: March 2018
Response Date: April 2018

California State Auditor's Assessment of 1-Year Status: No Action Taken

Although the Office of the President asserts this recommendation is fully implemented, we disagree. It was unclear to us what actions the Office of the President planned to take to restructure its salary ranges because its response largely reiterates how its current salary setting system works. When we followed up with the Office of the President's Executive Director of Human Resources, she was unable to provide any evidence of any action taken regarding a determination of how the Office of the President would restructure the salary ranges and confirmed that that analysis would begin next fiscal year. Had the Office of the President started this process sooner, the results of the above analysis would be responsive to our recommendation. Thus the status of this recommendation is no action taken until we can evaluate the actionable steps the Office of the President will take to narrow its salary ranges.

We expected to see an analysis of the salary range widths the Office of the President uses and analysis of how they can bring their salary ranges to a width that is in line with compensation best practices. According to the Society for Human Resource Management (SHRM), a traditional salary range width is commonly 30 percent to 40 percent based on the midpoint. In other words, for a 30 percent salary range, SHRM's guidance recommends that an agency calculate 15 percent of the midpoint and use the results of that calculation to establish the salary range minimum and maximum. However, the Office of the President commonly uses salary ranges with a width that is approximately double that guidance. For example, in our report we identified that for a financial analyst position the Office of the President established a salary range width of 68 percent with 34 percent on either side of the midpoint. To address this recommendation the Office of the President could have performed an analysis to determine the appropriate target width for its salary ranges.

6-Month Agency Response

Options and recommendations for including public data and for assigning a weight have been presented to UCOP leadership for review and feedback.

Survey sources are being reviewed for analyzing and updating Market Reference Zones for Senior Management Group positions.

Analysis of UCOP salary ranges is being conducted.

Estimated Completion Date: April 2018
Response Date: October 2017

California State Auditor's Assessment of 6-Month Status: Pending

The status of this recommendation is pending the Office of the President's actions related to restructuring its salary ranges. To date the Office of the President has not provided us with sufficient documentation to allow us to understand the status of this recommendation. However, the concerns we discuss in recommendation 10 also apply to this recommendation.

60-Day Agency Response

A work group of compensation and Human Resource experts from OP and campuses/medical centers has been formed and will be working to address salary range structure as it relates to employee development and assurance of pay equity. A project plan has been finalized. A call with CalHR compensation is scheduled for information collection regarding the State's approach to employee development.

Estimated Completion Date: April 2018
Response Date: June 2017

California State Auditor's Assessment of 60-Day Status: Pending

The status of this recommendation is pending the Office of the President's actions related to restructuring its salary ranges.

Recommendation #12 To: University of California

To ensure that its staffing costs align with the needs of campuses and other stakeholders, by April 2018 the Office of the President should evaluate and identify needed changes in employee benefit policies to ensure that they include reasonable safeguards to control costs.

1-Year Agency Response

Policy revisions to the Senior Manager Group policies for car allowances, employer contributions toward a Retirement Savings Plan, relocation allowances and moving reimbursements were approved by the Regents Governance and Compensation Committee on March 14, 2018.

http://regents.universityofcalifornia.edu/regmeet/mar18/g1.pdf (item attachments show the "marked up" revisions)

Revised and approved stipend procedures and policies at the Office of the President were published here:

https://www.ucop.edu/local-human-resources/_files/policies/ppsm/PPSM30_stipend.pdf

https://www.ucop.edu/local-human-resources/_files/policies/ppsm/ppsm30.pdf

Regarding the CSA's concern about UCOP business meeting meals for its employees, UCOP revised its policy to lower the daily maximum for all meals to $74 per day and require that meetings be a minimum of three hours. Revised business meeting and entertainment policies and procedures for UCOP were published here:

https://www.ucop.edu/business-resource-center/policies-and-guidance/guidelines/new-restrictions-on-use-of-ucop-funds.html

Completion Date: April 2018
Response Date: April 2018

California State Auditor's Assessment of 1-Year Status: Fully Implemented

The Office of the President has taken action on all of the benefit policies we outline in Table 9 in our report. The changes we identified at six months paired with the changes described below make these policies sufficient to address the concerns we raise in the report and our recommendation.

Car Allowances: On March 15, 2018, the Regents approved an amendment to its car allowance policy. Under the new policy the university no longer offers car allowances to new senior management hires or appointees. Employees who currently receive these allowances will be able to continue to receive them as long as they remain in their current position.

Business Meetings and Entertainment: On April 19, 2018, the Office of the President issued a letter announcing a new daily maximum on business meals for meetings that is effective immediately. According to the letter, the new policy reduces the daily maximum for meeting meals from $174 to $74.

Employer Contributions Toward a Retirement Savings Plan for SMGs: On March 15, 2018, the Regents approved an amendment to the senior management supplemental benefit program. Under the new policy, the university no longer offers participation in this program to new senior management hires or appointees. Employees who currently receive the employer contributions may continue to receive them as long as they remain in their current position.

Stipends: The Office of the President formalized its local policy related to stipends-its human resources has approval authority for stipends that do not exceed 20 percent of an employee's base salary, whereas stipends over 20 percent, and up to 25 percent, of an employee's base salary must be approved by the Executive Director of UCOP Operations.

6-Month Agency Response

Changes to systemwide policies were made for car allowances, meal limits during business travel, hotel rates, relocation allowances, moving reimbursements and senior manager supplemental retirement contributions, effective October 2017. Changes to policies at the Office of the President were made in October 2017 for issuance of cell phones and other electronic devices and for stipends.

Completion Date: October 2017
Response Date: October 2017

California State Auditor's Assessment of 6-Month Status: Partially Implemented

The Office of the President has taken action on most of the benefit policies we outline in Table 9 of our report. Although the Office of the President asserts it made changes to systemwide policies, we determined that this recommendation remains partially implemented due to actions the Office of the President and the regents need to take to change its policies for car allowances, business meetings and entertainment, employer contributions toward a retirement savings plan for SMGs, and stipends. Moreover, many of the policy changes only effect new hires or appointees and do not apply to current staff.

Incomplete

Car Allowances: In October, the Office of the President added an administrative note to the car allowance policy stating that the President is no longer recommending or approving automobile allowances for new hires or new appointees. The note further states that current recipients may continue to receive automobile allowances until they step down from their current positions or change positions. Although we recognize this action as a positive step that meets the spirit of our recommendation, until the regents take action to approve the policy changes the Office of the President's approach creates the risk that in the future a president may choose to remove the administrative note and restart the practice of issuing car allowances. To implement this recommendation fully, the Office of the President needs to take policy revisions to the regents for approval who would vote to change the policy.

Business Meetings and Entertainment: We expressed a concern in our audit that the amount the Office of the President reimburses for business and entertainment costs is too high. The Office of the President has taken some actions to change its costs for business meetings and entertainment, but has not revised the university policy that allows for the reimbursement of these costs. In May 2017, the Office of the President implemented new restrictions disallowing expenditures on retirement events and limiting the cost of morale building events to $19 per person or $500 in total, whichever is less. The policy also states that Office of the President funds cannot be used for any form of entertainment such as tickets to a fine arts or sporting events. However, because the Office of the President has not taken steps to update the university's policy, we still have concerns. For example, based on our reading of the May 2017 memo and the university's policy, Office of the President employees could still charge between $19 and $81 for business meetings provided to its employees. To implement this recommendation fully, the Office of the President needs to update the university's business meeting and entertainment policy to lower these reimbursable costs.

Employer Contributions Toward a Retirement Savings Plan for SMGs: In October, the Office of the President added an administrative note to the senior management supplemental benefit policy stating that the President is no longer recommending or approving participation in this program for new hires or new appointees. The note further states that current recipients may continue to participate in the program until they step down from their current positions or change positions. We recognize this action as a positive step that meets the spirit of our recommendation. However, until the regents take action to approve policy changes that affect the compensation of SMG employees, the Office of the President's approach creates the risk that in the future a president may choose to remove the administrative note and allow new SMG employees to participate in the program. The Legislature made $50 million of funding contingent upon the university demonstrating a good faith effort at adopting a policy that does not provide supplemental retirement payments to any new SMG employees no later than May 1, 2018. To implement this recommendation fully, the Office of the President needs to take policy revisions to the regents for approval so they can vote to change the policy.

Stipends: In October 2017, the Executive Director of UCOP Human Resources sent an e-mail to all Office of the President managers and supervisors reissuing the Office of the President's procedures for approving stipends. In this e-mail, she establishes additional controls for Office of the President employees that exceed the requirements of the university's compensation policy. Specifically, according to this e-mail, the Office of the President's human resources recommends that stipends do not exceed 20 percent of an employee's base salary; whereas, the policy allows stipends to reach 25 percent of an employee's base salary. Although we recognize that this action is a positive step that meets the spirit of our recommendation, to implement this recommendation fully, the Office of the President needs to establish formal policies and procedures for the approval of stipends that reconcile the difference between the recommendation from its human resources and its formal policy.

Complete

Cell Phones: In October, the Office of the President issued a mobile device policy that includes many safeguards to control costs and ensure the proper distribution and tracking of cell phones and other electronics. This policy is sufficient to address our recommendation.

Meals: In October, the Office of the President updated its travel policy to limit the allowable per-person reimbursement for meals and incidentals to $62 per day. The policy also states that meal reimbursements must not be treated as a per diem and must be for the actual and reasonable costs incurred. This policy aligns with that of the California State University and is therefore more reasonable and justified. This policy is sufficient to address our recommendation.

Lodging: In October, the Office of the President updated its travel policy to limit in-state and out-of-state lodging reimbursements to a traveler's actual costs not to exceed $275 per night. The policy also states that lodging reimbursements must be reasonable for the locality of travel. This lodging policy aligns with that of the California State University and is therefore more reasonable and justified. This policy is sufficient to address our recommendation.

Relocation Allowance: In October 2017, the Office of the President removed its policy on relocation allowances and replaced it with a more specific policy on reimbursable relocation expenses. The new policy allows the university to reimburse an appointee for the cost to sell his/her former primary residence or for the settlement of an unexpired lease. This policy is sufficient to address our recommendation.

Moving Reimbursement: In October 2017, the Office of the President updated its moving reimbursement policy. The new policy clearly outlines which costs the university will reimburse for and places limits on those costs. It also made some costs that were previously reimbursable—such as the assembly and disassembly of unusual items like swing sets and swimming pools—unallowable. This policy is sufficient to address our recommendation.

Performance Bonuses: In May 2017, the Office of the President implemented new restrictions regarding employee bonuses. Specifically, it limited STAR Awards to $500 per person. Moreover, the policy only allows one award per person or team per fiscal year and the awards must recognize a specific project or event that is above and beyond the normal scope of an employee's regular job. These changes address our recommendation.

60-Day Agency Response

A memo restricting the use of funds for retirement parties and gifts, morale-building activities, STAR awards and spot awards at the Office of the President was issued on May 31, 2017 and the changes were effective immediately. Benchmarking of UC policies to other universities, CSU, the state of California and federal rates is underway.

Estimated Completion Date: April 2018
Response Date: June 2017

California State Auditor's Assessment of 60-Day Status: Partially Implemented

The May 31, 2017 memo included reductions in employee benefits such as bonuses and additional safeguards to control costs. Full implementation of this recommendation is pending the review of other employee benefit policies.

Recommendation #13 To: University of California

To ensure that its staffing costs align with the needs of campuses and other stakeholders, by April 2018 the Office of the President should complete phase one of CalHR's best-practice workforce planning model by developing a strategic direction for its workforce plan.

1-Year Agency Response

The workgroup completed Phase One: Setting the Strategic Direction of CalHR's best practice workforce planning model. The resulting whitepaper has been reviewed and discussed with key stakeholders, including the president, senior staff, Executive Budget Committee, Academic Senate representatives, Council of Chancellors and the UC Regents.

The March 2018 Regents Item: Update of University of California Office of the President Audit of Administrative Expenditures on Workforce Planning can be found here: http://regents.universityofcalifornia.edu/regmeet/mar18/g5.pdf

Completion Date: April 2018
Response Date: April 2018

California State Auditor's Assessment of 1-Year Status: Fully Implemented

The Office of the President presented a draft version of the strategic direction for its workforce plan as a discussion item at the March 14, 2018 Regents' meeting. We reviewed the draft copy of Workforce Planning for UCOP Setting the Strategic Direction and found that it was consistent with phase one of CalHR's best-practice workforce planning model. Specifically, the document outlined the strategic goals for the Office of the President's five largest divisions and identified both internal and external factors that impact the Office of the President's workforce needs. We look forward to seeing the finalized copy of the strategic direction report.

6-Month Agency Response

The workgroup has reviewed the CalHR workforce planning model and is is reviewing practices at other public and private AAU institutions to determine how each define the approach to workforce planning.

The group has completed the stakeholder analysis and is focused on the early development of the UCOP workforce planning model.

There was a conference call with CalHR in early October to discuss the current state of the CalHR workforce planning activity. Members of the workforce planning workgroup participated in the CalHR Quarter Workforce Planning forum on in early October.

Estimated Completion Date: April 2018
Response Date: October 2017

California State Auditor's Assessment of 6-Month Status: Pending

The status of this recommendation is pending the Office of the President's completion of CalHR's best-practice workforce planning model.

60-Day Agency Response

A work group has been formed and has begun identifying and reviewing different workforce planning models currently in place at state and like university systems to better understand the best practices. The work group consists of staff members from compensation, talent acquisition, HR Generalists, the program management office, departments from OP and campuses/medical centers. Meetings are being scheduled bi-weekly.

An initial call with CalHR's Director of Human Resources took place the week of May 15, 2017 to discuss CalHR's workforce planning model. A follow up call with the Division Chief in charge of workforce planning for CalHR took place the week of June 12, 2017.

Estimated Completion Date: April 2018
Response Date: June 2017

California State Auditor's Assessment of 60-Day Status: Pending

The status of this recommendation is pending the Office of the President's completion of CalHR's best-practice workforce planning model.

Recommendation #14 To: University of California Board of Regents

To ensure that the Office of the President's staffing levels are justified and that costs are reasonable and align with the needs of campuses and other stakeholders, the regents should require the Office of the President to implement our recommendations and report periodically on its progress.

Annual Follow-Up Agency Response From April 2020

The Office of the President provided regular updates to the Regents on its progress towards implementing the 12 audit recommendations related to identifying appropriate staffing levels and verification of justified and reasonable workforce costs during the three-year recommendation implementation timeline.

Completion Date: April 2020

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

We are rating this recommendation as partially implemented because after three years, the Office of the President has not fully implemented key salary recommendations. As we discuss in our assessment of recommendations 23 and 34, we continue to have concerns related to the Office of the President's implementation of our salary recommendations. In our 2017 report, we noted that opportunities existed for the Office of the President to reduce its salary costs by giving a greater weight to public sector positions when it set its salaries. However, the Office of the President applied an 8 percent market adjustment to its salary ranges that negated the effects of its new weighting methodology. Because of the 8 percent salary range increase, the Office of the President asserts it did not realize any salary savings from implementing this recommendation. Thus, we believe the Office of the President's implementation of our recommendation falls short.

Annual Follow-Up Agency Response From October 2019

The Office of the President continues to provide regular updates to the Regents on its progress towards implementing the audit recommendations.

Estimated Completion Date: April 2020

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Annual Follow-Up Agency Response From April 2019

The Office of the President continues to provide regular updates to the Regents on its progress implementing the audit recommendations.

Estimated Completion Date: April 2020

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Annual Follow-Up Agency Response From October 2018

The Office of the President continues to provide regular updates to the Regents on its progress implementing the audit recommendations.

The following reports were provided by UCOP to the Regents since our one-year update:

At the May 2018 meeting:

-To the Full Board: Fiscal Year 2018-19 Budget for the Office of the President

At the September 2018 meeting:

-To the Compliance and Audit Committee: Update on Implementation of Recommendations from State Audit of University of California Office of the President Administrative Expenditures

-To the Governance and Compensation Committee: Plan for Narrowing University of California Office of the President Non-Represented Staff Salary Ranges

Estimated Completion Date: April 2020

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

1-Year Agency Response

-To the Finance Committee: Reports of budget to actuals at the November, March and July meetings and biannual reports on Presidential Initiatives budgets.

-To the Governance and Compensation Committee: Reports on recommendations regarding staffing at the November, March and July meetings.

The following reports were provided by UCOP to the Regents since our six-month update in October 2017:

At the November 2017 meeting:

-To the Compliance And Audit Committee: Update on the status of implementation of recommendations at 6 months

-To the Finance and Capital Strategies Committee: Report of budget to actuals for the Office of the President

-To the Governance and Compensation Committee: Update on recommendations regarding staffing

At the January 2018 meeting:

-To the Full Board: Report on overall progress by the Chair of the Compliance and Audit Committee

-To the Finance and Capital Strategies Committee:

oAdoption of UCOP reserve policy (action) and discussion of related guidelines

o Update on the UCOP budget process

At the March 2018 meeting:

-To the Finance and Capital Strategies Committee:

oOffice of the President fund restrictions

oReport of budget to actuals for the Office of the President

oUpdate on the UCOP budget process and budget presentation prototype

oBudget categories and definitions: systemwide programs an initiatives

-To the Governance and Compensation Committee:

o Approval of Market Reference Zones for certain senior management group positions (action)

o Update on staff-related implementation workstreams

o Amendment and rescission of certain Regents' and other policies pertaining to senior management group compensation (action)

o Update on workforce planning

Completion Date: April 2020
Response Date: April 2018