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They Pledged Your Tuition
An Open Letter to UC Students
As students, you pay tuition in order to get an education at UC, and you know that the Regents plan to raise your tuition even higher. You may think that the tuition you pay is primarily or exclusively used for instruction, but this is not its only use. UC recently sold more than $1.6B in highly rated bonds one month after declaring an “extreme financial emergency.” Why is its bond rating excellent, even after UC says that without cutting employee pay it will have difficulty paying its bills? The single most important reason that UC has an excellent bond rating, much better than the state’s, is that it can now raise your tuition at will. Your tuition is UC’s #1 source of revenue to pay back bonds, ahead of new earnings from bond-funded projects, which do not even come second. The bond interest UC now pays will be $300M this year, and is projected to go way up as UC greatly increases the private capital it raises through tuition-backed bonds over the next decade. UC should disclose its plans to issue new tuition-backed bonds before you are asked to accept this year’s 32% tuition increase, which will automatically become part of the collateral for those bonds.
Because UC pledges 100% of tuition to maintain its bond rating, it has also implicitly assured bond financiers that it will raise your tuition so that it can borrow more. Since 2004, UC has based its financial planning on the growing confidence of bond markets that your tuition will increase. (Why? Because you’ve put up with this so far, and because UC has no other plan. Its capacity to raise tuition is advertised in every bond prospectus.)
(Before I go on, you should understand that there’s a difference between using your tuition as collateral for construction bonds and actually spending to pay the interest on those bonds. UC now spends some tuition revenue on debt service, and is likely spend more for this purpose as it borrows more against tuition. Since 2004, all of your tuition has been pledged in the sense that it will be paid into an account held by the bond trustee in the event of default.)
In pledging all your tuition as collateral for its bonds, UC is relying on a simple notion which, if used by an individual trying to borrow money, would go like this: if you had a good paycheck and you expected to have steady raises in the future, you could pledge your whole paycheck to secure a loan. Your bank might offer you a lower interest rate for pledging it all without expecting you to use it all to service your debt. You could then still live off your paycheck as well as get a lower interest rate. UC has done just that with your tuition. It considers itself smart to have made this kind of deal. In 2008 it paid 0.2% less in interest for bonds backed by tuition (and all General Revenues) than for bonds funded by project revenues alone, such as those that paid for employee parking garages.
So, one reason that UC has pledged all of your tuition, including future hikes, may have been to get a better interest rate, and that is likely to be the explanation it gives publicly. But is lowering interest rates the only reason why UC pledged your tuition?
In fact, there are stronger explanations that are less benign. The first is that, although tuition can be used for the same purposes as state educational funds, it can also be used for other purposes including construction, the collateral for construction bonds, and paying interest on those bonds. None of the latter uses is permissible for state funds, so the gradual substitution of tuition for state funds gives UC a growing opportunity to break free of the state in its capital funding. A second explanation for the tuition pledge is based on the idea that a bank will pay less attention to whether you’re making a good investment if it has access to your entire paycheck in the event you haven’t made a good invetment. This means that UC can be much less transparent about how much revenue it earns from tuition-backed bonds, which are now more than half of its total borrowing and are expected to greatly exceed all other borrowing over the next decade. A third explanation for including your tuition in the pledge is that tuition is expected to rise no matter what happens, and is likely to go up even faster in bad budget years. UC’s pledged collateral rose by 60% ($4.2B to $6.72B) from the last pre-Schwarzenegger year through June 2008. Tuition, a large and growing component of that collateral, has risen much faster since the state economy collapsed in 2008–it will be up 109% by Spring 2010 We won’t know the effect of recent increases on UC’s total collateral until its next two financial statements come out, but it appears that UC has nearly doubled its borrowing against that collateral in 2009 alone. The fact that UC can (and does) raise tuition during state economic crises means that a bad budget year can be a good bond year.
Why haven’t you been told that UC has been using your tuition as collateral to borrow billions of dollars? The obvious reason is that tuition increases are justified (to you) as a way to pay instructional expenses that taxpayers refuse to pay. If that’s why they’re being imposed, it’s natural to assume that tuition increase will be used to minimize cuts to education. But when UC pledges your tuition to its bond trustee (Bank of NY Mellon Trust), it’s really (legally) saying that your tuition doesn’t have to be used for education, or anything in particular. That’s why it can be used to back UC construction bonds, and why the growth in tuition revenue, as such, is enough to satisfy UC’s bond rating agencies (S&P and Moody’s), whether or not UC can pay its bills. The effect of UC’s pledge is to place a new legal restriction on the use of funds that it must first say it could have used for anything, including education. Thereafter, construction comes ahead of instruction.
Some of UC’s new, and self-imposed, constructions costs will come off the top of its annual budget, despite this year’s “extreme financial emergency.” When UC chose t0 take on $1.35B in new construction debt for 70 projects in August 2009—one month after imposing employee furloughs that “saved” $170M—it committed to spending $70-80M in extra interest payments for years into the future –they’ve just released the interest rates for each new bond series. Earlier in the year, UC had already issued $.8B in tuition-backed bonds in spring 2009, only some of which were for refinancing older projects at lower interest rate. It’s thus likely that the interest due on new projects funded during 2009 alone will have eaten up more than half of UC’s “savings” from the furloughs. Would the furloughs have been “unavoidable” if UC were not secretly planning to incur additional interest expenses for new bond-funded construction? I’ve just today (October 9) received a list of the 70 tuition-funded projects that were not announced until after the furloughs, and that UC decided not to postpone in order to avoid furloughs. These projects are listed at the end of this document. You can judge for yourself how urgent they are, and how high your tuition would go to finance more like them.
Interest payments are not the only cost of issuing bonds that comes off the top of UC’s budget: there are also reserves. UC’s Bond Indenture provides for reserves to be held in the name of UC’s bond trustee (BoNYMellonTrust ), even while allowing the Regents to control the larger accounts maintained to pay for actual construction and to avoid holding reserves for interest alone. Do these trustee-held reserves (which can’t be spent for other purposes) show up in UC’s audited financial statement? There is a line reporting that “non-current assets held by trustees” as of June 30, 2008 were $753M—a number, perhaps coincidentally, close to UC’s current-year shortfall in state funds. Does this line refer to the bond trustees? If so, how much higher will this number be as a result of this year’s $2.5B in newly-issued bonds? President Yudof knows. He could have had this line in UC’s Financial Statement in mind when he threw off a number of $900M in apparently “unrestricted” reserves that he says are really earmarked for construction. But he could have been referring, instead, to a separate construction fund, held by the Regents, or to their deposit in its common pool of reserves (called STIP), which in recent years has totaled up to $6B, and could have swelled even higher as a result of UC’s 2009 bond issues. The bottom line is that you should demand further disclosures about UC’s bond-related reserves.
A further question is the extent to which UC promised to manage its budget so as to protect its bond rating. The “due diligence” documents that UC should have furnished to the bond trustee( BoNYMellon) and the bond ratings companies (S&P and Moody’s) would normally address the “best-“ and “worst-“ case scenarios. If UC prepared such documents, they might well contain assurances, made as early as the first bonds issued 2004, about what UC would do when its state funding fell to present levels, These reductions were already anticipated, although not quite this soon. If so, these documents would explain, in a concrete way, why President Yudof now says that he had to cut pay (i.e., impose furloughs) and raise fees (especially tuition) as evidence that UC’s bonds are still good, indeed better than ever. The trust and ratings companies won’t release the documents UC furnished to get its bond rating, but President Yudof could do so. You should demand UC’s “due diligence” documents before you accept the claim that UC is raising your tuition as a matter of necessity, rather than as a choice to put construction first.
Even without such disclosures, UC’s shift in priorities from state-funded instruction to privately-funded construction is hidden in plain sight – in the text of the General Revenue Bond Indenture . The Indenture says (presumably the language is standard) that the Regents, in addition to avoiding default, “shall not permit to be done anything that might in any way weaken, diminish or impair the security intended to be given pursuant to the Indenture” (italics added). You would be foolish to regard this as meaningless lawyer-talk that leaves funding higher education intact as UC’s highest budgetary priority. It, rather, makes UC’s bond rating its highest budgetary priority.
The shift in priorities reflected in UC’s General Revenue bonds is even more important than the off-the-top costs, which will certainly rise over the decade unless UC’s priorities are reversed. The concept of a “General Revenue” bond is a hybrid between a “general obligation bond” and a “revenue bond,” and is as close as UC can come to backing each individual project with all it revenues without having the power to tax—although the power to raise fees comes close. By pledging “General Revenues” (everything it can legally pledge) for every project UC thus changed its spending (aka “budget”) priorities to suit the bond market. This shouldn’t be surprising—you, too, would change your spending priorities to suit that bank if you pledged your entire paycheck, or as much of it as you could. For UC this means increasing tuition for its own sake, because every tuition dollar can be added directly to the pledged collateral. It also means cutting spending when and where it can get away with doing so. What this is means is that state budget cuts are actually good for UC’s bond rating, because they allow UC to raise tuition simultaneously. Construction funding is a reason why the Regent’s want to raise tuition, perhaps the most important reason, but, as students, you are unlikely to go along with big increases to fund UC’s list of construction projects. Cutting back on instructional budgets is how they get you to agree to higher tuition without telling you how much will go to fund construction. On my campus, the most visible instructional cuts typically become permanent, and we’re told that without higher tuition they would have been worse. Campus administrations can always say that no particular tuition increase is ever large enough to reverse whatever instructional cuts were imposed to persuade you that it was necessary. If you accept this claim, you’ll never question how much of your tuition is used to fund construction, and whether you would have found an increase justified had you known.
To people in the financial world, it’s already obvious that UC committed itself to raise tuition and cut budgets when it decided in 2004 to secure its bonds. Most of my UC colleagues—faculty, students and staff—nevertheless find it unthinkable that UC would actually raise tuition and cut instruction in order to fund construction. People understand that UC wants to build. What’s unthinkable is that UC would still want to build rather than protect its programs and people when other great universities, including Harvard, indefinitely postponed new construction when their endowment income fell. Why? Because protecting people and programs seem to be a higher priority for Harvard than for UC.
Obvious? Unthinkable? UC’s actions are both. The Regents were under no legal obligation to spend any of your tuition on education—that’s why they can promise to turn the entire amount over to bondholders in the event of default. But neither were they obliged to pledge every penny of your tuition (all its other available revenue) in order to protect their borrowing power in capital markets. President Yudof could be referring to UC’s bond rating when he says that all UC’s “unrestricted” funds are “tied up or must be maintained at a certain amount for the fiscal health of the university.” Those of you who have skipped my footnotes should note that the title of his piece is “Why UC Must Raise Tuition.”
What UC has done was not inevitable, and went far beyond anything that the world of bond financing could have legally required of it. Before you go along with this year’s increase of 32% (which is compounded over last year’s increase), you should ask whether UC promised to manage its budget (your education) so as not to lower its bond rating.
It should be unthinkable that the Regents could have made such a commitment in 2004. To think that they actually did this means that, since 2004, UC’s highest priorities have been set by bond raters, and not by the State of California. I’m going public with my concerns about what this means for you, the students of our university, because I’m tired hearing that it will always be too soon to protest UC’s privatized future until it is already too late. By then, “the inevitable” will have happened by a thousand cuts, and taxpayers will believe that UC is determined to privatize no matter how much money it gets from the state. I, thus, see no point in waiting to know more before urging you to say “no” to the November tuition increase. More information won’t persuade my more cautious colleagues who think now is never the time to reverse the trend toward privatization—not even during a budget crisis when jobs are on the line, much less during good times when funds are flowing.
UC has a leadership problem, a problem of direction. So, yes, your tuition is pledged to finance UC’s plans to raise increasing amounts of capital in bond markets, and you should know what these plans are before paying more in tuition. I’ve made a further calculation in deciding that this is the right time for you to question UC’s leadership. If UC’s leaders can answer your questions by showing that the net budgetary impact of tuition-backed bonds is thus far relatively small, then you still have time to reverse their direction. If they are planning to greatly increase the funds raised by such bonds by rapidly raising tuition, this means that your time is running out.
Based on what I’ve said thus far, here’s why you should conclude that now is the time to demand full accountability from UC, and each of its campuses:
Some UC apologists will dismiss such questions about UC’s priorities, saying they are based on the naïve assumption that all your tuition money should go to the classroom, rather than, for example, research. In giving such an answer, they would be holding back a crucial piece of information that appears in UC’s non-public documents, which explicitly say that taxing research overhead is the #2 source of repayment funds for General Revenue bonds. This doesn’t mean that new buildings will be paid for by the additional research overhead they “earn.” Even federal grants, which pay UC the maximum “overhead” it gets from anyone, expect UC to “share” (i.e., eat) about 10% of the full budgetary cost on the grounds that doing research should be one of UC’s priorities. But once you see that no UC research ever fully pays for itself, you’ll see that UC must be assuming that all new research labs will add more costs than revenues. The bond documents don’t say that new projects will generate surplus revenue that could be used to support instruction: they are not like private sector “investments” that return a profit to the enterprise. Each new capital project that UC finances on its own, without state subsidy, is at best break-even. Most will be a permanent (perhaps growing) drain on campus resources that will be covered, first, by raising your tuition, second by spreading existing research support funds even thinner, and third by charging you more for other things, like student activities, while giving you less. The list goes on, but what you need to know is that even UC’s new research labs and sports facilities can’t be justified by how much new revenue they bring. Even if they earn some revenue, they’re being built for the prestige of the campuses (and thus the Chancellors) with no disclosure about how much they add to costs, how much tuition will be raised as a result, and whose instructional and research support budget will be cut.
Should the State of California restore funding to UC? Of course it should. Otherwise, UC can’t continue as the great public university it still is. But, as a taxpayer, I would be reluctant to pay more unless UC also reverses course: it must, once again, be willing to use the revenue it holds in public trust to advance its state-mandated purpose. UC’s continuation as a great public university is impossible if advancing public higher education has ceased to be its own top priority.
October 19, 2009
by Bob Meister,
Faculty colleagues have many questions about my open letter to students, “They Pledged Your Tuition.” Most of the questions come down to, “So what if students didn’t know that UC has been leveraging their tuition increases to fund more construction?” Let me formulate several versions of this question, and give some answers.
I clearly got my title right: there’s no question that since July 2003 UC has pledged student tuition (and other student fees) as part of the collateral for all the projects to be funded by General Revenue Bonds, which were first issued in 2004. I also gave students a clear enough explanation of what this means: that their tuition could be pledged because they can be legally obliged to pay it, but UC is not legally restricted in how to use it.
Much of my original letter was an effort to educate students about what UC’s bond pledge says with the exclamation points added. It says that UC could use tuition for any purpose; it also says that it would use tuition to repay interest and principal on bonds ahead of any instructional use. Beyond this, the indenture and every bond offering based on it include a “general covenant” requiring UC to raise tuition and fees as much as necessary to repay bond holders. Just before agreeing to this, UC also promises to do nothing that would cause its bond ratings to fall. Lower ratings would normally lower the price at which UC bonds can be sold before maturity. UC can protect its bond rating, while borrowing more, by adding to pledged collateral; but the only components of collateral under UC’s control are tuition and fees. This is why raising tuition and fees is the only concrete action UC promises the bond trustee and ratings agencies as part of its bond pledge.
Most students wouldn’t know that the increases in their tuition automatically add to UC’s collateral for construction bonds—and that UC can add collateral faster in years when state funds are cut. Why? Because higher tuition could be used to pay for what state education funds no longer cover, and many students want the most visible instructional cuts to be reversed. In my Open Letter I explain that this may not happen because the Regents see tuition revenue as a capital asset of the UC, and not as a straightforward replacement for state educational funds, which are not bankable in this way. Now that they know this, students should question how much of the 32% tuition increase will be used to restore educational cuts that UC blames on the state, and whether they would tolerate any increase as long as buildings are UC’s highest priority.
Since writing my letter, I can tell students much more than that UC could and would use tuition in this way: I can tell them that it has done this, roughly doubling the amount since 2008, and that it plans to do much more—beginning with another $2B bond issue that the Regents will announce after the 32% tuition increase in order to fund projects that they have already approved, but not announced. This information appears in a presentation by CFO Peter Taylor on October 6.. His slides show that General Revenue (i.e., tuition-backed) bonds provide UC with a rapidly growing capacity to take on more construction debt at favorable interest rates, and recommends that UC take advantage of this borrowing opportunity. This is how tuition increases look from his perspective, but not from a student perspective. They should be told that their tuition increases will allow UC to make construction a higher priority, whether or not instructional funding benefits.
This is a fair question based on my Open Letter to students—the very question I was urging them to ask. My letter distinguishes between what one pledges as collateral for a loan and what revenue stream one identifies as a source of repayment. As a rapidly-growing UC revenue stream, tuition could be either or both. I suspected that tuition could be both, but I wasn’t sure based on public available documents that tuition was being used as more than collateral. Peter Taylor’s presentation clearly shows that tuition is also the primary source of revenue for debt repayment, and recommends (for obvious reasons) increasing use of bonds that can be repaid in this way. The debt service on recently issued bonds, and new ones already in the pipeline, will have doubled to c. $435M between 2008 and 2012—a period in which tuition may also double.
If you think about it, CFO Taylor’s increased reliance on tuition as a way to repay bonds is obvious. State funds can’t be used for this purpose as a matter of state law; the “direct cost” portion of research contracts can’t be used for either debt collateral or for debt repayment because its use is restricted by the research contract themselves. Research “overhead” is never sufficient to cover the full cost of research, which UC is expected to “share” as part of its mission. Only bond-funded projects that bring in user fees, like parking garages and dorms, can be expected to pay for themselves. So what else is there but tuition to pick up the slack? And then, there’s the fact that UC has been allowed, since 2004, to increase tuition at will.
Do you have any doubt that the use of tuition for debt service will increase as tuition increases and UC borrowing against it also increases?
UC has made no secret of its desire to raise tuition. It told UCPB, when I was on it, that tuition was much too low, based on market factors that were independent of state budget cuts or increases. Under Gray Davis, however, UC was still concerned that continued state funding depended on its visible reluctance to raise tuition too fast—that eagerness to charge what the market allowed would provoke state cuts. UC’s long-term strategy was thus to raise tuition (which was too low anyway) in response to state cuts, so as to avoid retaliation, and to do this regardless of whether higher tuition would be used to restore the losses in instruction that seemed to necessitate it. Not restoring these losses was, I would argue, part of UC’s strategy, insofar as the continuing threat to other people and programs was part of its argument for the further tuition increases that UC wanted to impose anyway. Saving people and programs was, therefore, not UC’s first priority in using tuition increases: its first priority was to strengthen the case for further tuition increases. This strategy explains why President Dynes leapt at the opportunity afforded by Governor Schwarzenegger to accept permanent cuts in state funding in return for permission to raise tuition indefinitely without reprisal, and why the 2004 Dynes/Schwarzenegger Compact was such a turning point in the history of UC privatization.
Did Dynes and Schwarzenegger also, secretly, agree that UC could use tuition revenue, as it grew, to build whatever it wants independently of state bond funds? I don’t know. At the time of the Compact, UCPB was not told that was part of the deal, and was unaware that higher tuition in any amount would give UC more leverage to fund construction on its own. But maybe Schwarzenegger knew that this would sweeten the deal for Dynes. The tuition pledge had been adopted at an open Regents meeting, where Professor Charles Schwartz objected on the grounds that what has happened could happen. At that time, the tuition revenues -available to fund construction were less than half of what they are today, and General Revenue Bonds could be seen as a way to refinance existing bonds that already paid for themselves. So in 2004 the Regents could have said that including tuition in UC’s bond pledge provided investors with more diversified collateral, reducing risk lowering interest rates. It’s hard to argue now that this was its only effect.
My Open Letter asks UC students to demand proof that lower interest rates was the only effect of pledging tuition before going along with the next increase. Some students may choose to understand the link between higher tuition and construction growth as a conspiracy. To me UC’s policy would be just as bad if it had come about through a series of unplanned, opportunistic decisions made by people who had no interest in resisting privatization, which they saw as UC’s long-term future.
Did some UC decision-makers wrongly profit from these decisions? Others can investigate this question. Do all UC decision-makers benefit from privatization? Yes, after 2004 their pay scales were reset to match private sector compensation, rather than compensation in state agencies. For top administrators, privatization has already happened. And privatization is the problem.
UC’s median student is even more greatly harmed. That student (or his/her family) must borrow more to pay for higher tuition. UC’s 2004 capital plan was in fact based on the assumption that, as the home mortgage and student loan industries were expanding, the median students could and would borrow more into the indefinite future. Today, UC expects median students and their parents to take on long-term debt at very high interest rates, ever-higher as their credit ratings go down, so that UC can borrow from Wall Street at 4.6% by issuing Aa1 bonds. This looks like one of those mispriced credit swaps—but it’s not really a swap at all for the median UC student who has little choice. This is what UC implicitly communicates to bond raters when it demonstrates its ability to raise tuition indefinitely, and to substitute out-of-state-students who will pay even more for in-state students who are unwilling or unable to finance the next tuition increase through assuming increased personal debt. Median students who borrow more will end up paying much more for their education (including debt service) than richer students.
I heard that UCOP plans to answer my “charge” by appointing a team of “experts” to explain that it’s normal for organizations to financialize as much as possible and to shift their credit risk onto others if they can. The experts don’t need to persuade me, I know it’s normal. I also know that whether they can do this is, and ought to be, a political question. UC is still a public institution that can be made to answer political questions publicly. We should ask these questions before it is too late.
It leaves UC much freer to build projects that don’t pay for themselves without having to increase its endowment. UC has in effect leveraged its post-2004 freedom to raise tuition in order to borrow a pseudo-endowment that is now projected to reach $8B and will be unrestricted in its use. This is in contrast to UC’s actual endowment which is around $5B, almost all of which is donor-restricted. (Unrestricted endowment income is part of the General Revenue pledge.)
UC’s financial planners probably think they’re being smart, partly because they can use this borrowed money for projects that no longer have to earn the revenue that provide their principle source of repayment, which is now tuition. UC has used General Revenue Bonds to refinance existing bonds at lower rate of interest, which seems smart. I don’t doubt that these refinanced projects (including student dorms and parking lots) did pay for themselves—they had to show bondholders a favorable ratio between the additional cost of debt to the university and the additional revenue brought in by the funded project. That’s why UC issued its pre-2004 bonds for projects such as dorms.
Since 2004, however, all projects funded by General Revenue Bonds are funded by all General Revenue. This means that UC no longer published a debt service coverage ratio (net revenues divided by debt service for the year) for any project funded by General Revenue Bonds. Why? Because the principal source of repayment for all of them is student tuition across the UC system as a whole. To the extent that these bond-funded projects no longer have to pay for themselves, they will simply be a drain on increased tuition income that won’t be used for education and research. If UC were to publish a single debt service coverage ratio for all General Revenue Bonds, it would be conceding my point: that all construction projects funded in this way are subsidized by tuition and tuition increases.
I can’t say this for sure based on public documents alone: I can only show that they no longer have to pay for themselves. The burden is now on UC to prove otherwise.
Can UC prove otherwise? It would be easy if it were true. Charles Schwartz, a retired Berkeley physics professor, has just last week requested debt service coverage ratios for all individual projects funded by General Revenue Bonds, as it does for project-specific bonds. Maybe UC still requires that adequate debt service coverage be demonstrated before it approves any new projects, even if the bond-raters no longer ask this question because they are paid from tuition. I’m sure UC could easily show debt service coverage for parking lots and dorms. It would be much harder for UC to shows this for other bond-funded projects, like administration and telecom buildings (and the Berkeley stadium) unless it conceives of students as paying a virtual rent on these buildings out of their tuition. The disclosures of such “shadow” accounts for each project would, however, prove my point by showing the exact amounts of tuition that are diverted from instructional use to support these projects.
What other lines of defense might UC take? I’m sure I haven’t thought of them all. One conceivable argument is that all projects funded by General Revenue Bonds should be heavily subsidized by tuition and fee increases because they were necessitated by enrollment. This argument could be sustained if General Revenue Bonds were in fact limited to projects necessary to accommodate enrollment growth. The revenue source used to repay these bonds—higher tuition from a larger number of students—would then be closely aligned with the purpose for borrowing. It’s clear, however, from the eighteen supplemental bond indentures that only some of UC’s bond-funded projects could be justified in this way. How much? The indentures do not show what portion of bond proceeds goes to each project: all the projects are funded by all the bonds. And, none of the indentures attribute revenues to specific projects, which, insofar as they exist, will simply be added to the General Revenue fund used to repay all bonds. If UC argues that it exists for the benefit of students whose tuition should be used to fund whatever it chooses to do, it will have conceded that my analysis is right. Students will then be entitled to ask whether UC’s choice of construction projects justifies increasing their tuition.
What other information could UC offer that would answer their question? There may be internal documents I can’t imagine that others have seen. Until I see these documents, I must, sadly, assume that keeping up UC’s overall construction program has higher priority than funding the educational needs created by enrollment growth. I wish I were wrong.
The short answer is that we can’t know based on public documents. We know that interest on tuition-backed bonds will rise to c. $425M in the next 2-3 years (based on currently-approved projects) and that tuition will pay most of this interest. Whatever revenues these projects actually earn will be added to the General Revenue fund in categories of research overhead, user fees, etc., which are lower-ranked than tuition as a source of repayment. These General Revenue Bonds can be used to fund projects that don’t bring in additional General Revenue at all; they can also be used to fund projects that might reasonably be funded by student tuition or fees, such as classroom buildings, dorms or student centers. But now that all projects are funded by all student fees, student fee increases can be used to subsidize any project on any campus. The amount of this budgetary subsidy, which only begins with debt service and can encompass all losses associated with these projects, is the true educational cost of UC’s approach. To discover all these losses, we would need to drill down to the campus in order to see which programs have been cut (or ‘taxed’) the most to support new construction that does not specifically benefit them.
A clear example is UC Berkeley’s new football stadium, which will be financed by tuition-backed bonds. It’s conceivable that UCB has a debt service coverage ratio showing that it could have issued a “stadium bond” that would pay for itself with revenues earned. If so, it should share this analysis with the 49’ers. What if the stadium is not being financed by revenue from Berkeley football, but by tuition increases across the whole UC system? The rationale must then be that it adds luster to UC’s “brand” for which all students should pay. What does this say to other campus chancellors? It says that they should propose construction projects that enhance UC’s brand regardless of how much they drain funds from education, because such projects will certainly be built somewhere and will drain educational funds across the system.
UC may have market studies showing that new buildings help its “brand,” and that curricular cuts don’t hurt its “brand.” If such studies are the basis for its present priorities, let it say so. Students and faculty can then judge for themselves whether UC’s “brand” is more important to them than the quality of education they actually receive (and can give). In my opinion, a choice in favor of education would do more for UC’s “brand” than keeping planned construction projects on track.
No, I hate the classroom in which I now teach, and try to get my classes scheduled in the new, mostly science, building on the UCSC campus. But I would rather have TAs.
Yes, in 2008 it paid .2% less in interest for tuition-backed bonds than it paid for slightly-lower –rated bonds that were backed by revenues from specific projects.
If I understand this question correctly, it’s based on a spurious argument. The kernel of truth in this argument is that UC bonds are backed by something more than the contingent property right (lien) that bondholders have in the pledged collateral. If the pledge were insufficient, the loan document could also be enforceable against UC as an ordinary legal contract. The only way that UC could renege on this contract would be to threaten bankruptcy, which bondholders might be willing to avoid by taking what Wall Street calls a “haircut.” The spurious argument is that if UC could have paid bondholders out of tuition as an alternative to renegotiating its debts, then it makes no difference for it to pledge tuition upfront in order to reduce the likelihood of such a scenario.
These are, of course, completely different scenarios. UC issues secured debt for its construction projects, not unsecured debt (Commercial Paper) that requires it to keep a large positive bank balance but is otherwise much like a credit card. The fact that secured debt could revert to the status of credit card debt if the security vanishes does not justify UC’s General Revenue Bond program, which places something like a mortgage (really a lien) on student tuition. Consider the example of an ordinary mortgage in which the bank has a lien on your house, which serves as collateral. If your first mortgage is under water at the time of foreclosure, the holder of the second mortgage can try to collect against your paycheck alongside unsecured creditors, such as MasterCard. Does this mean you should pledge your paycheck as part of every mortgage, so that the bank can be assured of a more diverse source of funds for repayment? Most people wouldn’t pledge their paycheck. Why? Because in a real emergency they would want to pay for other things first. The bank would not necessarily be their highest priority.
UC has in effect pledged its paycheck (the portion it is free to sign over), but wants you (and more importantly students) to believe that it isn’t actually drawing on this paycheck to fund whatever it chooses to build. This pledge clearly commits UC to raise the collateral it controls (tuition and fees) to whatever levels the rating agencies require. What other effects does it have? Wouldn’t pledging your own paycheck in this way affect your budget (spending) priorities? Wouldn’t collateral of this kind reduce the lender’s concern with whether the loan proceeds are used for a project that pays for itself or a project that drains other revenue? Wouldn’t the bank’s right to seize your whole paycheck in the event of default reduce its concern with whether your use of the loan proceeds generates new income sufficient to pay it back? Surely it would be satisfied to know that you have the power to raise paycheck at its request. UC gets its Aa1 bond rating by demonstrating its ability to do this, and not by demonstrating that its construction projects are good investments.
My question is whether UC’s pledge of tuition has changed it budgetary priorities away from curriculum and toward construction, and whether this method of financing makes UC unaccountable for the drain that construction projects place on curriculum during a financial “emergency.”
It’s a question of priorities, and of values.
Nothing is wrong with the value of public higher education—UC’s leaders need to articulate that value, as Clark Kerr once did, as something that can be even better than the best private education. Why? Because Kerr’s Master Plan for Higher Education both expressed and aroused the desire for higher education as the pre-eminent common good that all Californians can in principle enjoy—a value added to the many uses education has for private advancement. UC’s specific role in the Master Plan is thatthe education it offers as equal to the best anywhere—and potentially even better because it also serves a public purpose
It is thus an article of faith for many Californians that UC is still great, and even greater because of its values. UC leaders have often urged me to suppress my criticisms, not because they are wrong, but because they would shake the public faith on which UC depends.
My underlying argument is that proponents of UC privatization both rely upon and betray the public’s willingness to believe that UC’s values are not changing—that it simply needs new sources of funding to do what it has always done. Californians need to know that a tuition-dependent UC will have its priorities driven by financial markets rather than by citizens. This means it will use the revenue streams from present activities, especially revenues that it can raise, to invest in new non-educational “initiatives” and “partnerships” that drain funds from UC’s Master Plan Mission.
Faculty who oppose UC’s present run to privatization need to draw on the willingness of Californians to believe that UC is still good because it’s still public. We demand that UC be accountable for all its funds, not just its state funds, and that it become more, not less, transparent about its priorities as a public trust during a financial emergency. Is funding public higher education the highest Regental priority for the use of the vast, accumulated assets that they regard as their own? Or is public higher education now merely a contractual service they provide to the extent that the state is willing to pay them for it?
I wrote first to students, and not to my faculty colleagues, because I think that Regental accountability should begin with tuition, and with the 32% tuition increase now proposed. UC officials who deal with Wall Street will, of course, tell the Regents to regard tuition revenue as their own money, unlike state funds, which are restricted as to use. The Regents will do this because they can—because from the standpoint of the financial world UC is already private (it belongs entirely to the Regents) except for the $2.6B in educational funding it still gets from the state. Has UC’s public mission become an exception within a broader set of priorities set by the private sector? Is higher education something that Californians must now bribe UC to deliver? I hope this has not happened yet.
Questions about tuition—its use and the reasons to increase it—are, I think, the first place to test Regental priorities for the use of non-state money, and eventually all UC’s money. That’s why I’ve urged UC students to take these questions to the November Regents Meeting at UCLA.
October 19, 2009
 President Yudof’s New York Times interview of September 27 2009 suggests that UC received a lot of public investment to feed the aspirations of my generation, the baby-boomers, and that most attractive public investments now lie in providing geriatric care for us. This is, of course, how a fund manager would think in deciding where to reinvest the capital that can be raised by leveraging tuition.
As CPB Chair at UC Santa Cruz, I heard a similar suggestion about how to “leverage” major campus “assets”: alumni loyalty and a magnificent ocean view. The answer, discussed seriously, was selling burial plots for rich alumni from the 1960s and 70s who were disillusioned by campus change. I suggested that our graveyard be called “Sunset College: Where the 60’s Never Die.”
October 26, 2009
by Bob Meister,
On October 20, UC issued a press release  (10/20/09) in which VP’s Taylor and Lenz respond to my Open Letter to Students: “They Pledged Your Tuition.” The UC press release confirms two major points I made:
1. It admits that all student tuition (including the education fee) is now pledged as part of the collateral for UC construction bonds.
2. It assumes that it would be wrong to use the Education Fee to pay for construction, or to service construction debt.
I say it assumes this because VP Taylor did not in any way qualify his categorical statement to the press on 10/20 that “educational fees are not used to pay debt service.” Although Regental policy allows “registration” fees to be used to fund construction projects related to student services, VP Taylor did not suggest that the Regents had adopted a similar rationale for using education fees to fund some buildings, such as classrooms, rather than others (such as administration buildings). Nor did he point out that Berkeley Law has been allowed to charge students a tuition-like supplement (beyond UC’s common education fee) for the express purpose of funding construction at Berkeley Law. His press release said nothing in support of any regental policies that might allow education fees to be used to pay debt service on some kinds of construction bonds.
Perhaps the reason the VP refrained from advocating this use of “ed fees” in a press release is that doing so would call attention to an apparent inconsistency between the Regents’ inclusion of “ed fees” in its General Revenue and their Student Fee Policy:
VP Taylor has now put the Regents in a pickle. Does their Student Fee Policy legally prohibit them from doing what they have pledged to do, or did they simply violate the Fee Policy when they did it? When President Yudof told the student press that UC couldn’t do this, because it would be “illegal” (Daily Cal, 10/19/09) he might have meant that Regental fee policy would legally trump the pledge? If the pledge could trump the policy, this opens the question of whether protecting the instructional uses of “ed fees” is still a high regental priority.
We no longer know what the Regents’ priorities are. The fact that their old “ed fee” policy remains in place suggests only that they are reluctant to admit that these fees can now be used for construction. Maybe they don’t know, or don’t want to know, whether “ed fees” are diverted by campuses competing for bond-funded projects; maybe the Regents simply count on VP Taylor to assure them that the campuses wouldn’t think of using “ed fees” for debt service. Does VP Taylor really know that the instructional use of “ed fees” is sacrosanct on every campus? Have the Regents asked him to find out?
There is now no dispute that the Regents pledged student “ed fees” for construction; it is also clear that their own Student Fee Policy reflects the assumption that they shouldn’t be used for this purpose. So what are the outstanding issues?
The first question is relatively narrow: Is UC actually using tuition revenue to pay debt service on construction?
The second question is a matter of values: Should UC use its opportunity to borrow against ever-increasing tuition in order to advance construction projects while cutting back on student instruction and services?
Both questions need to be addressed by the growing student movement to “Save UC.”
In the October 20 press release, VP Taylor flatly denies that UC uses any tuition revenue to pay debt service. This statement is at odds with his October 6 presentation to UC’s Academic Senate Committee on Planning and Budget that lists “sources of debt repayment” in the following order.
Here we have the full menu of revenue sources that the campuses can use for collateral and/or repayment of projects funded by General Revenue Bonds. Tuition (including “ed fees”) is first on the list, and is the largest single component of the menu. He also says UC should “align” its construction finance program to avail itself of the growing “debt capacity” that General Revenue Bonds provide. How can these statements, originally made to the UC Committee on Planning and Budget on October 6, be reconciled with VP Taylor’s October 20 press release stating that “educational fees are not used to pay debt service?”
There is only one way: drilling down to individual projects. According to regental policy “[e]ach external financing request must identify a specific fund source to be pledged to repay the obligation” and that this must be done, even for “non-revenue generating facilities with an administrative component.” If VP Taylor’s press release is true, then every project that the Regents have thus far approved (all those listed at the back of eighteen supplemental bond indentures)  should be accompanied by what non-experts might call a ‘shadow’ indenture—i.e., a collateral and repayment plan that allows no recourse to charges against instruction. 
The Regents have a Committee on Audit that is supposed to protect the Regents from doing anything wrong with the money they administer as a trust for the People of California. I will attend the Audit Committee’s October 28 meeting and ask it to audit VP Taylor’s October 20 statement that Regents have not, in fact, approved any construction project that draws on tuition revenue (charges instructional programs) for debt service. This task should be straightforward if VP Taylor has these documents at his fingertips. The Audit Committee can reasonably assume that he would not have approved the press release without checking them.
While it verifies that neither the Regents nor the Adminstration has done anything wrong with past tuition increases, the Audit Commitee should seek a delay in Regental approval of the next tuition increase, now scheduled for November.
The need for a regental audit should not, however, overshadow the more important question:
This is not a question most students would think to ask: how would they know about UC’s bond rating and how it might be influencing decisions and priorities?
In their press release VPs Taylor and Lenz ignore my question about UC’s bond rating: they simply repeat UC’s oft-stated position that the reason for tuition increases is that the state has cut instructional funds. This reason is plausible because tuition revenues could be used for instruction. The problem is, as the bond documents indicate, that tuition does not have to be used for instruction. It can be used for construction, and has been pledged as collateral for bonds used to pay for construction. Until we see documentary evidence to the contrary, we may also assume that it is among the revenue sources used to pay debt service on bonds.
The plain fact is that tuition increases give the Regents an opportunity to borrow more for construction by increasing the pledged collateral. This effect of tuition on collateral is automatic; it does not require a further Regental decision. It follows that any increase in tuition helps UC’s bond rating, regardless of how it is used, or what happens to instruction. So which is UC’s higher priority, its bond rating or instructional quality?
The question remains unanswered. How can we know the Regents’ real priorities now that they have given up on California’s Master Plan? Even the Regents claim not to know what goals they now serve or should serve: they have appointed a Commission (the Gould Commission) to tell them.
VP Taylor’s presentation of October 6 does not speak of regental priorities: it simply recommends that UC seize the opportunity created by tuition growth to increase construction borrowing. But should the Regents accelerate construction while cutting back on student instruction and services? VP Taylor attempts to answer this question in his 10/20 press release by explaining that UC saves a total of $29M in bond interest on bonds totaling $5.8B by pledging student tuition. He thus implies that this saving (in 2008 it was only .2%)  is the only difference the pledge of “ed fees” makes to the Regents.
The pledge of “ed fees,” which are rising, also allows them to issue more bonds. Thus far in 2009 the Regents have issued $1.6B in new General Revenue bonds (at 4.6%-4.8%)—incurring more than twice the annual debt service that VP Taylor says UC has saved by including “ed fees” in the pledge. The Regents will soon announce a plan to pile on even more debt service by issuing yet another $2B in bonds to fund projects they have already approved. Under current regental plans, UC will have added roughly $230M in new General Revenue Bond debt service since the 2008 financial crisis began, or more than 8x the amount that pledging “ed fees” has saved in lower interest cost. This calls into question the whole idea that the slightly lower interest rate the Regents receive by pledging all their “general revenues” is a way to preserve funding for instruction.
Students should question what UC wants to do with their tuition before going along with the next increase. They shouldn’t get bogged down in arguing about whether the lower interest rate justifies UC’s decision to borrow more for construction. They should ask how their “ed fees” are being used at a time when the university is so short of funds that it must furlough faculty and staff, cut back support of basic services, including those funded by their “reg fees” and special fee assessments, which have not been affected by state budget cuts.
What if UC really wants to raise tuition simply because it has market research saying it is too low: that if it charged more, students would pay more? It wouldn’t give this as a reason. It would tell each of its constituencies that it really wants to raise tuition for them: students will be told that UC is doing it to increase financial aid and replace funding for academic offerings that the state has withdrawn; faculty will be told that they’re doing it to restore and raise salaries; staff will be told that there’s no chance of a living wage without higher tuition. None of these groups will be told that UC also wants to raise tuition to expand its construction program—that’s what Wall Street has been told. If UC’s internal constituencies don’t unite, UC will raise tuition so that it can do whatever it wants, which may simply be what Wall Street wants. That’s part of the privatization effect.
To Sum Up:
UC’s top priority should be to preserve and restore California’s Master Plan for Higher Education. If this is no longer UC’s highest priority, this change should be announced and UC should then be held publicly accountable for what it does with all its revenue—even the revenue that it regards as its own, beginning with tuition.
 http://cucfa.org/archive/Taylor_PPT_06_OCT_2009.pdf Italics added.
 Ibid., p. 6.
 These are now archived at www.cucfa.org.
 To the extent the “ed fees” are not being used to fund such buildings, students and employees should ask what other revenue sources listed above are being increased and/or diverted to pay off unrelated projects. Have student approved fees or employee parking fees been increased and then diverted for this purpose? There is also the question of how construction cost over-runs are funded. When I chaired my campus Committee on Planning and Budget, there was a tendency to fund these by taxing instructional budgets.