Last week, at BATS, a colleague from a research lab was asking me what exactly is going on with the budget of the University of California. The conversation went like this:

“How much does the state contribute to the UC Budget?”

“About a third”

“And how much has the state contribution decreased this year”

“About 20%”

“So that’s about 6% of the total budget. How come they need to cut salaries by 8% and increase tuition by 32% in order to recover from a 6% budget cut?”

How come, indeed? Over the weekend I have tried to make sense of this question, but unfortunately it is very difficult to make sense of the UC budget, not to mention that the numbers in the 2008-09 budget document from the office of the president are quite different from the number in the 2008-09 audit.

Here is, however, what I have understood so far:

  • Overall, the University of California has an annual budget of slightly less than $20 billions. This is about the same as the revenues of Google or of Amazon, and about 2/3 of the revenues of Apple.
  • About $5.5 billions relate to non-academic entities that the University administers breaking even or at a slight profit:
    • The hospitals associated with the medical schools have a budget of about $4.8 billions;
    • The University gets about $0.6 billions to run federal (weapon-related) research labs, including part of Los Alamos.
  • About $4.5 billions come from outside research grants, from NSF, NIH, DoE, DoD, and similar three-letter-named federal agencies.

    Of this money, the university keeps about a third for “administering” the grant, while the rest are spent to run the labs, pay the grad students and so on.

  • This leaves about $9.5 billions to pay salaries of administrators and faculty, maintain the buildings, operate the libraries and so on. Most of this money is spent on teaching, although some expenses benefit research too. (E.g. the libraries benefit both, maintaining the buildings benefits both, and so on.)
  • Of these $9.5 billions, the university got about $3.5 billions from the state last year, which is down to about $2.9 this year, hence the sudden crisis. Adjusted for inflation, this is about half the money per student that the University was getting in 1990.
  • Student fees (tuition) accounts for another roughly $2 billions and gifts are around $1 billion. I am a little lost as of where the other $3 billions are coming from. (More than $2 billions are listed as “other sources” in the budget reports I have seen.)

When fees (tuition) are increased, about a third of the increase is set aside for additional financial aid. This means that even a 32% increase of fees will “only” raise $600 million, of which only $400 million can be used to cover the budget gap, which is about $700 millions. Hence the other $300 million have to come from elsewhere. I couldn’t find out how much money the University spends on salaries from the $9.5 billions above. A random guess of $7 billion implies that this year’s salary reductions saved about $500 millions, and more money was saved through layoffs. The numbers now more or less add up. Only a quarter of the tuition increase has effect this year (because there was only half of the increase and only for one semester), so it was $100 millions from the increased tuition, $500 millions from salary cuts and $100 millions from layoffs. Next year the salary reductions will expire, so all the shortfall has to be made up for with tuition increase and further economies (hence more layoffs etc.).

Now, next time someone asks me what is going on at the U.C., they will regret they ever asked such questions.

And if any reader has a better understanding of the budget, and he or she can explain it without waving away $3 billions, then please leave a comment.

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