STATEMENT
by Professor Emeritus Charles Schwartz of UC Berkeley
to the Regents’ Committee on Grounds and Buildings
meeting in San Francisco on January 19, 2010
This is a summary report on recent investigations that show serious lapses in the University’s fiduciary oversight of its bond indebtedness programs. It appears that this problem arises not just by accident, but from persistent and willful negligence on the part of high level officials.
All of the University’s external bond debt has been undergoing reorganization, since 2003, into two financing pools: One for all the Medical Centers and the other for all the campuses – that last is called the General Revenue pool. According to the latest Debt Capital Report, for Fiscal Year 2009, the outstanding debt for these two pools was:
$1.039 Billion for the Medical Center Pooled Revenue Bonds; and
$5.852 Billion for the General Revenue Bonds.
For the external parties, the Bond Market, the overall financial numbers are what count; and you see some of that data in the annual Debt Capital Report provided to The Regents. For the internal parties – all of us here inside the University – more specific data is required.
When each construction project comes before the Regents, first their Committee on Grounds and Buildings, there is specified a primary source of debt service, a particular revenue stream which takes on the responsibility of meeting all future obligations to pay back interest and principal. The main question here is: What mechanism is in place to monitor, to oversee, the ongoing performance of those arrangements?
For the UC Medical Centers one sees relevant data published not only in their annual financial reports but even in their Quarterly Status Reports. On the very first page of Key Indicators one finds: Debt Service Coverage Ratios, for Current Y-T-D and Prior Y-T-D for each one of the 5 Medical Centers. That is good and proper reporting, which comes to The Regents and to any interested member of the University or of the public.
THERE IS NO SUCH REPORTAGE FOR THE GENERAL REVENUE POOL.
This is a shocking situation. Let me tell you how I have come to discover this.
You may recall a series of articles posted by Professor Robert Meister, who made disquieting allegations about the pledge of student fee revenues in support of campus construction projects. My own investigations have been much more narrow, seeking to learn what oversight mechanisms are in place to monitor when some construction project might dip into student fee revenues in order to meet its debt service obligations under the General Revenue Pool.
There has been a series of letters between myself and Executive Vice President Peter Taylor, seeking to get that information. Finally, after several frustrating run-arounds, I have received a definitive reply. Here it is. (Email from UCOP Office of Public Information, January 13, 2010.)
“The University does not record individual tabulations of each project’s debt service coverage. This is because revenues generated by said projects are not the only revenues that can be pledged toward the projects and counted toward a debt service coverage calculation.”
That means that there is nobody minding the cash register of this candy store. More specifically, any time that a campus-based construction project runs short of revenue to meet its debt obligations, there might easily be a switch of funding to use student fees, without anyone knowing what has happened.
I have previously raised this question of the adequacy of regental oversight with the Committee on Audit. At that time we did not have definitive information about what UCOP does and doesn’t do. Now we have the answer; and it is not good.
You need to take corrective action.
If you have any questions about this, I will gladly respond.
Thank you.
Showing posts with label UC bonds. Show all posts
Showing posts with label UC bonds. Show all posts
Wednesday, January 20, 2010
Friday, October 30, 2009
Berkeley Faculty Association Head Calls on Regents to Audit Use of Ed Fees
I am Christine Rosen, the Secretary of the Council of UC Faculty Association (CUCFA). As Bob Meister just said we are requesting that you conduct an audit to determine whether the Office of the President is violating its own rules by using student educational fees to for debt service on its construction bonds.
As part of this audit, we would also like to request that you audit UCOP’s assertion that this debt is actually being paid out of the revenues generated by the revenue generating programs that are housed in the new buildings. We question whether most of these programs can generate enough revenue to service this debt. To give you an example of why we are concerned:
Berkeley is in the process of constructing a $136 M Student Athlete High Performance Center and is about to begin a much larger $321 M renovation of the football stadium. The Department of Intercollegiate Athletics (DIA) is the revenue generating entity responsible for repaying the $457 M debt. Assuming a 4.8% interest rate, it will have to pay out $22M a year.
However, the DIA operates at a large multimillion dollar loss every year. A faculty group looking into the matter has discovered for the most recent 5-year period for which the DIA has released detailed data (2003-08), its cost to campus has been at least $10 million every year - except for 2007-08 for which the cost was $7.4 million [Note 1]; and that for the most recent fiscal year (2008-09), the cost to the campus is expected to be a record high of approximately $13.5 million [Note 2]. The $22M debt service burden is going to come on top of this ongoing loss, creating at least a $33M shortfall per year. The faculty have heard that DIA needs to sell at least half a billion dollars worth of expensive skyboxes to generate the money to cover these costs. We question whether it will be able to sell enough to generate revenues of $33 M a year. Even if by some miracle it can do this, we want to know how the interest on $136 M debt incurred to construct the high performance athlete training center will be paid off during the years before the renovations to the football stadium are completed. Where will this money come from?
This is just one example of a revenue generating program that seems unlikely to generate the surplus funds needed to pay off the university’s debt. We suspect that many of the revenue generating programs assigned responsibility for paying off construction debt are incapable of shouldering the entire debt service burden placed them. Please audit all such projects to determine what level of debt service the Regents can realistically expect such revenue generating programs to generate for this purpose.
In addition, please audit the revenue flows that the Regents can realistically expect extramural research grants to generate to contribute to the general revenues that UCOP is pledging as collateral for its construction debt and/or that it may be using to service this debt. We doubt that it is capable of generating enough revenue to relieve the university of the need to divert funds from student educational fees for this purpose.
Finally, let me tell you why conducting these audits is important. If in fact UCOP is diverting revenues from student educational fees to pay for debt service, this diversion is coming on top of the recent, devastating state budget cuts to instruction. So it is coming at a great cost to our students as well as to our capacity to maintain the university’s reputation as a world class institution. It is part of the reason why departments have had to slash course offering, increase class size, cut back on funding for Graduate Student Instructors and graders faculty need to support their ability to teach gigantic classes effectively. It’s part of the reason why students restrooms are being cleaned even less than in the past and are in increasingly horrible, unsanitary shape and why garbage is not getting collected and why departments are pulling out faculty phone service. It has to be recognized that it helped necessitate the furloughs and layoffs that have demoralized faculty and staff and undermined UC’s ability to retain its best faculty.
We’re told that the new buildings are an investment in UC’s long term future as a world class university. That may be, but in an era of financial crisis, diverting funds from student fees for this purpose means we are disinvesting in our students and our faculty – which is an even more serious threat to the university’s future.
***
Note 1: Computed from UC Berkeley Senate CAPRA estimates and DIA financial statements as shown on: http://budgetcrisis.berkeley.edu/?page_id=16
Note 2: The DIA has not provided detailed financial information for the 2008-2009 fiscal year; only this estimate.
As part of this audit, we would also like to request that you audit UCOP’s assertion that this debt is actually being paid out of the revenues generated by the revenue generating programs that are housed in the new buildings. We question whether most of these programs can generate enough revenue to service this debt. To give you an example of why we are concerned:
Berkeley is in the process of constructing a $136 M Student Athlete High Performance Center and is about to begin a much larger $321 M renovation of the football stadium. The Department of Intercollegiate Athletics (DIA) is the revenue generating entity responsible for repaying the $457 M debt. Assuming a 4.8% interest rate, it will have to pay out $22M a year.
However, the DIA operates at a large multimillion dollar loss every year. A faculty group looking into the matter has discovered for the most recent 5-year period for which the DIA has released detailed data (2003-08), its cost to campus has been at least $10 million every year - except for 2007-08 for which the cost was $7.4 million [Note 1]; and that for the most recent fiscal year (2008-09), the cost to the campus is expected to be a record high of approximately $13.5 million [Note 2]. The $22M debt service burden is going to come on top of this ongoing loss, creating at least a $33M shortfall per year. The faculty have heard that DIA needs to sell at least half a billion dollars worth of expensive skyboxes to generate the money to cover these costs. We question whether it will be able to sell enough to generate revenues of $33 M a year. Even if by some miracle it can do this, we want to know how the interest on $136 M debt incurred to construct the high performance athlete training center will be paid off during the years before the renovations to the football stadium are completed. Where will this money come from?
This is just one example of a revenue generating program that seems unlikely to generate the surplus funds needed to pay off the university’s debt. We suspect that many of the revenue generating programs assigned responsibility for paying off construction debt are incapable of shouldering the entire debt service burden placed them. Please audit all such projects to determine what level of debt service the Regents can realistically expect such revenue generating programs to generate for this purpose.
In addition, please audit the revenue flows that the Regents can realistically expect extramural research grants to generate to contribute to the general revenues that UCOP is pledging as collateral for its construction debt and/or that it may be using to service this debt. We doubt that it is capable of generating enough revenue to relieve the university of the need to divert funds from student educational fees for this purpose.
Finally, let me tell you why conducting these audits is important. If in fact UCOP is diverting revenues from student educational fees to pay for debt service, this diversion is coming on top of the recent, devastating state budget cuts to instruction. So it is coming at a great cost to our students as well as to our capacity to maintain the university’s reputation as a world class institution. It is part of the reason why departments have had to slash course offering, increase class size, cut back on funding for Graduate Student Instructors and graders faculty need to support their ability to teach gigantic classes effectively. It’s part of the reason why students restrooms are being cleaned even less than in the past and are in increasingly horrible, unsanitary shape and why garbage is not getting collected and why departments are pulling out faculty phone service. It has to be recognized that it helped necessitate the furloughs and layoffs that have demoralized faculty and staff and undermined UC’s ability to retain its best faculty.
We’re told that the new buildings are an investment in UC’s long term future as a world class university. That may be, but in an era of financial crisis, diverting funds from student fees for this purpose means we are disinvesting in our students and our faculty – which is an even more serious threat to the university’s future.
***
Note 1: Computed from UC Berkeley Senate CAPRA estimates and DIA financial statements as shown on: http://budgetcrisis.berkeley.edu/?page_id=16
Note 2: The DIA has not provided detailed financial information for the 2008-2009 fiscal year; only this estimate.
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