UC Berkeley announces new cost-cutting measures amid structural deficit

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Update 02/10/2016: This article has been updated to reflect additional information and interviews from campus officials, professors and students.

Amid continuing financial challenges, the campus announced comprehensive cost-cutting measures Wednesday morning, with plans to reimagine administrative systems, investments and discretionary expenses.

The campus is faced with what Chancellor Nicholas Dirks described in his announcement as a “substantial and growing” structural deficit that the campus cannot sustain in its current trajectory.

One of the campus’s primary sources of revenue — tuition and fees — has been frozen for undergraduate students for the last five years. Meanwhile, inflation continues to inch upward, and costs beyond the university’s control have continued to rise, all in the context of an era of public disinvestment, according to campus sources.

The administration aims to overhaul longstanding structures by which the campus operates through this extensive planning process, led by Executive Vice Chancellor and Provost Claude Steele.

“Because this deficit does not reflect a short-term dip in funding, but a ‘new normal’ era of reduced state support, responding to this deficit requires that we take a long-term view,” Dirks said in the announcement.

This year, the campus faces a $150 million deficit, which represents 6 percent of its operating budget, according to current projections. Structural deficit means that the campus continually spends more than it acquires in revenue.

Even Cal Athletics, which many perceive to be the campus’s biggest revenue generator,  will not escape budgetary review. Intercollegiate Athletics has run a deficit in recent years, with even more strain put on its pocketbooks by debt obligation — about $18.1 million annually until 2032 — accumulated after upgrading Memorial Stadium.   

Ben Hermalin, professor of economics and chair of the Academic Senate, said that the campus’s financial situation has been known for a while. It is not, he said, as if Dirks woke up this morning and decided the campus was in serious financial trouble.

“The letter makes public a process that has already begun,” Hermalin said.

He added that last spring, when the terms of the budgetary funding agreement between UC President Janet Napolitano and Gov. Jerry Brown were solidified, the campus really understood where its finances were headed. That realization “kicked things that were percolating into high gear.”

“It’s pretty much just arithmetic at that point,” Hermalin said.

UC Berkeley’s cost structure is particularly reliant on student tuition and fees, which make up 30 percent of the campus’s total revenues, according to campus officials. In-state undergraduate tuition rates are not set to increase until the 2017-18 academic year.

Jason Constantouros, a fiscal and policy analyst at the California Legislative Analyst’s Office, said UC campuses retain the money they earn from student tuition. Thus, flagship campuses such as UC Berkeley and UCLA, which enroll higher percentages of out-of-state students, collect more money through the supplemental tuition these students pay.

These campuses, however, also incur greater costs for faculty as they compete against prestigious private institutions in the hiring process.

“The budget challenge they are addressing resulted from a variety of factors, some being well-intentioned campus choices made over time, and others being the financial pressures faced by many universities nationally,” Napolitano said in a statement Wednesday.

The campus assigns blame to declining state funding — even with a recent uptick —  for its dependence on tuition in recent years. In the 1980s, UC Berkeley received approximately half of its funding from the state. Now, state funding represents about 13 percent of UC Berkeley’s operating budget.

“This endeavor must not be interpreted as an abandonment of our commitment to a public mission nor to our efforts to advocate for increased public funding for higher education,” Dirks said in the message.

Campus sources noted other UC Berkeley-specific costs, such as necessary seismic retrofitting expenses because of the campus’s location near the Hayward fault.  The campus has invested about $2.1 billion in constructing and maintaining facilities, of which roughly 60 percent, or about $1.25 billion, addressed seismic safety issues.

Annual debt service obligations have thus grown from about $25 million to $100 million in that time period.The campus also has a large inventory of aging facilities that require higher maintenance costs.

Hermalin said some capital investments in these buildings were paid with debt, and many campus officials did not anticipate that state funding would not return to prerecession levels.

Having experienced a previous round of budget cuts, Dirks said the campus is more acquainted with what cost-cutting strategies work. Last time around, then-chancellor Robert Birgeneau implemented Operational Excellence, an initiative that made budget cuts across the board.

“We’re going to be a lot more strategic in the way we both reorganize processes and structures, and we will do that … in a very open and transparent way,” Dirks said in a phone press conference.

The campus administration is considering short-term measures that include increasing revenue from its real estate assets and expanding online and master’s programs that bring in money, while reducing enrollment for some doctoral programs.

Dirks said in the announcement that some of these changes will be “painful.”

“Change is difficult, we accustom ourselves to the structure we inherit and then inhabit, but in this case there will be changes we simply have to make,” Dirks reiterated in the press conference.

Hermalin said that given the fact that the campus is set to absorb 750 additional in-state students, it would be surprising if the administration decided to lay off nontenure-track faculty. Staff should anticipate possible layoffs, Hermalin said, or at the very least, tighter control of staffing levels, meaning that when staff members leave or retire, the campus will carefully consider whether they are worth replacing.

Senior research fellow at UC Berkeley’s Center for Studies in Higher Education John Douglass sees this as simply another round in a cycle of attempts to reduce operating costs. Dirks’s announcement is a statement declaring that all options are on the table, he said.

During the last round of budget cuts in 2012, UC Student Association President Kevin Sabo said, it was low-income staff members whose positions were cut, while upper-level administrators remained.

“One vice chancellor position is the equivalent of a handful of service workers,” in terms of cost, Sabo said.

The layoffs recently made in Campus Shared Services, or CSS, mark current campus efforts underway to streamline work processes.

ASUC Senator Wes Adrianson is also concerned about which programs the campus will prune — mental health and ethnic studies programs are often on the cutting block, he said, even as the size of administrative staff continues to grow.

Adrianson noted that the campus sees partnerships with private entities as a potential source of revenue for its long-term sustainability.

“Most of us are incredibly concerned about how we maintain Berkeley’s set of values,” said Henry Brady, dean of the campus Goldman School of Public Policy, regarding potential private partnerships.

The campus has identified its potential options and now must determine its cost-cutting decisions.

“We are committed to using this not just as a moment of ‘Oh dear, we have to cut again,’” Dirks said at the conference, but rather as a chance to examine the institution as a whole.

The administration will establish a new Office of Strategic Initiatives and advisory council to provide coordinating efforts, and will begin implementing prescribed changes this summer.

Suhauna Hussain is the university news editor. Contact her at [email protected] and follow her on Twitter at @suhaunah.