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Report Number: 2016-130

University of California Office of the President
It Failed to Disclose Tens of Millions in Surplus Funds and Its Budget Practices Are Misleading



Summary

HIGHLIGHTS

Our audit of the University of California Office of the President’s budget and staffing processes revealed the following:


Results in Brief

The rising cost of higher education in the State and nationwide places an important responsibility on public universities to make fiscally prudent decisions that best serve the financially burdened students and families who help to provide for their support. Nonetheless, over the past five years, the University of California (university) Office of the President has made decisions that redirected funds away from the university’s fulfillment of its role as the State’s primary academic research institution and toward other priorities. Although the University of California Board of Regents (regents) delegated authority and responsibility over the administration of the university’s affairs and operations to the Office of the President, it has not managed its own budget—which amounted to $747 million in fiscal year 2015–16—in a fiscally prudent or transparent way. Further, it has not ensured that its spending decisions consistently align with the needs of the university’s 10 campuses, students, and other stakeholders.

Specifically, the Office of the President did not disclose to the regents that it had amassed more than $175 million in reserve funds as of fiscal year 2015–16. In each of the four years we reviewed, the Office of the President spent significantly less than it budgeted for and it asked the regents for increases in future funding based on its previous years’ over-estimated budgets rather than its actual expenditures. Consequently, it accumulated significant annual budget surpluses, which it maintains in two reserves: restricted and discretionary. Furthermore, it not only failed to disclose the existence of these reserves to the regents, but it also failed to inform them of the annual undisclosed budget it created to spend the reserves. This undisclosed budget ranged from $77 million to $114 million in the four years we reviewed.

In effect, the Office of the President received more funds than it needed each year, and it amassed millions of dollars in reserves that it spent with little or no oversight from the regents or the public. According to the Office of the President, disclosing its reserves was unnecessary because the regents had approved the spending in previous years’ budgets. Further, its budget director stated that the Office of the President can use the discretionary reserve to fund any program or project at the Office of the President or the campuses. However, this practice contradicts the intent of a regents’ 2006 policy prohibiting the Office of the President from spending any funds until the regents approve its annual budget each year. Had the regents known about the Office of the President’s reserves, they could have potentially requested that the Office of the President use at least some of the funds to better meet the campuses’ and students’ needs. Further, even though the Office of the President stated that expenditures from its undisclosed budget went through a rigorous approval process, it could not demonstrate adequate approval for 82 percent, or $34 million, of the planned expenditures we reviewed from its undisclosed budget in fiscal year 2015–16. With no evidence of proper approval, the majority of the undisclosed budget was unnecessarily at risk for misuse.

The Office of the President’s budgeting practices are also of concern because its disclosed discretionary budget is almost entirely funded by an annual charge, called the campus assessment, that it levies on the campuses. The Office of the President allows campuses to pay this assessment using any funding source, and campuses paid about a third of the $288 million fiscal year 2015–16 assessment—up to $106 million—using their portion of the money from the State’s General Fund. Over the past five years, the Office of the President has underspent the revenue it received from the campus assessment by $32 million, and as a result, a significant portion of the Office of the President’s discretionary reserve consists of funds the campuses could have retained and spent for other purposes. Moreover, the Office of the President increased the campus assessment in two of the four years we reviewed, a decision we find problematic given that it consistently failed to spend all of the revenue it received from the campuses. We believe the Office of the President might be able to refund at least $38 million of its uncommitted reserve funds to campuses.

Furthermore, because the Office of the President provides so little information about its budget—and the information it does provide is sometimes misleading—the regents and Legislature are likely to find it difficult, if not impossible to understand its operations. In fact, we found the Office of the President made inaccurate and unsubstantiated claims about its budget during regents meetings, such as claiming the Office of the President is not funded using state money even though campuses use money from the State’s General Fund to pay for the campus assessment. The Office of the President’s inability to substantiate its public claims is due to its lack of strong, consistent budgeting processes, which would help to provide transparency and accountability. For example, since 2013 its annual budget process has not included a formal avenue for soliciting input from the campuses regarding its planned spending decisions. We identified a number of best practices that the Office of the President should immediately implement, including eliminating its undisclosed budget and using its actual expenditures as a basis to establish its future budgets. Implementing these practices would not only increase transparency but would also shed light on opportunities that the Office of the President has to reevaluate its financial decisions and reduce its spending.

The Office of the President might also be able to realize significant savings by adjusting the generous compensation it pays its staff. For example, the 10 executives in the Office of the President whose compensation we analyzed were paid a total of $3.7 million in fiscal year 2014–15—over $700,000 more than the combined salaries of their highest paid state employee counterparts. In one example, the Office of the President paid the senior vice president for government relations a salary that was $130,000 greater than the salaries of the top three highest‑paid state employees in comparable positions. In defense of its salaries, the Office of the President asserted that the higher education environment necessitates higher pay for its staff. Although this argument may have merit for certain executive employees, it has little merit for administrative staff such as financial analysts who perform similar duties irrespective of the entities for which they work. Nonetheless, we found that the Office of the President paid individuals annual salary rates for the 10 administrative positions we reviewed that were $2.5 million more than the maximum annual salary ranges for comparable state employees. The Office of the President uses salary survey data that come almost entirely from private sector companies and higher education institutions to determine its base salary levels, which typically pay their staff more than public entities.

Further, the Office of the President spent at least $21.6 million from fiscal years 2011–12 through 2015–16 on generous employee benefits, many of which are atypical of those public sector employees receive. For example, in addition to its regular retirement plan, the Office of the President also offers its executives a retirement savings account, into which the Office of the President contributes up to 5 percent of the executives’ salaries. These contributions totaled $2.5 million over the past five years. The Office of the President also spent more than $2 million for its staff’s business meetings and entertainment expenses over the past five years—a benefit that the State does not offer to its employees except in limited circumstances. Moreover, the Office of the President lacks sufficient policies to ensure that the cost of certain employee benefits is contained. For example, when its employees travel, the Office of the President recommends but does not require that its staff book hotels that do not exceed 200 percent of the federal per diem rate.

The Office of the President’s spending decisions are not limited to its internal operations; rather, it is also responsible for deciding how to spend funds on behalf of the university as a whole. Specifically, half of its budget presented to the regents is related to systemwide initiatives—a term that the Office of the President uses to describe programs that benefit the entire university system. Examples of these initiatives include academic and research programs such as the University of California Observatories, the University of California Washington Center, and the Breast Cancer Research Program. Although many systemwide initiatives undoubtedly provide a benefit to the public and to students, the choice to fund them may come at the expense of the university’s priority of access and affordability for California undergraduates. Moreover, when we attempted to quantify the costs of its systemwide initiatives, we found that the Office of the President was unable to provide a complete listing of the systemwide initiatives it administers or their cost. Additionally, it has budgeted funds for systemwide initiatives that it did not include as part of the systemwide initiatives section of the budget it presented to the regents, such as $910,000 in fiscal year 2015–16 designated for three separate initiatives: advocacy communication, sustainability, and administrative funds that it uses to reimburse campus officials for purchases they make on the university’s behalf. Even though some of the programs that the Office of the President has designated as systemwide initiatives benefit the university as a whole, the Office of the President does not regularly evaluate these initiatives’ continued priority, benefit, cost, or intent.

The importance of justifying its spending decisions is amplified by the fact that the Office of the President’s administrative costs increased from fiscal years 2012–13 through 2015–16. Specifically, the Office of the President’s administrative spending increased by 28 percent, or $80 million, while campus administrative costs increased by 26 percent over the same time period. Furthermore, the Office of the President’s budget and staffing levels exceed those of the central administration at comparable university systems, such as the University of Texas. The Office of the President explained that this may be because it provides services to its campuses and employees that other universities do not, such as the management costs associated with the university’s retirement program. To support that assertion, we expected that the Office of the President would have established a consistent definition for and method of tracking its and the university’s administrative costs; however, it has not done so. Lacking these, we question whether the Office of the President can adequately justify either its or the university system’s administrative expenses.

Finally, the Office of the President’s actions during this audit have caused us to question whether it will make a genuine effort to change. This conclusion is based on the fact that it intentionally interfered with our audit process, which hindered our ability in addressing certain aspects of our audit objectives. Specifically, we administered two surveys to the campuses seeking their perspectives on issues such as the quality of the Office of the President’s services and programs. However, correspondence between the Office of the President and the campuses shows that the Office of the President inappropriately reviewed the campuses’ survey responses and that campuses subsequently made changes before submitting them to us. Specifically, when we compared the campuses’ original survey responses sent to the Office of the President to the later versions of their responses that they eventually sent us, we found that the campus statements that were initially critical of the Office of the President had been removed or significantly revised and that the surveys’ quality ratings had been shifted to be more positive. Because the Office of the President inappropriately inserted itself into the survey process, auditing standards prohibit us from drawing conclusions based on the survey results. As a result, the Office of the President missed an opportunity to receive feedback from its key stakeholders, and it demonstrated an unwillingness to receive constructive feedback.

As a result of the nature and number of the concerns we identified in the course of this audit, we believe that significant reforms are necessary to ensure that the Office of the President makes prudent decisions that reflect the interests of those that it serves. Specifically, the Legislature should directly appropriate funds to the Office of the President that eliminates the need for levying an assessment on campuses. This change would increase the Office of the President’s accountability by requiring it to justify both its budget levels and fiscal decisions, such as the level of compensation it provides for its staff. Additionally, we believe that the Legislature should, from the funds appropriated, require the regents to contract with an independent third party that can assist the regents in monitoring a three-year corrective action plan focused on addressing the many issues we identify in this report. This plan, which we summarize in Figure 19 of this report, would help to ensure the Office of the President’s accountability and transparency and give campuses a better ability to plan for expenses that should benefit them.

Selected Recommendations

To determine the amount of money that it can reallocate to campuses and to ensure that it publicly presents comprehensive and accurate budget information, the Office of the President should do the following:

To ensure that its staffing costs align with the needs of campuses and other stakeholders, the Office of the President should do the following:

To ensure that its expenditures for systemwide initiatives represent the university’s priorities, the Office of the President should do the following:

To ensure the Office of the President’s ongoing accountability, the Legislature should directly appropriate funds for the Office of the President’s operations.

Agency Comments

The Office of the President disagreed with a key conclusion of our report—that it has failed to disclose millions in surplus funds. However, in its response the Office of the President did not provide evidence that refuted our conclusion. The Office of the President also stated that it intends to implement many of our recommendations; however, its conduct during this audit—namely interfering with our audit process—casts doubt on whether it will follow through on its intentions.

Due to the nature and number of concerns we identified in the course of this audit, we concluded that significant reforms are necessary to ensure the Office of the President makes prudent decisions that reflect the interests of those it serves. We provide our perspective on the Office of the President’s response to our report.




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