Bridging Berkeley’s budget gap

Acknowledging that Berkeley’s state funding “will likely continue to decline,” Chancellor Robert Birgeneau recently directed vice chancellors to find a total of $30 million in reserves to spare the campus from further contractions during the 2011-12 fiscal year. His budget strategy, he wrote, “focuses on bridging over our funding gap by utilizing all the resources at our disposal.”

Under the plan, not only has the chancellor urged vice chancellors to meet the $30 million target by spending available funds — not by cutting programs or personnel — the figure appears well below Berkeley’s $70-$80 million share of state-funding reductions to UC, currently $500 million and counting.

Given what Birgeneau called “the uncertainty in this year’s planning process,” the NewsCenter asked John Wilton, Berkeley’s new vice chancellor for administration and finance, to shed some light on the campus’s budget challenges, and to describe the steps being taken to minimize the pain of continued funding cuts from Sacramento.

Help us with the budget math here. At this point in the state budget process, the UC system has been hit with $500 million in funding cuts. Berkeley’s share of that is upwards of $70 million. Yet the chancellor is looking for just $30 million in funds from campus departments. Where is the rest coming from?

John Wilton: As the chancellor explained in his call letter, we are estimating that Berkeley’s total funding gap for 2011-12 will be somewhere between $102 and $112 million.  That amount is a combination of the $70-$80 million reduction we are receiving from cuts to the UC system plus about $32 million of funds we need to find to pay for increased costs such as salary increases for faculty and represented staff, benefits and retirement contributions, and utilities.

John Wilton

If there is any good news in this year’s budget cycle, though, it’s this: We expect nearly half of that total — as much as $50 million — to be addressed by steps we have already taken as part of our multi-year strategy toward sustainability. These include increased efficiencies flowing from Operational Excellence, tuition increases, and higher enrollments of out-of-state and international students. We have also decided to apply, on a one-time basis, $30 million of central reserves we had set aside for self-insurance purposes. That leaves just $30 million to be recovered from the control units led by the various vice chancellors.

Why is this called a bridging strategy?

JW: This is because the steps that we have taken as part of our multi-year strategy will take a few years to generate sufficient recurring sources of savings and income for the campus to offset the latest budget cuts. Because these cuts were larger than anticipated, we had to find a way to bridge to a sustainable position. Rather than impose additional significant cuts — furloughs, for example — we decided to tap reserves. If everything remains the same, the budget gap narrows in each subsequent year as the impact of our multi-year strategy increases.

Vice chancellors have been asked to look at their own reserves, and to make up the gaps in their 2011-12 budgets with those funds. Given the budget crunch of the past few years, many might be surprised to learn unit heads still have such funds at their disposal.

JW: It is true that not every department has usable reserves on hand. But at the level of the larger control units, vice chancellors do have modest financial cushions to help them absorb the impact of reduced funding. It is important that units use these reserves so that we can avoid further cuts to programs and services.

According to the chancellor’s call letter, the bulk of the resource withdrawal is slated to come from the provost’s unit, which means educational funding.

JW: The resource withdrawal request in Executive Vice Chancellor and Provost George Breslauer’s unit is exactly the same in terms of the percent of that unit’s overall budget and reserves as other control units. The approach, at the aggregate level, is unambiguously equitable.

What about the idea of spending $30 million of self-insurance funds? Should we be concerned about that?

JW: No. The campus actually has sufficient funds for self-insurance purposes. As you may know, the Office of the President has insurance for the UC system to provide campuses with funds in the event of major emergencies. In addition to that coverage, Berkeley has maintained a supplementary fund. The balance of that fund has now grown to around $55 million, which is about $30 million more than we feel we need. As part of the process of re-examining every possible way to not cut spending on priority needs, we looked at these reserves and made a decision to put that money to more urgent uses — namely, preserving the integrity of our educational and research mission.

The $500 million state-funding cut was predicated on the governor’s plan to win voter approval of a ballot measure to extend $12.5 billion in continuing tax revenues over the next five years. But that measure didn’t receive the two-thirds vote it needed from the Legislature to appear on the June ballot. Doesn’t that mean we’ll be faced with even deeper cuts once Sacramento finally passes a budget?

JW: That is a possibility. We can’t predict the outcome of the state budget process. If the governor doesn’t get his tax extensions — and it’s still possible voters will get to decide on them in November — there are other ways to make up the shortfall. The political process may lead to cuts being made in other non-educational-related activities or increased debt. We simply do not know.

What if the state does make deeper cuts to UC?

JW: We will have to recalibrate. What we know is that this would put increased pressure on us to accelerate our efforts to identify ways to increase efficiencies.  In this regard, we have a fantastic team working on Operational Excellence that needs the support of all of us as we search for ways to do what we do better and at lower cost. I doubt this would be enough by itself, so additional revenue and cost saving measures would be required.

Do you view that scenario as likely?

JW: I don’t want to speculate on what will happen in Sacramento, or what additional steps we might need to take here at Berkeley. For now, we have a strategy that will get us through the next fiscal year with minimal disruption to the educational enterprise, and minimal pain for faculty, staff and students.

And I can’t stress this enough: The efficiency improvements we’re making through Operational Excellence would be needed even if we weren’t faced with a state budget crisis. Improving services with fewer resources is crucial to maintaining Berkeley’s status as the country’s leading public university.

So what happens now?

JW: The chancellor’s call letter, which went out March 22, is the first step in the annual budget process. Vice chancellors have until April 25 to report back with their budget projections, and budget hearings with the chancellor will take place in May. This is all about “cascading decision-making,” giving those most familiar with the nuts and bolts of their units the opportunity to come up with ways to streamline, consolidate and restructure their operations.

Are there still unanswered questions about Berkeley’s budget? Of course, and we continue to closely monitor legislative activities so that we are prepared for variable outcomes. It is extraordinarily challenging to adjust to the unpredictable and damaging budget cuts emanating from Sacramento in the near term. However, it is useful to step back and look at the bigger picture. Thanks to Berkeley’s multi-year strategy toward sustainability we are financially stable and are becoming more independent of state revenue. I am confident we will continue to sustain our excellence despite these near-term budgetary challenges.