OUTCOME OF 1996-97 UC BUDGET &
PRELIMINARY DISCUSSION ABOUT 1997-98 BUDGET
Remarks by President Richard C. Atkinson &
Associate Vice President Lawrence Hershman
Regents' Meeting
July 19, 1996

(See Table 1 for complete list of increases to the 1996-97 UC budget)

President Atkinson:

I am pleased to express my thanks to the Governor and the Legislature for their support of the University's 1996-97 budget plan which was based on the Governor's four-year compact. There are three important characteristics of the State's budget for the University that I would like to mention.

First, because the 1996-97 budget is consistent with the Governor's compact, it allows us to continue our progress toward several important goals for the University. The budget will permit us to maintain the quality of our academic programs, bring us a step closer to restoring competitive faculty salaries, and ensure that students will continue to get the classes they need to graduate in a timely fashion. It also allows us to continue admitting all eligible California students who wish to attend.

Second, the budget includes an additional $27 million in State general funds so that our students will not have a general fee increase next year. This will be the second consecutive year The Regents will not have to ask students to pay more in fees.

Third, it also provides funding for several high priorities over and above the Governor's January budget proposal. These include $5 million for the Industry-University Cooperative Research Program, $1 million for the supercomputer program, and $1 million to expand our academic outreach programs.

All of this is good news, and we are grateful to the Governor and the Legislature for a budget that recognizes UC's special and important role in the life of this state. I also want to express my appreciation to members of the Board and the University's many other friends for their personal efforts in helping us achieve a very satisfactory budget for this year.

The University of California is a research university, one whose responsibilities for education, research and public service are, in the words of a 1974 mission statement, "shaped and bounded by the central and pervasive mission of discovering and advancing knowledge."

California urgently needs to invest in the emerging industries that are replacing our defense-related industries. High-technology industries, like biotechnology and information technology, are generating research breakthroughs that will have a major effect on the State's economy by creating jobs and generating revenue. And now that California is emerging from the difficult economic years of the early 1990s, we have a window of opportunity. Investments in research are investments in economic growth. Recent polls show significant support for government investment in research. We are convinced of the importance of the bridge between industry and universities and accordingly, have established the Industry-University Cooperative Research Program, building on our earlier efforts with industry.

I am, therefore, especially pleased with the State's recognition of the role of research at the University of California by providing $5 million for the Industry-University Cooperative Research Program. With this investment, the State has become our partner in the pursuit of industry-university coalitions to stimulate economic growth. The State and University dollars will leverage private dollars by requiring an industry match to fund research that shows promise for the development of new products and processes. Through this program, the University will expand its activities to facilitate and speed the transfer of ideas from the laboratory to the marketplace.

This year's budget gives us a sound basis upon which to begin planning for 1997-98. Before asking Associate Vice President Hershman to address the details of the 1996-97 budget and our preliminary planning for the 1997-98 budget, I want to briefly share our general approach to the 1997-98 budget.

Our basic strategy for 1997-98 will be similar to the strategy The Regents took in 1996-97. We plan to develop a 1997-98 budget plan on the basis of the compact, which has been supported by the Governor and the Legislature for the last two years. We will also identify additional priorities for which we will seek funding when the State's fiscal situation permits.

The only new proposal we are considering is the creation of a partnership among our students, the State, private industry and our campuses to provide students with state-of-the-art instructional technology. The issue, of course, is one of funding. We are considering a shared funding strategy in which we would ask the campuses to continue their resource commitments to instructional technology; we would ask students to pay a small fee; we would ask the State to provide funds to match what the students pay; and finally, we would ask business to provide funding or in-kind contributions, in the form of equipment. We plan to come to the Board for a discussion this fall. At that time, we will be prepared to lay out a proposal and discuss the funding options in more detail.

After Larry has reviewed the final outcome of the 1996-97 budget and outlined our current thinking for 1997-98, we would be happy to answer your questions.

Associate Vice President Hershman:

I, too, am very pleased with the actions of the Legislature and the Governor. I agree with President Atkinson--this is a good budget for the University.

The 1996-97 budget represents good news for the State of California, as well, demonstrating that California has clearly recovered from the economic downturn of the early 1990's. The final budget reflects the significant increases in State revenues as well as many compromises on expenditures.
I want to start by talking about State General fund revenues, which for the current year--1995-96--have exceeded budgeted amounts by over $1 billion. About two-thirds of these revenues will be directed, by the provisions of Proposition 98, to funding K-14 programs. The remaining revenues are needed to pay for costs that were incurred by the State due to lack of federal actions that the State had counted on.

With respect to 1996-97, revenue projections are also up compared to the projections used by the Governor in January. The projected increase in revenues will be used to pay off the small deficit remaining from previous years; to build up a reserve of about $300 million; and to fund the 1996-97 expenditure plan.

One of the major issues related to revenues was the question of providing tax relief and at what level. The final compromise was a five percent reduction in the tax rates for banks and corporations beginning January 1, 1997.

Turning to expenditures, the 1996-97 State budget includes a 4 percent increase in State general fund expenditures, which is double the 2 percent proposed in the January budget.

One major consideration affecting the level of expenditures is there is essentially no growth projected for Medi-Cal and welfare caseloads; a good sign that is presumably due to the healthy economy. The budget reflects a compromise on health and welfare that continues previous cuts but does not require any further reductions.

The Department of Corrections received about a ten percent increase for caseload growth, slightly less than had been projected in January, and no inflation adjustment.

The budget includes a nine percent increase for K-12, on top of the extra funding they received for 1995-96, providing a 3.3 percent cost-of-living adjustment, funds for enrollment growth, nearly $800 million to reduce class size for grades K-3, and funding for other improvements.

The final budget suspends the renters' tax credit for one more year, saving the State over $500 million.

UC and CSU are treated similarly and will receive funding for the base budget as proposed under the compact, funds to "buy out" proposed student fee increases, as well as some augmentations for high priority programs.

The University will receive a total State general fund appropriation of $ 2.06 billion for 1996-97, an increase of $130 million or 6.7 percent, in State general funds. However, looking at a combination of State general funds, UC general funds and student fee funds, the University's 1996-97 spending plan will increase by a little more than five percent. Thus, while the State is providing a 6.7 percent increase in State general funds, our spending plan will increase only by about 5 percent because student fees were not increased. The State budget also includes $147 million in general obligation bonds to support our capital outlay program and an additional $5 million in general obligation bonds to support high priority deferred maintenance projects. The only changes to the basic expenditure plan you approved in November are related to the augmentations approved by the Governor and the Legislature.

If you will turn to Table 1, which has been distributed, we can quickly walk through the University's budget plan for 1996-97.

Looking at the first line, you will see that the University will receive $82.9 million under the compact and an additional $27 million to "buy out" a proposed student fee increase. This funding will be used to:

In addition, the budget provides $12.8 million to cover the debt service related to capital outlay and the first year payment on a State-authorized $25 million loan for deferred maintenance.

If you look at the middle of the table, you will note that there are several augmentations for important University programs:

The Governor and the Legislature provided $5 million for the Industry-University Cooperative Research Program. The $5 million is in addition to the $3 million already committed by President Atkinson. This program, which will require matching funds from industry, will fund research that has the best prospect of benefitting the State's economy.

The budget includes $1 million for the State of California supercomputing program located at our San Diego campus, with supplemental language stating the Legislature's intent to provide $3 million a year over the next five years. The supercomputer center is currently one of four nationwide centers funded by the National Science Foundation (NSF). This program is being phased out and in its place, the NSF will provide funding for only two centers nationwide. UC San Diego, on behalf of a consortium that includes other UC campuses, the three national laboratories managed by UC, CalTech, Stanford University, the California State University, other universities and numerous businesses including IBM, Sun Microsystems and TRW, has submitted a proposal to the NSF. This augmentation will bolster California's chance of successfully competing for one of the two new National Science Foundation computer centers.

The State budget includes a $1 million augmentation to our budget to expand academic outreach. Of the $1 million increase, $250,000 would be earmarked for academic outreach programs in the Central Valley which has traditionally had disproportionately fewer UC-eligible students attending the University.

There is one disappointment in the final 1996-97 Budget Act. The Governor vetoed the Legislature's $7.5 million augmentation for building maintenance in order to help provide a reserve level for the State which he considers essential. The $7.5 million was to be the first year of a multi-year plan to properly fund the University's building maintenance program, which is currently underfunded by about $60 million. The underfunding of building maintenance has contributed to the $480 million backlog in deferred maintenance. We intend to develop a longer-term plan to deal with the enormity of the deferred maintenance problem and to request an increase in our building maintenance budget over the next several years consistent with the plan supported by the Legislature.

I want to call your attention to the footnote at the bottom of the page. The budget transfers $13.9 million from the Department of Education to the University's budget for the Subject Matter Projects and the MESA program. These programs were supported previously by Proposition 98 funds in the Department of Education's budget. The Governor recommended, and the Legislature agreed, that funding be transferred to the University as a result of a settlement agreement related to the CTA versus Gould lawsuit.

As indicated in the footnote, an additional $56.4 million in Proposition 99 funds is provided for the Tobacco Related Disease Research Program. These funds had been set aside by the State pending resolution of litigation.
I want to clarify the University's position on the language included in the budget bill. We worked out this language with the Legislature and we intend to comply with the intent of the Governor and the Legislature to provide the State with an expenditure plan, which will identify the relative amounts of funding available for targeted research areas, and we will participate in public hearings. We also intend to honor the funding priorities identified by the Governor and the Legislature which, and I quote from the budget bill language, are to be used "primarily for applied research...with an emphasis on youth and young adults, including but not limited to, the effects of active and passive smoking, primary prevention of tobacco use, nicotine addiction and its treatment, effects of secondhand smoke, and public health issues, surrounding tobacco use."

The language also states legislative intent that prohibits the use of these funds for research that is of a partisan political nature. We don't do partisan political research. Thus, this language is not a problem.

Toward the end of the table, you will notice that the 1996-97 State budget also provides the University with $152 million in general obligation bonds as follows:

The budget includes supplemental language asking us to convene a work group to address the financial problems facing our teaching hospitals. The work group will identify factors contributing to the teaching hospital's financial problems and will develop options for presentation to the Governor and the Legislature to mitigate the problems. The work group also will identify alternatives that specifically address the education-related costs of providing medical care in a clinical teaching environment.

In addition, there is another item of particular interest to the Board as well as our students and their families. In 1996-97, State funding for Cal Grants will increase by $25 million. Of the total increase, $5 million will be used to offset reductions in federal funds; $10 million will be used to increase the size of the awards for students attending private universities; and $10 million will be used to provide more awards for students attending all universities. Our students can expect to receive about $3 million of this increase.

Before I talk about our current thinking for 1997-98, I would be happy to answer any questions on the 1996-97 budget.

As President Atkinson said earlier, we again plan to develop our basic 1997-98 budget request on the basis of the Governor's four-year compact with higher education.

Under the compact, the University can expect to receive a four percent increase in State funds plus funds for debt service on capital outlay. The Governor's compact also assumes that student fees will increase on average by no more than ten percent a year, with a third of the fee revenue set aside for financial aid and the remainder going to help to fund the budget. Additional financial aid will be available to UC students through the State Cal Grant program. There is the possibility that the State's economy will continue to strengthen, in which case the Governor and the Legislature may be able to provide the University with a larger-than-anticipated budget increase.

The University's 1997-98 budget plan under the compact would be quite similar to this year's budget, with funding available to pay for:

The University's capital budget request will be limited to $150 million, the annual amount called for under the Governor's compact. The capital budget, which will be funded from general obligation bonds, will continue to focus on seismic and life-safety improvements as well as necessary infrastructure and modernization projects.

Consistent with the actions taken by the Board last November, we will identify priorities for funding if the State's revenue situation permits. Last year, this strategy was well received. We have, therefore, identified a number of additional priorities. These include funds to accelerate the restoration of competitive faculty salaries, to "buy out" the general student fee increase, to provide a second increment of State funds for the Industry-University Cooperative Research Program, to expand our academic outreach programs, and to fund additional building maintenance in accord with our agreement with the Legislature.

As President Atkinson mentioned, we are considering one new item for the 1997-98 budget--a program that focuses on improvements in instructional technology that would be of direct benefit to students. Technology is playing an increasingly important role in higher education and it is critical that our students have access and equipment, and that we have the ability to properly maintain the systems. We recognize that providing up-to-date access and technology is costly. We recognize, also, that we will need to look at a combination of fund sources. Our current thinking is that funding would be a shared responsibility; shared by the campuses, the students, the State and business. Under this scenario we would ask each partner to contribute. We are now fleshing out the proposal and plan to present it to The Regents for discussion this fall.

I want to share with you our view of the process. As usual, our detailed budget proposal will be presented to the Board in October for discussion. As we did last year, we will ask you to approve an expenditure plan in November but not ask you to approve a general student fee increase until January after we see what's in the Governor's budget. In November, we will also ask you to approve, as you did last year, priorities for additional funding if State revenues are available. We will ask you to approve, in November as well, proposed increases in professional school fees consistent with the plan previously presented to The Regents and in non-resident tuition in November. There is no possibility that the Governor--or the Legislature--would "buy out" any proposed increases in these fees. We will ask that you also approve the instructional technology fee in November because we will be presenting this to the State as a match for additional State funds.

That concludes my remarks. I would be happy to answer any questions.