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California State Auditor Report Number : 2014-121

University of California, Davis
It Has Not Identified Future Financing for the Strawberry Breeding Program nor Collected All Available Revenues

Responses to the Audit

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University of California, Davis

California State Auditor’s Comment on the Response From the University of California, Davis

Response From the University of California, Davis

May 22, 2015

California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Dear Ms. Howle:

We are in receipt of the California State Auditor’s June 2015 draft audit report #2014-121 regarding the University of California, Davis administration of the Strawberry Breeding Program audit conducted at the request of the Joint Legislative Audit Committee. We take the results of your audit seriously. After reviewing the draft report’s findings and recommendations we are pleased to provide the following comments in response. Each recommendation will be addressed individually.

The University of California, Davis (UC Davis) is a leading global university. As a research university with a public and land-grant mission, UC Davis’ primary mission is to maximize the public good through education, training, and research. We are proud of the many contributions the UC Davis Strawberry Breeding Program (strawberry program) has made. Our long-established and well-recognized record in the development and release of new and improved strawberry varieties continues to make a positive impact to the strawberry industry today, and we will continue to do so for many years in the future.

UC Davis is committed to the strawberry program’s continued service to strawberry producers, shippers, processors and consumers, as it has been for more than 60 years. We have declared and demonstrated our commitment to a robust strawberry program by way of numerous statements from the UC Davis Chancellor and the College of Agricultural and Environmental Sciences Dean, commitments made to settle litigation with the California Strawberry Commission, and actions taken on campus. Even before the two former breeders retired, UC Davis commenced an internal audit of the strawberry program to evaluate its fiscal soundness, business practices, and mission. Following the retirement of the former breeders, UC Davis promptly hired a new tenured faculty member to serve as the new breeder and to partner with the University to re-envision, re-energize and re-focus the strawberry program on its primary commitment of serving the industry and public. The new breeder immediately took on activities critical to the future success of the strawberry program, including contracting for propagation of the entire germplasm collection, continuing to DNA fingerprint the collection, evaluating alternative land options with input from the California Strawberry Commission, hiring key staff to run the field program, accepting graduate students to work on genetics and breeding, and establishing other state and national collaborations for the purpose of sequencing the strawberry genome and submitting joint research proposals. These actions leave no room for doubt that UC Davis will ensure the continuation of the strawberry program by allocating necessary funds and seeking out new funding sources as needed.

As a preeminent university, we constantly strive to be reliable partners and trustworthy stewards of our resources. Below we provide comments on the specific findings as well as UC Davis’ intended actions to address the Report Recommendations. Our comments are structured as follows: The audit results and specific findings from the report (bolded), followed by UC Davis’ comments, the report’s recommendation (italicized), and UC Davis’ action plan.

I. “The University of California, Davis Has Not Determined How It Will Address the Strawberry Breeding Program’s Recent Loss of Funding”
Although UC Davis has not made final budgetary determinations regarding the sources of funds for the strawberry program, it will ensure sufficient funds are available for the 2015-16 budget year and beyond. The reduction in strawberry program sources during the period under review is, as you note, due to the termination of the research agreements associated with discounted royalty rates. The discounted rates could only be offered in accord with the inventors’ consent. The inventors in this case were the two former breeders. The discontinuation of the discount program was the beginning of a transition period for the strawberry program as the former breeders began preparing for their retirement. The strawberry program is now embarking on a new era and a new direction with the recent hire of a new breeder. The new breeder is currently exploring many options for the strawberry program’s direction. Certainly part of this decision-making process is identifying other funding sources that may be pursued to meet the future needs and ensure sustainability of the strawberry program.

  1. “UC Davis Has Options for Increasing Revenue to the Strawberry Program”
    Indeed the University has several options available to ensure the strawberry program is sufficiently funded to meet its program objectives including:

    • The strawberry program has reserves of approximately $1 million which are available for use. We find it appropriate for the strawberry program to utilize these funds as needed.
    • There are discretionary funds at the Department of Plant Sciences (Department), College of Agricultural and Environmental Sciences (College), and campus levels that could be leveraged to ensure adequate funding of the strawberry program, and these funds will be used if necessary for the financial vitality of the program.
    • UC Davis analyzed and revised its patent revenue allocation methodology two years ago to better align with the Incentive-Based Budget Model. This resulted in greater allocations of patent income to the colleges and schools.

      1. Allocate more patent income to the strawberry program
        We want to clarify that any revenue generated by a University patent is University income. Per UC Davis Policy and Procedure Manual PPM 250-15 Patents and Material Transfers III.A. The University retains all patent rights to Intellectual Property resulting from University research or employment, and IV.A.1. At the time of hire, the department must have the employee sign the University’s Patent Acknowledgement.

      2. Net patent income distributions received by UC Davis are unrestricted resources and the University can and should exercise discretion over the allocation and management of these funds. That said, the campus allocates patent (and other unrestricted) revenues using a methodology that meets several goals such as providing an incentive to units (i.e., department and college) that generate the revenues. In addition, the allocation methodology has a core principle of administrative ease and consideration of year-over-year fluctuations. Finally, the allocation of a single fund source such as patent revenues is always considered in the context of overall programmatic needs and how those needs might be met or reframed to ensure success. Increasing the allocation of patent revenues directly to the strawberry program is inconsistent with the all-funds budget approach that is used for units of this type.

        We want to provide some additional context for the strawberry program. The strawberry program’s annual expenses are approximately $2 million and are relatively small when compared to the entire UC Davis annual operating expenses of more than $3 billion. The strawberry program is supported by a variety of general infrastructural support that it does not pay for directly. These services include departmental administration, building use, operations and maintenance, sponsored projects administration, and general administrative services to name a few. The campus supports these vital services with a variety of unrestricted funds, which may include patent income.

        We cannot determine whether the University of Florida’s (Florida) Royalty Revenue Distribution Model would be a better distribution methodology for use at UC Davis. There are many unknown variables at Florida that may not compare to UC Davis. For instance:
        • Are Florida strawberry personnel salaries paid directly from the breeding program’s royalty revenue or another source as is the case with the UC Davis strawberry program?
        • oes the Florida strawberry breeding program pay for all of its support service expenses directly which are considered indirect support at UC Davis (i.e. Office of Research, Accounting & Financial Services, Human Resources, Provost) and paid for by the campus with unrestricted funds?
        • What, if any, research funding arrangements does Florida have with its in-state breeders and what other funding sources are available to them?

        • Report Recommendation
          UC Davis should ensure that the strawberry program is adequately funded. To address the strawberry program’s recent loss of funding, the university should consider allocating more of the strawberry program’s patent income back to the program itself.

          UC Davis Actions
          UC Davis is committed to the success of the strawberry program and will ensure the strawberry program is adequately funded. UC Davis will make certain the strawberry program is sustained and continues to serve the strawberry industry. The strawberry program has not been in deficit, and as of April 30, 2015 it had approximately a $1 million surplus.
          A number of different funding sources are used to support the strawberry program, royalty funds being only one such source. Revising our royalty distribution model to favor the strawberry program over other University programs is not consistent with the University’s funding approach. Yet we will consider all funding options for the strawberry program that include the discretionary patent income allocated to the Department and College dean’s office.

      3. Reassess royalty rates
        The mission of the University is not to maximize revenues, but to work collaboratively with all areas of California agriculture to provide research, education and support as mandated by its land grant origins.

          Report Recommendation
          UC Davis should regularly reassess the appropriateness of the strawberry program’s royalty rates charged to licensees and adjust the rates as needed to support the program.

            UC Davis Actions
            UC Davis will: (a) continue to assess the appropriateness of the strawberry program’s royalty rates in view of input from the California Strawberry Commission, licensees, and other industry members and in light of its mission as a public land grant university; (b) memorialize these assessments in annual written reviews; and (c) adjust royalty rates if and when appropriate based on market conditions and the assessment described in (a) above. We anticipate the annual written reviews will be completed by December 31 of each year.

  2. “The Department Has Not Always Developed or Used a Budget to Monitor the Strawberry Program”
    We agree that the University has not routinely prepared an annual budget specific to the strawberry program. The periodic budgets developed were used for planning purposes rather than as a monitoring tool. The financial condition of the strawberry program was monitored as part of the overall monitoring of the Department. While we feel there was sufficient awareness and oversight of the strawberry program’s financial condition we do find value in the best business practices you recommend.

      Report Recommendation
      The department should prepare a balanced budget for each fiscal year that details how it will fund the strawberry program. In addition, it should begin comparing actual income and expenses to the budget periodically to ensure that the program is operating in a cost efficient manner and is adequately funded.

        UC Davis Actions
        The new strawberry program faculty breeder was hired February 1, 2015. During the past few months, the new breeder has been traveling throughout the state of California to meet strawberry growers, shippers, processors, and members of the California Strawberry Commission. The new breeder has also met with other UC Davis faculty and staff involved with strawberry research. He has toured and examined strawberry research facilities both at the UC Davis campus and the one leased by UC Davis in central California. He has also met with scientists at the United States Department of Agriculture Germplasm facilities. This extensive initial effort is necessary for the new breeder, in conjunction with the Department and the College, to determine the scope of the strawberry program going forward. Once the scope of the program is determined a budget will be developed. The budget will be updated each year thereafter. We will continue to ensure the strawberry program operates in a cost efficient manner and actual expenses will be compared to budget periodically.

      Report Recommendation
      To better enable it to effectively monitor and report the financial condition of the strawberry program, UC Davis should implement its plan to begin accounting for the strawberry program’s financial activities separately from those of the breeder in fiscal year 2015-2016.

        UC Davis Actions
        This was identified in the UC Davis internal audit. The resulting action plan calls for the establishment of unique organizational codes for the strawberry program and its breeder. The Department will implement its plan to begin accounting for the strawberry program’s financial activities separately from those of the breeder in fiscal year 2015-16.

II. “The University Missed Opportunities to Collect Strawberry Program Revenues”
As a research university with a public and land-grant mission, UC Davis’ primary objective is not the maximization of revenues. As at all other universities, public and private, land-grant and non-land-grant, the University’s mission is to maximize the public good through education, training, and research. An important aspect of the societal benefit derived from research performed at the University is the commercialization of this research with the objective of driving economic prosperity in our local, regional, state, national, and global communities. Effective commercialization with this focus on public benefit entails working with licensees in a manner that is supportive of their commercial and business needs rather than one focused on being punitive or directed towards extracting the maximum possible economic benefit from one or more licensees. While we do seek to enforce contractual obligations, in practice we take a fair, equitable, consistent, and good-faith based approach to working with our licensees.

This reasonable and longstanding business practice impacts enforcement of licensee obligations and how we implement payment plans that are designed to encourage receipt of owed revenues by the University in a manner that does not result in the unintended consequence of potentially driving California-based businesses into insolvency. Additionally, the university’s approach is informed by the fact that its strawberry program is unique in the longevity and robustness of its success in supporting the economic vitality of an important segment of California’s agricultural industry, providing financial benefit to farmers, and enabling significant revenue generation for the University and its inventors. In this context, it should be evident that maintaining a relationship that is based on fair and equitable dealings with licensees and businesses has proved economically beneficial to all relevant stakeholders in contrast to an alternative approach that might have been based on the short term maximization of revenues in isolation of other considerations and, in our judgment, has enhanced the finances of the strawberry program and furthered its interest of promoting California agriculture.

Thank you for the opportunity to comment on the draft audit report. We appreciate the time and effort that went into this audit.


Mary E. Delany, Ph.D.
(Signed by Mary E. Delany)
Executive Associate Dean
College of Agricultural and Environmental Sciences

(Signed by Harris Lewin)
Harris A. Lewin, Ph.D.
Vice Chancellor for Research

California State Auditor’s Comments on the Response From the University of California, Davis

To provide clarity and perspective, we are commenting on the University of California, Davis’ (UC Davis) response to our audit. The numbers below correspond to the numbers we have placed in the margin of UC Davis’ response.


UC Davis states that it cannot determine whether the University of Florida (Florida) royalty revenue distribution model would be a better methodology for it to use because there are many unknown variables at Florida that may not compare to UC Davis. However, in its 2007 assessment of the Strawberry Breeding Program’s (strawberry program) royalty rates, which we describe in the Audit Results, UC Davis identified Florida as an industry peer that used a similar royalty model that made it suitable for purposes of comparing royalty rates. In addition, our only purpose in describing Florida’s distribution model within our report is to provide an example of a similar strawberry breeding program that uses a different methodology for allocating its patent income. As we describe in the Audit Results, Florida allocates a larger portion of strawberry patent income back to the strawberry breeding program, which was sufficient to cover 100 percent of its breeding operation expenses in fiscal year 2012–13.


UC Davis’ response suggests that it has been regularly assessing the strawberry program’s royalty rates; however, as we describe in the Audit Results, it was unable to demonstrate that it has performed such an assessment since 2007.


As we state in the Audit Results, over a three-year period, UC Davis did not collect approximately $157,000 in interest charges from three licensed nurseries and a master licensee for late royalty payments. By choosing not to pursue collecting late payment fees, UC Davis is missing opportunities to collect revenues that could be used to support the strawberry program. Given the strawberry program’s recent loss of funding, we continue to believe that UC Davis should collect all late fees that its licensees owe.


Although the right to audit clause exists within the university’s current licensing agreements, UC Davis has never performed such an audit, as we describe in the Audit Results. Thus, we firmly believe that UC Davis should notify all licensees that it will begin auditing the sales records of selected licensees. Moreover, we believe that this notification may have the additional benefit of encouraging licensees to report accurate sales amounts.

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