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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

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Chapter 1

THE OFFICE OF THE PRESIDENT DID NOT DISCLOSE $175 MILLION IN BUDGET SURPLUSES, AND IT LACKS SAFEGUARDS TO ENSURE ACCOUNTABILITY OVER ITS SPENDING


Chapter Summary

The budget for the University of California (university) Office of the President has grown without adequate justification. In fact, in each of the past four fiscal years, the Office of the President presented an annual budget to the University of California Board of Regents (regents) for approval that significantly overstated the amount of funds it required. Further, the Office of the President did not disclose to its stakeholders—including the regents—that it had amassed $175 million in budget surpluses as a result of its inflated budgets. By reducing the size of its budgets to better reflect its actual spending, the Office of the President could have reduced the assessment it annually levied on campuses for its services, allowing the campuses to instead spend those funds for the benefit of students. The Office of the President has itself acknowledged the campuses’ need for such additional funding: it cited chronic state underfunding when it asked the regents to approve an increase in student tuition and fees in 2017.

The Office of the President has further hindered the ability of the regents and its other stakeholders to fully understand or make informed decisions about its budget and finances by issuing high-level budget reports that do not adequately account for its operations. As a result of these convoluted and misleading budgets, the Office of the President has received little meaningful oversight of its finances, increasing the risk that its spending decisions may not fully reflect the university’s priorities, such as access and affordability for California undergraduate students. We recommend that the Office of the President adopt the best practices typical of government and higher education entities to ensure that its budget provides accurate and transparent information about its spending decisions to its stakeholders, including the regents, the campuses, the Legislature, the students, and the public.

The Office of the President’s Budgets Are Misleading and Do Not Disclose Its Significant Budget Surpluses

For each of the past four years, the Office of the President requested that the regents approve budgets that significantly exceeded the amounts it was likely to spend. The Office of the President’s budget surpluses accumulated in two reserves—restricted and discretionary. We define these as well as other key budget terms we use throughout this chapter in Table 3. The Office of the President did not disclose the existence of these two reserves, which totaled about $175 million as of June 30, 2016, to the regents, the Legislature, or the public. Further, it did not disclose the annual budgets it created to spend these funds. In fact, its poor tracking and oversight of the expenditures it made from its reserves put the funds at risk for wasteful spending. Our analysis suggests the Office of the President could use from $38 to $175 million from its fiscal year 2015–16 reserves for other university priorities, depending on the results of a review of its funds and commitments.

Table 3
Key Budget Terms

Campus assessment A charge the Office of the President annually levies against campuses to pay for the Office of the President’s services and administration.
Carryforward expenditures Expenditures made in the current fiscal year from funding that was approved in a prior fiscal year.
Decision memos Documents used by the Office of the President’s staff to request discretionary funds for unanticipated or one-time project expenses.
Disclosed budget The planned spending that the Office of the President presents to the Regents of the University of California (regents). The Office of the President views spending in this budget as ongoing and internally refers to this budget as its permanent budget.
Discretionary funds Unrestricted funds that the Office of the President can generally use for any purpose.
Discretionary reserve Reserves from discretionary budget surpluses that the Office of the President annually sweeps for distribution to other budgetary priorities. Discretionary reserves can be used to fund any program or project at the Office of the President or at the campuses.
Pass-through funds Funds, such as research grants, that the Office of the President receives and then sends to campuses or external organizations.
Restricted funds Funds that are generally subject to limitations of use, such as state funds that can only be used for research; however, the Office of the President internally places restrictions on some funds, such as its systemwide administrative cost recovery fund. The Office of the President may also remove some restrictions on funds, as it did with the Searles Fund.
Restricted reserve Reserve from restricted budget surpluses, which are generally subject to limitations of use.
Undisclosed budget The planned spending that the Office of the President does not present to the regents. The Office of the President spends these funds for what it asserts are unanticipated expenses, one-time projects, or carryforwards, and internally refers to this budget as its temporary budget.

Sources: California State Auditor’s analysis of Office of the President budget documentation and interviews with the Office of the President’s budget director.

The Office of the President Did Not Inform Its Stakeholders About Its $175 Million in Budget Surpluses

The Office of the President maintains two budgets: a budget it presents to the regents each year for approval, which we refer to as the disclosed budget, and a budget it does not present to the regents or other stakeholders, which we refer to as the undisclosed budget, as shown in Figure 6. From fiscal years 2012–13 through 2015–16, the disclosed budget that the Office of the President presented to the regents ranged from $557 million to $655 million. However, as Figure 7 shows, the Office of the President’s total budget—when accounting for both the disclosed and undisclosed budget—ranged from $638 million to $747 million during those same years. The combined disclosed and undisclosed budgets for the Office of the President grew faster than inflation, in part because of programs it funded using its undisclosed budget, such as a $1.3 million subsidy program to reduce employee contributions to the university’s health insurance program and $2.2 million for its cybersecurity program. The consistent growth in the Office of the President’s spending makes the lack of transparency of its budget to its stakeholders particularly troubling.

Figure 6
The Office of the President Has Not Disclosed a Significant Portion of Its Budget to the Board of Regents, the Legislature, and the Public
Fiscal Year 2015–16
(in Millions)

Figure 6 shows that the Office of the President did not disclose a significant portion of its budget for fiscal year 2015-16.

Sources: California State Auditor’s analysis of the Office of the President’s budget processes, fund balances, and data obtained from the Office of the President’s budget development system.

* Endowments and other funds include the Searles Fund, President’s Endowment Fund, Common Fund, investment pool funds, and others.

In addition to being funded by the restricted reserve, the restricted undisclosed budget is also funded by restricted revenues that the Office of the President considers to be temporary.

Some of these expenditures may have been presented to the regents outside of the context of annual budget approval. For example, the Office of the President reported on the progress of a discretionary project funded via the undisclosed budget, such as its cybersecurity program. However, the Office of the President did not present the total dollar amount or the sources used to pay for this initiative to the regents as part of its annual budget approval.

§ According to the Office of the President’s budget director, the restricted reserves include $13 million in extramural funds, such as contracts and grants, which were not included in the university’s financial statements because the university may not fully realize those funds.

The Office of the President’s undisclosed budget represents, in part, its planned spending from the undisclosed budget surpluses that it has accumulated annually over time. Over the past four years, the Office of the President has spent an average of $97 million less per year than it planned to spend. As a result of these budget surpluses, the Office of the President’s undisclosed restricted and discretionary reserves have both grown. The Office of the President has amassed more than $175 million in undisclosed budget surpluses since fiscal year 2012–13, an increase of $74 million. Figure 6 shows that as of fiscal year 2015–16, it had $83 million in its restricted reserve and $92 million in its discretionary reserve. According to its undisclosed budget, the Office of the President planned to spend about $92 million in fiscal year 2015–16—$62 million in restricted funds and $30 million in discretionary funds. These amounts are in addition to its other planned spending of $655 million, which it disclosed to the regents for that same fiscal year.

Figure 7
From Fiscal Years 2012–13 Through 2015–16, the Office of the President’s Total Budget Outpaced Inflation by $65 Million

Figure 7 shows that the Office of the President’s total budget outpaced inflation by $65 million from fiscal year 2012-13 through 2015-16.

Sources: California State Auditor’s analysis of the Office of the President’s budgets presented to the Board of Regents, budget data obtained from the Office of the President’s budget development system, and the higher education price index.

Note: The Office of the President could not provide comparable data for its fiscal year 2011–12 budget because it was not yet using the Budget Development System and did not retain the data that was used to prepare that year’s budget.

The Office of the President’s failure to disclose a significant portion of its budget is of concern because the regents make important decisions based upon the information the Office of the President presents to them. The impact of the undisclosed budget is not only that the Office of the President costs more than it has publicly reported but also that it is able to spend more than the regents approve each year. In fact, for fiscal year 2015–16, the Office of the President had up to $830 million of funds available to spend but only presented a budget totaling $655 million to the regents. As Figure 8 shows, a comparison of the Office of the President’s disclosed budget to its actual expenditures demonstrates that the Office of the President overspent its approved budgets for each of the fiscal years we reviewed. Nevertheless, the accumulation of undisclosed reserves allows the Office of the President to overspend on its disclosed budget and continue to maintain sizeable reserves.

Although the Office of the President’s spending of its undisclosed reserve on its undisclosed budget does not directly violate the regents’ budget policy, its actions do not align with the intent of a regents’ policy as explained by the individual regents who voted to recommend its approval. Specifically, the regents’ policy states that the Office of the President shall not spend funds until the regents approve the budget each year. However, the minutes from November 2006, when the regents’ committee on finance recommended approval of this policy, and which the entire Board of Regents later approved, states that the Office of the President shall have no authority to expend funds related to its operations for that fiscal year unless and until the regents approve the budget each year. Moreover, in approving the recommendation of this policy, the individual committee members remarked that it was a positive step to increase transparency, test the Office of the President’s efficiency, measure its productivity, and make sure the university’s “bloated bureaucracy” was trimmed. The Office of the President’s decision not to disclose its entire budget each year does not allow the regents to fulfill those objectives.

Figure 8
The Office of the President’s Actual Spending Exceeded the Budget Approved by the Board of Regents
(in Millions)

Figure 8 shows that the Office of the President’s actual spending exceeded the budget approved by the board of regents.

Sources: California State Auditor’s analysis of the Office of the President’s budget presented to the regents and obtained from the Office of the President’s budget development system.

* The Office of the President does not separately identify expenditures from the disclosed and undisclosed budgets. Thus, the actual expenditures include spending from both budgets.

When we discussed this policy and the corresponding minutes with the Office of the President, it stated as justification for not disclosing to the regents the planned spending from the undisclosed budget that this budget represents carryforward expenditures for activities and programs and that the regents had previously approved these amounts. However, based on documents the Office of the President’s budget office provided, carryforward expenditures only represented 6 percent to 22 percent of the total undisclosed discretionary budget amount from fiscal years 2012–13 through 2015–16. The remaining undisclosed reserve funds were spent on one-time projects and unanticipated expenses. Thus, most of the spending in this budget was for purposes that the regents had not explicitly approved. Further, the Office of the President’s chief financial officer stated that he believed a presentation of these funds would not be material to the regents because they represent only a small fraction of the overall budget. Finally, the Office of the President could provide no formal authority for spending outside of the budget the regents had approved.

The Office of the President spent its undisclosed reserves for a variety of purposes. According to the director of the Office of the President’s budget (budget director), the Office of the President can use the discretionary reserve to fund any program or project at the Office of the President or at the campuses. In contrast, the Office of the President’s use of the restricted reserve is generally subject to limitations because the reserve may contain, for example, state funds that the Legislature appropriated for a specific purpose. However, the Office of the President has flexibility in spending parts of its restricted reserve because some of these restrictions are self-imposed. For instance, although the Office of the President considers its systemwide administration cost recovery fund to be restricted because it is composed of fees charged to endowments in order to recover the reasonable and actual costs related to administration of those endowments, the Office of the President spends a significant portion of this fund on marketing. We attempted to analyze the purposes for which the Office of the President spent its undisclosed reserve, but the Office of the President does not differentiate between its expenditures that are paid for with its disclosed budget and those paid for with its undisclosed budget; instead, it only tracks total expenditures. We were able to identify the planned spending and found that the Office of the President planned to spend undisclosed funds for varied purposes as shown in Table 4.

Table 4
The Office of the President’s Planned Spending From the Undisclosed Budget Includes a Number of Different Types of Expenditures
Fiscal Years 2012–13 Through 2015–16

Examples of Planned Spending Fiscal Year
2012–13 2013–14 2014–15 2015–16
Advertising, communications, and brand management $3,700,000 $815,000 $77,000 $76,000
Historically Black Colleges and Universities Initiative* 785,000 2,191,000 2,271,000
Multi-campus research program institutes 2,610,000
Nonresident recruiting 686,000 490,000 490,000 97,000
President’s Postdoctoral Fellowships Program 2,685,000 3,809,000
President’s residence 252,000 252,000 179,000 179,000
Printer Initiative and Print Management Program 533,000 84,000 70,000
Sexual Violence Sexual Assault Task Force 5,887,000 3,110,000
Staffing costs 95,000 303,000 1,115,000 687,000
Transcript Evaluation Services 291,000 1,389,000 1,048,000
University of California Merced faculty start-up support 5,000,000 5,000,000
University of California Riverside medical school start-up support 2,000,000 2,000,000 2,000,000 2,000,000

Sources: California State Auditor’s analysis of the Office of the President’s budget approval documents and data obtained from the Office of the President’s budget development system.

* The Historically Black Colleges and Universities (HBCU) Initiative provides funding to support HBCU students to participate in summer research activities located at a University of California campus, as well as funding for doctoral students at the university who have graduated from HBCUs.

Staffing costs include costs for firms to search for executive-level candidates, performance bonuses, $49,000 for staff appreciation including a breakfast, employee salary increases, contract positions, and $2,000 spent on a retirement party.

The Office of the President disagrees with the terminology we are using to describe the undisclosed budget. In particular, the Office of the President asserts that it has publicly disclosed this budget and the projects it funds from this budget. However, we disagree with this assertion. As a public entity and an institution of higher education, the Office of the President has a responsibility to spend its funds in a transparent and prudent manner. Nonetheless, since at least fiscal year 2012–13, the Office of the President has not fully or consistently shared in a systematic manner its undisclosed budget with the regents, the Legislature, or the public.

Statements About the Undisclosed Budget

  • “The Office of the President continues to draw down its own carryforwards and reserves in a responsible manner and to fund, on behalf of the campuses, systemwide or campus-based programs and other systemwide obligations. The total expended over the last two fiscal years for these purposes approaches $125 million, an amount that otherwise would have been largely shouldered by the campuses.”
  • “Comprehensiveness. The Office of the President budget has reconciled funding into one consolidated budget… [which includes] ongoing funding previously budgeted as temporary.”

Sources: The Board of Regents’ committee on finance action items related to the Office of the President’s fiscal year 2012–13 and fiscal year 2013–14 budgets.

The Office of the President also asserted that the term undisclosed implied intent to conceal this budget which, from its perspective, was not the case. The Office of the President further stated that staff discuss the undisclosed budget at length internally within the Office of the President and document those discussions, which would be available to the public via a public records act request. However, when we asked the Office of the President to furnish documents that demonstrated that it—at any point—had explicitly shared its undisclosed budget via public statements or public records act requests, it could not convincingly do so. Specifically, the documents the Office of the President identified included only two statements that it made over the past five years that vaguely refer to the Office of the President’s undisclosed budget, as shown in the text box. These two statements would not give a stakeholder the ability to determine that the Office of the President has an additional budget in which it records tens of millions of dollars in planned spending each year. Furthermore, these documents were included in the materials presented to the regents’ committee on finance, rather than as part of the presentation to the entire Board of Regents.

The Office of the President also claimed that it presents the projects and programs via its undisclosed budget to the regents and online; however, based on our review, these documents are not complete. In fact, although the materials the Office of the President provided demonstrate it publicly described many projects since fiscal year 2012–13, none of these adequately clarified that the projects were funded using the undisclosed budget. The Office of the President asserts that it did not intend to conceal its undisclosed budget; nevertheless, over the four-year period we reviewed, it consistently made the decision not to include this spending in the budgets it presented to the regents or in the descriptions of the projects it funded with its undisclosed budget. Merely discussing the undisclosed budget within the Office of the President falls short of providing the type of transparency we believe is necessary for stakeholders to make sound decisions.

In addition to not informing the regents about the existence of the undisclosed budget and reserves, the Office of the President’s budget does not provide the regents with the information that would allow them to fully understand the magnitude of its spending. As Figure 6 shows, the Office of the President’s fiscal year 2015–16 budget presentation to the regents did not include other key components of its annual spending plans, including the following:

Further, the budget inappropriately included $184 million in pass‑through funds that the Office of the President sent to campuses, even though the use of these funds is restricted and they are not spent by the Office of the President. Examples of pass-through funds include patent royalties paid to inventors and state contract funds for research programs. These pass‑through funds convolute the Office of the President’s total budget, making it difficult to understand its true operating costs. A more transparent budget presentation would separate pass-through funds from the Office of the President’s actual operating expenditures.

The Office of the President’s budget presentation also makes it difficult for the regents to discern the amount of the budget increases that they approve each year. For example, the Office of the President’s total budget for fiscal year 2015–16 was $55 million more than it actually spent in fiscal year 2014–15. However, because the Office of the President did not provide the regents with its actual fiscal year 2014–15 expenditures and instead only provided what it planned to spend in that previous fiscal year—which turned out to be overestimated—the regents believed they were approving a $28 million dollar increase.1 Further, if the Office of the President had provided the prior fiscal year expenditures, the regents would have known that the Office of the President spent more in the prior year than the regents had approved. Consequently, we question whether the regents would have approved the Office of President’s fiscal year 2015–16 budget—or the Office of the President’s requested $10 million increase to the campus assessment, as we discuss in the next section—if they had known its actual expenditures in fiscal year 2014–15.

After we asked about its budgeting practices, the Office of the President systemwide controller told us that it began creating the temporary budget [undisclosed budget] as a result of the state budget process and that it had maintained the process because it had always budgeted in that manner. When we asked about the Office of the President’s failure to base its budgets on the current year’s estimated actual expenditures, its management asserted that they would consider using actual expenditures as the basis for future budget planning. However, its management expressed concern that basing budgets on actual expenditures would create incentives for the Office of the President’s divisions to spend their full budgeted amounts each year so as not to lose their budget allocations for the following year.

We do not consider the Office of the President’s concern to be valid because it annually sweeps unused discretionary budget allocations into a discretionary reserve, a practice that already could encourage its divisions to spend their entire budget allocations. The Office of the President has dealt with this potential problem by allowing its divisions to keep 5 percent of their unused discretionary budget allocations and by implementing a carryforward process that allows divisions to request that a portion of their unused allocations be carried forward into the next year. The Office of the President should base future budget planning on its actual expenditures to improve the accuracy of its estimated budgets, cut unnecessary spending, and reduce the financial burden the campus assessment places on the campuses.

The Office of the President Has Overcharged Campuses and Made Certain Spending Decisions That May Not Reflect the Campuses’ Best Interests

The Office of the President accumulated its significant reserves in large part because it calculates the campus assessment amount based on its budgets rather than on its actual spending. As stated in the Introduction, the largest portion of the Office of the President’s discretionary revenue—$288 million in fiscal year 2015–16—comes from the annual assessment that the Office of the President levies on campuses. As part of approving the Office of the President’s overall budget, the regents also approve the amount that the Office of the President proposes to assess the campuses. As Figure 9 shows, the Office of the President’s discretionary reserve for fiscal year 2015–16 includes $32 million in unspent campus assessment funds.

Figure 9
$32 Million of the Office of the President’s Growing Discretionary Reserve Was Unspent Campus Assessment Funds as of June 30, 2016

Figure 9 illustrates that $32 million of the Office of the President’s growing discretionary reserve is unspent campus assessment funds as of June 30, 2016.

Sources: California State Auditor’s analysis of discretionary fund balances for fiscal years 2011–12 through 2015–16 provided by the Office of the President.

* Endowment funds consist of the Searles Fund and the President’s Endowment Fund.

Other funds include the Common Fund, University General Fund, investment pool earnings, and miscellaneous others.

In the July 2011 meetings in which the regents approved the creation of the campus assessment, the Office of the President committed to keeping the campus assessment as low as possible. Nonetheless, for two of the subsequent four years, it asked the regents to approve increases to the campus assessment even though it had not spent all of the funds that the regents approved in the previous years, as Table 5 shows. It did not return any of these unused funds to campuses in the form of a refund.

Table 5
The Office of the President’s Reserve Balances Indicate That It Did Not Keep the Campus Assessment as Low as Possible
(in Millions)

Fiscal Year
2011–12 2012–13 2013–14 2014–15 2015–16
Campus assessment revenue $266 $262 $279 $278 $288
Campus assessment expenditure 259 252 261 279 290
Budget surplus or (deficit) 7 10 18 (1) (2)
Cumulative surplus 7 17 35 34 32

Sources: California State Auditor’s analysis of the Office of the President’s campus assessment revenue and fund balances for fiscal years 2011–12 through 2015–16 provided by the Office of the President.

Although in 2011 the Office of the President created a campus budget committee (committee) to review and advise on its budget, it has not convened the committee since May 2013. It created the committee, which consisted of campus provosts and vice chancellors of planning and budget, because it had begun assessing the campuses to fund its discretionary budget and it wanted a way to include campus involvement in its budgeting process. However, the committee advised the Office of the President on its budget for only two years. According to the Office of the President’s chief financial officer, the committee no longer meets because it achieved its purpose of aligning the annual budget with campus priorities. He also explained that the Office of the President continues to brief the campuses on the development of the annual budget through informal monthly meetings with the campus vice chancellors of planning and budget. However, our review of several briefing documents shows that the vice chancellors of planning and budget learn about budget changes only after the president has already approved them. Thus, these vice chancellors have little opportunity to provide suggestions that affect the budget’s development.

Some of the campus administrators with whom we spoke stated that the Office of the President should receive more suggestions from campuses regarding its budget decisions through a formal advisory body. For example, Riverside’s vice chancellor stated that the Office of the President should develop its budget in a more collaborative manner that includes the creation of a process to prioritize initiatives and programs in a way that is transparent and that allows the campuses to participate in the decision making. Without adequate opportunity for campuses to provide feedback on the Office of the President’s budget, the Office of the President has less assurance that its budget continues to align with the university’s priorities and serves the needs of campuses.

The Office of the President Could Use Between $38 and $175 Million of Its Undisclosed Reserves for Other University Priorities

As previously discussed, the Office of the President had about $83 million in its undisclosed restricted reserve and about $92 million in its undisclosed discretionary reserve at the end of fiscal year 2015–16. Given the university’s recently approved tuition increase and the campuses’ ongoing struggles to ensure that they have sufficient funding to maintain academic quality, we believe the Office of the President should refund available funds in these reserves by returning them to the campuses for the benefit of students. Specifically, the Office of the President needs to reevaluate the planned uses of its $175 million in the undisclosed reserves.

Our analysis suggests that the Office of the President could refund at least $38 million in uncommitted funds from its discretionary reserve as Figure 10 shows. According to its budget director, the Office of the President can use the $92 million in its discretionary reserve to fund any Office of the President or campus activity. The Office of the President identified $54 million in planned commitments from this $92 million reserve. Thus, we believe the remaining $38 million could be sent back to the campuses to be used for the university’s priority of access and affordability for California undergraduate students. The Office of the President might also be able to return portions of the $54 million in discretionary reserve commitments to campuses. For example, the one-time expense of $280,000 in salary and benefit costs for the chief of staff’s office. Finally, the Office of the President should also reevaluate the $83 million in its restricted reserve because some internal restrictions, if lifted, could allow the Office of the President to reallocate these dollars to the campuses.

Figure 10
The Office of the President Could Redirect at Least $38 Million From Its 2015–16 Reserves After Reevaluating Its Commitments With Stakeholders

Figure 10 shows that the Office of the President could redirect at least $38 million from its fiscal year 2015-16 reserves by reevaluating its commitments.

Source: California State Auditor’s analysis of fiscal year 2016–17 fund commitments and fiscal year 2015–16 fund balances provided by the Office of the President.

* Other net commitments include projects such as the UC Mexico Initiative two-year work plans, DREAM Loan, and funding for the Presidential Postdoctoral Fellowship Program.

The listing of planned commitments to be paid from the undisclosed discretionary reserve includes programs and projects that the Office of the President intends to provide. Although we recognize that the Office of the President needs some flexibility to fund these sorts of programs or projects if they arise during the year, the regents already approve an annual allocation of $10 million in discretionary funds for presidential initiatives. In each of the past four fiscal years, the president did not spend all of this allocation. The fact that the president receives—and does not always fully spend—an allocation specifically for discretionary use demonstrates that the Office of the President might have opportunities to use some of the undisclosed discretionary reserve in a different way after an evaluation of what funding best serves the needs of the campuses and students. At the very least, the Office of the President should reevaluate the annual commitments it funds using the undisclosed discretionary reserve by implementing a more open and transparent budgeting process.

Furthermore, the Office of the President has opportunities to review—and potentially use—some of the $83 million in funds that were in its undisclosed restricted reserve at the end of fiscal year 2015–16. Although the Office of the President stated that most of the funds in the restricted reserve include grants, special state appropriations, and other funds with general spending restrictions, it cannot fully support this assertion. Specifically, when we asked for a list of all the restrictions tied to the funds, we found that the Office of the President did not maintain one. Moreover, the director of corporate accounting confirmed that the Office of the President can designate funds as restricted. An example is the systemwide administration cost recovery fund, of which the Office of the President spends a significant portion on marketing. Further, in the past, the Office of the President has reclassified some restricted funds as discretionary. For example, until fiscal year 2011–12, the Searles Fund, which provides about $7 million in revenue each year according to data provided by the Office of the President, was restricted for the use and benefit of the university. Beginning in fiscal year 2011–12, the Office of the President reclassified the Searles Fund as an unrestricted fund to minimize the campus assessment, citing the endowment’s terms that allow the university to use the fund for purposes that cannot be covered by other funding sources.

The Office of the President’s Budget Practices Are Ineffective and Preclude Accountability

The Office of the President’s budget practices lack the processes and safeguards necessary to ensure that it consistently justifies and approves its expenditures. In particular, the Office of the President has not established safeguards over its expenditures related to its undisclosed budget, thus putting millions of dollars at risk of misuse. Although the regents’ committee on finance adopted a recommendation that directed the Office of the President to create appropriate budget guidelines, processes, and standards in November 2006, the Office of the President has yet to do so. Because of its lack of budget standards, Office of the President management could not adequately explain many of the changes it has made in recent years to its practices for preparing its budget, even when those changes reduced feedback from the campuses.

The Office of the President’s Weak Internal Oversight of Its Undisclosed Budget Expenditures Creates the Risk of Wasteful Spending

The difficulty we had reconciling and validating the Office of the President’s undisclosed budget expenditures led us to conclude that its budget practices may put tens of millions of dollars at risk for wasteful spending. As discussed previously, the Office of the President does not disclose these expenditures to the regents, the Legislature, or the public. As a result, we expected it would have adopted strong processes for justifying, approving, and tracking the expenditures to guard against misuse and to protect the Office of the President from outside criticism if the expenditures were questioned. However, the Office of the President generally did not have clear guidelines or expectations for approving undisclosed expenditures during the four years we reviewed. Moreover, the Office of the President’s budget director and the deputy chief of staff to the president (deputy chief of staff) had a difficult time identifying approval documents for undisclosed expenditures it made from fiscal years 2012–13 through 2015–16. As we discuss in Chapter 3, the Office of the President took seven weeks to locate and provide requested approval documentation related to the undisclosed budget. Moreover, after the Office of the President provided this documentation, we found some of the approval documents were incomplete because they did not include the expenditures’ justifications or identify the individuals who approved them.

Further, our analysis of undisclosed budget expenditures at five divisions of the Office of the President found that the expenditures were approved in a number of both formal and informal ways, but that these approvals were rarely fully documented. When we reviewed the approval documents for these expenditures from fiscal year 2012–13, we found that the Office of the President could not demonstrate adequate approval for 98 percent, or $37 million, of the expenditures that we analyzed. Although the Office of the President began using an improved approval process involving decision memos in November 2014 for some of its undisclosed budget expenditures, its use of this process was inconsistent. Specifically, these decision memos included descriptions of the expenditures, their justifications, and signatures from the management who approved them, including the president. However, according to the deputy chief of staff, the president verbally approves some expenditures during meetings, and the approval process remained flexible even after November 2014. Consequently, the Office of the President was unable to demonstrate adequate approval for 82 percent, or $34 million, of the five divisions’ fiscal year 2015–16 expenditures that we reviewed subsequent to the improved approval process.

We also have concerns regarding the reliability of the Office of the President’s budget data and its inability to determine the actual expenditures related to its undisclosed budget. Two of the five divisions with which we spoke identified more than $3 million in data entry errors in the Office of the President’s budget data. Division staff attributed these errors to a lack of safeguards that would ensure that the historical budget data could not be changed after the end of the budget year. Further, Office of the President management confirmed that it could not easily determine the amount of the undisclosed budget that it actually spent for the years we reviewed because it does not separately identify actual expenditures from the undisclosed budget. In fact, we found it difficult to determine which decision memos related to the undisclosed budget because the Office of the President does not distinguish between these memos and ones related to its disclosed budget. The executive director for operations asserted that the Office of the President recently added tracking codes to undisclosed budget allocations so it will be able to determine the total amount of its undisclosed expenditures in the future.

The lack of safeguards and consistency creates the risk that Office of the President staff could inappropriately spend funds from the undisclosed budget because the divisions’ budget allocations could exceed their needs or they could be spent on inadequately defined projects. The Office of the President has the critical responsibility of implementing strong budget processes so that its management has enough information to detect and prevent wasteful spending. Its lack of formalized budget processes, inability to find approval documents, inaccurate budget data, and failure to track undisclosed actual expenditures put tens of millions of dollars at risk for wasteful spending. According to the deputy chief of staff, changes in fiscal climate and administrations have meant that the Office of the President’s budget preparation process has been unique each year; consequently, connecting approval documents and data is not always straightforward. Nevertheless, strong policies and procedures would have helped ensure the consistent approval and tracking of these expenditures across administrations. Further, it would have increased the Office of the President’s ability to monitor budgets and detect any potential for wasteful spending.

The Office of the President Lacks Adequate Policies and Procedures for Preparing Its Disclosed Budgets

The Office of the President has not followed a regents’ committee on finance recommendation from 2006 directing it to create appropriate guidelines, procedures, and standards for preparing its budget. In addition to the problems with the undisclosed budget that we previously discussed, our review found that the Office of the President’s processes for preparing, reviewing, and approving its disclosed budget changed each year from fiscal years 2011–12 through 2015–16. Further, the Office of the President was not able to fully explain changes to its process for developing its disclosed budget or the standards it used to arrive at its spending decisions. Without clearly outlined procedures, the Office of the President has less assurance that it adequately addresses issues stakeholders raise during the budget development process.

Although the budget development process for any large organization is the result of a myriad of suggestions, negotiations, and compromises, these dynamics necessitate an orderly and formalized process to facilitate difficult budgeting decisions. Nevertheless, the Office of the President, which had a total budget of $747 million in fiscal year 2015–16, does not have a set of policies or procedures that describe its budgeting process. Instead, the Office of the President could only provide annual budget letters that it sent to its divisions that described at a high-level specific budgeting priorities—like reducing meeting costs—and changes to the budget review process. However, these letters did not sufficiently explain how the divisions were to implement these guidelines within the framework of an existing budgeting process.

For example, the annual budget letters describe a number of different committees, hearings, and other internal review processes that the Office of the President used at different times to make budgeting decisions. One of these committees was the President’s Operations Group (operations group), which consisted of its senior leadership, who reviewed division budget requests and advised the president on what changes to approve for the proposed disclosed budget. However, the Office of the President did not establish standards to guide the operations group’s budget review and did not document the results of the meetings. According to the Office of the President’s budget director, the group instead set priorities that evolved over time and changed from year to year. The deputy chief of staff stated that the operations group ceased its involvement with the budget review in late 2013 because the responsibilities for this group were shifted elsewhere. Since that time, only the president has reviewed division budget change requests.

Turnover in the Office of the President’s budget director position further emphasizes the need for consistent, documented processes for budget development. One rationale for creating such procedures is the need to maintain institutional knowledge in case of frequent staff turnover. The Office of the President’s budget director changed three times from fiscal years 2011–12 through 2015–16, compounding its difficulties in explaining its evolving budget process. For example, the current budget director has only been in her position for two years and could not answer many of the questions we had about the Office of the President’s budget process.

The Office of the President Could Improve Its Budget Processes and Presentation by Aligning Them With Best Practices From Government Finance and Higher Education

The Office of the President has developed and presented its budgets in ways that preclude full transparency and accountability of its spending. Table 6 identifies the degree to which the Office of the President’s processes do not align with a selection of recommended budget practices from the Government Finance Officers Association (GFOA) and the National Association of College and University Business Officers (NACUBO). Implementing these best practices would improve the Office of the President’s budget development process and presentation to the regents.

Table 6
The Office of the President Does Not Follow Recommended Budget Practices

Recommended Budget Practice The Office of the President’s Budget Practices In this column, "O" represents: Partially Implemented, and "X" represents: Did Not ImplementScorecard
Develop budget procedures to facilitate budget review, discussion, modification, and adoption. No documented budget procedures, policies, or standards exist other than an annual letter sent to divisions containing general budget guidelines. O
Identify opportunities for stakeholder input. Although the Office of the President holds monthly meetings with campus representatives and receives feedback related to its budget at some of those meetings, it no longer convenes an advisory budget committee consisting of campus representatives. O
Prepare and present a recommended budget that includes all programs, funds, and expenditures. The budget omits expenditures from the temporary budget and fee‑for‑service expenditures that should be displayed and includes other expenditures—such as pass-through funds spent by campuses—that should not be displayed. X
Develop and evaluate financial options, which includes long‑term forecasting of budgeted revenues and expenditures. Annual budgets are prepared without long-term forecasts of revenues or expenditures. X
Reflect fiscal year-end actual expenditures in budget and monitor performance by comparing budget to actual expenditures. Future budgets are based on current year budget, and the budget office does not regularly monitor actual expenditures. X
Develop a formal fund balance policy that sets appropriate fund balance level and uses. No fund balance policy exists, and an excessive undisclosed unrestricted reserve exists that can be used to fund any program or project. X
Present a budget that includes sufficient information for external stakeholders and the governing body about the entity’s operations, resources, fund balances, budgetary results, and key issues and choices. Budget presentation does not include sufficient information about operations, resources, reserve balances, or key issues and choices. Budgetary results are not presented. X

Sources: California State Auditor’s analysis of the Government Finance Officer Association’s Recommended Budget Practices, the National Association of College and University Business Officers’ presentation on Budgeting and Capital Planning Best Practices, the Office of the President’s budget documents, and data obtained from the Office of the President’s budget development system.

O = Partially implemented budget best practice.

X = Did not implement budget best practice.

For example, although the Office of the President sets aside a portion of its discretionary reserve to guard against unanticipated expenditures, it has not established a reserve policy that defines how much that reserve should be and how it can be spent. Instead, the Office of the President’s documents show that it considers all of its discretionary reserve available for spending on discretionary programs. Further, establishing a prudent reserve policy would likely have prevented the Office of the President from accumulating the excessive reserve balances that we discuss earlier in this chapter.

The Office of the President’s budget presentation also lacks sufficient detail about its funding sources, which is information that would provide the regents greater insight about possible means for keeping the campus assessment as low as possible. The GFOA recommends identifying funding requirements and sources of funds as well as providing any supplemental information necessary to understand the budget’s funding plan. Although the Office of the President’s budget provides the campus assessment amount, it does not include sufficient information about other available funding sources it will use to supplement the assessment, such as its endowment income, restricted revenue sources, and undisclosed discretionary reserve. The Office of the President’s choice to omit information about its other available funding sources is of concern because we determined it could have used these sources to minimize the campus assessment or used these funds for other university priorities by returning excess reserves to the campuses in the form of a refund.

In the past, the Office of the President had addressed several of the missing elements we describe in Table 6 when presenting its budgets. We found that its budget for fiscal year 2010–11 separated pass-through expenditures from its operating budget, included some of the now-undisclosed budget, and highlighted expenditures it funded on a fee-for-service basis. The chief financial officer stated that the Office of the President created the detailed fiscal year 2010–11 budget to provide the regents additional information about its operations in preparation for the university’s transition to the Funding Streams Initiative. He further stated that the Office of the President stopped providing this level of detail at the request of the regents. If the Office of the President had continued to use this budget framework, its publicly available documents would have addressed many of our concerns and questions.

Although the Office of the President’s executive management agreed that it could improve its internal budget management by including its undisclosed budget, providing budgeted and actual expenditure results, and removing its pass-through expenditures, the systemwide controller disagreed that the Office of the President should follow GFOA standards. The systemwide controller stated that GFOA budget practices do not necessarily apply to the Office of the President because it reports as a business-type activity whose operations are financed in part by fees charged for its services, making it different from other entities primarily funded through public funds. However, we believe that because the university receives $3 billion from taxpayers via the State’s General Fund, it should follow GFOA best practices. Moreover, when we contacted the GFOA, a senior manager agreed that these best budget practices are applicable to public sector higher education institutions. In fact, the university’s Division of Agriculture and Natural Resources (ANR), which is headquartered at the Office of the President, follows several of these best practices for budgeting including budgeted to actual expenditure comparisons and the use of long-term budget forecasts, which indicates that implementing at least some of these best practices is feasible.

Additionally, Office of the President management disagreed with the need to provide additional budget detail and information to the regents. The chief financial officer and chief operating officer stated that the regents do not expect or want this level of detail to understand the Office of the President’s budget. However, when we spoke with the regents, they stated that although they believed the Office of the President had provided adequate detail regarding the budget, additional information—such as the amounts of the reserve balances—would be helpful. Moreover, the regents were open to recommendations for making the Office of the President’s budget more transparent.

Contrary to the opinion of the Office of the President, implementing the best practices we suggest would not result in a voluminous amount of granular budget detail. In fact, we developed a proposal for a one-page budget display that the Office of the President could use for its presentation to the regents, which we display in Figure 11. We believe this budget display would allow the regents to better understand and provide oversight of the Office of the President’s proposed budgets and requests for revenue increases, which was part of the regents’ committee on finance’s rationale for recommending approval of the November 2006 policy requiring the Office of the President to present its budget for approval each year. Furthermore, we believe the regents, the Legislature, and the public would benefit from the transparency this display provides.

Figure 11
By Implementing Best Practices, the Office of the President Could Ensure Its Budget Presentation Would Better Inform the Board of Regents and Other Stakeholders

Figure 11 shows the Office of the President’s July 2015 budget summary and illustration of how the budget presentation could look after implementing a selection of best practices.

Sources: California State Auditor’s Analysis of the Office of the President’s budget presented to the Board of Regents (regents) on July 22, 2015; data obtained from the Office of the President’s budget development system; statements by the Office of the President’s budget director; and recommended budgeting practices published by the Government Finance Officer Association and the National Association of College and University Business Officers.

Note: This figure is a hypothetical presentation for illustrative purposes, and is the minimum amount of information that should be presented. When implementing best practices, the Office of the President should work with the regents to determine the appropriate format and level of detail needed for the regents’ oversight. The Office of the President should also explain to the regents why its restated budget amount differs from its originally approved budget amount, and update the regents on its final actual expenditures by September of each year. Finally the Office of the President’s budget presentation should also include its total revenue sources.

A Financial Audit of the Office of the President Likely Would Have Identified Some of the Errors and Weak Processes We Identified

Over the last several years, the university’s budget and finances have been subject to scrutiny from students, the Legislature, and the Governor. In light of this level of interest, we question why the Office of the President has not considered avenues for greater transparency through the annual financial audit it receives. Specifically, although the university receives an annual financial audit from an independent external auditor, this audit is conducted at a systemwide level, which obscures the Office of the President’s financial activities and does not specifically evaluate the Office of the President’s processes. Thus, the financial audit has not identified major issues that we found, including the Office of the President placing $96 million from the State intended for the university’s retirement fund in its short-term investment pool instead and then failing to transfer almost $77,000 in interest to the university’s retirement fund where it belonged.

The university’s annual financial audit involves independent external auditors examining the campuses, the Office of the President, the medical centers, and other university programs as a single entity. Thus, the auditors only review the accuracy of the financial statements for the university system and do not specifically issue an opinion on the individual financial activities for each campus, the Office of the President, the medical centers, and the other university programs.2 Combining all of the university’s components into one audit essentially obscures the finances for specific components, such as the Office of the President. For example, the university’s most recent annual financial report indicated that the university as a whole maintained a deficit unrestricted fund balance of $11 billion, a significant portion of which is attributable to pensions and retiree health benefit obligations. However, as we demonstrated earlier in this chapter, the Office of the President itself maintains a significant surplus reserve balance: $92 million of discretionary reserves at the end of fiscal year 2015–16.

In fact, when we first analyzed the undisclosed discretionary reserve, the ending balance for fiscal year 2015–16 was initially $188 million because it inappropriately included $96 million that the Office of the President received from the State for the university’s retirement plan. When we inquired about this $96 million, the systemwide controller asserted that the Office of the President placed this money in its short-term investment pool for one day before transferring it out to the retirement fund. However, when we followed up with the director of corporate accounting to get evidence of this statement, it became apparent that this money actually remained in the short-term investment pool for 25 days before it was transferred out. During those 25 days, the $96 million earned almost $77,000 in interest that the Office of the President failed to transfer to the retirement fund. The Office of the President did not transfer this money until March 17, 2017, after we notified it of this issue.

This is of further concern because the Office of the President’s standard practice is to deposit state appropriations, including the $96 million in funds for the retirement plan, and any other incoming receipts addressed to the university from external parties into its short-term investment pool. Without strong controls in place, the Office of the President risks inappropriately spending the interest generated from funds designated for a specific purpose on purposes for which these funds were not originally designated.

Moreover, we determined that the Office of the President does not centrally manage all of its expenditures and could not tell us the actual amount of restricted revenue it received. Specifically, the Office of the President’s budget director stated that the budget office periodically assesses variances between its budget and actual expenditures at the midpoint and the end of the fiscal year. The Office of the President also requires divisions to more closely monitor their budgets throughout the year. The budget office views the more than 300 restricted funds as the responsibility of the divisions that receive them. Nevertheless, since this information is not managed centrally, it is not readily available, and therefore, the Office of the President was unable to provide us with information regarding the actual restricted revenue it received.

Finally, the Office of the President’s Corporate Financial Reporting system (reporting system) does not distinguish between its own operating costs and systemwide costs, making it difficult to determine how much the Office of the President actually costs to run. Specifically, when we attempted to gain assurance about the accuracy and completeness of the actual expenditure data the Office of the President provided, we compared it to the university’s reporting system, which is used to prepare the audited financial statements. However, the expenditures associated with the Office of the President’s portion of the reporting system also included systemwide expenditures such as costs for pensions and other post‑employment benefits for the entire system. Without a more distinct separation between the Office of the President’s operating costs and systemwide costs, it is difficult to compare the Office of the President’s expenditures to costs in its reporting system.

When we spoke with the university’s independent auditors, they stated that separately auditing each of the university’s units would be very expensive. The auditors also stated it would be difficult because some financial activities—like investments and retirement costs—would need additional analysis to allocate them to the campuses, medical centers, labs, and the Office of the President. Regardless, the current level of financial statement reporting does not allow the regents, the Legislature, or the public to accurately differentiate the Office of the President’s financial activities from the rest of the university’s components. In addition to improving transparency, a financial audit of the Office of the President would recommend detailed improvements to processes that led to the mistakes and weaknesses we found and allow the Office of the President to better justify its spending decisions.


Recommendations

The Office of the President

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:

By April 2018:

By April 2019:

By April 2020:

The Regents



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Chapter 2

THE OFFICE OF THE PRESIDENT HAS NOT SUFFICIENTLY JUSTIFIED THE
SIZE AND COST OF ITS STAFF


Chapter Summary

The University of California (university) Office of the President has increased its budget by 17 percent over the past four years. One of the central causes of the escalation is the number and cost of the staff that the Office of the President employs. Because one of the primary roles of the Office of the President is to support campuses, we expected that it would have aligned its staffing levels with the needs of its campuses; however, it has not done so. The Office of the President has yet to develop and implement a workforce plan, and its position control process, which requires management review for staffing increases, has not kept staff levels from rising. The Office of the President acknowledged the need to review staffing in the past: in January 2014, it issued a presidential directive calling for its divisions to create staffing plans and participate in a budget review that was supposed to identify redundancies and determine the appropriate size, shape, and role of the Office of the President. However, it did not document the results of the review. Further, our analysis shows that the review did not decrease staffing levels or costs.

The rapid growth of the Office of the President’s staffing costs is in part attributable to its decision to pay its staff generous salaries and provide them with expensive employee benefits. Despite its status as the administrative headquarters of a large public university system, the Office of the President pays its executives and administrative staff significantly more than state agencies pay their employees. Our review of 10 executive and 10 administrative positions at the Office of the President shows that although these employees have similar duties to those of state government employees—such as human resource management and accounting—the Office of the President pays them significantly higher salaries. In fact, our review of these 20 positions indicates that the Office of the President could save at least $3.2 million annually by more closely aligning its executive and administrative staffs’ salaries to those state agencies offer. Additionally, the Office of the President offers its staff benefits that state agencies rarely provide, such as paying for business meetings and entertainment at a cost of at least $2 million over the five-year period we reviewed. If the Office of the President chose to eliminate or reduce these generous employee benefits, it could direct the resulting savings to campuses.

Both the Office of the President and the Campuses Have Increased Their Staffing Levels

Although the Office of the President has consistently stated publicly that it is doing all it can to keep its costs low, its staffing levels have grown by 11 percent since fiscal year 2010–11. As Table 7 shows, this rate of growth outpaced the rate of staffing growth for the university by 1 percent. Only the medical centers’ 15 percent rate of growth and the student staffs’ 19 percent rate of growth over the past five years exceeded that of the Office of the President. The medical centers, for the most part, receive their funding from patient fees.

Table 7
Since Fiscal Year 2010–11, Staff Levels Have Increased at the Office of the President, the Campuses, and in Health Related Areas

Fiscal Year Five-Year
Growth
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16
Office of the President
Total full-time equivalent staff
1,496 1,539 1,577 1,643 1,673 1,667 171
Percentage change 3% 2% 4% 2% 0% 11%
Total university staff
(excluding Office of the President staff)
132,779 134,393 136,089 137,564 143,089 146,177 13,398
Percentage change 1% 1% 1% 4% 2% 10%
Academic total full-time equivalent staff (campus and health locations) 40,669 40,727 41,070 41,372 42,189 42,998 2,329
Percentage change 0% 1% 1% 2% 2% 6%
Campus total full-time equivalent staff (nonacademic, nonstudent) 37,412 37,567 37,683 38,928 44,542 40,095 2,683
Percentage change 0% 0% 3% 14% (10%) 7%
Health total full-time equivalent staff (nonacademic, nonstudent) 48,242 49,562 50,460 50,145 48,839 55,412 7,170
Percentage change 3% 2% (1%) (3%) 13% 15%
Student staff total full-time equivalent staff (campus and health locations) 6,455 6,536 6,877 7,119 7,520 7,671 1,216
Percentage change 1% 5% 4% 6% 2% 19%

Sources: California State Auditor’s analysis of data obtained from the Office of the President’s Corporate Data Warehouse and Decision Support System and data from the University of California’s infocenter website. The Office of the President total excludes the United States Department of Energy Laboratories and Agriculture and Natural Resources staff. The university total excludes the United States Department of Energy Laboratories staff because the infocenter website does not include them.

Because the Office of the President manages a number of systemwide initiatives, it employs staff both at the campuses and at its central headquarters in Oakland. However, its staffing growth occurred largely at its headquarters. From fiscal years 2010–11 through 2015–16, the Office of the President increased the number of staff at its Oakland location by 153 employees, while it employed only 18 additional staff at the campuses. Employees at the Office of the President’s headquarters generally perform administrative functions, such as human resource administration, accounting, and information technology (IT) support.

The University of California’s
Employee Classification Groups

Senior management: Provide universitywide policy and program direction.

Managers and senior professionals: Provide leadership and professional expertise to major university units or fields of work.

Professional and support staff: Provide administrative, technical, operational, or clerical support for the university.

Academic staff: Conduct teaching, research, and public service. This category includes nonfaculty staff such as researchers and administrators.

Sources: University of California’s Career Tracks and Academic Personnel Manual.

The Office of the President has four general staffing groups, as the text box indicates. As shown in Figure 12, the Office of the President’s total salary costs have also increased over the past six years, especially for managers and senior professionals. Although the Office of the President has maintained relatively steady staffing and salary levels for its senior management group, it has increased both staffing and salary levels for its managers and senior professionals and for its professional and support staff. In fact, it increased its managers and senior professionals’ staffing levels by 32 percent from fiscal years 2010–11 through 2015–16, from 519 employees to 685 employees. Further, the total salaries it paid its managers and senior professionals increased by $38 million, or 59 percent, and their average salaries increased by 21 percent, or nearly $25,600, over this same period.

Some of the increased costs for manager and senior professionals might be caused by the Office of the President’s inefficient use of these positions. For example, although the Office of the President’s guidance states that supervisory and management positions are supposed to supervise at least two full-time positions, our analysis of the Office of the President’s organizational charts found that many supervisors and managers do not meet this guideline. For instance, one associate director in the public affairs division with an annual salary rate of nearly $160,700 does not directly manage any employees. Likewise, a manager in the academic affairs division with an annual salary rate of $120,200 manages only one employee. In fact, we identified 10 managers who appeared to oversee only one employee and six managers who did not oversee anyone. When we shared this analysis with the Office of the President, it stated that the guidance was not a strict rule. However, we question whether the number of managers and their corresponding pay is justified given the Office of the President’s perspective that its managers do not necessarily need to oversee at least two staff. An analysis of management and staffing ratios can be incorporated into a workforce plan, which we discuss later.

Figure 12
Most of the Office of the President’s Staffing and Salary Growth Has Related to Management and Senior Professionals

Figure 12 illustrates that most of the Office of the President’s staffing and salary growth is related to management and senior professionals.

Source: California State Auditor’s analysis of personnel data obtained from the Office of the President’s Corporate Data Warehouse and Decision Support System.

The Office of the President Pays Its Executives and Administrative Staff Significantly More Than Their Public Sector Counterparts Receive

The Office of the President could save millions of dollars in salary costs by paying its executive management and administrative staff salaries that more closely align with those that state agencies and the California State University (CSU) offer. The Office of the President’s higher salaries are largely the result of its decision to use mostly private sector and higher education data when determining appropriate salaries for its positions. Further, the Office of the President has established wider salary ranges than those for comparable state employees, and this may not allow it to effectively control costs or provide incentives for employee development because employees do not necessarily have to take on additional responsibilities to earn more money.

The Office of the President Could Save at Least $700,000 Annually by Aligning Its Executive Salaries to Those of Comparable Public Sector Executives

In the Budget Act of 2016, the Legislature required the University of California Board of Regents (regents) to consider compensation for comparable state positions when evaluating the salaries of certain Office of the President executives. The Office of the President’s compensation program and strategy unit (compensation unit) stated that it was not able to find comparable state positions for many of its executives who worked for laboratory management or in its medical centers, although the unit did find matches for 35 percent of the executives within its senior management group. For example, the compensation unit determined that its chief financial officer position was comparable to several other positions, including the state finance director and the chief financial officer of the CSU system. According to the executive director of the compensation unit (compensation director), a salary above 90 percent of the range developed from this exercise would have been subject to a salary freeze. However, the compensation director was not aware of any instances in which the Office of the President actually froze salaries as a result of the review. In fact, the compensation director stated that salaries below 25 percent of the determined range for a position were eligible for an increase.

Nonetheless, our analysis indicated that the Office of the President’s executives generally earn significantly higher salaries than state employees in similar positions. As shown in Figure 13, we compared the salaries of a selection of the Office of the President’s executive staff with the salaries of the three highest‑paid state employees and one CSU employee in similar positions when possible for fiscal year 2014–15. (Appendix A presents the detailed data supporting Figure 13.) The 10 Office of the President executives we analyzed had combined salaries of $3.7 million—over $700,000 more than the combined salaries of their highest-paid state employee counterparts after adjusting for their respective cost of living.3 Furthermore, in many instances, the state employee executives had roughly the same levels of responsibility as the Office of the President executives. For example, the director for the California Department of Human Resources (CalHR) earns about $100,000 less than the vice president of human resources at the Office of the President. Both positions are responsible for labor relations, collective bargaining, employee salaries and benefits, job classifications, recruitment, and retention; however, CalHR is responsible for over 225,000 employees compared to 190,000 at the university.

Figure 13
The Office of the President’s Executives Make More Than Comparable California State Employees Do
Fiscal Year 2014–15

Figure 13 shows that the Office of the President’s executives make more than comparable California state employees do.

Sources: California State Auditor’s analysis of data obtained from the Office of the President’s Corporate Data Warehouse and Decision Support System and State Controller’s Office information for CSU and state government employees.

Note: We compared the Office of the President’s executives against the three highest-paid comparable executives in state government when possible. The Office of the President has 42 executive staff compared with only seven at the CSU Chancellor’s Office; therefore, we were unable to find comparable executives at CSU for each position at the Office of the President.

* We increased the state executive and CSU employee salaries based on a cost-of-living adjustment calculated by comparing the cities where their agencies’ main offices are located to the city of Oakland, where the Office of the President is headquartered. We calculated the adjustments using cost-of-living index information from the Council for Community and Economic Research for quarter two of 2016. We used the following adjustment rates: Sacramento: 26.2 percent; San Francisco: -15.7 percent; and Long Beach: 5.1 percent. We did not make adjustments for agencies headquartered in the East Bay Area.

The Office of the President also paid its executives higher salaries than CSU paid its executives during fiscal year 2014–15. Although CSU’s executives oversee 13 more campuses and 200,000 more students than the Office of the President oversees, the CSU Chancellor’s Office—the administrative body equivalent to the Office of the President—has only seven executive‑level staff while the Office of the President has 42. A partial explanation for this difference is that the State manages certain aspects of CSU, such as its payroll system and retirement programs. Additionally, the university’s tripartite mission of teaching, research, and public service means the Office of the President oversees medical centers, graduate education, and programs that exceed the scope of CSU’s mission. Nonetheless, CSU’s executives have more responsibility than their Office of the President’s counterparts in some instances. For example, CSU’s chief financial officer—whose annual salary was $70,000 less than the university’s chief financial officer’s salary in fiscal year 2014–15—is in charge of the business and finance division, whose mission includes management of IT services. Although the Office of the President’s chief financial officer has some IT duties, such as serving as an executive sponsor on the UCPath project—the university’s replacement payroll and human resources system—the Office of the President also has an executive serving as vice president of information technology who performs these duties and who received a salary rate of $345,100 in fiscal year 2014–15.

The Office of the President Could Save More Than $2.5 Million Annually by Reevaluating Its Administrative Staff Salaries

The Office of the President has asserted that the higher education environment necessitates higher pay for its staff. Although that assertion may have merit for certain executive employees, it has much less merit for administrative staff who perform similar duties no matter where they work. Table 8 shows that the Office of the President’s annual salary rates for the administrative staff we reviewed amounted to $2.5 million more than the maximum annual salary ranges for comparable state employees, even after including a cost‑of‑living adjustment.4 We analyzed the job duties, responsibilities, and qualifications of the Office of the President administrative classifications to identify similar state positions. We found that the average Office of the President salary was higher than the maximum amount the State pays an employee to perform the same administrative duties for eight of the 10 positions we reviewed.

Table 8
The Office of the President’s Administrative Staff Annual Salaries Generally Exceeded the Annual Salary Ranges of Comparable State Employees
Fiscal Year 2015–16

Office of the President* State Employee Monetary Effect Comparable California State
University (CSU) Job Classifications
Monetary Effect
Job Classification Number of
Employees in Classification
Average
Annual Salary
Maximum
Annual Salary Range
Job Classification Maximum
Annual Salary Range
Job Classification Maximum
Annual Salary Range§
Accounting
Manager 2
3 $142,600 $169,600   Accounting Administrator II $90,400 $156,500   No Comparable ClassificationII
Applications
Programmer 3
55 95,400 120,600 Staff Programmer
Analyst (Specialist)
86,900 494,600 Analyst / Programmer Range 2 $112,800 $13,000
Business Systems
Analyst 3
32 84,100 120,600 Staff Information Systems Analyst (Specialist) 86,900 96,000 Analyst / Programmer Range 2 112,800 0
Executive Assistant 3 24 68,900 98,100 Executive Assistant 53,700 367,200 Presidential Aide 93,800 0
Financial Analyst 3 13 86,700 120,600 Staff Finance Budget Analyst 86,500 45,000 Senior Budget Analyst 93,000 13,600
Information
Systems Analyst 4#
25 122,900 169,600 Senior Information Systems Analyst (Specialist)

Senior Programmer Analyst (Specialist)
95,500 684,900 Operating Systems Analyst Range 3

Analyst/Programmer Range 3
126,500 78,000
Information Systems
Manager 3
2 185,800 258,000 Information Systems Manager 110,700 150,100 No Comparable ClassificationII
Strategic Sourcing Professional 4 17 110,000 169,600 Purchasing Manager 116,300 83,600 Buyer III 76,100 575,800
Systems
Administrator 4#
19 119,700 169,600 Senior Information Systems Analyst (Supervisor) 100,300 368,200 Operating Systems Analyst Range 3

Network Analyst Range 3

Analyst/Programmer Range 3
126,500 8,600
Writer Editor 3 5 93,200 107,900 Associate Editor of Publications 71,900 110,200 No Comparable Classification
Total $2,556,300 Total $689,000

Sources: California State Auditor’s analysis of data obtained from the Office of the President’s Corporate Data Warehouse, the State of California’s civil service pay scale, the CSU Salary Schedule, and job descriptions from all three entities.

Note: Dollar amounts have been rounded to the nearest hundred.

* We excluded systemwide employees who are located at campuses because campuses may have different salary ranges.

We added a 4 percent cost-of-living adjustment when comparing state employees to Office of the President employees. The cost-of-living adjustment uses a statewide number we developed by calculating the cost of living for counties in which state employees worked. We compared this weighted average against Alameda County’s cost of living because that is where the Office of the President is located. Cost-of-living data are from the Council for Community and Economic Research.

These amounts are the cumulative totals for the portion of each employee’s annual salary rate that exceeded the state and CSU maximum salary range. We included this amount for each Office of the President employee in the respective job classification without adjusting for how long the employee worked in the position. Therefore, the actual monetary effect for these job classifications may be less if an employee did not work for a full year. However, if the Office of the President performed a similar analysis for all administrative positions, it may identify greater savings.

§ We did not adjust CSU’s salary ranges with a cost-of-living index adjustment because CSU has structured the ranges so that it can adjust salary costs to accommodate any geographic region in the State.

II CSU’s Management Personnel Program uses generic classifications for management employees; therefore, we were unable to make valid comparisons between these employees.

# Because of differences in the job descriptions and overlapping job duties, we found multiple comparable state and CSU classifications at the equivalent skill level that shared a common salary.

When we performed a similar analysis comparing the Office of the President’s administrative positions to similar positions at CSU, we found that although CSU’s maximum salary ranges for all but one comparable position were higher than the average salaries of the Office of the President’s classifications, the Office of the President established higher maximum salary ranges for all seven of the comparable classifications we reviewed. As the examples in Figure 14 show, CSU has wide salary ranges, similar to those of the Office of the President. As a result, the Office of the President would save $689,000 annually if it aligned its salaries for the classifications in our analysis with CSU’s ranges. However, according to CSU’s compensation guide, CSU’s salary ranges are wide in part to allow the system to adjust salaries based on the employees’ geographic regions in California. This is contrary to the Office of the President’s salary ranges, which are already adjusted for geographic region. Moreover, as Figure 14 demonstrates, the true cost of employees depends on where they are placed in the salary range, creating the potential—because our estimated savings are based on CSU’s salary range maximums—that a wider gap exists between Office of the President and CSU salaries.

To set the salaries of its employees, the Office of the President uses market surveys that largely rely on national private sector and higher education data; thus, the vast majority of the entities against which it compares itself are private companies that typically pay their staff higher salaries than public entities do. Specifically, the market survey the Office of the President most commonly uses contained only 28 government or higher education participants out of a total of 694 entities for the positions we analyzed.

Figure 14
The Office of the President’s Employee Salaries Generally Fall in the Middle of Its Salary Ranges
Fiscal Year 2015–16

Figure 14 shows that the Office of the President’s employees generally fall in the middle of the salary range for fiscal year 2015-16.

Sources: California State Auditor’s analysis of data obtained from the Office of the President’s Corporate Data Warehouse and job specifications for comparable positions at the Office of the President, California Department of Human Resources, and CSU.

Note: Dollar amounts have been rounded to the nearest hundred.

* These amounts are the cumulative totals for the portion of each employee’s annual salary rate that exceeded the state maximum salary range. We included this amount for each Office of the President employee in the job classification without adjusting for how long the employee worked in the position. Therefore, the actual monetary effect may be less if an employee did not work for a full year.

We did not adjust CSU’s salary ranges with a cost-of-living index adjustment because CSU has structured the ranges so that it can adjust salary costs to accommodate any geographic region in the State.

We added a 4 percent cost-of-living adjustment when comparing state employees to Office of the President employees. The cost-of-living adjustment uses a statewide number we developed by calculating the cost of living for counties in which all state employees worked. We compared this weighted average against Alameda County’s cost of living because that is where the Office of the President is located. Cost-of-living data are from the Council for Community and Economic Research.

Other surveys that the Office of the President uses also rely heavily upon private sector data, particularly from the technology, aerospace, laboratory, consumer product, life science, and higher education industries. Because state employee salary information is publicly available, we believe the Office of the President could have more strongly focused on state salaries when determining salaries for its administrative positions.

When we suggested that the Office of the President give greater weight to state salaries when setting its salaries, it claimed that lowering salaries would make it less competitive in the Bay Area job market and therefore affect its ability to attract talent. It especially emphasized this point for the technology positions we selected. Nonetheless, we disagree with the implication that pay alone attracts talent. The Office of the President offers stability and generous benefits, including a retirement plan, that are not always provided in the private sector. Moreover, the Office of the President can attract individuals for whom working for the public sector to advance the university’s prestigious reputation has an intangible benefit. These factors help to offset the pay differential between the Office of the President and the private sector.

The Office of the President’s Salary Ranges Are Too Wide to Control Payroll Costs, Ensure Pay Equity, and Create Incentives for Employee Development

The Office of the President’s salary ranges are too wide to effectively control payroll costs or ensure internal equity within job classifications. The maximum of every salary range the Office of the President uses for its nonrepresented employees who are not executives is at least double the minimum salary for the same range. For example, the Office of the President’s highest salary range that was effective from July 2014 through June 2016 spans from $124,600 to $344,600—a difference of $220,000. The Office of the President’s policy states that its divisions generally cannot hire new employees above the 75th percentile without the approval of the chief of human resources. For the salary range discussed above, that policy would allow a division to hire a new employee without additional approval for a starting salary between $124,600 and $289,600. However, according to the executive director of human resources, in practice the Office of the President tends to hire new employees at salaries near the midpoint of their respective ranges.

Further, the use of such wide salary ranges can create situations in which two employees perform similar duties and have similar responsibilities but earn vastly different amounts. In fact, we noted 51 instances of employees in the Office of the President who had pay rates that were more than 50 percent higher than those of peers in the same classifications. In these instances, the salary differences could not be attributed to the employees’ responsibilities or skill levels because—according to the university’s policy manual—the purpose of the classification process is to ensure that the university correctly identifies positions’ required skill levels and assigned responsibilities. If an employee operates at a higher skill level or performs more difficult work than others in his or her classification, that employee should be in a higher classification. Although some of the salary differences we observed might be attributed to the length of time an employee had been in his or her position, we do not believe that would explain a 50 percent difference in pay rates between Office of the President employees in the same classification.

The Office of the President’s use of wide salary ranges also presents challenges in maintaining equity between different levels within the same job classification series. In describing its job classification system, the university indicates that higher levels within a job classification series are supposed to denote greater expertise and responsibility. Consequently, higher levels within a series carry higher salary ranges than lower levels. For example, financial analyst 3 is an “experienced” position, whereas financial analyst 2 is an “intermediate” position; thus, a financial analyst 3 should generally have a higher salary than a financial analyst 2. However, because of the Office of the President’s wide salary ranges for each job classification, significant overlap exists between different job levels. For example, the salary ranges for a financial analyst 2 and a financial analyst 3 overlap by $39,100, as Figure 15 shows.

Figure 15
The Office of the President’s Salary Ranges Contain Significant Overlap and Are Wider Than the Ranges for Similar Classifications for State Employees
Fiscal Year 2015–16

Figure 15 displays that the Office of the President’s salary ranges contain significant overlap and are wider than the ranges for similar classifications for state employees for fiscal year 2015-16.

Sources: California State Auditor’s analysis of data obtained from the Office of the President’s Corporate Data Warehouse as well as Office of the President’s job specifications, California Department of Human Resources job specifications for comparable job series, and the State of California’s CMI service pay scale.

= Actual placement of the Office of the President’s employees at their fiscal year 2015–16 salary rates.

* We excluded systemwide employees who are located at campuses because campuses may have different salary ranges.

The Office of the President did not employ any staff in the entry-level financial analyst 1 position as of fiscal year 2015–16.

Although some overlap in salaries for different job levels may be inevitable, the equivalent state financial analyst classification series only has a $5,700 overlap in its annual salary ranges. As a result of the Office of the President’s wide salary ranges, a financial analyst 4 with a salary rate of $128,500 in fiscal year 2015–16, was the third highest‑paid person among the Office of the President’s employees in the financial analyst series. In fact, this individual’s salary rate was higher than the salary rates for five staff at the financial analyst 5 level, which ranged from $110,300 to $123,100 during this same year. Thus, these five employees received less pay than an employee whose job level required less skill and fewer responsibilities.

According to the director of compensation programs and strategies, the university structured its salary ranges to accommodate salaries for junior-level employees and employees with deep expertise. She also indicated that the Office of the President aligns its salary ranges with the marketplace so it can compete for employees. However, we disagree that the wide salary ranges are necessary because the Office of the President’s classification system already ensures salary accommodation for junior-level staff at lower tiers within a series and more experienced staff at higher tiers. In fact, the large salary ranges paired with the classification system create an environment in which staff do not need to perform additional responsibilities to earn higher salaries.

The Office of the President Offers a Generous Retirement Benefit That the State Does Not Offer

In addition to paying salaries that significantly exceed those of employees in comparable high-level executive branch positions, the Office of the President spent $2.5 million from fiscal years 2011–12 through 2015–16 to provide a generous retirement benefit to certain executive employees. Specifically, the Office of the President contributes an amount equal to between 3 percent and 5 percent of these executives’ monthly base salaries to their retirement savings plans. For example, the former chief compliance and audit officer earned a base salary of $417,200 in fiscal year 2014–15 and would have received $20,900 that year to her elected retirement savings plan. This retirement benefit is in addition to the university’s regular pension plan, to which the Office of President contributes 14 percent and employees contribute 8 percent of their gross pay. Although the State also offers a regular retirement plan to which both it and its employees contribute, the State does not make contributions towards employees’ retirement savings plans as an additional benefit.

Furthermore, the Office of the President made a questionable decision about its retirement plan that has drastically increased the amounts it must contribute for all its employees. Beginning in 1990, the Office of the President suspended both its and its employees’ contributions into the university retirement plan because of an actuarial study that concluded that the retirement plan was adequately funded for many years into the future. Although the State also suspended executive branch contributions to the state retirement system, it did so only for one year. The Office of the President, however, did not resume the university’s contributions until 2010, a 20-year lapse in funding.

Employer-Paid Retirement Savings Contributions for the Office of the
President’s Employees

Fiscal
Year
Percentage
of Salary
Employer Contribution
(in millions)
2011–12 7 $8.9
2012–13 10 13.7
2013–14 12 18.1
2014–15 14 22.2
2015–16 14 23.4
Total $86.3

Sources: California State Auditor’s analysis of the University of California’s 2016–17 Budget for Current Operations and employer contribution amounts the Office of the President provided.

The Office of the President acknowledged that this decision created a serious problem in which the university’s retirement plan was underfunded by $12.1 billion as of July 2015. In fact, a July 2010 task force report on the university’s retirement benefits program estimated that its retirement plan would have been more than 120 percent funded in 2009 had the university and its employees continued making normal contributions. As shown in the text box, the Office of the President’s contributions to its employees’ retirement plans have risen dramatically in recent years. It contributed $8.9 million in fiscal year 2011–12, and that amount nearly tripled to $23.4 million in fiscal year 2015–16.

The Office of the President Offers Its Staff Generous Benefits That State Employees Do Not Generally Receive

The Office of the President offers its employees a number of generous benefits, some of which we summarize in Table 9.5 For example, it spent at least $35.8 million from fiscal years 2012–13 through 2015–16 on travel, meetings, and other related expenses. To understand the policies related to these expenses and determine their prudency, we examined certain categories in detail. Specifically, while the state policy permits the reimbursement of meals for employees on travel and prohibits reimbursement for business meetings with agency employees, the university’s policy allows for reimbursements up to $174 per person per day in reimbursements for business meetings and entertainment. As a result, the Office of the President has reimbursed its staff more than $2 million for such expenses since fiscal year 2011–12. Although the Office of the President’s executive director of operations asserted that events generally only occur during part of the day, we identified an instance in which the Office of the President paid for all three meals for attendees when it hosted a conference. For a three-day compliance symposium it hosted in 2015, the Office of the President spent $153 in meals per person in one day for about 280 attendees. The total cost of catering for this symposium was $74,000, most of which the Office of the President paid for out of the campus assessment fund. Additionally, the Office of the President spent $2,370 on alcohol that it charged to the Searles Fund, an endowment from a private donor. The Office of the President reclassified the Searles Fund as a discretionary funding source in 2011–12, as discussed in Chapter 1. The Office of the President also spent at least $940,000 in campus assessment funds for food and beverage expenses over the five-year period we reviewed.

Table 9
The Office of the President’s Employee Benefits Are More Generous Than the State of California’s Policies and Practices

Staffing Benefit Office of the President’s
Policy or Practice
Office of the President’s Cost
from 2011–12
through 2015–16*
State of California’s
Policy or Practice
California State University’s (CSU) Policy or Practice
Car allowance The president and 23 other staff from the senior management group (SMG) received monthly car allowances up to $743. $603,900 The Governor and other high‑ranking executives receive state cars to use for official state business. The State does not offer employees car allowances. 12 executives from the CSU received a monthly car allowance of $1,000.
Cell phones The University of California (university) provides cell phones to certain staff. The phones must be primarily for business use. 2,040,300 Effective February 2017, state agencies must ensure that the use of mobile computing devices will cost‑effectively meet a significant business need and increase the efficiency of the agency. The CSU allows cell phones for certain Chancellor’s Office employees who have telecommuting agreements.
Meals The allowable per‑person limit for meals and incidentals for overnight travel is $74 per day. 1,490,300 The allowable per‑person limit for meals and incidentals for overnight travel is $46 per day. The allowable per‑person limit for meals and incidentals for overnight travel is $62 per day.
Lodging The cost for lodging must be reasonable and supported by a receipt. The policy recommends that if lodging expenses exceed 200 percent of the federal per diem, the traveler should submit additional documentation supporting the higher lodging rate. 6,724,900 The in‑state and out‑of‑state rates for reimbursement range from $90 to $250 per night depending on a traveler’s destination. Out‑of‑country travel reimbursements must not exceed the federal per diem. For in‑state and out‑of‑state travel, the maximum reimbursement may not exceed $275 per night. Out‑of‑country travel reimbursements must not exceed the federal per diem.
Business meetings and entertainment The university may pay or reimburse expenses for meals and light refreshments provided in connection with business meetings and entertainment. The maximum per‑person expenditures for meals and light refreshments furnished by the university may not exceed $27 for breakfast, $47 for lunch, $81 for dinner, and $19 for light refreshments, equaling a maximum daily total of $174. 2,151,000 The State does not reimburse business meals when agencies call meetings with their own and/or other agency employees to conduct state business. In a limited number of instances, agencies may reimburse employees for meal expenses in connection to official state business with individuals from outside state government. The CSU reimburses hospitality expenses to the extent that they are necessary, appropriate, reasonable in amount, and serve a purpose consistent with the mission and fiduciary responsibilities of the CSU.
Relocation allowance The university provides certain SMG staff with a relocation allowance as part of their employment offers. The only limit on the amount is that it cannot exceed 25 percent of the employees’ starting base salaries. $1,095,300 State employees are eligible for lodging and meal reimbursement for up to 60 days while relocating to a permanent residency at the new location. The CSU reimburses actual, necessary, and reasonable moving expenses when employees are required to change the place of their residence or when they accept long‑term temporary assignments.
Moving reimbursement The university reimburses certain SMG staff for the costs associated with moving as part of their employment offers. 697,800 The State will reimburse certain employees for the costs associated with moving as part of their employment. The CSU reimburses actual, necessary, and reasonable moving expenses when employees are appointed.
Employer contributions toward a retirement savings plan for SMGs In addition to the university’s regular pension plan, it makes contributions to retirement savings plans for SMG employees with full‑time, nontenured academic appointments at the rate of 3 percent to 5 percent of their monthly base salaries. 2,541,100 Although state employees do participate in a regular pension plan, the State does not offer additional employer contributions toward a retirement savings plan. Although CSU employees do participate in the State’s regular pension plan, the CSU does not offer additional employer contributions toward a retirement savings plan.
Performance bonus The STAR Program provides employees, excluding SMG staff, with cash awards that may generally not exceed 10 percent of their base salaries or $5,000, whichever is lower. Employees are eligible for this award if they receive a ranking of “meets expectations” or better on their most recent performance evaluation. 1,884,400§ Employees with the State are eligible for cash awards for exceptional performance. Cash awards can range from $50 to $500. Some state agencies have discretion to start their own bonus programs outside of these cash awards. Some employees are eligible for performance bonuses that amount to up to 15 percent of their salaries when they meet predetermined measurable objectives.
Stipends Employees may receive an administrative stipend when they temporarily perform responsibilities of higher‑level positions. The stipend amount cannot exceed 25 percent of the employee’s base salary. Generally, out-of-classification assignments may not exceed 12 months. 2,389,500§ The State will compensate certain employees who temporarily perform duties of higher classifications for more than 15 days with the rates of pay that the employees would receive if the assignments were permanent. Generally, out‑of‑classification assignments may not exceed four months. Certain employees temporarily assigned to perform duties of higher classifications receive compensation appropriate to the higher classifications for the duration of the assignments. There is not a limit on the amount of time employees can be in an out‑of‑classification assignment.
Monetary effect $21,618,500

Sources: California State Auditor’s analysis of data obtained from the Office of the President, Corporate Data Warehouse and Decision Support System, the Office of the President’s policies, state policies, and CSU policies. Note: Total costs rounded to the nearest hundred.

* Except for performance bonuses and stipends, these amounts include payments to Office of the President staff from the Agriculture and Natural Resources division.

Data only available from July 1, 2012. Amounts for fiscal year 2015–16 include cell phones, wifi-enabled iPads, and hot spots.

We requested the Office of the President to provide expenditures for lodging, meals, business meetings, entertainment, and similar expenses for the five-year period from fiscal years 2011–12 through 2015–16. However, during our quality control review, we determined that the Office of the President did not provide all the expenditures we requested as it excluded foreign travel, catering, and other related expenses. Using the Office of the President’s budget data, we determined the Office of the President spent at least $35.8 million over the four-year period from fiscal years 2012–13 through 2015–16 as opposed to the $10.4 million it provided for the five-year period from fiscal years 2011–12 through 2015–16. Thus, the analysis in this table only represents a portion of the Office of the President’s actual spending for these purposes.

§ Excludes Office of the President staff from the treasurer, chief investment officer, and health divisions because they receive special bonuses based on specific investment and health performance goals.

Moreover, the Office of the President has not established a maximum rate for reimbursing employees for domestic lodging requests, although we recommended in December 2012 that it do so. Specifically, in our Investigations of Improper Activities by State Agencies and Employees, Report I2012-1, we found that a high-level official at the Office of the President wasted more than $6,000 on inappropriate travel expenses. To prevent similar improper expenses in the future, we recommended that the Office of the President revise its policies to include established rates for domestic lodging expenses. In response, the Office of the President provided a policy that recommended travelers submit additional documentation when seeking payment for lodging expenses exceeding 200 percent of the federal lodging rate. However, currently, the Office of the President’s only requirement for lodging reimbursement is that the cost be reasonable and supported by a receipt. When we informed the Office of the President that its policy did not address our concern, it stated that it would not take any additional action on our recommendation.

From fiscal years 2011–12 through 2015–16, the Office of the President spent at least $8.2 million reimbursing its staff for lodging and meals while on certain types of travel, and our review of three travel expense claims found an instance in which reimbursements exceeded allowable amounts for federal and state employees. Specifically, one employee spent more than $350 per night on a hotel room, even though this cost exceeded the federal and state allowable limits by $140 per night. Similarly, the Office of the President’s maximum allowance for meals is $74 per day when its employees travel domestically, while the State’s reimbursement rate is capped at $46 per day. In our review of the three travel reimbursement claims, we identified six instances in which employees claimed over the State’s maximum meal rate of $46 per day. We also identified other instances in which the Office of the President reimbursed questionable travel expenses, including a ticket for a theater performance and limousine services.

Although some of the more than $21.6 million the Office of the President spent on the employee benefits we evaluated was necessary and justified, the Office of the President could better control its costs by evaluating its policies. When we shared Table 9 with the Office of the President, it did not agree with our analysis. For example, the executive director of operations stated that the Office of the President has a rigorous process for approving lodging requests that requires employees to book standard rooms as opposed to clubrooms or suites. However, its process is significantly less rigorous than the processes the State and the federal government use, both of which include caps on the amounts employees may spend on lodging without obtaining additional approval. We question how the Office of the President can ensure that lodging expenses are justified without establishing a similar threshold. Of further concern is that the Office of the President lacks controls to monitor all of its costs associated with certain benefits. For example, although the Office of the President spent at least $2 million on cell phones and other electronic devices for its employees, it has no formal process for tracking the number of devices it issues.

The Office of the President has also spent nearly $4.3 million on staff performance bonuses and stipends since fiscal year 2011–12. It offers certain employees performance bonuses, and it provides stipends to employees who are temporarily assigned higher-level responsibilities that are not part of their normal duties. Figure 16 shows that during the economic crisis the Office of the President awarded fewer bonuses and reduced its spending on stipends; however, as the economy improved, it increased its total spending on stipends and bonuses.

Figure 16
The Amount the Office of the President Has Spent on Stipends and Performance Bonuses Has Increased Since Fiscal Year 2011–12

Figure 16 displays the Office of the President expenditures on stipends and performance bonuses and shows their increase since fiscal year 2011-12.

Source: California State Auditor’s analysis of data obtained from the Office of the President’s Corporate Data Warehouse and Decision Support System.

Note: The Office of the President’s management and senior professional staff, professional and support staff, and academic staff are eligible to receive bonuses and stipends. Senior management group employees can receive stipends but are not eligible for bonuses. We excluded Office of the President staff from the treasurer, chief investment officer, and health divisions because they are eligible for separate bonuses based on specific investment or health performance goals.

We examined the Office of the President’s performance bonus program, which it calls the Staff Appreciation and Recognition (STAR) awards, on which it has spent almost $1.9 million since fiscal year 2011–12. Even though the Office of the President confirmed that it provided its employees with salary increases for three of the last five years, the employees were also eligible for cash awards if they received a rating of “meets expectations” or better on their most recent performance evaluations and their supervisors asserted that they demonstrated “sustained, superior performance.” According to personnel data, STAR awards ranged from $30 to $5,300; the chief operating officer must approve awards that exceed $2,500 and the president must approve those that exceed $5,000. Although some state departments have discretion to implement their own bonus programs, CalHR’s guidelines specify that performance bonuses for state employees range from $25 to $500 and require employees to exhibit exceptional performance that results in increasing the efficiency of state government.

We identified several instances in which employees received both stipends and bonuses in addition to their regular pay. For example, since fiscal year 2011–12, the current director of the operating budget (university budget director) has collected nearly $47,200 in bonuses and stipends. In fiscal year 2012–13 alone, he received more than $18,300 in stipends and a $5,000 bonus in addition to his $122,100 salary. Similarly, the current executive director of student services, whose base salary ranged from $147,400 to $185,300 between fiscal years 2011–12 and 2015–16, received nearly $37,900 in stipends and bonuses. She received bonuses each year for the last four years, ranging from $2,000 to $5,000. Since the Office of the President asserts that it already pays market-based salaries, these stipends and bonuses appear to be excessive.

The Office of the President Has Not Completed a Thorough Workforce Plan That Could Enable It to Justify the Size and Cost of Its Staff

The Office of the President has not yet completed a workforce plan that could justify the size of its staff and identify any redundancies between the work it performs and the work the campuses perform. CalHR recommends that agencies adopt a comprehensive workforce plan that addresses their long-term staffing needs over three to five years. It also provides a workforce planning model to help state agencies determine their staffing needs based on current and future business needs. We view this as a best practice and compared CalHR’s guidance in this area with the Office of the President’s practices. The Office of the President’s current workforce plan template only projects staffing costs for one year and does not include strategies for meeting long-term workforce goals. Instead, the template simply calculates each division’s projection of its staff costs for the year without consideration of the Office of the President’s mission or goals.

As shown in Table 10, the CalHR model involves five separate phases. Although the Office of the President has partially completed some of these phases, it has not started others. We believe that until it implements a true workforce plan similar to the model CalHR recommends, the Office of the President is at risk both for maintaining redundant positions and for not having the appropriate number and type of staff to meet its needs.

The Office of the President has only partially completed the first step of CalHR’s model, which involves setting the strategic direction for an entity’s workforce plan. CalHR states that an agency should develop a strategic plan that outlines its critical functions and factors that may impact its workforce. Although the Office of the President has yet to develop a plan for itself as a whole organization, three of its 11 divisions participating in the Office of the President’s strategic planning have completed strategic plans. For example, the chief financial officer’s division has adopted a strategic plan that defines the objectives for this division and provides a timeline for completing these objectives. Although the divisions’ individual plans are likely helpful, they cannot take the place of an overarching strategic plan that would guide the organization as a whole.

In addition, the Office of the President has only partially completed the second phase of the workforce plan model, which involves developing a current workforce profile and analyzing current and future staffing needs. In January 2014, as part of a measure intended to cap the Office of the President’s budget, the president issued a directive calling for its divisions to develop such staffing analyses. The directive also stated that the Office of the President would review its budget to determine its appropriate size, shape, and role, and it would identify internal redundancies within the Office of the President and overlap with campuses. However, the deputy chief of staff stated that the president did not intend this directive to result in a report and that no documentation exists demonstrating what services or programs the Office of the President found to be redundant. Rather, the president’s intent was that divisions develop more thoughtful ways to prepare their budgets. Nevertheless, changes to the budget process do not appear to us to have met the president’s directive.

Table 10
The Office of the President’s Steps to Evaluate Its Organization Fall Short of the Best Practices Advocated by the California Department of Human Resources’ Workforce Planning Model

California
Department of
Human Resources’ Workforce Planning Model
Phase 1
Set the Strategic Direction for the Workforce Plan
Phase 2
Gather and Analyze Departmental Data for the Workforce Plan
Phase 3
Develop the Workforce Strategies and Plan
Phase 4
Implement Strategies
Phase 5
Evaluate the Workforce Plan
Purpose The organization determines its strategic goals so that the workforce plan can align staffing and business needs to meet these goals. The organization analyzes its current workforce and its skills. It should determine gaps between its current workforce and its current and future needs to fulfill its goals. It should also project changes to its workforce. Based on the strategic plan and the workforce analysis, the organization develops a comprehensive plan to meet its workforce needs over the next three to five years. The organization communicates its plan to its employees and carries out the strategies developed in the workforce plan. The organization reviews its workforce plan after it is implemented to ensure that the organization is meeting its goals.
Deliverable A document that outlines the strategic goals of the organization. This should identify factors such as technological or economic changes that could impact the organization’s workforce. A comprehensive analysis of the organization’s staffing and competency gaps. This includes a list of positions that pose a risk because of retirement, vacancies, critical importance, or other factors that could impact the organization. A workforce plan that includes strategies for reaching the workforce the organization needs over the next three to five years. It should include general steps, an estimated budget, and milestones for fulfilling these strategies. Completion of the workforce plan by the organization under the direction of a steering committee. An evaluation of the results of the workforce plan and revisions, if necessary.


STATUS
Partially Completed Partially Completed Not Completed Not Completed Not Completed
Office of the
President Actions
The Office of the President does not have a strategic plan that documents its critical functions and the internal and external factors that impact its workforce. Three out of 11 divisions participating in the Office of the President’s strategic planning have strategic plans and the other divisions are in the process of developing strategic plans to be completed by December 2017. None of the workforce‑related documents the Office of the President provided contained an analysis of staffing and competency gaps, although it has some staffing data that could inform this analysis. The Office of the President does not have a workforce plan that meets this model. This phase cannot be completed because the Office of the President does not have a workforce plan as described in phase 3. This phase cannot be completed because the Office of the President does not have a workforce plan as described in phase 3.

Sources: California State Auditor’s analysis of California Department of Human Resources’ workforce planning model, which we consider a best practice, and the documentation provided by the Office of the President related to workforce planning activities.

Because of the lack of documentation related to that review, the Office of the President cannot demonstrate whether it is the appropriate size, shape, or fulfills an appropriate role. Moreover, the Office of the President could not show us that it had identified and eliminated internal redundancies and overlap with the campuses, as the president intended. The deputy chief of staff stated that any cost savings realized as part of the review process were reflected in the fiscal year 2015–16 budget. However, the fiscal year 2015–16 budget the Office of the President presented to the regents included $36 million more in spending than the fiscal year 2014–15 budget. Furthermore, despite the directive, the Office of the President’s staff in Oakland and at the campuses grew from 1,577 staff in 2012–13—the fiscal year before the budget review announcement—to 1,667 staff in 2015–16.

Additionally, the Office of the President implemented an internal realignment of its chief operating officer’s division and its chief financial officer’s division in 2014 that could have streamlined operations in the two divisions but that did not include proposals to change staffing levels or eliminate redundancies. Consequently, the Office of the President missed an opportunity to identify and address potential staffing excesses. According to an Office of the President’s presentation to its staff in 2014 describing the realignment, its goal was to improve the organization’s effectiveness and efficiency. However, it does not state that reducing staff was a goal. After analyzing the Office of the President’s staffing levels in Oakland, we found that staff increased by 3 percent, or 38 staff, from fiscal years 2013–14 through 2015–16.

The Office of the President also has not completed the third phase of the best practices workforce planning model, which is to develop workforce strategies and plans, but it has adopted a process designed to control staff increases that could be part of the fourth phase, which is to implement strategies. Specifically, in September 2013, the Office of the President implemented a position control process to regulate staff levels and costs. This process—which is facilitated over email—requires management approval of all proposals to temporarily or permanently fill positions in addition to an assessment of whether each position overlaps or is redundant to another position within the Office of the President. This process could have ensured that the Office of the President only filled positions that fit within its strategic goals had it previously identified such goals. Instead, it did not prevent the Office of the President’s staffing levels from increasing. In fact, the Office of the President was unable to demonstrate management approval for 19 of the 35 new or refilled positions we reviewed, and it was only able to provide four of the redundancy analyses required for these positions because of its email retention policy. Therefore, we cannot determine how effectively this process was implemented.

Ultimately, we believe that the Office of the President needs to engage in a workforce planning process that follows CalHR’s model to ensure that it can justify its staffing levels and costs. Further, the Office of the President should obtain feedback from the campuses—which are key stakeholders—as part of this process. In addition, the Office of the President should perform and document an assessment of whether its positions overlap or are redundant to other positions within it. Finally, the Office of the President should make its workforce plan publicly available to show that it is using its resources effectively.


Recommendations

The Office of the President

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

By April 2018

By April 2019

By April 2020

The Regents

To ensure that the Office of the President’s staffing levels are justified and that costs are reasonable and align with the needs of campuses and other stakeholders, the regents should require the Office of the President to implement our recommendations and report periodically on its progress.



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Chapter 3

SIGNIFICANT CHANGE IS NECESSARY TO ENSURE THAT THE OFFICE OF THE PRESIDENT’S ACTIONS ALIGN WITH THE MISSION OF THE UNIVERSITY OF CALIFORNIA


Chapter Summary

Significant change is necessary to ensure the future accountability, transparency, and efficiency of the University of California (university) Office of the President. In particular, we found that the Office of the President budgeted about $210 million in discretionary money for systemwide initiatives in fiscal year 2015–16, using funds that the campuses could have otherwise spent on other priorities. Although many of these initiatives provide academic or public benefits, we question the Office of the President’s decision to prioritize them over other activities such as campus spending on students especially given it has not sufficiently evaluated these initiatives’ purpose and intent. Further, even though it has publicly stated that it has consolidated its own and the campuses’ operations, both the Office of the President and campus administrative costs have increased, and the Office of the President’s budget and staff exceed those of the central administration at comparable institutions. Moreover, we found that the Office of the President has not established a consistent definition for or method of tracking its administrative spending. Because a clear definition is lacking, we do not believe the Office of the President has fully justified its administrative costs.

In addition, the Office of the President’s actions have limited its transparency and made it difficult for stakeholders—including the University of California Board of Regents (regents)—to hold it accountable. For example, it has at times made inaccurate and misleading claims to the regents, the Legislature, and the public about its budget. Further, it interfered with surveys we sent to campuses, which we intended to use to evaluate the services it performs. Auditing standards require that we disclose this interference and prohibit us from drawing conclusions based on this portion of our work. As a consequence of these concerns and the other problems we have highlighted throughout this report, we believe the Legislature needs to take a more significant role in ensuring that the Office of the President implements necessary reforms.

The Office of the President’s Poor Tracking and Monitoring of Its Systemwide Initiatives Convolutes Its Administrative Cost Totals

The Office of the President has not prioritized its spending decisions to ensure that the university system is able to dedicate the maximum amount of funding possible to supporting its priority of access and affordability for California residents. The Office of the President defines systemwide initiatives as initiatives that it administers or funds for the benefit of the entire university. Systemwide initiatives include critical academic and research programs, such as the University of California Observatories and the California Institutes for Science and Innovation, and non‑campus based academic research programs, such as the University of California Washington Center. Some systemwide initiatives were established by the Legislature; examples include the California Breast Cancer Research Program and University of California, Berkeley, Institute of Transportation Studies. However, we found that the Office of the President does not adequately track all of its systemwide initiatives’ costs or systematically assess their continued benefit to the university system.

According to the Office of the President, systemwide initiatives account for half of its annual disclosed budget. However, when we requested a list of systemwide initiatives and their associated costs, the Office of the President could not provide a complete listing of the systemwide initiatives it administers. Based on the documents we obtained, we identified at least 79 systemwide initiatives, with a total cost that we estimated at $434 million in fiscal year 2015–16, as Table 11 shows.6 For some of the initiatives—highlighted in grey in Table 11—the Office of the President has provided funding to campuses and programs, and it assumed they spent the full amount rather than monitoring the use of these funds. Thus, it does not have actual expenditure data for these systemwide initiatives, nor does it know with certainty if these initiatives are delivering their intended benefits.

The Office of the President’s definition of activities that constitute systemwide initiatives is broad and inconsistent. Consequently, some of the items the Office of the President identifies as systemwide initiatives in its budget data—but has not presented as such to the regents—are of questionable benefit to the entire university system. For example, we believe initiatives such as the president’s residence and the deficit related to the Office of the President’s general counsel’s office should not be classified as systemwide initiatives in the Office of the President’s budget data. Moreover, we identified several examples of expenditures that the Office of the President reclassified as systemwide initiatives after initially classifying them as regular administrative expenses. For example, the Office of the President classified UCPath—the university’s replacement payroll and human resources system—as part of its central administrative budget in fiscal years 2013–14 and 2015–16 but changed it to a systemwide initiative in fiscal year 2016–17. In another example, in fiscal year 2014–15, the Office of the President reclassified $4 million in lab management expenditures from a regular administrative expense to a systemwide initiative. According to Office of the President staff, it made these changes to highlight the systemwide nature and benefits of both programs. It also stated that it will move UCPath back to the central administration for the fiscal year 2017–18 budget. However, with a very broad and inconsistent definition of what activities constitute a systemwide initiative, the decisions to reclassify these expenditures appear arbitrary.

Table 11
The Office of the President Does Not Consistently Track Spending on Systemwide Initiatives
Fiscal Year 2015–16

Count Systemwide Initiative Estimated
Expenditures
Estimated Amount (Under)/Over Budget
Category: Academic Support $48,588,000 $(5,170,000)
1 California Digital Library $21,909,000 $(944,000)
2 Casa de California 266,000(382,000)
This row is shaded gray. ALL gray shaded rows in this table are tied to the following footnote: The Office of the President's data did not show complete actual expenditures for some of its accounts because it assumes all budgeted amounts were spent. Thus, we use the amount budgeted to estimate the actual expenditure. Systemwide initiatives can have multiple accounts.3 Graduate Fellows 41,000
This row is shaded gray.4 Mathematics Diagnostic Testing Project 59,000
This row is shaded gray.5 Academic Senate 2,022,000 (55,000)
6 University of California Press 22,960,000 (2,621,000)
7 Historically Black Colleges and Universities Initiative 1,207,000 (1,156,000)
8 President’s Postdoctoral Fellowship Program 75,000 3,000
9 Librarian’s Association of the University of California 49,000 (15,000)
Category: Agriculture and Natural Resources $188,568,000 $2,006,000
This row is shaded green, denoting: Agriculture and Natural Resources is highlighted in green because these amounts are its total expenditures, which Agriculture and Natural Resources provided us. The Office of the President’s budget data did not include the Agriculture and Natural Resources’ total expenditures.10 Division of Agriculture and Natural Resources $188,568,000 $2,006,000
Category: Instruction $52,737,000 $(1,861,000)
This row is shaded gray.11 University of California Education Abroad Program $34,983,000
12 Governor’s Teacher Scholars Program 320,000
13 Innovative Learning Technology Initiative 10,045,000 $45,000
14 Principal Leadership Institutes 300,000
15 University of California Online 519,000 519,000
This row is shaded gray.16 University of California Sacramento Center 674,000
17 University of California Washington Center 4,700,000 (2,425,000)
This row is shaded gray.18 President’s Postdoctoral Fellowship Program 1,196,000
Category: National Laboratories $3,714,000 $(826,000)
19 Office of the National Laboratories $3,714,000 $(826,000)
Category: Presidential Initiatives* $8,244,000 $(6,580,000)
20 Presidential Initiatives $8,244,000 $(6,580,000)
Category: Public Service $27,452,000 $(5,039,000)
21 Armenian University Project $(2,000) $(2,000)
22 California Subject Matter Project 7,191,000 (1,943,000)
23 Community College Assist Program 1,371,000 215,000
24 Career Technical Education Initiative
25 Diversity Pipeline 547,000 97,000
26 Gaining Early Awareness and Readiness for Undergraduate Programs 4,721,000 (279,000)
27 Graduate and Professional Outreach 4,000 (42,000)
28 High School Articulation 883,000 (218,000)
29 Mathematics Diagnostic Testing Project 224,000 (755,000)
This row is shaded gray.30 Student Academic Preparation and Educational Partnerships 8,756,000 (1,524,000)
31 Student Preparation $280,000 $(530,000)
32 Science and Math Teacher Initiative 191,000 (12,000)
33 Teaching, Learning, and Leadership 49,000 (1,000)
34 Transfer Articulation 248,000 (73,000)
35 University of California Leads 97,000 45,000
36 University of California Curriculum Integration 543,000 (17,000)
This row is shaded gray.37 University of California–Mexico Initiative 2,349,000
Category: Research $88,399,000 $(25,829,000)
38 Breast Cancer Research $1,783,000 $(8,616,000)
This row is shaded gray.39 California Cancer Research 2,271,000 (129,000)
This row is shaded gray.40 California Institute for Science and Innovation 16,660,000
This row is shaded gray.41 California Program on Access to Care 935,000
This row is shaded gray.42 California State Summer School for Mathematics and Science 241,000
This row is shaded gray.43 California Advancement Research Association Board 5,000
44 Center for Health Quality and Innovation 1,142,000 (3,411,000)
This row is shaded gray.45 David Hayes-Bautista Project 557,000
46 Discovery Grants
This row is shaded gray.47 Drew Matching Funds 475,000
48 Health Affairs 2,163,000 140,000
49 California Human Immunodeficiency Virus/Acquired Immune Deficiency Syndrome Research 1,201,000 (7,566,000)
This row is shaded gray.50 University of California, Berkeley, Institute of Transportation Studies 980,000
51 Los Alamos National Security/Lawrence Livermore National Security (57,000) (9,845,000)
This row is shaded gray.52 Natural Reserve System 2,892,000 255,000
53 New Graduate Studies Initiative 25,000 (975,000)
54 Research Program Communication Support
55 Research Program Evaluation
56 Research Grants Program Office 16,000 16,000
This row is shaded gray.57 Song Brown Act 100,000
58 Special Research Program 24,598,000 24,636,000
59 Tobacco-Related Disease Research Program 1,590,000 (8,538,000)
This row is shaded gray.60 University of California Institute for Mexico and the United States 930,000
This row is shaded gray.61 University of California Observatories $20,511,000 $91,000
62 University of California Research Initiatives 9,907,000 (342,000)
63 Historically Black Colleges and Universities Initiative 1,806,000 (103,000)
This row is shaded gray.64 Youth Leadership 50,000
This row is shaded gray.65 Social Security/Double Taxation 187,000
66 President’s Postdoctoral Fellowship Program 511,000
67 Non-Multicampus Research Unit (3,080,000) (11,442,000)
Category: Other Systemwide Initiatives in Budget Data but Not Classified as Systemwide Programs in Presentation to Regents $16,325,000 $(3,563,000)
This row is shaded gray.68 Advocacy Communication $184,000
This row is shaded gray.69 Chancellor’s House Maintenance 1,030,000
This row is shaded gray.70 Collaborative Exchange 144,000
71 Fresno Center Debt Service 647,000 $(43,000)
72 Sustainability 291,000 20,000
73 UCPath 12,194,000 (3,401,000)
This row is shaded gray.74 President’s Residence 253,000
This row is shaded gray.75 Chancellor’s Administrative Funds 435,000
76 Chancellor Inaugurations (197,000)
This row is shaded gray.77 Office of the General Counsel Deficit 854,000
78 Presidents Emeriti Expenses 163,000 58,000
This row is shaded gray.79 Special Supplemental Retirement Contribution 130,000
$434,027,000 $(46,862,000)

Sources: California State Auditor’s analysis of data from the Office of the President’s budget development system and other information regarding systemwide initiatives and programs.

Note 1: The Office of the President’s budget development system does not consistently track budgets, reimbursements, or expenditures for systemwide initiatives. For example, many systemwide initiatives have a budget but no actual expenditures. As a result, the amounts we present in this table represent estimates of the amount the Office of the President budgeted and spent on systemwide initiatives.

Note 2: Cells without amounts either contain an amount less than $1,000 or received an adjustment.

This is the footnote for the rows shaded in gray.

The Office of the President’s data did not show complete actual expenditures for some of its accounts because it assumes all budgeted amounts were spent. Thus, we use the amount budgeted to estimate the actual expenditure. Systemwide initiatives can have multiple accounts.

This is the footnote for the row shaded in green.

Agriculture and Natural Resources is highlighted in green because these amounts are its total expenditures, which Agriculture and Natural Resources provided us. The Office of the President’s budget data did not include the Agriculture and Natural Resources’ total expenditures.

* Although the Office of the President’s budget system contains one category labeled presidential initiatives, we show 24 different presidential initiatives as of fiscal year 2015–16 in Figure 17. The Office of the President labels some presidential initiatives, such as UCPath, separately in its budget system.

UCPath is the university’s replacement payroll and human resources system.

Moreover, the manner in which the Office of the President presents the costs of these initiatives to the regents and the Legislature is misleading and obscures the amount the Office of the President spends to actually administer the university. For example, in its 2016–17 Budget for Current Operations—which is one way it communicates its budget to the public—the Office of the President stated that half of its budget supports systemwide initiatives and that the other half supports central and administrative services. The costs related to the central and administrative services represented about 1 percent of the university’s overall budget. However, our analysis demonstrates that the Office of the President’s claim that it spent only about $314 million in fiscal year 2015–16 to administer the university is inaccurate because its administrative budget did not always account for administrative activities connected to systemwide initiatives. For example, the Office of the President’s budget data shows that in fiscal year 2015–16, $500,000 was budgeted for administration of the Breast Cancer Research Program, but this was captured in the systemwide initiatives budget.

Furthermore, the Office of the President does not regularly evaluate those programs that it classifies as systemwide initiatives to assess their continued benefit to the university. We acknowledge that many of these initiatives undoubtedly have value. However, absent any analysis of the benefits the systemwide initiatives may provide, we question the Office of the President’s decision to prioritize these initiatives over other priorities, such as campus spending on students. This is particularly important given that the State’s recent budget crises and the university’s decision to raise tuition have increased the financial burden on students and their families. The Office of the President budgeted about $210 million in discretionary revenue in fiscal year 2015–16 alone to pay for 55 of the 79 systemwide initiatives we identified. About 90 percent of the Office of the President’s discretionary revenue in fiscal year 2015–16 came from the annual assessment it levied on the campuses. In other words, the campuses indirectly paid for many of these initiatives.

Given the number of systemwide initiatives that we identified, we believe that opportunities exist for the Office of the President to evaluate their continued prioritization and to allow campuses to retain more of their own funds. For example, because the Office of the President funds many of the systemwide initiatives—such as advocacy communication and special supplemental retirement contributions—using discretionary revenue, it ostensibly has significant discretion to decide whether to continue funding them at their current levels. Further, in our March 2016 audit report, The University of California: Its Admission and Financial Decisions Have Disadvantaged California Resident Students, Report 2015‑107, we listed 18 programs that we recommended the Office of the President evaluate in light of its own and the State’s current priorities. Eight of the 18 programs, with a combined cost of $49 million in fiscal year 2014–15, pertain directly to the Office of the President’s spending on systemwide initiatives and may present an opportunity for reductions in funding, possibly through the identification of alternative sources to pay for them. Specifically, to provide the university more flexibility in allocating its funds, in fiscal year 2012–13 the Governor eliminated earmarks for specific programs, such as the California Human Immunodeficiency Virus/Acquired Immune Deficiency Syndrome Research program. Yet as we noted in our previous report, the university has continued to fund these programs despite internal evaluations indicating that they could be funded using other sources.

Spending on Presidential Initiatives Shifts Funding Away From Campus Priorities

The Office of the President also budgets $10 million per year of discretionary funds on what it calls presidential initiatives, which represent a subset of systemwide initiatives. The cost of presidential initiatives—which are discretionary programs launched by the university president—increased from about $4 million in fiscal year 2012–13 to about $23 million in fiscal year 2015–16. As Figure 17 shows the Office of the President’s presidential initiatives increased by 10 programs from fiscal years 2012–13 through 2015–16. For example, the Global Food Initiative—at an estimated cost of $1.5 million—is a program that the president, together with campus chancellors, implemented in 2014 to enhance collaboration and research related to food security and health among the university campuses, the Lawrence Berkeley National Laboratory, and Agriculture and Natural Resources.

Similar to our concern with systemwide initiatives, we question the prioritization of some of these expenditures over other university priorities, such as direct campus spending on students especially given it has not sufficiently evaluated these initiatives’ purpose and intent. As an example of a questionable spending decision on a presidential initiative, since fiscal year 2012–13, the Office of the President has spent $1.4 million on Casa de California—a facility in Mexico City that is part of its University of California’s Mexico Initiative. In 2015 the Office of the President asserted that Casa de California’s Casona—a building located on the property—had been underused since the Office of the President purchased it in 2003. In fact, the Office of the President’s chief risk officer advised that the university not use the building for any events or program activities until it completed deferred maintenance and upgrade work to address serious safety issues. Through its decision memo process, which we describe in Chapter 1, the president elected to keep the property and approved using $323,400 in unspent campus assessment dollars, previously allocated to the Casa de California, for essential repairs and upgrades, like replacing the roof. Considering that the Office of the President acknowledged the building had been underused since 2003, the decision to continue to invest campus funds on Casa de California is questionable.

Further, the Office of the President can require that campuses directly invest funds in presidential initiatives. For example, both the Office of the President and the campuses are bearing the project development costs associated with UCPath, which as of April 2017 was estimated to cost $504 million. This investment in UCPath further decreased the amounts the campuses had available to spend on their own priorities, such as instruction or student housing. According to executive management at the Riverside and Santa Cruz campuses, the Office of the President’s increases in spending have shifted money away from campus priorities like instruction, academic support, and student housing. In general, because smaller campuses have greater difficulty increasing discretionary revenue, the Office of the President’s spending decisions have a greater impact on their budgets.

Figure 17
The Number of Presidential Initiatives Has Increased Since Fiscal Year 2012–13

Initiative Title Fiscal year
2012–13 2013–14 2014–15 2015–16
1 Historically Black Colleges and Universities Presidential initiative Presidential initiative Presidential initiative Presidential initiative
2 Accountability Report Presidential initiative Presidential initiative No longer identified as a presidential initiative online but ongoing as of February 2017. No longer identified as a presidential initiative online but ongoing as of February 2017.
3 Blue and Gold Opportunity Plan Presidential initiative Presidential initiative No longer identified as a presidential initiative online but ongoing as of February 2017. No longer identified as a presidential initiative online but ongoing as of February 2017.
4 UCPath* Presidential initiative Presidential initiative No longer identified as a presidential initiative online but ongoing as of February 2017. No longer identified as a presidential initiative online but ongoing as of February 2017.
5 Science and Mathematics Teacher Initiative Presidential initiative Presidential initiative No longer identified as a presidential initiative online but ongoing as of February 2017. No longer identified as a presidential initiative online but ongoing as of February 2017.
6 Sustainability Presidential initiative Presidential initiative No longer identified as a presidential initiative online but ongoing as of February 2017. No longer identified as a presidential initiative online but ongoing as of February 2017.
7 Working Smarter Presidential initiative Presidential initiative No longer identified as a presidential initiative online but ongoing as of February 2017. No longer identified as a presidential initiative online but ongoing as of February 2017.
8 Innovative Learning Technology Initiative Presidential initiative No longer identified as a presidential initiative online but ongoing as of February 2017. No longer identified as a presidential initiative online but ongoing as of February 2017.
9 University of California Online Presidential initiative Presidential initiative No longer identified as a presidential initiative online but ongoing as of February 2017. No longer identified as a presidential initiative online but ongoing as of February 2017.
10 Enterprise Risk Management Presidential initiative Presidential initiative No longer identified as a presidential initiative online but ongoing as of February 2017. No longer identified as a presidential initiative online but ongoing as of February 2017.
11 Commission on the Future Presidential initiative Presidential initiative Presidential initiative
12 Campus Climate Presidential initiative Presidential initiative Presidential initiative
13 Project You Can Presidential initiative Presidential initiative
14 Data Improvement Project Presidential initiative Presidential initiative
15 Civil Disobedience Initiative Presidential initiative
16 Innovation and Entrepreneurship Initiative Presidential initiative Presidential initiative
17 Global Food Initiative Presidential initiative Presidential initiative
18 President's Postdoctoral Fellowship Program Presidential initiative Presidential initiative
19 Undocumented Students Initiative Presidential initiative Presidential initiative
20 Transfer Students Action Team Presidential initiative Presidential initiative
21 University of California–Mexico Initiative Presidential initiative Presidential initiative
22 Carbon Neutrality Initiative Presidential initiative Presidential initiative
23 Research Catalyst Awards Presidential initiative Presidential initiative
24 University of California–Oakland Partnership Presidential initiative Presidential initiative
25 We Vote Presidential initiative
26 Lesbian-Gay-Bisexual-Transgender Initiative Presidential initiative Presidential initiative Presidential initiative
27 Staff Appreciation Presidential initiative Presidential initiative
28 Sexual Violence Initiatives Presidential initiative Presidential initiative
29 Western Hemisphere Initiative Presidential initiative Presidential initiative
30 Blum Federation Grant Presidential initiative
31 Various Initiative-Related Charges Presidential initiative
32 Staff Education Scholarships Presidential initiative
Total presidential initiatives 14 18 25 24

Sources: California State Auditor’s analysis of initiatives reported on the Office of the President’s website and information provided by the Office of the President.

* UCPath is the university’s replacement payroll and human resources system.

= Presidential initiative.

= No longer identified as a presidential initiative online but ongoing as of February 2017.

The Riverside campus’ vice chancellor for planning and budget stated that even if these systemwide initiatives are valuable, there are always more requests for funding than there are resources available, consequently, she believes that the Office of the President needs to consider its activities in collaboration with the campuses and in terms of trade-offs. Similarly, executive management at Santa Cruz stated that Office of the President’s initiatives crowd out campus discretionary spending and that the campus could otherwise use the funds for instruction, research, academic support, or deferred maintenance. In fact, a former university president stated in a 2008 letter to the regents that spending on discretionary programs diverts funds away from campuses. To ensure that campus spending remains a priority, we believe the Office of the President should work with campuses and students to evaluate the purpose, intent, and prioritization of these initiatives.

The University’s Administrative Spending Has Increased and the Office of the President’s Budget and Staff Exceeds Those of Similar Institutions

Although we have concerns about the accuracy of the Office of the President’s tracking of the university’s administrative costs, its data indicate that its administrative spending has increased by 28 percent, or $80 million, since fiscal year 2012–13. Further, its budget and staffing levels are larger than the central administrations of comparable institutions, in part, because the Office of the President manages certain systemwide activities other institutions do not, such as the university’s retirement program. In addition to our concerns with the lack of a standard definition of administrative costs and a consistent method of categorizing its costs, we question whether the Office of the President can adequately justify the university’s administrative expenses.

The Office of the President Cannot Accurately Determine Its or the Campuses’ Administrative Costs

The Office of the President does not have a standard definition for or method of tracking its administrative costs. Instead, it separates its expenditures into central administration services and systemwide initiatives. However, because the Office of the President does not consistently use these two categories, neither accurately depicts its administrative costs. As we discuss in the Introduction, the Office of the President and the campuses track costs using the higher education expenditures categories developed by the National Association of College and University Business Officers (NACUBO). In fact, the Office of the President at times presents its expenditures in these NACUBO categories, including in the Governor’s Budget. For that reason, we used these categories in our attempt to determine how much the Office of the President and the university as a whole spend on administration.

Nonetheless, the NACUBO uniform accounting structure does not clearly delineate the university’s administrative costs. As Table 12 demonstrates, the institutional support, academic support, and operations categories are all largely—rather than wholly—administrative in nature. For example, institutional support includes costs associated with activities such as on-campus law enforcement that could be viewed as a direct student service. Similarly, academic support includes costs associated with campus libraries—another activity that could be considered a direct student service. Further, every category we termed largely nonadministrative includes some elements of administrative overhead. For example, the student services category includes costs associated with the administration of financial aid and the management of student admissions and records—activities that could both be considered administrative. As a result of these overlaps, accurately determining the university’s administrative costs is difficult, if not impossible.

Table 12
The University of California’s Functional Categories Do Not Clearly Delineate Administrative Activities

University of California
Function Category
Description

Largely Administrative
Institutional support Central, executive‑level activities concerned with management and long‑range planning for the entire university, containing many of the university’s administrative costs. These activities include the Office of the President, campus chancellors, procurement, accounting, and human resources.
Academic support Support services for the university’s missions of instruction, research, and public service, including academic administration and computing support.
Operation and maintenance of plant Maintenance of the institution’s physical plant, including utilities, facilities services, and related administration.

Largely Nonadministrative
Instruction Activities that are part of the university’s instruction program, including academic and vocational instruction, research, summer sessions, and university extensions.
Research Activities specifically organized to produce individual or project research, as well as research from institutes and research centers.
Public service Noninstructional services beneficial to individuals and groups external to the university, such as community service programs.
Student services Noninstructional activities related to students, including admissions, registrars’ offices, athletics, student health services, and counseling.
Student financial aid Scholarships and fellowships in the form of grants to students.
Auxiliary enterprises Entities that furnish goods or services, such as parking and food services to students, faculty, and staff.
Teaching hospitals Patient care operations of hospitals, including nursing and other professional services, general services, administrative services, fiscal services, and charges for physical plant operations.

Source: California State Auditor’s analysis of the University of California’s Uniform Accounting Structure Manual and the National Association of Colleges and University Business Officers’ functional categories.

Further, the Office of the President’s lax oversight leads us to question the accuracy of the university’s NACUBO data. The university’s decentralized financial reporting system relies on each campus to implement its own set of practices to record and report expenditures by category. The Office of the President’s systemwide controller explained that the unique organizational arrangement at each campus and the broad NACUBO functional definitions mean that each campus must exercise judgment and subjectivity when assigning expenditures by category, leading to inconsistent practices among the campuses.

These inconsistencies are compounded because the Office of the President does not monitor expenditures by functional category but rather relies on the campuses to report this information correctly. Further, the university does not require its independent auditor to audit the categories for accuracy. Given the opportunities for inconsistency and the absence of oversight by the Office of the President, analyses of campuses’ administrative expenditures are not likely to be accurate or reliable. For example, the director of general accounting for the San Diego campus explained that the campus overstated its institutional support expenditures by $19 million and $23 million in fiscal years 2014–15 and 2015–16, respectively, because it unintentionally misclassified some costs. The university’s inaccurate reporting is of further concern because the university reports its expenditures by function as part of the annual Governor’s Budget.

The Administrative Costs of the Office of the President and the Campuses Have Increased in Recent Years

Even though we have concerns with the accuracy of the NACUBO categories, we used them to evaluate whether the administrative costs of the Office of the President and the campuses were reasonable because these categories represent the best data available. Our analysis found that over four years, the Office of the President spent an average of 69 percent of its total expenditures on administrative costs, while campuses consistently spent 14 percent of their expenditures on administrative functions. In its 2015–16 Budget for Current Operations, the Office of the President stated that in response to budget cuts, university administrative units had implemented new processes, improved their use of technology, and consolidated their operations to increase productivity in order to meet increasing workload demands under constrained budget circumstances. Nonetheless, since fiscal year 2012–13, both campus and Office of the President administrative costs have increased by almost 26 and 28 percent, respectively.

The expenditure data also show that although campus administrative costs have increased at the same rate as their nonadministrative costs, the Office of the President’s administrative costs have escalated while its nonadministrative costs dropped. Specifically, at the campuses, both administrative and nonadministrative categories have grown by about 27 percent. In total, campus administrative costs increased by $800 million and nonadministrative costs increased by more than $5 billion from fiscal years 2012–13 through 2015–16. In contrast, the Office of the President’s administrative costs increased over this same time period by 28 percent, or $80 million, while its nonadministrative costs decreased by 15 percent, or $24 million. Causes for the increases to the Office of the President’s administrative costs include UCPath and a procurement initiative—an effort to centralize contracting efforts for the university. Figure 18 shows changes to administrative and nonadministrative costs at the campuses and the Office of the President since fiscal year 2012–13.

Figure 18
Total Administrative Costs Have Grown at Both the Office of the President and at University Campuses

Figure 18 shows increasing administrative costs both at the Office of the President and the Campus from fiscal year 2012-13 to 2015-16.

Sources: California State Auditor’s analysis of data obtained from the Office of the President’s budget development system, the Office of the President’s campus financial schedules, and functional categories established by the National Association of College and University Business Officers.

Note: These expenditures do not include the Office of the President’s systemwide initiatives, the United States Department of Education Laboratories, depreciation and amortization, impairment of capital assets, and other expenses reported in the University of California’s (university) annual financial report.

* Administrative expenditures include those classified by the university as institutional support, academic support (excluding libraries), and operation and maintenance of plant.

Nonadministrative expenditures include those classified by the university as instruction, research, public service, libraries, student services, student financial aid, auxiliary enterprises, and teaching hospitals.

The Office of the President’s Budget and Staffing Levels Exceed Those of the Central Administrations at Comparable Institutions

Additionally, we found that the Office of the President’s annual budget and staffing levels are higher than the central administrations at comparable public universities. Specifically, we identified the University of Texas (Texas), the State University System of Florida (Florida), and the California State University (CSU) as comparable because of their size and because they have central administrative offices that provide services for multiple campuses. Our review of budget and staffing data for these institutions indicates that for fiscal year 2015–16, the Office of the President’s $655 million disclosed budget and 1,667 staff exceeded the cost and size of the central administrations for these institutions. Table 13 shows the Office of the President’s budget and staffing levels compared to the central administrations of the comparable institutions.

Table 13
The Office of the President‘s Budget and Staffing Levels Are Larger Than Those of the Administrative Offices of Comparable Institutions

Institutions’ Central Administration Budget
(In Millions)
Number of Staff Campuses in System Fall 2015
Enrollment*
University of California Office of the President $655 1,667 10 257,438
California State University Chancellor’s Office 98 498 23 451,209
State University System of Florida Board of Governors 8 63 12 345,672
University of Texas System Office 202 763 8 221,337

Sources: California State Auditor’s analysis of personnel data obtained from the Office of the President’s Corporate Data Warehouse and Decision Support System, and budget data for the Office of the President as well as publicly available information for the central administrations of the California State University for fiscal year 2015–16, State University System of Florida for fiscal year 2015–16, and a 2016 presentation from the University of Texas Board of Regents meeting.

* Enrollment refers to student headcount.

This amount does not include the Office of the President’s undisclosed budget.

The Office of the President stated that it may spend more on administration than other institutions, in part, because it provides services to its campuses and employees that other universities do not provide, such as retirement management. Moreover, the Office of the President stated its role in creating and administering systemwide initiatives also contributes to increased costs as compared to other systems. Nonetheless, we believe there are opportunities for the Office of the President to reduce its costs through an evaluation of its budget and staffing practices.

The Office of the President Has at Times Made Inaccurate and Misleading Claims About Its Budget to the Regents, the Legislature, and the Public

Transparency is critical to ensuring that public entities spend public funds and make decisions in a prudent manner; however, we found in our review of documents related to the Office of the President’s budget that it had not always provided accurate or complete information to its stakeholders. As Table 14 shows, when we asked the Office of the President to substantiate a number of its public claims and statements related to its budget, it was unable to do so in many instances. Additionally, our review determined that a significant number of these claims were incorrect. For example, in fiscal year 2012–13, the Office of the President’s budget presentation to the regents claimed that its budget was comprehensive and that its budget totals included ongoing funding permanently budgeted as temporary. However, we determined that the Office of the President did not include $81 million in expenditures from its undisclosed budget—which it internally refers to as its temporary budget—in this budget presentation. Furthermore, during the regents’ meeting in which the Office of the President presented the fiscal year 2012–13 budget, the current chief financial officer claimed the Office of the President no longer received state funds. However, the current chief financial officer’s claim was also incorrect because campuses used money from the State General Fund to pay for up to one‑third—about $79 million—of the campus assessment that year, which the Office of the President used to fund its operations.

Table 14
The Office of the President Was Unable to Fully Substantiate Its Statements Regarding Its Budget

Public Document Office of the President Statement Our Assessment
Fiscal year 2012–13 Office of the President budget “The Office of the President has developed a rigorous and transparent budget that fully reflects the complexities of the central administration’s structure and funding mechanisms.” This budget did not present all the Office of the President’s revenue sources, show spending from its undisclosed budget, or describe the purposes of its divisions.
“Comprehensiveness. The Office of the President’s budget has reconciled funding into one consolidated budget… [which includes] ongoing funding previously budgeted as temporary*.” The Office of the President did not present to the Board of Regents (regents) $81 million dollars in expenditures from its undisclosed budget.
“Rigor. New reporting and budget development systems at the Office of the President provide comprehensive oversight over department budgets.” We determined that during this fiscal year, the Office of the President could only demonstrate approval for 2 percent of the $38 million in undisclosed budget expenditures that we tested.
Regents’ minutes from the fiscal year 2012–13 Office of the President budget presentation The current chief financial officer stated “the Office of the President is no longer funded by State money.” Although the Office of the President no longer directly received state funding, the campuses used up to $79 million in fiscal year 2012–13 from their State General Fund appropriations to pay for the Office of the President’s campus assessment. Those funds constituted almost one‑third of the total campus assessment amount that year.
Regents’ minutes from the fiscal year 2013–14 Office of the President’s budget presentation “The Office of the President plans to engage in multiyear budgeting so that campuses can be advised of the possible impact on their budgets.” The Office of the President has yet to develop multiyear budgets.
Fiscal year 2014–15 Office of the President’s budget The president requested that her staff reduce travel costs by 10 percent. The Office of the President’s budget data show that its disclosed budget included an estimated 21 percent increase for meetings, travel, and other related costs.
“A new process for approving the use of consultants is expected to lower the amount of funding spent overall for this purpose.” The Office of the President’s budget data show that its disclosed budget included an estimated 2.5 percent increase for consultant costs.
Regents’ minutes from the fiscal year 2014–15 Office of the President’s budget presentation “The Office of the President considered which functions should be centralized and which should remain at the campuses.” The Office of the President is unable to demonstrate that any services were centralized as a result of this process.
In response to Governor Brown’s request for a document analyzing all elements of the Office President, both historically and at present, chief financial officer stated that many documents are available. The Office of the President never provided the office of the Governor with such a document but stated that it had many communications with the office of the Governor.
In response to a question from Governor Brown, the current chief financial officer stated that “a great deal of the Office of the President’s budget flows through to the campuses… actual administrative functions account for about $90 million of the budget.” After subtracting all of the funds that flowed through to campuses, the Office of the President’s central and administrative budget was $280 million.
A regent-designate asked about funding for UCPath and why it was not listed on the budget shown to the regents. The chief financial officer responded by saying that all of UCPath’s costs to date were being capitalized and that once UCPath was operational, its costs would appear on the Office of the President’s budget in the next fiscal year. Budget data for fiscal years 2013–14 and 2014–15 show that the Office of the President spent $14.9 million and $13.7 million, respectively, for UCPath’s operational costs.
Fiscal year 2015–16 Office of the President’s budget The Office of the President characterized a portion of a $13.4 million budget increase as a cost-of-living adjustment for its employees and stated that it was only the fourth increase in the last eight years. The budget increase for staff salaries was actually a 3 percent across-the-board increase. The Office of the President’s leadership determined the amount rather than using a cost-of-living metric. The Office of the President also gave 3 percent salary increases that were not tied to a cost‑of‑living adjustment in fiscal years 2011–12, 2013–14, and 2014–15.
Regents’ minutes from the fiscal year 2015–16 Office of the President budget presentation “Monies received from campus assessments would not affect enrollment.” Since campuses can choose to pay the campus assessment using appropriations from the State General Fund, tuition, and fees, it is possible that the amount of the campus assessment does affect enrollment.

Sources: California State Auditor’s analysis of the Office of the President’s public statements in its budget presentations and during related regents meetings as compared to data obtained from its budget development system, budget documentation, and interviews with Office of the President staff and campus administrators.

* The Office of the President internally refers to the undisclosed budget as its temporary budget.

UCPath is the university’s replacement payroll and human resources system.

Our Criteria for Significant Budget Changes

We defined significant budget changes as changes that met all of the following criteria:

  • Involved an amount greater than $500,000.
  • Involved a change of at least 10 percent from the prior year.
  • Involved expenditures that were more than 50 percent funded by discretionary dollars.

Source: California State Auditor’s definition of a significant budget change.

Additionally, we determined that the Office of the President did not share information with the regents regarding $83 million in significant budget changes from fiscal years 2013–14 through 2015–16. When we asked the Office of the President how it determined which budget changes to share with the regents, the chief operating officer stated that the Office of the President shares what it considers to be strategic budget changes and that it does not have a dollar threshold for when it must share information with the regents. Because we did not have a quantitative threshold from the Office of the President, we developed our own criteria for significant budget changes, which the text box outlines. We found that during the four years for which the Office of the President could provide data, it did not share more than $83 million in significant budget changes—both increases and decreases—with the regents. For example, according to the Office of the President’s budget data, it did not highlight a $2.5 million increase in the UCPath budget for fiscal year 2014–15. In fact, during the regents’ meeting discussing the fiscal year 2014–15 budget, the chief financial officer incorrectly claimed that there were no UCPath costs included in that fiscal year.

Finally, although the Office of the President publishes the Budget for Current Operations each year, it does not ensure that this document contains sufficient and updated information about its operations. As we previously mentioned, the Budget for Current Operations is a means that the Office of the President uses to communicate the university’s budget to the public. Nevertheless, since at least fiscal year 2011–12, it has dedicated less than two pages of the budget presentation document—a presentation that is upwards of 230 pages in length—to describing its own budget and operations. Moreover, it uses nearly identical language each year to describe its operations. For example, since fiscal year 2011–12, the Office of the President has not updated the analyses supporting its statement that its budget compares favorably to those of other public university systems. When we asked the director of the operating budget for the underlying information for this assertion, he could not fully support the statement; instead, he could only provide us an analysis that was more limited in scope than the statement in the Budget for Current Operations implies.

The Office of the President Inappropriately Interfered With Our Audit and Limited Our Ability to Provide Complete Information to the Legislature and the Public

In accordance with Government Code Section 8546.1, we conduct our audits under generally accepted government auditing standards published by the United States Government Accountability Office. Therefore, it is important that the entities we audit cooperate with us in a manner that ensures that we can meet these auditing standards, which are meant, in turn, to ensure that the quality of the evidence we collect is sufficient and appropriate so that we can reach accurate conclusions. However, the Office of the President’s actions throughout this audit infringed upon our ability to meet these standards and, as a result of those actions, we are prohibited from drawing conclusions from some of the work we were asked to complete.

Auditing Standards Prohibit Us From Drawing Conclusions Based on Our Campuswide Surveys Because of Interference From the Office of the President

In October 2016, we sent two surveys to each campus to assess their use of Office of the President’s services and programs as well as their perceptions of the Office of the President’s process for establishing the amount of the campus assessment they pay. We based the first survey on a list of programs and services that the Office of the President provided. These programs and services covered many areas of university administration, including academic affairs, government relations, systemwide financial services, and more. The survey asked campus executives to document whether they used these services or programs and to rate the quality of the services and programs they used. The second survey asked open‑ended questions about the campus assessment, such as whether the amounts the campuses paid fairly reflected the value of the services the Office of the President provided. It also included a section in which we asked campus executives to rate their satisfaction with the campus assessment amount and the process for setting and paying the assessment.

Although we explicitly asked each campus not to share its survey results with anyone outside of the campus, we learned in February 2017 that the Office of the President had requested campuses to send their survey responses to it and that the deputy chief of staff of the Office of the President (deputy chief of staff) organized a conference call with all campuses to discuss the survey and screened the surveys before the campuses submitted them to us. According to auditing standards, evaluating how surveys are administered assists auditors in evaluating their reliability. To that end, we contacted the Office of the President to determine whether it took any part in the survey’s administration. In response to our query, the deputy chief of staff informed us that he had communicated with campuses related to both surveys so that he could determine whether their answers met the following criteria:

Upon our further request, the deputy chief of staff provided the survey responses that the campuses had sent to the Office of the President. When we compared the prescreened versions of the surveys to the versions the campuses subsequently submitted to us, we discovered trends that concerned us. Specifically, we found that the survey responses were changed in ways that made the Office of the President appear more efficient and effective. The most extensive changes were in the open-ended comments that campuses provided in response to our broad questions. Table 15 summarizes several examples of those changes. Further, after the Office of the President’s review, campuses also changed 13 ratings that we know of; 12 of these made the Office of the President look better. For example, in the prescreened version of its survey, San Diego stated that it was dissatisfied with the transparency regarding what the campus assessment pays for within the Office of the President. However, the survey we received stated that the campus was satisfied with the level of transparency. In addition, San Diego’s comments documenting concerns with the Office of the President’s budget process were deleted.

We also question the link between the criteria the Office of the President stated it used for its review and the information that was subsequently removed from the surveys. For example, one of our audit objectives was to identify duplicative administrative functions between the Office of the President and the campuses. The vice provost of academic personnel (vice provost) at the Irvine campus identified the Information Learning and Technology Initiative—a program that helps campuses provide online courses—as duplicating efforts on individual campuses. This comment was removed from the survey, although it clearly fell within the audit’s scope and cannot be factually inaccurate because it reflects the perspective of the vice provost. Further, we find it peculiar that the deputy chief of staff would understand the perspectives of the 10 campus chancellors better than their own executive management.

Table 15
Campus Surveys Responses Were Changed After the Office of the President’s Review

Campus Example of Changes
Irvine The Office of the President organizes regular peer group discussions that focus on review of systemwide policy and practice. These are extremely useful in that discussion of current practices as they evolve to adjust to changing conditions can be shared in a way that result in best practices and helps to maintain consistency across campuses. There are systemwide programs that also have major benefits for both the system as a whole as well as the individual campuses. This includes the presidential postdoctoral fellow program that supports hiring of a more diverse faculty. The Information Learning and Technology Initiative is an example of a systemwide program that has a number of challenges and this is an example of an initiative that does duplicate efforts on the individual campuses in a way that many feel is not value added. The Office of the President used to provide faculty diversity reports and analyses by campus, which provided useful comparisons with our University peers. The website was taken offline and has been under development for some time.
Riverside The Information Learning Technology Initiative has been very helpful for our campus in development of online courses. The accounting of students cross enrolled has not been as smooth as I would like. I also think that it would be helpful for the Office of the President to require some training/mentoring, either centrally or on the campus, for faculty who are teaching an online course for the first time. I worry that not all faculty offering these courses are familiar with best practices in online instruction.
San Diego Ideally we would want to keep the assessment amount flat with a small, predictable inflation factor. This would help campuses and the Office of the President to plan over a multi-year period. Early in the February to March timeframe would be best time to communicate as campuses are kicking off budget planning processes for upcoming year. We would also like a better understanding of the base budget we are funding, so the assessment could be delivered together with a breakdown of the Office of the President budget it’s intended to fund, with an opportunity for question and answers prior to the Office of the President budget being finalized. This could be done via an early vice chancellor of planning and budget meetings, sometime in January timeframe at latest.
We would like to have organized and timely materials to inform a discussion of the Office of the President budget in total, including a breakdown of what portion is funded by assessment versus other means. We would like to see a justification and brief description of what services the different Office of the President departments provide to campuses and how they are staffed and funded (drivers to justify staffing and funding level). We would ideally like the communication of the annual assessment to happen in February to March timeframe to better align with local budget planning for the upcoming year.
Santa Cruz

While the Office of the President does indeed exist through a “tax” on the ten campuses, it does serve several essential functions. Having central offices with general counsel, with auditors, with budget people, with quality control on graduate programs, and with centralized admissions offices serves to benefit all campuses. In particular, the centralized Office of General Counsel has surely saved the system a great deal of money. In many cases, the smaller (and much more diverse) campuses may benefit the most because they cannot always provide those services themselves at reasonable cost. An example of that is finance and construction, where the new Systemwide housing initiative will initially benefit Santa Cruz and Riverside the most. Some Office of the President initiatives, such as UCPath were at first very poorly and inefficiently run, but they seem to have figured it out and are on the way to bringing a huge and (often) failure prone project to a successful conclusion. The key issue is that the Office of the President provides the leadership, vision, and public relations acumen to keep the University on the best course.

The services and leadership provided by the Office of the President are crucial for the success of the system. Especially for a smaller campus like ours, it would be both expensive and inefficient to provide those services ourselves. In addition, there is a true public policy benefit to the role that the Office of the President plays in providing uniform standards (both academic and business) as well as coordination to the system.

Source: California State Auditor’s analysis of documents campuses sent to the deputy chief of staff to the president (deputy chief of staff) compared to the campuses’ final survey submissions to the California State Auditor.

Text = Text with strike out was included in surveys sent to the deputy chief of staff but not in the surveys submitted to the California State Auditor.

Text = Underlined text is language that was added after the review by the deputy chief of staff.

The deputy chief of staff asserted to us that because the Office of the President and the campuses are parts of a single entity, he and the campuses communicated in a manner that was consistent with the way in which the divisions within a given campus may have communicated to complete the surveys. However, our review clearly indicates that, because of the text and rating changes, the Office of the President’s actions exceeded that of communication; further, as a result of its actions, the survey results no longer reflect campuses’ opinions on the services that the Office of the President provides. Because of the Office of the President’s involvement, we believe that the survey results carry an unacceptably high risk of leading us and users of the survey results to reach incorrect or improper conclusions regarding the efficacy of the Office of the President’s operations. Auditing standards prohibit us from using such evidence as support for findings and conclusions. Nevertheless, we have included the survey responses exactly as campuses submitted them to us on our website, and Appendix B offers summaries of the responses. Ultimately, we are disappointed that the Office of the President’s interference led to this outcome, especially because the campuses put significant effort into responding to these surveys.

The Office of the President Delayed Our Access to Expenditure Approval Documents Related to Its Undisclosed Budget, and It Failed to Provide Us All of the Information We Requested

The Office of the President also failed to give us access to the expenditure approval documents related to its undisclosed budget for seven weeks despite our legal right to access the information upon request and our need for direct access to these documents to meet auditing standards. Specifically, in November 2016, we requested access to the Office of the President’s decision memos—the documents it used to approve certain undisclosed budget expenditures, as we discuss in Chapter 1. Initially the deputy chief of staff named himself as the point of contact for retrieving the decision memos, but he did not tell us where they were stored until early in December. Later in December, he sent us copies of the documents he believed were responsive to our request, although upon our review we discovered that he had not provided many of the documents we requested. He also redacted the copies so we could not see notes related to the president’s approval of the requests, even though we later discovered that these notes sometimes demonstrated that the president questioned expenses and lowered approved budget amounts in an effort to be fiscally prudent.

Finally at the end of December 2016—after extensive communication with our legal counsel—the Office of the President provided full access to the documents. However, the deputy chief of staff and the Office of the President’s legal counsel continued to contest some of the documents that we had determined we needed, claiming that they were outside the scope of the audit. Auditing standards require auditors to determine and continually assess the scope of an audit in terms of the sufficiency and appropriateness of the evidence that is available to address audit objectives. To ensure that audits remain independent, auditing standards do not allow those being audited to dictate what information is relevant to the auditors’ work, a point we frequently reiterated to Office of the President’s management. Further, auditing standards require that we report the limitations we face, including excessive delays in providing access to records, such as those we encountered in this audit. This delay is one such example.

In addition, the Office of the President did not provide us all of the information we requested related to its travel and entertainment expenses. Specifically, in January 2017, we requested information concerning all of the expenditures the Office of the President had made for the five-year period from fiscal years 2011–12 through 2015–16 for business meetings and entertainment, lodging, meals, and other expenses employees incurred while on business travel. During our quality control process in March 2017, we recognized a discrepancy between the Office of the President’s actual expenditures—which capture meetings, travel, and related expenses at a high level—and the data previously provided by the Office of the President. Although this high-level expenditure information indicated that the Office of the President had spent at least $35.8 million for the four-year period from fiscal years 2012–13 through 2015–16 on meetings, travel, and related expenses, the Office of the President only provided us with data relating to $10.4 million in expenditures it made for such activities supposedly over a five-year period, a discrepancy of $25.4 million. When we followed up with the Office of the President for an explanation of this discrepancy, the director of its business resource center confirmed that the data provided to us in January 2017 was incomplete and did not include expenses related to foreign travel, catering, vehicle rentals, airfare, hospitality travel outside of California, non-food and beverage entertainment costs, and other costs that reasonably fell within our original request. As a result, the Office of the President limited the analysis we were able to perform, and thus Table 9 in Chapter 2 represents only a portion of the Office of the President’s actual spending in this area as indicated by the symbol ‡.

Legislative Oversight Is Necessary to Ensure That the Office of the President Implements Crucial Reforms

Throughout this report, we have identified numerous concerns regarding the Office of President’s accountability, transparency, and decision making. These concerns specifically relate to the Office of the President’s weak budget processes, failure to disclose certain budgets and reserves, generous staff compensation, lax oversight, lack of a workforce plan, use of campus funds for initiatives that may not benefit students, and questionable actions that limited our ability to address certain audit objectives. Taken as a whole, these problems indicate that significant change is necessary to strengthen the public’s trust in the University of California. To achieve this change, we believe the Legislature should increase its oversight of the Office of the President.

The Legislature has several options for overseeing the Office of the President’s operations. Because of the university’s constitutional autonomy, the Legislature is limited in the means by which it can effect these changes; however, it can require some changes as a condition of the university’s annual state appropriation. We believe the first step is for the Legislature to directly fund the portion of the Office of the President’s discretionary budget that the campuses currently fund through the annual assessments they pay. The Legislature would not need to increase the total amount of state funding the university receives; rather, it could more specifically allocate the funding it currently provides. Under this change, campuses would receive less state funding, but they would not be required to pay the Office of the President each year. A direct appropriation would create an avenue for legislative oversight over the Office of the President’s use of its discretionary funds. Further, it could create cost pressures that would require the Office of the President to assess its costs and justify the number of its staff and the necessity of its programs. Directly allocating money to the central administration of a university system is not a new idea; the Florida legislature makes direct appropriations to the central administration for its higher education system.

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 the implementation of the three-year plan we outline in each chapter of this report. This plan contains specific steps intended to increase transparency and accountability. If implemented thoughtfully and thoroughly, it would aid in correcting the problems we identify in this report and strengthen the accountability and transparency of the Office of the President. Also, the Legislature should hold annual hearings that include a status report by the independent third party regarding the Office of the President’s progress, challenges, and barriers to success in implementing the three-year corrective action plan. Figure 19 presents a high-level summary of our recommendations.

Figure 19
Actions by the Legislature Will Be More Effective at Establishing Long-Term Accountability and Transparency at the Office of the President

Figure 19 illustrates that actions by the Legislature will be more effective at establishing long-term accountability and transparency at the Office of the President.

Source: Based on the California State Auditor’s recommendations to the Legislature, the Board of Regents, and the Office of the President.


Recommendations

The Legislature

To ensure that the Office of the President’s actions align with the university’s primary mission, the Legislature should do the following:

The Regents

To ensure that the Office of the President is engaging in a thorough review of its systemwide and administrative costs and implementing our recommendations, the regents should do the following:

The Office of the President

To ensure that its spending aligns with the needs of its stakeholders, including campuses and students, the Office of the President should do the following:

By April 2018:

By April 2019:

By April 2020:


We conducted this audit under the authority vested in the California State Auditor by 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the scope section of the report. We believe that the evidence obtained provide a reasonable basis for our findings and conclusions based on our objectives, except for the work related to our two campuswide surveys. Specifically, because the Office of the President interfered with the survey process, we believe that the survey responses carry an unacceptably high risk of leading us and users of the survey results to reach incorrect or improper conclusions about the efficacy of the Office of the President’s operations.

Respectfully submitted,

ELAINE M. HOWLE, CPA
State Auditor


Date:
April 25, 2017

Staff:
Kathleen Klein Fullerton, MPA, Audit Principal
John Baier, CPA, Audit Principal
Kathryn Cardenas, MPPA
Oswin Chan, MPP, CIA
Jeffrey Filice
Matt Gannon
Matthew McAuley
Cecilia White, MPPA

IT Audits:
Michelle J. Baur, CISA, Audit Principal
Ben Ward, CISA, ACDA
Kim L. Buchanan, MBA, CIA
Richard W. Fry, MPA, ACDA

Legal Counsel:
Joseph L. Porche, Staff Counsel

For questions regarding the contents of this report, please contact
Margarita Fernández, Chief of Public Affairs, at 916.445.0255.




Footnotes

1 The Office of the President restated its 2014–15 budget, increasing it from $619 million, as shown in Figure 8 to $627 million. Go back to text

2 The university’s medical centers also issue their own audited financial statements that are separate from the university’s systemwide financial statements. Go back to text

3 We increased the state executive and CSU employee salaries based on a cost-of-living adjustment calculated by comparing the cities where their agencies’ main offices are located to the city of Oakland, where the Office of the President is headquartered. We calculated the adjustments using cost-of-living index information from the Council for Community and Economic Research for quarter two of 2016. We used the following adjustment rates: Sacramento: 26.2 percent; San Francisco: -15.7 percent; and Long Beach: 5.1 percent. We did not make adjustments for agencies headquartered in the East Bay Area. Go back to text

4 We added a 4 percent cost-of-living adjustment when comparing the salaries of administrative state employees to Office of the President administrative employees. The cost-of-living adjustment uses a statewide number we developed by calculating the cost-of-living for the counties in which all state employees worked. We compared this weighted average to Alameda County’s cost-of-living because the Office of the President is located in Alameda County. We used cost-of-living data from the Council for Community and Economic Research. Go back to text

5 Please see the note to Table 9 with the ‡ symbol for an explanation of why the information in this table is incomplete. Go back to text

6 Our estimated cost of systemwide initiatives is higher than what the Office of the President includes in the budget it presents to the regents because we include the disclosed and undisclosed budget totals for systemwide initiatives. For example, we include an additional $90 million for Agriculture and Natural Resources that is not presented to the regents. Go back to text



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