Report Finds Prop 30 Subsidizes UC Losses from Risky Wall Street Investments

Jerry Brown worked hard on Tuesday to postpone a vote on fee increases in the UC system.

The Sacramento Bee reports this morning that the UC Regents, at the request of the governor, have “yanked an item from today’s agenda that called for raising fees at several UC professional schools, including schools of nursing, business, law and medicine.”

The governor campaigned heavily on college campuses, promising that the approval of Proposition 30 would put more money toward higher education and avert potential tuition increases.

The result of the passage is that CSU is actually able to reduce tuition in January, and UC is avoiding increases to undergraduate tuition.

In a release from the UC Regents, they announced that the fee increase consideration “has been postponed and will be rescheduled for a future meeting. This was done at the request of Gov. Brown.”

“The governor, who serves on the Board of Regents by virtue of his office, asked for additional time to allow him to develop a better understanding of the policies and methodology involved in the setting of fee levels at individual graduate professional programs charging PDSTs,” the release continues.

But while the governor avoided one potential crisis, at least for now, a bombshell was reported in the San Francisco Chronicle early on Tuesday.

The paper reports that, while Prop 30’s passage prevented near-term cuts to UC, “a large part of that lifeline might be squandered in payments to Wall Street banks, according to a report released Tuesday by researchers at UC Berkeley.”

According to the paper, over the past decade the UC Board of Regents “engaged in risky deals with Wall Street banks called interest rate swaps.”

“Banks sold swaps to the university and other public institutions as insurance against rising interest rates on variable rate bonds. Under a swap agreement, borrowers such as the university paid a fixed rate to the bank in exchange for the bank paying the university a variable rate based on the markets’ interest rates for borrowing,” the Chronicle reported on Tuesday.

Unfortunately these swaps now have ended up costing the university hundreds of millions of dollars as interest rates plummeted following the financial crisis back in 2008, “in part because of illegal manipulation by the same banks that sold the swaps.”

Interest rates remain at these record low levels and the result is the deals have already cost the UC nearly $57 million, however, with another $200 million more in loses anticipated.

The report released on Tuesday “highlights the costs to students and taxpayers of UC’s interest rate swaps and debt-driven profit strategies. Such strategies have been called into question for Wall Street banks, let alone for public universities.”

The report found that UC management more than doubled the debt burden from $6.9 billion in May 2007 to $14.3 billion by the end of 2011.

They write, “Rather than contributing to UC’s core mission, funds have been directed toward more profitable UC enterprises like medical centers and attracting out-of-state students. Medical center profits have increased steadily to $900 million annually last year. Out-of state enrollment has doubled across UC – increasing from 11% to 30% at UC Berkeley.”

“UC borrowing is often backed by student tuition, but profits on debt-funded investments have not been used to mitigate service cuts or tuition hikes,” the report finds. “As a result, students are made to bear the costs and the risks of poor returns, but have not received benefits from positive returns: tuition has increased 300% since 2002 and total enrollment of freshmen from California declined by 10% from 2008 to 2011.”

In short, the UC Berkeley researchers found that of the $250 million that UC will receive from Prop 30, at least $10 million will go to these swap payments unless the deals are ended.

“In other words, the UC Regents forgot the first rule of casino gambling: The house always wins. Now the rest of us are paying the price,” Adam Goldstein and Jacob Habinek, graduate students at UC Berkeley, write.

“It’s hard to overstate the cost to students and taxpayers of UC management’s financial strategies,” they write.  “In recent years, the Regents have overseen a threefold increase in in-state tuition, declining in-state enrollment, reduced course offerings and draconian cuts imposed on UC workers. They also have continued to increase the number of university executives making more than $200,000 annually.”

Even with the passage of Prop 30, more cuts and tuition increases are in store.

This news will feed into the discourse of student protesters like the Occupy Movement, who argued not only against fee increases but against the Wall Street ties and the privatization movement of the university.

Revelations such as this demonstrate the validity of the student complaints and show a direct link now between UC fee increases and Wall Street.

“These swap deals are part of a dramatic change in UC’s relationship with Wall Street,” Mr. Goldstein and Mr. Habinek report.  “In 1990, none of UC’s top management or regents had direct ties to the major Wall Street banks. Today, those banks have a growing foothold among top UC management with direct oversight over UC’s finances.”

They note that Chief Financial Officer Peter Taylor came to the University of California from Lehman Brothers, where he had been managing director for public finance prior to the collapse of Lehman Brothers in September of 2008 – which set off one of the worst economic downturns in the United States since the Great Depression.

While the collapse of Lehman Brothers was the largest bankruptcy in American history, Mr. Taylor  is tied not only to that collapse but also to Lehman Brothers being hired to help expand UC’s debt load.   Lehman Brothers was a party to one of the rate swaps which would, according to Mr. Goldstein and Mr. Habinek, cost the university over $23 million.

They write, “California taxpayers have entrusted the regents with stewardship of the university, but the regents’ cozy ties to Wall Street raise questions about their financial priorities. It’s time for the UC Board of Regents to stop gambling with California’s future.”

They conclude: “The millions of Californians who voted for Proposition 30 deserve nothing less.”

A link to the report can be found here.

—David M. Greenwald reporting

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