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BERKELEY'S NEWS • JANUARY 17, 2023

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Financial plan is on shaky ground

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JULY 12, 2022

Editor’s note: Republished from the archives, the article originally appeared on December 3, 2010. The op-ed precedes the  January 25, 2011 op-ed “UC Berkeley’s endowment seating program doesn’t quite add up” by the same author. 

On November 27, 2010, the San Jose Mercury News reported on the final football game before the California Memorial Stadium, or CMS, renovation begins in earnest: “Cal’s football program lost a game in the final seconds, saw its season end in a blink, closed down its stadium and punctuated the day’s activity by conceding that it had resorted to trickery in a game it lost two weeks earlier.” The article could have extended the “trickery” to Cal’s “closing down its stadium” since Cal’s next play is to plunge into deep debt to renovate the stadium without a viable plan for repayment. Although Intercollegiate Athletics, or IA, lacks a demonstrated means to repay, the UC regents have approved a financial plan as shaky as the ground under the stadium. 

The construction cost of the stadium is enormous: approaching half a billion dollars, comprising $321 million for CMS renovation per se, and $136-$153 million for construction of the Student Athlete High Performance Center, or SAHPC, which will osculate the western wall of the stadium and be off-limits to 99 percent of the students whose physical education budget was slashed in half. 

On Sept. 16, 2009, the regents approved deep debt for this project. According to Attachments 3 and 4 of Document GB2, IA will pay interest ($28 million annually) for the first 20 years, then both interest and return of principal ($62.5 million annually) for the following 10 years. This is a 30-year $1.185 billion commitment. The regents stipulated that the debt must be repaid by “athletics program gross revenues” and “the general credit of the Regents will not be pledged.” 

Although those stipulations may sound reassuring, a critical fact has been overlooked: From IA’s reports to the NCAA as far back as for the 2003-04 fiscal year, IA has never generated sufficient revenue to cover its expenditures; rather, it has had an annual shortfall averaging $11 million over the 2003-09 period. This situation has been allowed to continue unabated even though IA at Berkeley is classified as an auxiliary — according to the UC Accounting Manual, Chapter A-783-1, Sections II.A, II.C.5, III.A, III.B — and as such should be self-supporting. Even after IA receives subsidies from the Chancellor’s discretionary funds and from student registration fees (now called student service fees), it continues spending beyond its subsidies with impunity, and has never repaid its debt to campus resulting from its annual deficit spending. 

At our sister campus, UCLA Athletics runs without a penny of deficit year after year. For the most recent year for which NCAA information is publicly available, 2008-09: The amount of direct institutional support, not including funds from student fees, was over 42 times higher at UC Berkeley ($8.89 million) than at UCLA ($0.21 million). Athletics cost Berkeley more than five times what it cost UCLA ($13.67 million versus $2.71 million) and it cost each Berkeley student about 30 percent more in student fees than at UCLA. 

Based on what Berkeley reported to the NCAA, the cumulative cost to campus, from subsidies and deficit spending that has never been repaid, is about $80M over the 2003-10 period. Combining this with earlier figures that the Berkeley division of the Academic Senate had, the cumulative cost to campus comes to $173 million since 1991 when the Smelser report “Intercollegiate Athletics at Berkeley” ignited a heightened campus commitment to IA. 

According to Bob Meister, professor of political and social thought at UC Santa Cruz and president of the Council of UC Faculty Associations, the debt being undertaken for the Berkeley stadium comes in the form of general revenue bonds issued by the university. Consequently, notwithstanding the regents’ proclamations, the debt is the obligation of the university. 

Let’s examine the financial wizardry described in Document GB2: Beginning in 2014-15, the first 44 percent of IA’s estimated gross revenues will be dedicated to pay the annual interest on the debt. But this will leave only 56 percent of IA’s revenues available to pay its expenses, even though all of its generated revenues currently cover only about 80 percent of its total expenditures. This 44 percent figure provided in the document is the ratio of Debt Service Coverage of $28 million to Estimated Athletics Gross Revenue of $64 million. The difference between these two quantities, $36 million, will be the amount of revenue available to pay expenses. But expenses are estimated to be $74 million according to a Sept. 28, 2010 press release from the Berkeley Office of Public Affairs. Thus, the plan is for IA to spend more than double what it will generate, falling short of covering its expenses by $38 million. From where will IA obtain the $38 million for the remaining expenditures? Will we then see an annual cost to campus soar to $38 million for what is supposed to be a self-supporting auxiliary? 

As disconcerting as this is, it pales in comparison to what awaits IA in the longer term. For ten years beginning in fiscal year 2032-33, annual repayment of principal will be added to annual interest. The document shows this debt service coverage as $62.5 million, consuming 79 percent of estimated athletics gross revenue of $79 million. Incredibly, the regents have approved a plan where IA will allocate the first 79 percent of its annual gross revenues to debt service, leaving only 21 percent of IA’s revenues ($19 million) to pay its expenses. How can this be? Surely, the regents cannot expect that IA will spend $19 million and generate $79 million. Again, the critical question is with so little money available from generated revenues, where will IA obtain the funds for all its expenditures? 

Lest one think that the answer lies in the Endowment Seating Program, or ESP, there is a critical footnote (b) in Attachment 4 of the document GB2 stating that the revenues from the ESP have already been included in the “Estimated Athletics Gross Revenue” line. 

Although the ESP is supposed to raise $400 million by 2014, my analysis, published in a companion op-ed in The Daily Californian, concludes that the ESP has raised only about $20 million, corresponding to a mere five percent of the goal amount. If indeed the actual amount is higher, then I would welcome hearing that from the campus. 

The financial plan described in the regents’ document would be considered precarious even in the best of times, but is nothing short of irresponsible to the mission of the university when undertaken at the threshold of a new era of lower sustained funding of the academic program.

 

Brian Barsky is a Professor of the Graduate School and Professor Emeritus of Computer Science and Vision Science.
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JULY 12, 2022