REMARKS NATHAN BROSTROM EXECUTIVE VICE PRESIDENT, BUSINESS OPERATIONS UNIVERSITY OF CALIFORNIA SYSTEM

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1 REMARKS NATHAN BROSTROM EXECUTIVE VICE PRESIDENT, BUSINESS OPERATIONS UNIVERSITY OF CALIFORNIA SYSTEM NATIONAL CONSORTIUM FOR CONTINUOUS IMPROVEMENT IN HIGHER EDUCATION Friday, July 23, 2010 INTRODUCTION: The University of California s unique value Good morning. It is a pleasure to be here to share with you my thoughts and feelings about the challenges facing public higher education from the perspective of our experiences at the University of California. Our situation today the steps we are taking to address it and where I think we are headed is not unique to the University of California. The challenge of addressing new fiscal realities while sustaining excellence is shared among all of us in public higher education, and I hope that UC s experiences can prove useful to others. What will probably surprise you, however, is that this is going to be a very optimistic talk. Yes, it is optimistic even in the face of a yawning $20 billion state structural budget deficit the declining state of K 12 education a fractured and failing state government structure and a mounting collision of irreversible forces demographic, economic, environmental and social that the naysayers all say point to the certain demise of the California dream. I am optimistic because even in the face of those failures and threats, there still exists a uniquely Californian institution that, by its very mission, remains committed to the public good to stirring innovation and serving new industry to providing access and opportunity to those seeking a better life and to developing technologies to protect our environment, to improve health care and generally increase the quality of all our lives. 1

2 And that institution is, as it has been since its founding 142 years ago, the University of California. So as easy as it to focus on what is wrong with California, there remains much right about the state beginning right here with the University of California. Let s start with some basics. I bring to this subject a passion forged by personal connections to the University. While I did not get either of my degrees at a UC campus, I spring from a family of UC graduates. I count at least 15 of my direct family members who have studied at, taught at or worked at one of our great campuses. But beyond my personal connections, I was drawn to the University and remain passionate about its promise because of its special and singular nature, a University that is built on twin pillars of access and excellence, goals that many of you undoubtedly share. On excellence, we compete with the top private universities for our faculty, graduate students and undergraduates. Among the 60 top research universities that make up the Association of American Universities, six are UC campuses. UC faculty and researchers represent close to 20% of the membership of the National Academy of Sciences and in the annual competition for Sloan Research Fellows, which are awarded to early career scientists, mathematicians and economists in the University. We currently count 56 Nobel Laureates among our faculty, a number which grows every year. It attracts similarly high quality students: UC enrolls 7% of U.S. graduate students, and anywhere from a fifth to nearly a third of those are recipients of the most prestigious fellowships in science, arts and humanities. 2

3 UC isn t just a national phenomena it is recognized internationally as one of the most prestigious in the world. Shanghai Jiao Tong, one of the oldest and most prestigious universities in China, conducts an annual Academic Rankings of World Universities that places four of our campuses in the top 20 worldwide and 7 in the top 50. But what makes this excellence even more remarkable is that UC s educational and research experience remains accessible to Californians from all walks of life. This has been true throughout its history: UC has been an engine of transformation for generations of Californians, not only for those graduates but for their whole family. And it remains the case. Despite fee increases and enrollment reductions, UC continues to attract record numbers of applicants and from that pool, UC admits the best and brightest regardless of income level. Remarkably, one third of UC students are recipients of federal Pell Grants, awarded to low income students. This percentage far exceeds any of UC s public or private comparison institutions. In fact, a campus like Berkeley or UCLA has more Pell Grant recipients than the entire Ivy League combined. And nearly 40% of UC undergraduates are the first of their families to attend college, a fact that has a transformative impact not only for the student, but for her family, and our entire State. The University of California impacts lives and families in a broader way by serving as the driver of California s economy. California s investments in the University of California spawned the research that helped create the prosperity that generated a strong tax base. This fueled state budget dollars that, in turn, could be reinvested in the University, creating a virtuous cycle that has repeated itself over many generations. The cycle can be traced back to the University s beginnings as a land grant institution. In those earliest days, UC focused on California s oldest industry, 3

4 agriculture. UC researchers took their studies directly to the fields, turning what was once barren land into the most productive agricultural region in the world. In today s knowledge based global economy, computers and the Internet have become almost as vital as food. UC scientists designed a faster, cheaper approach to computer design that has been adopted by virtually every U.S. computer manufacturer. UC contributed directly to the creation of the Internet, and UC laboratories pioneered laser and fiber optic research that forms the central nervous system of the telecommunications market. Today, UC research is taking California s pioneering information technology advancements, especially in wireless broadband telecommunications, into new markets and uses many of which will change the way we think about and use computers in our everyday lives. UC also contributed to the gene splicing techniques that launched the $27 billion biotechnology industry, where even now a third of the country s biotech firms are located within 35 miles of a UC campus. And always at medicine s frontiers, UC research has contributed to the fights against AIDS, cancer and heart disease. The list goes on and on. It was no understatement when former UC President Clark Kerr observed: As goes education, so goes the future of the state of California. THE FRAYING RELATIONSHIP WITH THE STATE Sadly, however, the relationship between California and its public research university is fraying. If the middle part of the 20 th century was about California, under Governor Pat Brown, building the best public research university in the world, the early part of the 21 st century has become about California s disinvestment in public higher education. It is driven by the precipitous decline in State revenues due to the recession and global financial crisis. As a result, State support for UC has dropped $3.3 billion in fiscal year and $2.6 billion in FY

5 What is more troubling, however, has been the decade long disinvestment in the University by the State: From to , State expenditures were up 30% but UC received only 2% increase. Where did new revenues go? The corrections budget has doubled Health and human service budgets are up 50% And K 12 is up 43%. In other words, those three segments accounted for all the new revenues in the State. But most dramatic of all is that California, like other local and state governments across the nation, faces crushing pressures from our pension and postemployment benefits. In the last decade, during that same period when UC received only a 2% increase in state support, we have seen a 232% increase in retiree health costs and a 2883% increase in costs to our public employee retirement system. This amounts to nearly $4 billion in new spending over the past decade and our pension funds still remain significantly underfunded. At the same time, spending on public higher education is further squeezed by increase debt service costs to the State, federal and court ordered mandates, and other constitutionally guaranteed funding. Indeed, UC is part of an increasingly dwindling discretionary portion of the State budget. Less than 20% of the budget enjoys no constitutional protections. As grim as this State funding picture is, it s only the most visible piece of UC s financial challenge. Other, more hidden challenges include The State has provided no contributions to our pension system, as it does for the CSU or community colleges, leaving us an unfunded liability when combined with retiree health, that could exceed $40 billion liability in four short years Spending on capital projects has been virtually frozen, with little funding to address either deferred maintenance or ongoing maintenance of our aging buildings; There has been no money for salary increases, leaving us with an increasingly uncompetitive gap on both faculty and staff salaries. 5

6 OTHER PARTS OF THE UNIVERSITY S ENTERPRISE REMAIN STRONG: So, why am I optimistic? While there is no minimizing the crisis UC faces in regard to the loss of State support, UC remains a $20 billion enterprise that unlike many other statefunded public universities across the nation has other strengths from which it can draw. Some of these include our research enterprise, our medical centers, and private philanthropy. Let s take them one by one. Research now stands at $4.9 billion, nearly 25% of our overall budget. What does that mean? Consider just one measure: According to an annual report released last month, the University of California for the last 17 years has led all the nation s other research universities in the number of patents awarded. In 2009 alone, UC ideas and inventions produced 1,500 new inventions and spawned 47 startup companies, which will continue to drive the California economy. In addition, the nearly 50,000 academic and professional degree students UC enrolls every academic year will become the backbone of California s future knowledge based industries and spawn the next growth sectors of our economy. Our medical enterprise is another critical asset. Encompassing 16 health professional schools and ten hospitals on seven campuses, health care comprises about 44% of the total UC budget and remains a tremendous source of public service to California: 60% of med school grads in California are from UC Schools of Medicine 40% of UC patients are uninsured or covered by Medicaid. We are in discussions over whether UC medical centers could provide health care for CA s inmate population, a practice which is currently extraordinarily expensive and yields poor outcomes. Finally, private philanthropy is a relatively new activity for the University, yet already is becoming a source of strength for the institution. 6

7 In FY2009 UC campuses raised more than $1.3 billion in private support the ninth straight year over $1 billion. While giving is down 20% over preceding year, fundraising still exceeded expectations in very difficult year in fact, it was the second most successful year in UC history. As we grow this critical new piece of the University s financial support puzzle, we face two challenges: Compared to our private and public peers, UC raises relatively little for its endowments, and a very high percentage fully 93% of the money raised is restricted in its use. That is significantly higher than either our public competitors, at 80% restricted, or private universities, where the average is 55%. This gives other universities far more flexibility to spend private money where it is most needed an important tool during bad budget times. THE ROAD AHEAD: REDEFINING WHAT IT MEANS TO BE A PUBLIC UNIVERSITY While the University of California must continue to fight for adequate funding from the State, fiscal realities require that we must also lead the way in redefining what it means to be a public research university. This is a challenge all of us in higher education share. How do we do this? First, we must become more aggressive at advocating for public funds and forge a new partnership with our states. For California, the new reality is that in a termlimited legislature, members do not serve long enough to know, understand and appreciate the value of UC to California, its economy and its quality of life. Complicating the challenge is that UC increasingly finds itself competing with other interests, some that as mentioned earlier are constitutionally protected. This requires a far more sophisticated and grassroots support building strategy that must involve students, faculty and staff, alumni, donors and the business community. 7

8 But as critical is the message, which must change from an argument of appropriations and consumption to one of investing. The current paradigm the current budgeting practices pits us against other areas of State spending such as health and human services or K 12 education with compelling needs and more immediate implications from funding decisions. We need to instead transition our argument into one of investment, and reclaim the virtuous cycle that investing in the UC will create the technologies which will lead to the jobs and whole new industries which will propel California forward. That is: Investing in UC will help solve problems that the State faces. The second thing we must do is to build a sustainable financial model regardless of the level of State funding. One branch of this model will come from new revenue streams that leverage the strengths of our great institution. I mentioned the phenomenal growth in our research enterprise. We must ensure that we recover an ever greater percentage of our administrative costs through indirect cost recovery that support that research. Our indirect cost rates lag far behind those of our private counterparts, in large measure because the argument was that the State was building our buildings and funding their maintenance. Well, that is not happening and hasn t happened for several years, so we need to push for appropriate rates from the federal agencies. It s the same story with philanthropy: we have a strong and dedicated group of donors and supporters. We need to develop models that channel this giving to the critical core of our mission, maintaining the excellence of our faculty and access for all students. We must also become more entrepreneurial in looking at other new ways to leverage revenue opportunities on our campuses and across the system, whether this be in new self supporting academic programs or leveraging our brand through education abroad, summer sessions and extension programs. These efforts do not compromise our academic standards and instead help support and promote our academic excellence. 8

9 The second branch of this initiative to build a sustainable financial model involves looking at the way we work and developing smarter and more effective ways to support the University. Critical to this is a new initiative, announced last spring, to identify additional administrative and financial efficiencies that so far has allowed us to redirect hundreds of millions of dollars to its core academic and research mission and promises to yield even greater savings in the next several years. This is a three pronged effort, involving individual campus restructuring initiatives, the creation of regional centers of excellence, and identifying systemwide efficiency measures. Let me give you a couple of examples: On the campus level, Berkeley and Davis currently are moving quickly from analysis to implementation of comprehensive initiatives on administrative practices that will change the way they do everything from procurement and energy management to student services and information technology. These follow similar efforts at other campuses, including Riverside, San Diego and Santa Cruz, which have resulted in consolidation of business functions in ways that are saving significant costs while providing higher quality services. On the regional level, we are exploring ways that campuses can share resources by establishing regional centers of excellence. A good example of that are regional data centers, which enable campuses to pool their data storage needs at centralized locations; this saves significant capital and energy costs. We are seeing similar movement in creating shared financial systems, human capital management and job classification systems, and in e procurement. Many of these measures also lend themselves to systemwide approaches. If we can regionalize e procurement, we probably can leverage our considerable buying power with a systemwide approach. We are also investing in systemwide travel systems a coordinated approach to indirect cost recovery more rational and coordinated asset management a single payroll system and systemwide selfinsurance plans, beginning with coverage for our undergraduate and graduate students. 9

10 At the same time, we are continuing our efforts to develop systemwide strategic energy partnerships and climate solutions, as well as building on existing systemwide strategic sourcing and risk management efforts. This represents a significant change in mindset. Previously, such work would have taken place in silos among individual campuses or even within divisions and departments on the campuses. What we are seeing, with leadership from the Regents, the President and our campus Chancellors, is an increasing willingness to look at areas for regional collaboration or systemwide programs that both drive efficiencies and enhance the quality of our support services. Our size with over 220,000 students and 180,000 employees holds tremendous power and promise, allowing us to reduce duplication, share systems and resources, and to leverage our vast purchasing power. CONCLUSION: The University of California at a crossroads I am optimistic about the State of California because I am optimistic about the University of California about its enduring promise and potential, as well as its capacity to help lead the state to a better and stronger place. And that optimism about UC springs from its history of accomplishment, but also from the strength of its people the faculty, staff and alumni who have shown remarkable patience, creativity and resilience in the midst of enormous change and uncertainty. Despite furloughs, layoffs, open positions and ever more responsibility without any increase in pay, our faculty and staff have continued to support our University and proved the well spring of new ideas and approaches. I am reminded of the second inaugural address of Franklin Delano Roosevelt, delivered in 1937 during a much darker and fearful time than we now face, a time when in his own words one third of the nation was ill housed, ill clad, illnourished. 10

11 Yet Roosevelt did not paint the picture of the distressed nation in despair but in hope, for he knew that the country had the resources, the compassion and the commitment to address the challenges of that time. Overwhelmingly, he said, we of the Republic are men and women of good will; men and women who have more than warm hearts of dedication; men and women who have cool heads and willing hands of practical purpose as well. They will insist that every agency of popular government use effective instruments to carry out their will. In my view, we can replace the words republic and government with University and produce the same result. All of us in higher education bring to our missions warm hearts of dedication. We bring cool heads and willing hands of practical purpose. With our hearts, heads and hands, we will meet the challenges facing public higher education. We will build not just stronger and more vibrant universities, but a stronger nation. Thank you. # # # 11