Moody’s Resets the UC Agenda

During a recent press conference discussing the changes in the UC post-retirement benefits, one of the university budget officers declared that the efforts to reshape the pension plan have already been applauded by Moody’s in their latest bond ratings. Looking at the investors’ service report dated (Sept. 9 2010) “MOODY'S ASSIGNS Aa2 RATING TO UNIVERSITY OF CALIFORNIA'S, LIMITED PROJECT REVENUE BONDS 2010 SERIES E AND F; UNIVERSITY'S OTHER RATINGS AFFIRMED WITH STABLE OUTLOOK,” we find the following: “The University's retirement health and pension plans represent a significant and growing liability and expense of the System. We believe the University will need to take significant steps to either curtail the benefits or improve ongoing funding of the costs in order to sustain its long-term credit quality. However, the University has been pro-active, creating a taskforce dedicated to provide recommendations to modify the current benefit design that should result in a reduction in the liability.” Here the bond raters clearly indicate that if the university wants to maintain its high long-term credit rating, it must show that it is willing to “curtail” or “modify” retirement benefits.

The push to drive down the costs and value of the UC retirement plan is coupled with the claim that the university is still in a healthy fiscal state because it remains, “one of the premier higher education systems in the world, serving over 220,000 students, conducting over $3.7 billion of research annually, and generating in excess of $5 billion of net patient revenue in fiscal year (FY) 2009 at its five academic medical centers.” It is important to note that while the medical centers continue to rake in huge profits, they are now apparently resisting contributing their full share of the employer pension contributions. The PEP Task force hints at this point by stating that, “if the University funds the State share of PEB costs immediately, it cannot be assumed that other fund sources will be able to afford their share without some time to revise their operating models and assess the impact of faculty, students and staff.” The “other fund sources” mentioned in this report are the medical centers and research grants that should cover 67% of the employer contributions.

Of course, Moody’s does not mention that the medical centers do not want to share their profits, and the research grants may already be costing the UC money; instead, the bond raters stress how the UC is currently rolling in unrestricted funds: “Sizeable balance sheet that remains highly liquid, with $3.5 billion of unrestricted financial resources ($5.9 billion excluding post-retirement health liabilities) and active treasury management monitoring a short-term investment pool exceeding $10 billion.” Since the UC is only paying its retiree healthcare costs on a “pay-as-you-go” basis, the university currently has close to a combined $16 billion in its unrestricted funds and short-term investment accounts, which is not bad for an institution that is supposedly facing a fiscal crisis.

One of the things that is helping the university to increase its revenue as it cuts costs and benefits for workers is its ability to use low interest rates to take on a huge amount of debt: “Significant capital needs likely to result in rising borrowing levels; debt outstanding has grown from $8.3 billion in FY2006 to over $13.3 billion in FY2009 and including new borrowings since the end of the fiscal year, a 61% increase; however we believe management and the board will remain prudent and focus on utilizing debt strategically in a challenging economic environment.” Like the rest of America, the UC is addicted to debt and continues to increase both its financial holdings and its need for credit.

While the university appears to have unlimited access to cash, the bond raters once again warn that the system is plagued by unionized workers, governmental regulations, and high healthcare costs: “Substantial exposure to healthcare sector (29% of operating revenues) and associated credit challenges, including generally more volatile operating performance, high susceptibility to regulatory and government payor changes, coupled with unique stresses on California healthcare, including unionized labor, and seismic requirements.” Here we see the underlying neoliberal agenda of the bond raters surface; according to this logic, the only thing holding the university back from making more profit and taking on more debt is the fact that there are regulations, unions, and employee benefits. If only the university didn’t have to worry about pesky things, like its employees, even more credit would be available.

One area where Moody’s thinks the university can improve is in its ability to extract more money from students: “The University has implemented significant tuition increases in the last year and is likely to continue to implement substantial increases. We believe constraints on future growth in this area will largely be mission-based and politically driven as market drivers would likely allow the University to grow tuition revenues at high rates, especially if the University was willing to seek out a greater proportion of out-of-state students.” According to this neoliberal logic, the only thing preventing the university from charging more is politics. While we might expect bond rates to make this type of political anti-political statement, it is important to stress that the more the university relies on debt and high finance, the more it has to follow the will of the raters.

One of the central demands of Moody’s, which is matched by the UC administration, is the need to wean the university off if its reliance on public funds. This move for privatization is related to an updated accounting of the lack of state funding: “Funding from the State of California (debt rated A1) is likely to remain very challenging for the next several years. The State's support accounted for 14% of operating revenues during FY2009, reflecting a decline in state appropriation revenue of $561 million or 18%. In FY2010, the reduction is estimated to be an additional $637 million.” While it looks like the university lost $1.2 billion dollars during the last two fiscal years, it is important to stress that much of this money was replaced by federal recovery money: “As of May 26th, management reports that the system has received $837.8 million in ARRA funding.” I want to emphasize that this ARRA money is not federal grant money; rather, these funds were used to reduce the overall state reduction for the last two years to under $400 million. In other words, during each year of its fiscal crisis, the UC lost about 1% of its total $20 billion budget. However, it is virtually impossible to account for how much money the UC receives each year from the state because of the way California has been paying its bills: “In FY2010, the State deferred $250 million from July until October and an additional $750 million was deferred until the end of the fiscal year. The University has used its own liquidity and borrowings under taxable commercial paper to bridge this funding gap.” In other words, UC is not able to account for how much money it gets from the state each year because it is involved in a complicated system of lending and borrowing state funds.

While we still do not know exactly how much money the university has lost from the state, we do know that even during the fiscal crisis, which justified furloughs and layoffs, the UC continued to increase its revenue and profits: “Moody's believes that the University's demonstrated ability to grow financial resources through operating performance, investment returns, and philanthropy should support planned strategic capital investments and additional leverage. UC's financial resources have grown from approximately $11 billion in FY2002 to nearly $13 billion in FY2009, including the recognition of over $2.3 billion of post-retirement health obligations.” Due to the diversified nature of its funding streams, the UC is able to claim poverty, while it brings in record profits.

One place where the university has performed well is in its ability to stay highly liquid: “The University's policy is to not allow more than $200 million of CP [commercial paper] to mature on any given day, therefore limiting maturities within a given week to $1 billion. The University retains significant liquid investment holdings, including $630 million of U.S. Treasury and Agency securities not on loan as of June 30, 2010. The University also holds additional U.S. Treasuries and Agency securities on loan ($2.0 billion). In addition, the University holds over $6 billion in corporate commercial paper and other investment grade fixed income securities that could be liquidated within a week.” The university thus has a high level of debt but also a high level of assets it can cash in at a relatively short notice.

While the university clearly does not face a fiscal crisis, it does have a very high level of debt due mostly to ongoing construction projects, and while the bond raters are pushing the UC to reduce its retiree liabilities by reducing benefits, this report also shows that the unfunded liabilities are mostly an accounting figure used to justify further reductions in employee costs. If the university wants to reduce its debt and its reliance on the neoliberal investment services, it is clear that it has to change its focus from construction to instruction.