Report 2016-130 Recommendation 4 Responses

Report 2016-130: The University of California Office of the President: It Failed to Disclose Tens of Millions in Surplus Funds, and Its Budget Practices Are Misleading (Release Date: April 2017)

Recommendation #4 To: University of California

To determine the amount of money that it can reallocate to campuses and to ensure that it publicly presents comprehensive and accurate budget information, by April 2018 the Office of the President should develop a reserve policy that governs how large its reserves should be and the purposes for which they can be used.

1-Year Agency Response

UCOP has completed its analysis and determined appropriate operating reserve requirements. As a result, a Regents policy governing UCOP's Central Operating Reserve was developed and subsequently approved by the Regents at the January 2018 Regents meeting. The policy can be found here: http://regents.universityofcalifornia.edu/governance/policies/5104.html. Implementation guidelines detailing how the Central Operating Reserve should be implemented are documented in the approved Presidential Guidelines here: https://policy.ucop.edu/doc/3000673. The Presidential Guidelines were included in the item approved by the Regents at the January 2018 meeting.

UCOP has also reviewed historical practices for short-term strategic priorities funding. Presidential Guidelines governing the amount and spending guidelines for the Strategic Priorities Fund were developed, approved by the President, and reviewed by the Regents. The approved Presidential Guidelines covering the Strategic Priorities Fund can be found here: https://policy.ucop.edu/doc/3000674.

  • Completion Date: February 2018
  • Response Date: April 2018

California State Auditor's Assessment of 1-Year Status: Partially Implemented

We assessed this recommendation as partially implemented because although the Office of the President has developed two reserve policies, it is difficult to determine the Office of the President's total reserve amount, which we do not believe addresses the intent of our recommendation for it to develop comprehensive budget information that promotes transparency. Specifically, to understand the Office of the President's total reserve amount stakeholders would need to add together three different types of reserves—only two of which are included in its budget prototype. Since one reserve type is not included in the presentation, stakeholders cannot determine the total reserve amount from the information the Office of the President plans to present in its annual budget presentation. Moreover, without extensive knowledge about the Office of the President's budget processes, most stakeholders likely would not understand that they need to add together the two reserve types listed below to more fully understand the Office of the President's total reserve amount.

The Office of the President has three reserve types: central operating reserve, strategic priority fund, and restricted and project reserves. At the January 2018 Regents meeting, the Regents approved a policy that requires the Office of the President to maintain a central operating reserve to support its operations in the event of an unanticipated disruption in planned funding. Presidential guidelines effective July 1, 2018 further require a central operating reserve of $15 million or three and a half percent of applicable funds, whichever is greater. The president can also supplement the central operating reserve up to an additional $100 million or three months of applicable funds, whichever is greater. Some funds are not covered by this reserve, including restricted funds and programs with self-funded reserves; the policies for these reserves vary by fund. The central operating reserve is funded by the President's Endowment fund and the president must approve all transactions from the reserve and notify the Regents before any funds are drawn. Expenses beyond $15 million require approval from the majority of three Regents: the chair of the board, the chair of the finance and capital strategies committee, and the chair of the compliance and audit committee.

The Office of the President also issued guidelines governing its strategic priorities fund. This fund is similar to what we described in our report as the undisclosed budget and was supported with reserve funds at the time of our audit. The strategic priorities fund is for one-time or limited-term strategic priorities and is supported with unrestricted funds. The target budget for the strategic priorities fund is $30 million, but is variable based on the Regents' annual approval via the budget process. Additionally, the Office of the President established three internal approval processes that it uses depending on the total amount of the request and the type of the request.


6-Month Agency Response

An analysis and summary of existing UCOP reserve practices and balances and a stakeholder analysis have been completed and reviewed by UCOP leadership. This process included benchmarking and research of reserve practices and policies of other universities and organizations in the non-profit/government sector.

A forecasting model for reserve-requirements scenarios with related assumptions for a central operating reserve is being developed. The workgroup will use it to model various reserve-requirements scenarios. A review of historical practices for strategic-priorities reserves is in progress to support projections and scenarios for future reserves requirements.

  • Estimated Completion Date: April 2018
  • Response Date: October 2017

California State Auditor's Assessment of 6-Month Status: Pending

The status of this recommendation is pending the Office of the President's development of a reserve policy. The Office of the President plans to present its recommended reserve policy to the regents in late January 2018.


60-Day Agency Response

The reserve policy work group, which includes both UCOP and campus representatives, has been formed and is currently meeting weekly to define our scope, determine our research and benchmarking methodologies, and develop a more detailed workplan. Current objectives have been defined as: 1) complete a review of current UCOP reserve practices and existing reserves ("set the baseline"); 2) conduct research / benchmarking to document best-practices; 3) develop a formal UCOP Reserves policy and obtain stakeholder agreement and Regental approval; and 4) develop and approve how the reserves will be funded.

Research and benchmarking efforts are already underway and will include: higher education institutions (e.g., CSU, Big 10, SUNY, etc.), industry associations (e.g., NACUBO, EAB, GFAO, etc.), as well as other industry and government entities.

  • Estimated Completion Date: April 2018
  • Response Date: June 2017

California State Auditor's Assessment of 60-Day Status: Pending

The status of this recommendation is pending the Office of the President's development of a reserve policy. The Office of the President plans to present its recommended reserve policy to the regents in late January 2018.


All Recommendations in 2016-130

Agency responses received are posted verbatim.