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.

Annual Follow-Up Agency Response From April 2019

The approved UCOP FY18-19 Budget included four pages of detailed reporting on UCOP's fund balances, reserves, and commitments including a plan to redistribute available fund balances to UC campuses. As confirmed through the review and approval process with multiple stakeholders including the UC Regents, this level of detail provided transparency and simplified reporting of available balances, reserves and commitments. UCOP will continue to incorporate this level of detail in future budget reporting.

In March 2019 UCOP reviewed comprehensive Reserve Guidelines with the UC Regents for all UCOP reserves, including programmatic and non-operating reserves. Since presenting to the Regents in March, the document has been improved and refined.

The UCOP Reserve Guidelines leverages best practices; clearly defines reserves, commitments, and fund balances; clarifies the difference between reserves and fund balances; provides guidance on funding, using, monitoring, and reporting; sets target funding levels for all UCOP reserves, and establishes the process for allocating fund balances and funds in excess of reserves.

To develop the guidelines UCOP conducted best-practice research and industry benchmarking from over 38 institutions including GFOA, NACUBO, federal, state, and local governments, and higher education institutions such as CSU. The research was helpful in informing the development of the guidelines despite the fact that it indicated there is no one, agreed-upon best practice. Rather, each organization has a unique business model, risk exposure and financial circumstances; therefore, the level of assets that are set aside to mitigate against risks appropriately vary by organization and reserve type.

The UCOP Reserve Guidelines are available at: https://ucop.edu/ucop-budget/_files/ucop-reserves-guiding-principles.pdf. Per these guidelines, UCOP will continue to report on all reserves as part of the annual budget process and after year-end fiscal close.

  • Completion Date: March 2019

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

We are rating this recommendation as fully implemented due to the Office of the President's published reserve guidelines that establish policies for the programs that did not have policies during our last review and identify the purpose, minimum targets, and maximum targets for each reserve. The Office of the President stated it developed target minimums and maximums after considering best practices, benchmarking at peer institutions, and its own risk analysis. We also noted that the Office of the President shared the reserve guidelines with the Regents.

We discuss our conclusions related to the current size of the Office of the President's reserves and fund balances in recommendation 22.


Annual Follow-Up Agency Response From October 2018

Implementation of this recommendation is complete based on the FY18-19 budget presentation to the Regents which added more information than was included in the budget prototype and provides not just reserve balances but also fund balances and commitments in a way that attempts to be both comprehensive and transparent.

Pages 15-18 of the budget item describes actions taken over the past year to identify, define, and forecast balances, commitments and reserves. The differentiation between fund reserves and fund balances is clarified:

-Fund balances result from either savings relative to the budget or timing of mulit-year funding and expenses across fiscal years

-Reserves are funds intentionally accrued from the operating budget over a period of time or specifically designated or restricted for a purpose such as maintaining assets in good working order, managing risk, or in anticipation of periodic large expenses such as preparing an RFP response for the Department of Energy.

Two types of reserves are presented and defined in this section of the budget item: a Central Operating Reserve, and program-specific reserves. The Central Operating Reserve is held in the principal of the systemwide President's Endowment Fund and as such is not maintained as a separate fund balance.

Program-specific reserves, commitments and fund balances are organized by fund type to make it easier to understand and explain how balances, commitments and reserves are managed for each type.

The Strategic Priorities Fund is not considered a reserve. As of FY18-19 it is a line item in the operating budget used to fund emerging priorities and initiatives.

  • Completion Date: May 2018

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

We rate this recommendation as partially implemented because the Office of the President could not provide policies for all seven of its program specific reserves that totaled $122 million in its fiscal year 2018-19 budget. Additionally, we are still concerned about the lack of sufficient transparency related to fund balance amounts in the Office of the President's budget for fiscal year 2018-19, which we discuss in our assessment of recommendation 5.

Perhaps of greater concern, the absence of sufficient reserve policies allows the Office of the President to retain and maintain virtually an unlimited amount of fund balances and reserves. In particular, the Government Finance Officers' Association (GFOA) recommends that, generally, an entity retain at least two months of its total operating expenses in its unrestricted fund balance as a reserve. Additionally, GFOA recommends that entities develop a policy for how to handle unrestricted fund balances above the policy requirements. Without policies that identify for each reserve at least the purpose, minimum amounts or proportions, maximum amounts or proportions, and descriptions of how it intends to handle unrestricted or excess fund balances, the Office of the President and UC stakeholders will find it difficult to assess what portion of the fund balances could potentially be allocated to the campuses. Therefore, the Office of the President's fund balances and reserves do not conform with GFOA's recommendations, and it is unclear how the Office of the President intends to spend its unrestricted fund balances in future years.


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.