Report 2016-130 Recommendation 22 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 #22 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 2019 the Office of the President should continue to present a comprehensive budget based on the presentation in Figure 11 to the regents, the Legislature, and the public.

Annual Follow-Up Agency Response From October 2022

UCOP has been incorporating the CSA Figure 11 format in its annual budget proposal for several years.

The University of California prepares its consolidated annual budget each fall, and it is presented to the UC Regents in November. This total amount is inclusive of any amount that would be subsequently allocated to UCOP under a campus assessment for the operations of the Office of the President. The university's timeline is consistent and aligned with other California State agencies. This process allows ample time to inform the Governor's budget released in January.

The UCOP campus assessment is best established with knowledge of the level of support from the State of California. This approach allows the university to optimize allocations across the system's key priorities. Further, this timing allows the university to highly leverage year-to-date actual expenditures used to set annual budgets at the Office of the President. The UCOP May Regents item provides a very comprehensive and transparent presentation of prospective expenditures for the forthcoming fiscal year which commences annually on July 1st.

The designated fund balance referenced above totaling $39M, as of the May 2021 budget presentation, includes $35M in funds that are designated by the UC Regents for the UC National Laboratories. These balances are reviewed annually by the Regents and retained for business development and post-contract matters. The remaining designated balance of $4M is specifically designated across approximately 10 key programs including the UC Health Collaborative, the California Digital Library, the UC Washington D.C. academic program and others. These funds will be reserved for use in their designated programs and are not available as a revenue source for any other purpose.

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

We rate this recommendation as partially implemented because, as we mention in recommendation 5, we continue to have serious concerns that the timing of the Office of the President's budget may hinder the Department of Finance, the Legislature, and the Governor when making decisions regarding UC's portion of the state budget.

We also continue to be concerned that the Office of the President's budget does not recognize millions of dollars in beginning fund balances as an available source of funds. Specifically, one schedule in the Office of the President's May 2022 proposed budget forecasts almost $76 million in designated and restricted fund balances available for the 2022-23 fiscal year. However, the schedule in the budget that summarizes sources and uses of funds does not include these fund balances and, therefore, almost $76 million is not included as a potential source of funds. The Office of the President did provide additional information about fund balances as an addendum to its budget, but it did not address our previous concern by including beginning fund balances in other relevant sections of the actual budget presentation.

Annual Follow-Up Agency Response From October 2021

The UC Office of the President has included Figure 11 annually in its budget presentation and will continue to do so. This single exhibit provides an excellent summary of the proposed budget, budget trends, and fund balances. Supporting budget schedules provide complete transparency into the UCOP budget.

Fund balances are provided in detail and are separated into the three fund types used in the UCOP budget. These balances are provided in Schedule H of the FY21-22 budget item. This schedule shows total fund balances of $46.4M projected as of June 2021. Included in that figure, $38.7M is included in Designated Funds primarily held in the UC Office of the National Laboratories. Separately, the UC Regents annually review the budget and fund balances of this entity each July.

The FY21/22 budget was approved in May 2021, on schedule. A May budget presentation allows for significant more accurate budgeting due to the ability to leverage YTD actuals and prior year actuals in the budgeting process.

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

We rate this recommendation as partially implemented because, as we mention in recommendation 5, we continue to have serious concerns that the timing of the Office of the President's budget may hinder the Department of Finance, the Legislature, and the Governor when making decisions regarding UC's portion of the state budget.

We also continue to be concerned that the Office of the President's budget does not recognize millions of dollars in beginning fund balances as an available source of funds. Specifically, one schedule in the Office of the President's May 2021 proposed budget forecasts almost $39 million in designated fund balances available for the 2021-22 fiscal year. However, the schedule in the budget that summarizes sources and uses of funds does not include these fund balances and therefore over $39 million is not included as a potential source of funds. The Office of the President did provide additional information about fund balances as an addendum to its budget, but it did not address our previous concern by including beginning fund balances in other relevant sections of the budget presentation.

Annual Follow-Up Agency Response From April 2020

Recommendation #22 requires UCOP to present a comprehensive budget based on the presentation in Figure 11. The FY19-20 UCOP budget utilized Figure 11 as one element in a comprehensive budget presentation which totaled 55 pages and 12 detailed schedules. UCOP has invested a substantial and genuine effort in developing the systems, schedules, processes and analytical skills required to provide this level of detail and transparency.

The UCOP budget is presented to the Regents with forecasted fund balances. UCOP evaluates all forecasted fund balances during the preparation of the budget and includes them in the operating budget where appropriate. For example, the FY19-20 budget reflected the use of all remaining unrestricted fund balances. Over the past three years UCOP has reallocated $166.3M to the campuses, of which $87.6M was from fund balances.

All designated fund balances are clearly documented throughout the FY19-20 budget, including:

1) in the Executive Summary, Figure 5 of Attachment 1 which follows the CSA's Figure 11 format;

2) in the Fund Balances section of Attachment 1, pages 20-21 which summarizes fund balances and commitments for all types of funds and describes the designated fund balances in detail on page 21;

3) in Attachment 1, Appendix 1, Schedule I - Fund Balances, which line items every designated fund forecasted balance and commitments, and

4) in Attachment 3, page 4, Schedule I-1, Designated Funds Detail which lists every designated fund balance, source of funds, who they are designated by, and a description.

As described in the budget, the majority of designated balances are being held to meet multi-year commitments, such as to researchers through the Lab Fees Research program, and are therefore not appropriate for funding operational needs. All Lab Fee revenues and their intended use and purpose are reviewed by the Regents Labs committee every year in addition to being presented in the budget.

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

We rate this recommendation as partially implemented because, as we mention in recommendation 5, we continue to have serious concerns that the timing of the Office of the President's budget may hinder the Department of Finance, the Legislature, and the Governor when making decisions regarding UC's portion of the state budget. The Office of the President's 2020-21 budget will not be approved until the July 2020 Regent's meeting, after the Governor has approved the State's budget.

We also continue to be concerned that the Office of the President's budget does not recognize millions of dollars in beginning fund balances as an available source of funds. Specifically, one schedule in the Office of the President's May 2020 proposed budget forecasts over $70 million in designated fund balances and $2.6 million in undesignated fund balances available for the 2020-21 fiscal year. However, the schedule in the budget that summarizes sources and uses of funds does not include these fund balances and therefore over $72 million is not included as a potential source of funds. The Office of the President did provide additional information about fund balances as an addendum to its budget, but it did not address our previous concern by including beginning fund balances in other relevant sections of the budget presentation.

The Office of the President's budget was not approved at the May 2020 Regent's meeting. The Regent's directed the Office of the President to submit a balanced budget that includes the appropriate level of reductions at the July 2020 Regent's meeting. On June 29, 2020, the Governor approved the Budget Act of 2020, which reduced the Office of the President's appropriation by $27 million.

Annual Follow-Up Agency Response From November 2019

The timing of the budget is discussed in Recommendation #5.

The CSA assessed Recommendations #3 and #4 as complete which required UCOP to document and review its funds, commitments and reserve policies. The UCOP budget is presented to the Regents each spring with forecasted, not actual, fund balances. Balances are recognized as revenues where possible, but because the year is still in process they are reviewed more thoroughly after fiscal year-end. The $12M referenced by the CSA was recognized as revenue in the final FY19-20 budget approved in July.

Designated balances are also forecasted during the budget process. Additional detail was requested by the Regents Governance Committee in June and provided in Attachment 3 presented to the Regents in July. This budget was approved. Balances were also evaluated during the year-end close process and are being utilized as revenue where appropriate to address the UC Health Collaborative, to fund research programs, or for other strategic priorities. The largest balance is the Lab Fees Research program, a competitive research program funded through Regental approval. Unlike State-funded programs such as the Tobacco-Related Disease Research Program, where fund balances are held by the State, this program is funded from fees earned by the University. The balance represents the total available to be awarded to grantees over multiple years. Commitments reflect multi-year awards already made and new competitions are planned which will further commit remaining balances.

Reserves are also forecasted in May and thoroughly reviewed after fiscal year-end close. The reallocation of funds in excess of reserves is considered where appropriate, e.g. the Housing Loan Program, which the CSA identified as forecasting excess reserves, is reallocating $5M to the campuses this year, which brings the balance within the target range as indicated in the November Regents item which has been provided to the CSA.

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

We rate this recommendation as partially implemented because, although the Office of the President's fiscal year 2019-20 budget largely incorporated our recommended budget presentation, the Office of the President did not complete this recommendation by April 2019. As we mention in recommendation 5, we continue to have serious concerns that the timing of the Office of the President's budget may hinder the Department of Finance, the Legislature, and the Governor when making decisions regarding UC's portion of the state budget.

We are also concerned that the Office of the President's budget does not recognize millions of dollars in beginning fund balances as available revenue. For example, one schedule in the Office of the President's budget forecasts $85.3 million in designated fund balances available for the 2019-20 fiscal year. However, the schedule in the budget summarizing revenue and expenditures only includes $3 million in designated fund balance revenue and therefore $82.3 million is not included as a potential source of funds. The Office of the President did provide additional information about designated balances as an addendum to their budget, but it did not address this concern in the budget presentation itself.

The Office of the President is reporting that it has no funding left in its fund balances that are unrestricted, undesignated, and allocated for Office of the President purposes. Because the Department of Finance did not approve the Office of the President's budget change proposal, it is using its remaining unrestricted fund balances to address a budget gap. In November, the Office of the President also reported that most of its reserves are within established targets. The Office of the President plans to reallocate $5 million from its Housing Loan Program—the only program that significantly exceeds reserve targets—in fiscal year 2019-20. This reallocation will bring that program in line with established targets.

We do note that the Office of the President's fiscal year 2019-20 budget is more transparent because it is generally easier to understand. For example, the Office of the President's one page budget summary—based on the recommended budget presentation in our report—clearly summarizes its expenditures, reserves, and fund balances. In contrast to the fiscal year 2018-19 budget, the current budget includes summary line items that clearly display the Office of the President's total reserve and fund balance amounts.

Annual Follow-Up Agency Response From April 2019

UCOP continues to present comprehensive, simplified and transparent budget presentations to the UC Regents in May (proposed), March (mid-year) and November (post-year). The process and presentation have continued to be refined and improved upon over the past year. The process is documented in the UCOP Budget Manual which is posted online and publicly available, https://ucop.edu/ucop-budget/ucop-operating-budget-manual.pdf. UCOP also reviews and compares budget to actuals with variance explanations each quarter and prepares quarterly forecasts in the first, second and third quarters.

UCOP anticipates this recommendation to be fully implemented in the first week of May when the UCOP budget becomes publicly available on the UC Regents website.

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

We rate this recommendation as partially implemented because, although the Office of the President's fiscal year 2019-20 budget largely incorporated our recommended budget presentation, the Office of the President did not complete this recommendation by April 2019 and needs to make additional improvements to the budget presentation. As we mention in recommendation 5, we continue to have serious concerns that the timing of the Office of the President's budget many hinder the Department of Finance, the Legislature, and the Governor when making decisions regarding UC's portion of the state budget.

We are also concerned that the Office of the President's budget does not recognize millions of dollars in beginning fund balances as available revenue. For example, one schedule in the Office of the President's budget forecasts $88 million in designated fund balances available for the 2019-20 fiscal year. However, the schedule in the budget summarizing revenue and expenditures only includes $3 million in designated fund balance revenue and therefore $85 million is not included as a potential source of funds.

The Office of the President also has almost $12 million in fund balances that is potentially available for reallocation to campuses for the benefit of students in fiscal year 2019-20. These funds are unrestricted, undesignated, and allocated for Office of the President purposes. Although $12 million could potentially be reallocated, the Office of the President is currently not recommending a reallocation of these funds stating it needs to assess the outcome of the state budget process and intends to review fiscal year-end balances before identifying reallocation opportunities. It plans to report updated numbers to the Regents in November 2019. Additionally, the amount potentially available for reallocation could be higher than the $12 million as the Office of the President and the Regents continue to evaluate their spending decisions related to the $85 million in unrestricted funds designated for certain purposes.

Furthermore, over $6.5 million from the Office of the President's reserves may also be available for reallocation because three reserves exceed the reserve target maximum established in the Office of the President's reserve guidelines. For example, the reserve for the housing loan program is $5.5 million higher than the target maximum. In fiscal year 2018-19, the Office of the President redistributed some of these funds to campuses for housing priorities and could potentially do so again. The UC national laboratories and the UC Washington Center also have over $1 million in reserves that exceed target maximums according to the Office of the President's new guidelines.

We do note that the Office of the President's fiscal year 2019-20 budget is more transparent because it is generally easier to understand. For example, the Office of the President's one page budget summary—based on the recommended budget presentation in our report—clearly summarizes its expenditures, reserves, and fund balances. In contrast to the fiscal year 2018-19 budget, the current budget includes summary line items that clearly display the Office of the President's total reserve and fund balance amounts.

1-Year Agency Response

Consistent with the update provided in recommendation 5, the Office of the President has incorporated CSA's recommended budget format for the FY2018-19 annual budget presentation and is charting a course for continuous improvement beyond this budget year.

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

The status of this recommendation is pending the Office of the President's presentation of a comprehensive budget in April 2019.

6-Month Agency Response

Implementation of this recommendation will be dependent on actions taken in response to the April 2018 recommendations.

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

The status of this recommendation is pending the Office of the President's adoption of our recommended budget format due April 2018.

60-Day Agency Response

Implementation of this recommendation is dependent on actions taken in response to the April 2018 recommendations.

The budget presentation work group plans to implement improved financial systems to better support on-going development and transparency of the budget presentation, and this requires replacement of the existing budget development system (BDS). Figure 11 will be used, among other best practices guidelines, to establish user requirements for a BDS system.

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

The status of this recommendation is pending the Office of the President's adoption of our recommended budget format due April 2018.

All Recommendations in 2016-130

Agency responses received are posted verbatim.