Report 2007-102.1 Summary - November 2007

California State University

:

It Needs to Strengthen Its Oversight and Establish Stricter Policies for Compensating Current and Former Employees

HIGHLIGHTS

Our review of the California State University's (university) compensation practices revealed the following:

RESULTS IN BRIEF

The California State University (university) aims to make quality higher education programs accessible to people striving to develop intellectually, personally, and professionally. With 23 campuses serving nearly 417,000 students and employing 23,000 faculty members, the university is the nation's largest system of senior higher education. Overseeing university operations is the responsibility of a 25-member board of trustees (board), which adopts rules, regulations, and policies governing the university.

Although it has established compensation policies applicable to all campuses, the university has not developed a central system enabling it to adequately monitor adherence to those policies or measure their impact on university finances. Specifically, the university does not maintain systemwide compensation data by type and funding source, and this lack of data impairs the ability of the chancellor's office to provide effective oversight of its compensation policies. Although the university delegates broad authority to the campuses to ensure that systemwide policies are followed, it is important for the chancellor's office to have sufficient data to monitor the campuses' implementation of the policies.

In fiscal year 2006-07, university employees received a total of $2.6 billion in compensation, excluding amounts paid directly by external entities such as foundations. Funded primarily by state resources, most university compensation is paid in the form of salaries. Over the last five fiscal years, the university payroll has increased by $225.8 million, or 9.6 percent. Increased compensation per employee represented about 97 percent of that increase, and 3 percent stemmed from the hiring of more employees. However, the compensation increases varied significantly by employment classification. For example, average compensation for executives increased by 25.1 percent, and average compensation for Management Personnel Plan employees (management personnel), such as managers and professional technical staff, increased by 10.4 percent. In contrast, average compensation for tenure-track faculty and other faculty increased by 5.6 percent and 6.2 percent, respectively. Average compensation for all other university employees increased by 12.4 percent. Changes in the number of employees also varied significantly by employee classification over the five year period.

Because average executive compensation experienced the most growth during the five-year period, we examined the growth in the various components that make up executive compensation-salaries, housing allowances, and automobile allowances. Salary increases contributed the most to this growth, with the board approving increases for executives ranging from an average of 1.68 percent to 13.7 percent on three separate occasions. The board has continually justified increasing executive salaries on the basis that its executives' cash, or salary, compensation lags behind that of comparable institutions. However, as early as October 2004, the California Postsecondary Education Commission (commission), the entity that was involved with executive compensation studies until that time, raised concerns that the methodology used in making such comparisons did not present a complete picture of the value of individual compensation packages because it did not consider the benefits and perquisites provided to executives, which can be substantial. Despite these concerns and the absence of further commission involvement in surveys of executive compensation, the university proceeded to use a consulting firm to perform surveys of the comparison institutions using the questioned methodology. Further, documents indicate that the board approved executive salary increases in October 2005 and January 2007 based only on considering the lag in cash compensation.

In 2007 the commission and the Legislative Analyst's Office (legislative analyst) expressed further concerns about the existing methodology used in these types of comparisons. Nevertheless, in September 2007, the board subsequently granted its executives another raise averaging 11.8 percent. Further, the chancellor recommended that the board adopt a new formal executive compensation policy and that the board continue to have a salary target focused on the average cash compensation of similar positions at comparable institutions. In response to these recommendations, the board adopted a new executive compensation policy and resolved that it aims to attain parity for its executives and faculty by fiscal year 2010-11.

We asked the chancellor's office why the university continued to justify increases in compensation for its executives based on a methodology that has been questioned by the commission and the legislative analyst. The vice chancellor of human resources1 responded that the university did not believe it appropriate to deviate from a methodology that was agreed upon years ago by the various interested parties, including the commission and the legislative analyst. However, as these are now the same parties that are raising concerns, we believe it is time for the university to work with the interested parties to develop a more appropriate methodology that considers total compensation.

The university has three executive transition programs through which current employees receive postemployment compensation packages upon their departure from the university. These programs are in addition to the standard retirement benefits the university provides to eligible executives, including retirement income, medical and dental coverage, and voluntary retirement savings plans. The university has three programs because over time the board has made revisions to the original transition program established in 1981. Each departing executive is eligible for the program in effect at the time of his or her appointment. The terms of the transition agreement offered to a departing executive depend on the transition program for which the person is eligible but can include one year of paid leave, lifetime tenure as a trustee professor at a campus, or an alternative agreement negotiated by the chancellor.

In November 2006, after media criticism of the existing transition programs, the board passed a resolution requiring the chancellor to provide each board member with a copy of all final transition agreements and to submit an annual report summarizing all existing transition agreements. However, the annual report presented by the chancellor in March 2007 does not include information on the status of accomplishments or deliverables that former executives may have agreed to provide the university as part of their transition agreements. Moreover, the chancellor does not have to disclose details to the board until after entering into a final agreement with a departing executive. Although the board prefers not to participate in the negotiating process, it should continue to monitor the chancellor's administration of the executive transition program to ensure that it is conducted in a prudent manner and that intended cost savings are achieved.

Although only executives are eligible to participate in a transition program, we noted instances in which management personnel received questionable transitionlike compensation after they were no longer providing services to the university or while they were transitioning to faculty positions. For example, we found that one individual, who received compensation totaling $102,000 during a seven-year leave on the premise that he was gaining experience that would benefit the university on his return, never returned to university employment.

The university exercises considerable discretion in paying expenses related to moving and relocation (collectively referred to here as relocation) for its employees. The university's broad policy on relocation expenses enables employees to receive reimbursement for actual, necessary, and reasonable expenses, but the policy sets few monetary limits on those expenses. Further, although the policy identifies the types of expenses that can be reimbursed, it contains clauses that permit the chancellor or campus presidents to grant exceptions to the policy.

The chancellor determines the amounts of relocation reimbursements for executives, campus presidents, and management personnel in the chancellor's office, and the campus presidents determine the amounts for management personnel and faculty at their respective campuses. Board approval of these arrangements is not required, and typically the payment amounts are not disclosed to the board. The discretionary nature of the university's policy can result in questionable reimbursements covering, for instance, the cost of moving household goods and closing costs associated with selling and purchasing residences. These costs can be considerable. For example, we noted that the university reimbursed one individual for $65,000 in closing costs and $19,000 in moving expenses.

Finally, the university has established a dual-employment policy that allows its employees to have jobs outside the university system as long as no conflicts of interest exist. However, the policy does not require employees to obtain prior approval for outside employment, nor does it require them to disclose that they have such employment. Thus, the university is unable to adequately determine whether employees have outside employment in conflict with their university employment.

RECOMMENDATIONS

To provide effective oversight of its systemwide compensation policies, the university needs accurate, detailed, and timely compensation data. The university should create a centralized information structure to catalog university compensation by individual, payment type, and funding source.

The board should consider total compensation received by comparable institutions, rather than just cash compensation, when deciding on future salary increases for executives, faculty, and other employees. The university should work with interested parties, such as the commission and the legislative analyst, to develop a methodology for comparing itself to other institutions that considers total compensation. If the university believes it needs a statutory change to facilitate its efforts, it should seek it.

The board should continue to monitor the executive transition programs to ensure that the chancellor administers them prudently and that intended cost savings are achieved for the university. In addition, the board should require the chancellor to include in the transition agreements clear expectations of specific duties to be performed, as well as procedures for the former executives to report on their accomplishments and status of deliverables. Further, the board should require the chancellor to include information in his annual report on the status of accomplishments and deliverables associated with transition agreements.

The university should work through the regulatory process to develop stronger regulations governing paid leaves of absence for management personnel. The improved regulations should include specific eligibility criteria, time restrictions, and provisions designed to protect the university from financial loss if an employee fails to render service to the university following a leave. Further, the board should establish a policy defining the extent to which it wants to be informed of such leaves of absence for management personnel.

The university should strengthen its policy governing the reimbursement of relocation expenses. For example, the policy should include comprehensive monetary thresholds above which board approval is required. In addition, the policy should prohibit reimbursements for any tax liabilities resulting from relocation payments. Finally, the board should require the chancellor to disclose the amounts of relocation reimbursements to be offered to incoming executives.

The university should work to strengthen its dual-employment policy by imposing disclosure and approval requirements for faculty and other employees, including management personnel. If the university believes it needs a statutory change to facilitate its efforts, it should seek it.

AGENCY COMMENTS

The university agrees that the facts are correctly stated in our report and indicates that our recommendations will be helpful in its efforts to improve its compensation policies and practices. In fact, the university reports that it will begin implementing some of our recommendations immediately and will act on others as soon as feasible.

1 The former vice chancellor of human resources departed her position on August 1, 2007, but for the purposes of this report, we refer to her as the vice chancellor of human resources.