California: Doing Wall Street One Better

The UC Regent’s Credit Swap Scheme

And the Fleecing of California Public Education

In a scam that would make Bernie Madoff green with envy, a former UC Planning and Budget Commission member has revealed that UC Regents are playing private bond markets with public tuition money in order to fund pet projects. In the middle of the worst economic crisis since the Great Depression, the Regents have pledged rising student tuition against private loans in order to finance elective construction projects -- projects which due to their private funding classification, require no legislative approval. Meanwhile, California’s public university students will pay for the unapproved projects through rising tuition and fees -- funds that are now being secretly diverted from decimated instructional budgets to private debt service. And in what is being called a "surreal credit swap scheme," California public university students will finance UC private bond ventures by borrowing in the student loan and home mortgage markets, assuming increased personal debt.

In his Open Letter to UC Students, Robert Meister, President of the Council of UC Faculty Associations, last week revealed that in July of 2003, UC Regents voted to begin using tuition as collateral to secure private construction bonds. Although this change freed the Regent’s from constraints of the state budget, it also freed the decision of whether to construct from any sort of public approval. This is because UC-issued bonds, unlike state-issued bonds, are authorized only by the Regents. Thus, as the UC continues to cut employee wages, eliminate jobs and raise tuition, it can build at will, arguing that it should be able to spend “its private money” as it sees fit.

But just how private is this money? “Since 2004,” Meister writes to students, “all of your tuition has been pledged in the sense that it will be paid into an account held by the bond trustee in the event of default.” But this tuition money is not only used as collateral: whereas state money cannot be used to pay interest or principal on private bonds, tuition -- which goes into the General Fund -- can be used for many types of payments. Pledging tuition is a great deal for bond holders and the Regents, Meister points out, because while students "can be legally obliged to pay it, ... UC is not legally restricted in how to use it."¹ In this sense the Regents are absolutely right: it is private money -- the private money of public university students.

Meister continues with more bad news: “The fact that UC can (and does) raise tuition during state economic crises means that a bad budget year can be a good bond year.”² This is because raising tuition increases the amount of unrestricted money that Regents can use to secure and pay for private loans. The end result says Meister, “is that state budget cuts are actually good for UC’ s bond rating, because they allow UC to raise tuition simultaneously.”³ In this sense, the Regents prefer to raise tuition rather than to secure money from the state. And as tuition increases, argues Meister, “UC’ s highest priorities [are] set by bond raters, and not by the State of California.”⁴

But if the UC is getting better interest rates, isn’t that good for everyone? Not when it fundamentally changes the priorities of a public university, Meister argues. “When UC chose to take on $1.35B in new construction debt for 70 projects in August 2009 -- one month after imposing employee furloughs that 'saved' $170M -- it committed to spending $70-80M in extra interest payments... Would the furloughs have been ‘unavoidable,”Meister asks, “if UC were not secretly planning to incur additional interest expenses for new bond-funded construction?”⁵ He further wonders the extent to which UC promised to manage its budget as to protect its bond rating. According to Meister, “due diligence” documents that UC would have had to file with the bond trustee (BoNYMellon) and the bond ratings companies (S&P and Moody’s) would have addressed this issue. Meister wonders if President Yudof said that he “had to cut pay (i.e. impose furloughs) and raise fees (especially tuition) as evidence that UC’ s bonds are still good, indeed better than ever?”⁶

Meister goes on to describe how the Regent’s plan has created a “credit swap” scheme in which borrowing students essentially fund a private expense account for the Regents:

UC has based its financial planning on the growing confidence of bond markets that your tuition will increase. (Why? Because you‘ve put up with it so far, and because UC has no other plan. Its capacity to raise tuition is advertised in every bond prospectus.) … A privatizing university will generate the higher tuition used to finance capital projects by requiring you (its median student) to barrow the same money from the home mortgage and student loan industries. It is, thus, requiring you to support UC’ s excellent bond rating by taking on personal debt backed by your own credit rating. This is a surreal form of credit swap in which UC funds new construction by getting your parents to risk foreclosure and you to risk insolvency for much of your adulthood.⁷

Although this works great for the Regents, Meister says, “as students, you are unlikely to go along with big increases to fund UC’ s list of construction projects. Cutting back on instructional budgets is how they get you to agree to higher tuition without telling you how much will go to fund construction:"⁸

Campus administrations can always say that no particular tuition increase is ever large enough to reverse whatever instructional cuts were imposed to persuade you that it was necessary. If you accept this claim, you’ll never question how much of your tuition is used to fund construction, and whether you would have found an increase justified had you known.”⁹

Meister points out that the problem, rather than legal, is political:

"UC leaders [can] now take an openly negative stand toward California tax payers, and especially the state legislature. Instead of expecting -- or trying to mobilize -- political support for public higher education, UC now blames public indifference for what it is not 'forced' to do, and implies that a legislature that won’t pay should have no say over how UC uses the money that it “raises” on its own, such as tuition."¹⁰

What to do

First, Meister advises students, don't despair: "Many will try to discourage you, ... saying that these problems are typical of those facing public universities" and that this is neither the time nor the place to address them. Don't be "bamboozled" he warns: "This is, in fact, a good place and time for us to confront a wider long-term problem. UC is a nationally prominent, and successful, public institution that has a deep reservoir of public support and a large body of students, faculty and staff who are ready to be educated and engaged in action."¹¹

“Before you go along with this year’s increase of 32%,” Meister advises, students should ask the Regents some questions: “Is UC simply raising your tuition because it can, and because doing so automatically increases the collateral available for its bonds?" Has "UC promised to manage its budget (your education) so as not to lower its bond rating?" How much of the tuition increase will be used to restore educational cuts?” Finally, Meister warns that the Regents are planning to announce another $2B bond issue (for projects they have already approved, but not announced) after the November tuition increase vote.¹² He encourages students to insist that UC disclose its plans to issue new tuition-backed bonds before students accept further tuition increases -- and to take this demand and these questions to the November 18 Regents Meeting at UCLA.

For a list of the August 2009 UC bond projects see Meister’s Open Letter to Students, pp. 11-12. To read further discussion of the issue, see Meister's Response to Faculty Questions: "They Pledged Your Tuition" II. To contact the Regents, you can email them at regentsoffice@ucop.edu, call them at (510) 987-9220, or fax them at (510) 987-9224. As a governing body of a California state institution, they would love to hear from the public.

notes

¹ Meister. Response to Faculty Questions: "They Pledged Your Tuition" II. p.1

² Meister, They Pledged Your Tuition: An Open Letter to Students, p. 3

³ Ibid., p. 5.

⁴ Ibid., p.6.

⁵ Ibid., p. 3.

⁶ Ibid., p. 4.

⁷ Ibid., p. 8.

⁸ Ibid., p. 5.

⁹ Ibid., p. 5.

¹⁰ Ibid., p. 9.

¹¹ Ibid., p. 10.

¹² Meister. Response to Faculty Questions, p.2.