California state universities' financial shenanigans

By Thomas Lifson

University administrators love big building projects. It gives them a sense of accomplishment ("I built that while running this campus"), and the opportunity to hand out big contracts, while raising money for donors interested in funding monuments. But when times turn tough, they scramble, and apparently are not above raiding funds set aside for other purposes.

As California struggles to pay lavish salaries, benefits, and retirement expenses for its state employees, state-owned universities are facing a budget crunch, and engaging in questionable financial schemes to support building projects

While no laws appear to have been broken, the slight-of-hand financial techniques are causing an uproar, because they draw funds away from academic programs.

The Los Angeles Times outlines two scandals, while the San Francisco Chronicle adds a third. From the LAT, we learn that a $185 million renovation of Pauley Pavilion (home to UCLA's basketball team, where seats between the baskets cost more than at Lakers games) is tapping $15 million in student activity funds "approved by a student referendum in 2000 to maintain two older campus buildings that house gyms and student centers." Sorry kids, your money is paying for cushy seats for fat cats.

From the Chron, we learn that a rather shaky financial structure has been created to pay for a high performance athletic center being constructed adjacent to the football stadium in Berkeley. In order to get the project going quickly, the university started construction before money was raised to pay for it. David Downs writes in the Chron:

Nathan Brostrom, now UC's executive vice president for Business Operations, created the financing plan during his time with UC Berkeley. Simply put, it was designed to get the campus a building for free. First the school would borrow money to build the center. The same amount of
money would be raised in donations simultaneously. Next, the donated money would be put to work in the stock market where it would make enough in returns to pay off what was borrowed.

[....]

The Student Athlete High Performance Center was originally conceived as a world-class facility for 13 UC Berkeley sports. The regents approved the building in 2006 at about $100 million to be funded entirely from gifts. But in 2007, the regents approved a switch to the debt and gift plan, and the school set out to raise funds.

Since then, project costs have ballooned to $153 million due to litigation stemming from the famed tree-sitters and the stock market collapsed. Excavation of the site began in April 2009, paid for with interim funds. In August, UC issued $124 million in bonds created by President Obama's American Recovery and Reinvestment Act.

Now, the university, which is cutting academic programs, has to come up with the scratch to service and amortize the debt, in a very difficult fundraising climate.

Perhaps the most egregious case yet is at Sacramento State University, where a private foundation affiliated with the school but not subject to financial disclosure, has run into financial difficulties on a building it purchased and is renovating for use in part for academic use, and in part for commercial rental. Jack Dolan writes in the LA Times:

University Enterprises Inc., an independent foundation affiliated with the school, paid more than $35 million raised from private donors to buy a commercial office building near campus in 2007. Administrators said they planned to hold classes in half of the building's 188,000 square feet and lease the rest to generate revenue.

Then the real estate bubble burst.

The building is empty, and university President Alexander Gonzalez said he paid $5.6 million last year to prevent the foundation from falling into foreclosure on it.

The money came from the school's general fund -- a combination of student fees and tax dollars -- which is more commonly used to pay professors' salaries, utility bills and the other day-to-day costs of educating students.

The upshot of all three cases is student and general use finds are being tapped to bail out unsound projects. For California students facing drastic hikes in tuition, these cases are hardly reassuring.