MOORLACH UPDATE — University of California Fiscal Realities — May 17, 2019

The University of California underwent another employee strike yesterday, continuing a theme of financially distressed educational systems facing employee angst while not fully appreciating or understanding that their employers’ cupboards are bare (also see MOORLACH UPDATE — UC, CCC and CSU — May 11, 2018 ).

Yesterday, I issued an ICYMI providing the twelve largest June 30, 2018 unrestricted net deficits out of California’s 944 school districts. And several of these districts also endured employee strikes in recent weeks.

The Governor and the Legislature need to prepare for funding demands if public employee union bargaining unit demands are actually agreed upon. Something is going to break. In the meantime, I submitted a piece with some suggestions for those representing University of California employees in the Fox & Hounds piece below.

25th Anniversary Look Back

On May 18, 1994, I had the opportunity to speak to the Orange County Society of the Institute of Certified Financial Planners (ICFP) at their quarterly meeting. I prepared a handout providing an outline of what my research and audits had found. I used words that started with the letter “D:” Debt; Derivatives; Diversity; Devaluation; Duration; Dysfunctional; Dangerous; Defense; Depart; Divorce; Disingenuous; Deceptive; Disclosure; Denial; Deflection; Debate; Dealers; Detect; and Differences.

The presentation was eerily precise. Allow me to provide a few of the bullet points.

Derivatives — 25% of the portfolio; 75% are inverse floaters; no secondary market.

Diversity — In certain cases, the portfolio owned 100% of an issuance.

Devaluation — Mark to market.

Duration — Average life of derivatives and FNMAs is four years.

Dysfunctional — Money market fund (should have a weighted average maturity of between 60 and 90 days and) SEC disallows using inverse floaters.

Dangerous — A major bull market bet at beginning of a bear market.

Defense — Minimal hedging for interest rate increases.

Depart — Top of the bond market was October 15, 1993. The smart money has gotten out of this approach.

Divorce — You don’t marry an investment, you manage it.

Disingenuous — “Risk free investments.” “Risks are prudent.” “Hold to maturity.”

Disclosure — First to use California freed of information act to obtain copies of the Pool.

Denial — Government bureaucrats are upset with my candidacy. Don’t comprehend Finance 101: for higher return you must take higher risks.

Differences — (Should) Emphasize financial fundamentals: 1. Safety of principal; 2. Liquidity; 3. Yield. Transparency = accountability = democracy.

To catch up with the rest of the string of Look Backs, go to MOORLACH UPDATE — SB 598 Moves On — May 16, 2019.

Union should face UC’s fiscal realities, work for sensible reforms

John Moorlach

By John MoorlachState Senator representing the 37th Senate District
Thursday, May 16th, 2019

California high-school seniors soon will receive their diplomas full of hope and eager to learn more in college. Which is why the last thing they need is a tuition increase.

Yet that’s just what could happen for those about to attend the University of California if the school meets the demands of unions threatening to go out on strike on May 16. It would be the fifth strike the past year, affecting as many as 39,000 service and patient care workers. At their last strike, on April 10, about a third of those workers went on strike.

According to the Sacramento Bee, the strike by locals AFSCME 3299 and UPTE-CWA 9119 would be “to protest the UC’s unilateral decisions to outsource tens of millions of dollars in work that should be performed by their members.” Earlier strikes were because, “Both unions have rejected offers of 3 percent annual increases in wages.”

Employees and union officials should be aware of the perilous state of UC finances due to unfunded pension and retiree medical liabilities. UC’s latest Comprehensive Annual Financial Report, for the fiscal year ending June 30, 2018, tallied an Unrestricted Net Deficit of $18.9 billion and a net Retiree Medical Liability of approximately the same amount.

Put another way, just that $18.9 billion deficit comes to about $473 in liabilities for every person in California, including freshman students and even newborn babies.

Then there’s the housing crisis among students, so severe it even has caused homelessness. Last year I voted for Senate Bill 1227, by state Sen. Nancy Skinner, D-Santa Barbara. It required cities and counties to grant a density bonus for housing projects that contain at least 20 percent of the total units for lower-income students.

And there’s UC President Janet Napolitano’s plan to increase out-of-state tuition by $762 a year, to a total of $42,324. As EdSource reported, UC Regents at their March 14 meeting “revolted” against the plan because it “would push out all but the wealthy.”

But if the unions’ demands are met, such a tuition increase would be inevitable to pay for everything – followed by new tuition hikes on California residents.

Another branch of AFSCME, Council 31 in Illinois, last year lost as the defendant in the Janus decision of the U.S. Supreme Court. The court ruled employees not in the union cannot be forced to pay “agency fees” for collective bargaining.

Local 3299 should be aware that, if it pushes too far in negotiations, its members simply could leave, taking their dues with them, while retaining their jobs in the UC system. Talk about an easy way to increase their take-home pay.

And let’s not forget California student debt averages $22,785 per student.

If these unions really want to help their members and students, there are four things they could do.

First, work with the administration to reform unsustainable pension and retiree medical benefits.

Second, insist on an analysis of the fast growth in administrators, who in 2018 numbered 13,358 in the ranks of the Senior Management Group and Management and Senior Professionals. That’s more than the 10,195 in “faculty–ladder-rank and equivalent,” according to UC data.

Third, ask Gov. Gavin Newsom and the Legislature’s Democratic supermajority for more funding out of the state’s general fund. They control the purse strings and the unions backed them.

Fourth, discourage voters from approving a potential $8 billion bond measure on the 2020 ballot, Senate Bill 14, by state Sen. Steve Glazer, D-Orinda. That additional $500 million per year in general fund debt payments inevitably would lead to future tax increases on students, parents and everybody. This would choke out potential additional funding for the UC system.

Fifth, repeal Senate Bill 574, by then-state Sen. Ricardo Lara, D-Bell Gardens, which makes it more difficult to contract out services. The UC response said, “SB 574 significantly undermines the University’s ability to achieve administrative cost savings that could be directed to the University’s core missions of teaching, research, and public service.” And, I should add, current employees.

In conclusion, union officials might sit in on some UC accounting classes to learn how to read their system’s financial reports. Any new revenues won’t get close to covering the $18.9 billion deficit.

A recession, long overdue, will expose UC’s financial distress. By then, it may be too late. The unions need to be a part of the solution, not the proverbial straw that breaks the camel’s back.

John M. W. Moorlach, R-Costa Mesa, represents the 37th District in the California Senate


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