Tuesday, November 13, 2012
Swaps as Flops?
Adam Goldstein and Jacob Habinek who study the economic sociology of financial markets. They are both doctoral candidates in the department of sociology at UC Berkeley.
...UC management has more than doubled the university’s debt burden from $6.9 billion in May 2007 to $14.3 billion at the end of 2011. Rather than contributing to UC’s core mission, funds have been directed toward more profitable UC enterprises like medical centers and attracting out-of-state students. Medical center profits have increased steadily to $900 million annually last year. Out-of state enrollment has doubled across UC—increasing from 11% to 30% at UC Berkeley...
Since particular loss dollars or gain dollars cannot be traced to particular purposes, the assertion that a particular loss raises tuition is questionable. For example, UC has undertaken various financial strategies which benefit the pension fund. The cost of the pension is eventually borne by UC and its various entities and could be reflected in tuition at some point. So if those costs are mitigated, eventual tuition might be lower. Again, to use the life insurance example, did the premiums you pay for such insurance come out of your grocery bills? Or did you reduce your movie going? Or did you buy a cheaper car? You really can't say. Generally, in evaluating the performance of those in charge of investing funds, you would look at total results since they are likely to do poorly in some decisions and better than average in others.
I am not sure a large fraction of the UC faculty would agree that med centers are not what UC has as part of its "core mission." What is UC-SF all about? Bringing in out-of-state students is meant as a mechanism to put more money into the overall system to make up for state budget cuts. It is hard to see why that endeavor is termed a "profitable UC enterprise" or why it isn't seen as a way of holding back tuition increases for state residents. What set in motion tuition increases and a shift of capital project support from the state to UC was the ongoing California budget crisis. We have not been shy on this blog at pointing out risky or wasteful expenditures and managerial deficiencies.
The report does make a point (noted in the article excerpt above) that some UC losses on swaps might be mitigated through litigation. Given the SF Chronicle piece, I suspect that UC will now say something about what, if any, litigation strategy it intends to pursue.