Report 2016-130 Recommendation 5 Responses
Report 2016-130: The University of California Office of the President: It Failed to Disclose Tens of Millions in Surplus Funds, and Its Budget Practices Are Misleading (Release Date: April 2017)
Recommendation #5 To: University of California
To determine the amount of money that it can reallocate to campuses and to ensure that it publicly presents comprehensive and accurate budget information, by April 2018 the Office of the President should implement our recommended budget presentation shown in Figure 11 on page 40. Specifically, the Office of the President's budget presentation to the regents should include a comparison of its proposed budget to its actual expenditures for the previous year. It should also include all its expenditures and identify changes to the discretionary and restricted reserves. The Office of the President should combine both the disclosed and undisclosed budgets into one budget presentation.
1-Year Agency Response
UCOP engaged in a project to simplify, clarify, and present a transparent annual operating budget to the Regents. UCOP revised the FY2018-19 budget presentation format by:
- Reviewing GFOA and NACUBO budgeting best practices
- Surveying state systemwide budget presentations, formats and trends in higher education, and professional presentations
- Gathering feedback from the Executive Budget Committee, Sjoberg/Evashenk and the Regents
- Incorporating the CSA's recommended budget format in Figure 11 of the audit report
- Incorporating outcomes from other workstreams
The proposed prototype was reviewed with the Regents in March 2018 and is available here: http://regents.universityofcalifornia.edu/regmeet/mar18/f11.pdf. Per Attachment 4, the format was updated to include:
- A single item format
- Operating and one-time expenses in one budget
- A "Sources and Uses" schedule
- Fee-For-Service and Pass-Through reporting
- Budgets based on projected actuals
- Fund restrictions designations
- Cause of Change analysis
- Strategic Priorities Fund budget that reflects commitments and an uncommitted allocation
A UCOP Budget Manual has been drafted and is being provided to the CSA that documents the policies, guidelines, procedures, and analyses associated with the annual budget process. The manual will be updated as improvements are made.
UCOP is finalizing the FY18-19 budget for the May Regents meeting using the revised format. The April 25th CSA deadline precedes the submission of the budget to the Regents. UCOP has provided the CSA with documented budget formats, enhancements, supporting policies and guidelines, and will send CSA the item when it becomes available to the Regents.
UCOP is making all feasible changes this year and planning improvements over the next two years as recommended by the CSA, including updates to BDS as a gap measure until a new financial and planning system is implemented. A roadmap for BDS replacement has been provided to the CSA.
In reference to the CSA comment at 6 months about the $12M change to the temporary budget from the November item, this was an error that was corrected in the March budget to actual item which reconfirmed that the FY2017-18 approved budget was $39 million and that actuals to date were below the budget.
- Completion Date: April 2018
- Response Date: April 2018
California State Auditor's Assessment of 1-Year Status: Pending
We assessed this recommendation as pending because the Office of the President did not implement the State Auditor's recommendation for developing its budget by April 2018. The failure to do so may hinder the Department of Finance, the Legislature, and the Governor when making decisions regarding the UC's portion of the fiscal year 2018-19 state budget. This is a critical recommendation that, if successfully implemented, will significantly improve stakeholders' ability to hold the Office of the President accountable. Not completing the budget recommendation on-time is an important deficiency in the Office of the President's response to the audit.
Moreover, the Office of the President was not forthcoming about its decision to delay providing us with its budget information. Specifically, beginning with its 60-day response to our audit in June 2017, and again with its 6-month response in October 2017, the Office of the President indicated that it would implement this recommendation by April 2018. In addition, at a meeting with us in February 2018, the Office of the President committed to providing us with the budget information that is necessary for us to assess the Office of the President's progress in implementing this recommendation. However, the Office of the President informed us on April 11—two weeks before the deadline—that it would not provide us with the budget information until May 2018 because it was still in the process of finalizing the budget and therefore it would be premature to provide the materials we requested until the president, Chair of the Regents, and others had reviewed it.
Additionally, the supporting documentation and data would have allowed us to review the accuracy and completeness of its draft budget. For example, we could have verified that the draft budget contained all expenditures—an expectation that is outlined in our recommendation—through a review of the Office of the President's supporting data. Reviewing the Office of the President's budget not only would have allowed us to gain some assurance that the presentation was complete and accurate, but also may have helped the Office of the President improve its budget presentation by addressing any errors or areas needing clarification that we identified in our review. However, all the Office of the President has provided to us is a prototype budget with no actual numbers.
Finally, although we recognize that the Office of the President has made progress by formalizing its budget policies and procedures in a single manual and by seeking feedback from the Regents on its budget prototype, it ultimately failed to develop its budget in a timely manner that would allow it to be assessed as part of the state budget process.
6-Month Agency Response
The budget presentation work group has met regularly to address the California State Auditor's budget format as detailed in figure 11, page 40, of CSA's audit report. The final FY2017-18 budget presentation in July 2017 incorporated CSA audit format and the team is focused on additional improvements to further enhance the nuances and clarity of the UCOP budget.
The work group completed its charter and stakeholder analysis review with COO Nava. The Executive Budget Committee (EBC) has reconvened and meets monthly. The October-through-December EBC meetings will include reviews of UCOP FY2017-18 budgets, including activities and associated costs.
The work group reviewed financial system functionality with partner UC campuses. UCOP awaits additional information from partner campuses before making a recommendation. New system solutions are expected to mitigate existing gaps between current capabilities and best practices, and include specific requirements to further adhere to the format presented in figure 11 of the CSA's report.
- Estimated Completion Date: April 2018
- Response Date: October 2017
California State Auditor's Assessment of 6-Month Status: Pending
We have concerns regarding the Office of the President's 2017-18 budget. On the Office of the President's website, it states that it has partially implemented this recommendation. However, we disagree based on a review of the Office of the President's data and its supporting documentation. Our concerns are regarding the budget's accuracy and the fact that the Office of the President did not seek the regents' approval for $12 million in additional budget expenditures. Overall, although the Office of the President used our recommended budget format, we found that it could not adequately substantiate the amounts it used in the presentation.
Because the Office of the President expedited its budget process by two months, it developed its budget "offline" using questionable methods. For example, for expenditures from what we called the undisclosed budget— which the Office of the President presented to the regents as the strategic priority reserve in May of 2017—it used estimates from staff as opposed to financial data. Moreover, even though its 2016-17 vacancy rate was 15 percent, the Office of the President also built $25.4 million in one-time salary savings back into the 2017-18 budget. In response to our audit, the Office of the President stated that its reserves stem from vacancies and other unexpected events that create one-time savings and that these are not permanent savings and cannot be used to support permanent expenditures. The Office of the President has consistently budgeted many more positions than it has actually filled. Since fiscal year 2013-14 the Office of the President's vacancy rate has been between 10 and 15 percent. While a small vacancy rate is reasonable, we have concerns because the Office of the President's high vacancy rates translate into recurring one-time savings that help to build its reserve. Our workforce planning recommendation should help the Office of the President better align its staff and lower its vacancy rate. The budget director stated that although the budget office made its best projections in the time available, it would not use the 2017-18 budget methods for future budgets.
In November 2017, the Office of the President also failed to receive the regents' approval for a $12 million increase in multi-year commitments paid for from its reserves and did not adequately describe its planned use of these funds. When asked by the regents, the budget director confirmed that the $12 million increase in multi-year commitments was the result of increased costs for a number of projects that were originally added as placeholders in the Office of the President's May budget proposal. This was despite the Office of the President's claim in its May budget proposal that projects from the reserve undergo a rigorous review prior to consideration for final approval and funding by the President. Moreover, based on our review of the Office of the President's documents, a significant amount of these increased costs relate to information technology projects including updating its financial and budgeting systems. The director of budget and finance stated this increase was presented as an informational item—meaning the regents did not vote on the increase—because of time constraints related to other high priority items for the regents to consider at the November meeting. The chief operations officer stated the Office of the President did not seek approval for this spending because the numbers were still very preliminary. However, we believe the regents should approve the $12 million increase and that the Office of the President should transparently present changes in funding for review by the Legislature, the regents, and the public.
Because of our concerns with the accuracy and budget process that the Office of the President used, we have rated this recommendation as pending. For its 2018-19 budget, we expect the Office of the President to be able to better justify the numbers in its budget and the process it used to develop its budget. We also recommend that the Office of the President seek the regents' approval on the $12 million increase in planned spending for multi-year commitments at the January 2018 regents meeting.
60-Day Agency Response
The budget presentation work group has been formed and meets regularly to incorporate the State Auditor budget format as detailed in Figure 11, page 40 of the State Auditor's audit report. Included in the FY17-18 Regents budget presentation were the following elements: (1) Incorporation of the FY16-17 forecasted actual expenditures compared with budget, (2) Detail of all expenditures including projections of fund balances, and (3) A combined comprehensive view of Permanent and One-Time spend including systemwide programs and initiatives. All of the above elements are included in the work plan.
The work group has already begun development of improved reporting, and will provide budget to actuals on a quarterly basis to the regents. Reporting improvements are also expected to provide visibility to all expenditures and reserves. The work group has initiated a project to evaluate current financial systems including the Budget Development System to identify gaps and evaluate improved systems with robust functionality, including reporting.
- Estimated Completion Date: April 2018
- Response Date: June 2017
California State Auditor's Assessment of 60-Day Status: Pending
The status of this recommendation is pending.The Office of the President presented the regents with more robust budgets during the last two regents' meetings that included forecasted actual expenditures and fund balances. However, as discussed during the regents' meetings, further improvements to the budget presentation are necessary to ensure transparency and clarity of the Office of the President's expenditures. The Office of the President plans to present its new budget presentation to the regents in May of 2018. In addition, we will conduct an analysis of the Office of the President's budget system to verify the amounts presented to the regents.
Agency responses received are posted verbatim.