Reports question UC’s financial practices following passage of Proposition 30

Amid celebration over the recent passage of Proposition 30, which prevented a trigger cut of $250 million to the University of California, there has been an outcry about the UC system engaging in interest rate swaps that could allegedly lose the system much of the money it stood to retain.The passage of Prop. 30, which increases taxes on California’s highest earners and prevents planned spending reductions to education programs in the state, allowed for a sigh of relief from many UC students who were worried about the possibility of a $2,400 increase in tuition.However, a report written by UC Berkeley students Charlie Eaton, Jacob Habinek, Mukul Kumar, Tamera Lee Stover and Alex Roehrkasse, titled “Swapping our Future: How Students and Taxpayers are Funding Risky UC Borrowing and Wall Street Profits,” criticizes the UC’s handling of finances, although it is also raising eyebrows.

The report alleges that the interest rate swaps that the UC Board of Regents have been engaging in with banks have already cost UC almost $57 million, with losses of an additional $200 million expected.

Among the criticisms made against the UC Board of Regents is the claim that outstanding swaps are held by banks with close ties to UC regents and executives.

In an interest rate swap, the borrower — in this case, the UC Board of Regents — pays the bank a fixed rate, and in return the bank pays the borrower a variable rate based on the current interest rates of the market. If the interest rates rise, the borrower pays less than they would have if they had not taken the swap, but if they drop, the borrower pays more.

In this case, the interest rates did drop and UC ended up paying the price. Three swaps in particular, made on funds borrowed to expand university medical centers, were identified as being unsuccessful by the report. While some equate these swaps to gambling deals, UC insists that the swaps were the wisest financial decision under the circumstances.

“UC has used swaps only when the advantage is significant. When this comparison is done correctly, it shows that UC has saved more than $40 million through the life of the bonds through swaps,” said Peter Taylor, chief financial officer in the UC Office of the President, in a Nov. 14 op-ed in The San Francisco Chronicle.

The drafters of “Swapping our Future” offered recommendations to UC given their findings. The recommendations include renegotiating current swap agreements, pursuing litigation to hold banks accountable for alleged illegal manipulation, and increasing transparency in the governance of its financial decisions.

“UC still has an opportunity to renegotiate and save precious dollars for reversing devastating tuition hikes and cuts,” the report states.

The UC will not be taking the recommendations of the report authors.

“Their miscalculations are outrageous,” Taylor said. “Indeed, if this level of ‘research’ were produced for a class on finance, it would merit an ‘F.’”

Opinions about the University of California’s financial practices remain split, but many UC students and California taxpayers question if the practices have any effect on them.

Shelly Meron, media specialist at the UC Office of the President, said that the UC Board of Regents did not consider any tuition increases at the Nov. 13 to 15 meeting.

“They did approve a proposed budget for UC for the 2013-14 school year … As always, if sufficient state funding doesn’t materialize and/or UC suffers additional cuts, all options will be considered for how to bridge the resulting gap. But right now, it’s much too early to speculate about future state funding or any potential tuition increases,” she said.

LAUREN MASCARENHAS can be reached at campus@theaggie.org.