UC’s Secret Lover. . . Wall Street . . . Students and Employees Get Screwed

Huck/Konopacki Labor Cartoons

California voters recently approved Proposition 30, which would temporarily raise taxes slightly on the wealthiest state residents while also imposing a regressive sales tax hike on the poorest residents. The measure is expected to help close California’s current $16 billion deficit, but not to restore the tens of billions in revenues that have been slashed over the past few years.

I recently wrote that despite the increased revenues from Prop 30, both of the state’s major university systems (CSU and UC) will be increasing fees and tuition for some students. In the case of UC, tuition for certain graduate programs could increase as much as 35%.

It is not simply that Prop 30 doesn’t come close to restoring pre-recession funding levels. It doesn’t. There is a deeper, institutional problem that Prop 30 merely covers up and plays into: The tax system and the political system are both designed to maximize the profits and bolster the economic interests of the employing class. Consider that Prop 30 did not touch capital gains, inheritance, corporate or property taxes. It did nothing to bring oil royalties up to the fairly low rates charged by Texas and Alaska. It essentially left the filthy rich filthy rich and the moderately rich still comfortably rich.

Even some of the increased revenues from Prop 30 that are earmarked for education will go directly into the hands of Wall Street bankers, rather than toward tuition reductions, increased course offerings or raises for professors. According to a recent report by UC Berkeley researchers, the UC Board of regents has made risky deals with Wall Street banks over the past decade known as interest rate swaps. They supposedly did this as a hedge against rising interest rates on variable rate bonds, but the swaps turned out to be a losing bet because interest rates dropped in the wake of the 2008 financial meltdown and have remained low since then.

These swap deals have already cost UC almost $57 million, according to the San Francisco Chronicle. However, another $200 million in losses are anticipated over the next 30 years (the university is currently paying Wall Street close to $750,000 per month according to the Nation). UC is expected to receive $250 million from Prop 30, which is not even enough to cover its Wall Street debts, let alone provide any financial relief for its students or employees.  Nevertheless, the university plans on spending $10 million a year from Prop 30 to service its Wall Street debt, leaving little for tuition relief, increased course offerings, student services or wage increases for employees. Tuition has tripled over the past few years, while salaries for professors and other employees have remained stagnant. Indeed, the regents are warning of more cuts and tuition increases, despite Prop 30, including a 24% across-the-board tuition hike over the next four years.

One might reasonably wonder how the regents made such a blunder. After all, it is well known among gamblers that, in the end, the House always comes out on top. But this wasn’t simply a matter of some naïve regents making a bad gamble. Rather, the regents ARE Wall Street insiders. They not only knew exactly what they were doing, but likely did it to enrich themselves and their cronies at the expense of taxpayers, students and employees. For example, the regent’s chief financial officer, Peter Taylor, came from Lehman Bros, where he had been managing director for public finance at a time when Lehman Bros. had been hired to help expand UC's debt load. Taylor continued to work for Lehman Bros while he was a regent. UC’s interest rate swap with Lehman ultimately cost the university over $23 million.

Similarly, UC Regent Monica Lozano has earned $1.5 million serving on the Board of Bank of America at the same time the university negotiated interest rate swaps with BofA worth a potential $28 million in profits to the bank. UC Executive Vice President Nathan Brostrom—a former managing director for public finance at JP Morgan—worked on financing for UC at a time when his former company was hired as a bond broker and swap counterparty for the UC Davis Medical Center, a deal in which the university ultimately lost $22.5 million. And UC Regent Russell Gould, who chaired the finance committee from 2008 to 2009 and the full board from 2009 to 2010, was receiving a salary from Wachovia/Wells Fargo from 1996 to 2009. (The regents’ biographies have been excerpted from the UC report)

The UC Berkeley report notes that the university obtained the interest rate swaps in order to finance the development of medical centers on three of its campuses (UCLA, UCD and UCSF). Since the medical centers are money-making enterprises for the university and since student tuition was used as collateral for the interest rate swaps, there was a financial incentive for the regents to jack up tuition. However, the university never had a chance to win on its gambles as the interest rate swaps were all based on rates determined by LIBOR, rates that were rigged in one of the largest banking scandals in history. (BofA is one of the banks currently under investigation in the LIBOR scandal).

Some have argued that the swaps made sense at the time and that the regents, despite the conflict of interest, had the university’s best interests in mind. However, if this was true, one might expect them to re-negotiate their loans or sue the banks, as have many other large institutions that have been screwed by similar deals. So far, they have made no indication that either plan is in the works. On the contrary, some regents are arguing that the swaps are still good deals, since the bonds don’t mature until 2047.

Meanwhile, the university will continue to transfer three quarters of a million dollars per month from the taxpayers to Wall Street banks to service their loans, thus keeping the bankers comfortable and their employees and students ever more stretched.