Millions of dollars from the new tax revenue earmarked for the University of California system as part of the state’s recently passed Proposition 30 will instead be routed to major financial firms because of bad bets made by a Wall Street-influenced UC Board of Regents.
Over the last decade, tuition and fees for undergraduates in the UC system have tripled, adding enormous debt burdens to UC graduates and pushing lower-income students into the already overstretched state college and community college systems, or out of higher education altogether. Members of the UC Board of Regents, which governs the system and which approved the tuition hikes, have blamed the increases on the bad economy and on politicians.
However, according to a new report written by five doctoral students at UC Berkeley, in the years preceding the 2008 financial collapse, members of the Board of Regents themselves had overseen “a qualitative shift in the financial practices of the University of California” by employing the same kinds of exotic financial instruments that precipitated the meltdown on Wall Street — primarily, bond issuances hedged by interest rate swaps.
An interest rate swap is essentially a bet that interest rates will rise. UC would issue a bond with a variable interest rate, then make regular payments to a third party (typically an investment bank) based on an agreed-upon fixed interest rate. The bank would then pay back to UC a dividend based on the variable interest rate of the original bond, if the variable rate were higher than the fixed rate. If the variable rate were lower than the fixed rate, then the money would go the other way: UC would owe money to the investment bank.
Between 2003 and 2007, the report explains, UC acquired interest rate swaps with five investment banks in order to issue over $600 million in bonds to finance development of medical centers on three campuses. Medical schools and hospitals are major profit centers for universities. As UC used debt financing to expand these profit engines, tuitions for students continued to rise. Since the risky contracts the Board of Regents entered into were made possible by the collateral afforded by UC student tuition costs and by the Board’s ability to jack up tuition and fees at its discretion, the same students whose ballooning debts and tuition payments to the university were making the UC system’s exotic financial bets possible were receiving no tuition relief from the university out of the profits generated by those bets, when successful.
The result of these complicated arrangements has become a familiar story since the 2008 meltdown. The Board of Regents’ pursuit of cheap money to increase UC profits left it exposed to the financial collapse. According to the report, UC’s risky bets have now cost it $57 million, which could rise to over $250 million over the next three decades. Between May 2007 and the end of last year, the Regents doubled UC’s debt load. The UC system is currently paying about three quarters of a million dollars per month to Wall Street firms as a result of the swaps.