BUREAU OF STATE AUDITS
California State Auditor
University of California:
Stricter Oversight and Greater Transparency Are Needed to Improve
Its Compensation Practices
May 2006
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Permission is granted to reproduce reports. CALIFORNIASTATEAUDITORSTEVENM. HENDRICKSONCHIEFDEPUTYSTATEAUDITORELAINEM. HOWLESTATEAUDITORBUREAU OF STATE AUDITS555 Capitol Mall, Suite 300, Sacramento, California 95814 Telephone: ( 916) 445- 0255 Fax: ( 916) 327- 0019 www. bsa. ca. gov
May 2, 2006 2006- 103
The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814
Dear Governor and Legislative Leaders:
As requested by the Joint Legislative Audit Committee, the Bureau of State Audits presents its audit report concerning the compensation practices of the University of California ( university).
This report concludes that the Corporate Personnel System ( CPS) used by the university’s Office of the President ( president’s office) to track the pay activity of university campuses contains inconsistencies and overly vague categories that did not allow us to determine the reliability of various compensation and funding source classifications contained within it and that limit its usefulness as an oversight tool. Despite the data reliability problems we found, the CPS is the most detailed and complete centrally maintained source of information, and in fiscal year 2004– 05 it reflects that university employees earned approximately $ 9.3 billion, comprised of $ 8.9 billion in regular pay and $ 334 million in additional compensation. CPS also indicates that the 4,071 university employees earning more than $ 168,000 from all funding sources received 10 percent of total regular pay, but 26 percent of the additional compensation. Further, the regular granting of exceptions to university compensation policy by the president’s office may weaken the credibility of the compensation policies it issues and create a culture of noncompliance. Indeed, in our review of 100 highly compensated employees we found that some university campuses circumvented or violated university policy, resulting in a significant overpayment to one employee, questionable forms of compensation provided to others, and improper increases to some employees’ retirement- covered compensation. In addition, we found that the university did not consistently disclose its officers’ nonsalary compensation, such as housing allowances, to the Board of Regents as required by policy.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor Contents
Summary 1
Introduction 7
Audit Results
Lack of Consistency Within the Corporate Personnel
System Limits Its Usefulness 17
Summary of Employee Compensation at the University 20
Summary of the Compensation of University Employees Receiving the Most Funds From State and Student Sources 22
The President’s Office Regularly Granted Exceptions
to Compensation Policy 25
The Circumvention of Policy Caused a Significant
Overpayment and Inappropriate Increases in
Retirement- Covered Compensation 27
The University Consistently Violated Policies the
Regents Established to Ensure Adequate Review of
Executive Compensation 35
Our Survey of Compensation Practices at Comparable Universities Showed That They Generally Did Not Disclose
More Information Than the University of California 40
Recommendations 41
Appendix A
Compensation for the 100 Highest‑Paid University Employees
From Funding Sources Made Up Entirely or Partially of State
and Student Sources 45 Appendix B
Survey Results on the Compensation Programs and
Disclosure Policies of Institutions Comparable to the
University of California 93
Appendix C
Reconciliation of the $ 871 Million in Additional
Pay the San Francisco Chronicle Reported to the
$ 334 Million Reported in This Audit 111
Appendix D
Summary of the Numerous Funding Sources for
University of California Employees’ Compensation 113
Appendix E
University of California Compensation Descriptions
Compared to the Descriptions We Use in This Report 117
Response to the Audit
University of California 135 California State Auditor Report 2006- 103
SUMMARY
RESULTS IN BRIEF
The University of California ( university) is a public, state- supported land grant institution with a mission to teach and conduct research in a wide range of disciplines and to provide public services. The university is administered by a 28- member Board of Regents ( regents), which has delegated overall policy development, planning, and resource allocations to the Office of the President ( president’s office). Beginning in November 2005, numerous articles published in various media criticized the university for providing undisclosed additional compensation in the form of bonuses, administrative stipends, and relocation packages to faculty and administrators while at the same time increasing student fees. The university responded to the controversy created by the issues and allegations raised by the media by providing additional information and explanations to the public, by implementing fact- finding efforts, and by establishing new compensation- related policies.
We were asked to identify systemwide compensation totals for the university by type and funding source to the extent that data are centrally maintained and consistent among campuses. To accomplish this we used the university’s Corporate Personnel System ( CPS), which is a reporting system that provides management and staff in the president’s office with demographic, personnel, and pay activity data on employees paid at the university’s campuses and laboratories. Our review found that inconsistencies in how campuses classify compensation and funding sources limit the system’s usefulness as an oversight tool for the president’s office. Because of the data inconsistencies we found, we were unable to determine the reliability of various compensation and funding source classifications contained within it. Although we found inconsistencies, we provide data from the CPS in the Audit Results of this report because it is the most detailed and complete centrally maintained source of this information. According to the CPS, university employees received $ 9.3 billion in total compensation during fiscal year 2004– 05. Regular compensation totaled over $ 8.9 billion, with the remaining $ 334 million going toward additional types of compensation. CPS data indicate that in fiscal year 2004– 05 the 4,071 university
1 This includes two nonvoting members from the university faculty.
Audit Highlights . . .
Our review of the compensation practices of the University of California ( university) revealed the following:
 The Corporate Personnel System ( CPS) used by the university’s Office of the President ( president’s office) to track the pay activity of university campuses contains inconsistencies and overly vague categories that did not allow us to determine the reliability of various compensation and funding source classifications contained within it and that limit its usefulness as an oversight tool.
 Despite these problems, the CPS is the most detailed and complete centrally maintained source of information, and in fiscal year 2004– 05 it reflects that university employees earned approximately $ 9.3 billion— comprised of $ 8.9 billion in regular pay and $ 334 million in additional compensation.
 The president’s office appears to regularly grant exceptions to university compensation policy. In a sample of 100 highly paid university employees, 17 benefited from an exception to compensation policy.
continued on next page . . . California State Auditor Report 2006- 103
employees earning $ 168,000 or more received 10 percent of the regular compensation total but about 26 percent of the additional compensation total.
We were also asked to identify the compensation of highly paid individuals receiving the most funds from state appropriations and student tuition. The compensation for 662 individuals receiving at least $ 168,000 in fiscal year 2004– 05 from these sources totaled $ 158 million. Appendix A presents the compensation received by the top 100 of these employees. While reviewing the compensation of these 100 employees, we found that the president’s office regularly granted these individuals exceptions to university compensation policy. University policy authorizes the president’s office to approve policy exceptions that provide employees with benefits for which they otherwise would not be eligible. Seventeen of the 100 individuals in our sample benefited from an exception to policy.
For example, the president’s office granted a dean at the University of California at Riverside ( Riverside) a housing allowance of $ 187,500 at a time when policy limited such allowances to no more than $ 53,300. In addition, the president’s office granted six executives in our sample who held academic appointments, including four chancellors and a campus provost, exceptions permitting them to participate in the university’s senior management severance pay plan. By doing so, the university agreed to contribute the equivalent of 5 percent of the employee’s salary into an interest bearing account that they receive when they leave the university.
We also found that some campuses circumvented and in some cases violated university policies, resulting in an overpayment to a university employee and inappropriate increases to other employees’ retirement- covered compensation. In an instance involving an employee at the University of California at San Diego ( San Diego), a president’s office official proposed a pay arrangement that circumvented policy and, because of San Diego’s faulty monitoring of the arrangement, resulted in an overpayment to the employee of $ 130,000 between November 2001 and January 2006. In a second case, the University of California at Los Angeles advanced a law professor $ 75,000 in future summer compensation and classified this payment as a housing allowance in the campus’s payroll system. In a third instance, despite being on sabbatical for much of fiscal year 2004– 05, a San Diego vice chancellor continued to receive a $ 68,100 administrative stipend for a position she had vacated and also an $ 8,900 auto
 Appendix A presents the compensation, exceptions to policy, and additional employment inducements received by a sample of 100 highly compensated university employees.
 Some university campuses circumvented or violated university policy, resulting in a $ 130,000 overpayment to an employee and improper increases to others’ retirement- covered compensation.
 The university did not consistently disclose its officers’ nonsalary compensation, such as housing allowances, to the Board of Regents as required by policy. California State Auditor Report 2006- 103
allowance. University policy states that senior managers’ sabbatical compensation shall be based solely on their administrative salary, which would not include a stipend or auto allowance.
Our review also revealed that some campuses violated the university’s retirement plan policy by including inappropriate forms of compensation, such as housing and auto allowances, in individuals’ retirement- covered compensation, a percentage of which they may receive when they retire. For instance, Riverside included housing allowances, each totaling $ 53,300, in two officials’ retirement- covered compensation, and the University of California at Irvine included $ 4,800 in auto allowance payments and $ 42,373 in profit associated with basketball camps in a coach’s retirement- covered compensation. The president’s office indicated that it is looking into these and the other apparent violations of policy that we found.
The regents’ policies require them to approve all forms of compensation for officers of the university. However, although the university consistently obtained regents’ approval for the salaries of officers, it did not consistently disclose to the regents officers’ nonsalary compensation, such as housing and auto allowances, as required by university policy. In a sample of 10 officers, the university violated its executive compensation policy by not disclosing to the regents eight auto allowances, four housing allowances ( two related to one officer), two transfers of sabbatical credits, and an acceleration of health insurance contributions at the time the regents considered the individuals’ appointment. For example, although the university agreed to provide an incoming provost with a $ 125,000 housing allowance, it did not disclose this allowance to the regents when they were deciding on the provost’s salary. Consequently, the regents increased the new provost’s salary to $ 380,000 without knowing she was receiving a $ 125,000 housing allowance.
Information about salary and nonsalary compensation to university officers was disclosed in the university’s annual report on compensation for fiscal year 2004– 05. However, the usefulness of this report is limited because it contained inaccuracies and because the president’s office did not submit this report to the regents until eight months after the close of the fiscal year, March 2006, at which time it also submitted the report for fiscal year 2003– 04. Finally, although university policy does not mandate disclosure of the compensation of employees who are not officers, five of the 10 employees in our sample who were not officers were provided significant housing and/ or relocation allowances ranging from California State Auditor Report 2006- 103
$ 100,000 to $ 270,000. Except for one relocation allowance, these allowances were not disclosed to the regents when they approved the five employees’ salaries. Consequently, we question whether the regents’ and university’s policies provide the transparency necessary to ensure effective oversight of compensation by the regents.
Appendix B presents the results of our survey of compensation programs and disclosure policies of comparable universities. In this appendix we present the responses we received from the University of California and seven other universities in California and other states. Although the seven responding universities did not fully complete our survey, their responses show that they generally do not disclose more about the details of employee compensation to the public than the University of California.
RECOMMENDATIONS
To improve its ability to monitor campus compliance, the president’s office needs to issue clear directives prescribing consistent use of the CPS. These directives should include a requirement that campuses consistently classify compensation into standard categories that best describe the compensation provided to employees. Also, the president’s office should standardize the categories that can be included in retirement- covered compensation and restrict the use of classifications that are too vague to allow the president’s office to ensure that the compensation complies with university policy.
To preserve the integrity of the compensation policies it issues, the president’s office needs to limit the number of exceptions to policy it allows. This objective could be accomplished by the regents requiring the university to track and annually report exceptions to compensation policy that the president, provost, vice chancellor of academic affairs, campus chancellors, and other university officials grant during a fiscal year and provide justification for each exception.
To preserve the integrity of the compensation policies it issues, the president’s office needs to improve its oversight of campuses’ compliance with those policies. One mechanism it should use to improve oversight is to annually use CPS data to identify unauthorized exceptions to policy, such as housing and relocation allowances paid above allowable limits and auto allowances being granted to individuals who do not qualify. California State Auditor Report 2006- 103
The president’s office should determine if it is appropriate to require repayment of university funds for the instances we identified in which a university employee received compensation in violation of university policy, and if so, develop a repayment plan with each employee.
To eliminate inappropriate compensation included in employees’ retirement earnings, the president’s office should remove the amounts we identified from the employees’ retirement earnings and establish a mechanism to detect, on at least an annual basis, compensation that campuses have incorrectly classified as retirement covered.
To increase transparency as it relates to the compensation of highly paid university employees, the regents should require the president’s office to disclose all forms of compensation for university officers and for all employees whose compensation exceeds an established threshold. This disclosure should occur when the regents approve the employees’ salaries and at least annually in a report to the regents. If the president’s office continues to submit its annual report on compensation to the regents, it should ensure that it is accurate and timely.
AGENCY COMMENTS
The university accepts the findings in our report and indicates that it will combine our recommendations with those of other efforts currently underway to make improvements to the university’s compensation programs and disclosure practices. n California State Auditor Report 2006- 103
Blank page inserted for reproduction purposes only. California State Auditor Report 2006- 103
INTRODUCTION
BACKGROUND
The University of California ( university) is a public, state- supported land grant institution with a mission to teach and conduct research in a wide range of disciplines and to provide public services. The university consists of nine general campuses and a 10th campus in San Francisco devoted to the health sciences. The university offers undergraduate, graduate, and professional education at all its campuses; has five medical schools and three law schools; and manages three national laboratories. During the fall of 2005, it served 208,000 students on its campuses and 333,000 students through its extension program.
The California Constitution designates the university as a public trust administered by its 28- member Board of Regents ( regents). The regents maintain full power of organization and government, subject only to limited control by the Legislature, and have delegated a broad range of authority and responsibility to the president of the university. A central Office of the President ( president’s office) heads the university’s administrative structure, with the president responsible for overall policy development, planning, and resource allocations. The chancellor at each campus has primary responsibility for managing campus resource allocations and administrative activities.
The university receives its funding from several sources. Of the university’s $ 19.4 billion in revenues for fiscal year 2004– 05, the State’s contributions, including state grants and contracts, totaled $ 3 billion, while revenue from student tuition and fees was $ 1.6 billion. According to the university’s audited financial statements, state appropriations and student tuition and fees are the core components supporting the instructional mission of the university, while grants and contracts provide opportunities for students to participate in research activities. In contrast to the $ 4.6 billion in state and student contributions, funds received by the university from the operation of its medical centers and the national laboratories it manages totaled more than $ 8.1 billion in fiscal year 2004– 05, of which $ 7.7 billion went toward the expenses associated with those functions.
This includes two nonvoting members from university faculty. California State Auditor Report 2006- 103
As indicated in the Figure, for fiscal year 2004– 05 the salary and benefits of university employees, including employees at medical centers but not national laboratories, totaled more than $ 8.9 billion and represented 48 percent of the university’s operating expenses.
FIGUREUniversity of California Operating Expenses Fiscal Year 2004– 05 ( Dollars in Millions) Source: University of California annual financial report, fiscal year 2004– 05. Other operatingexpenses $ 2,237 ( 12%) Salaries and wages$ 7,441 ( 40%) National laboratories( all expenses, includingsalaries and wages) $ 4,112 ( 22%) Depreciation andamortization $ 955 ( 5%) Supplies and materials$ 1,707 ( 9%) Utilities$ 311 ( 2%) Scholarships and fellowships $ 363 ( 2%) Benefits$ 1,483 ( 8%)
COMPENSATION CONTROVERSY AND THE UNIVERSITY’S RESPONSE
Beginning in November 2005, numerous articles issued by various media faulted the university for providing certain faculty and administrators with undisclosed compensation beyond their base salaries, including bonuses, administrative stipends, relocation packages, and other forms of cash compensation, at the same time it was increasing student fees. Additional issues raised by the media articles included the cost of housing the university provided to its president and chancellors, a refusal by the university to release to the public a written proposal to allegedly California State Auditor Report 2006- 103
boost top executives’ salaries, a widening salary gap between low- and high- paid employees, and the postresignation compensation packages provided to two high- ranking university administrators.
In response to the controversy created by the issues and allegations raised in the media articles, the university provided information and explanations to the public; embarked on fact- finding efforts, including the creation of a compensation task force charged by the regents with reviewing the university’s current disclosure policies and practices; and implemented new compensation policies. On a new Web site dedicated solely to compensation,  the university published a list of questions raised by the compensation controversy and the university’s corresponding answers. In addition, the university’s Web site included a December 2005 open letter in which the president said he believed the articles raised some important issues about university compensation but failed to present those issues in context, such as a recognition that salaries for faculty and staff across the university are significantly less than those offered at comparable institutions. The university also indicates that it has developed a practice to ensure a more timely release to the public of salary items approved by the regents, including interim actions.
According to a September 2005 study prepared for the university by a consultant, the average cash compensation among university employees lagged the average market salary by 15 percent, but because of favorable health and retirement benefits offered at the university, overall compensation was at market level. However, the consultant’s study indicated that continuing increases in health care costs and the likelihood that the university would reinstate employee pension plan contributions would necessitate increases in salaries in the coming years.
In February 2006 two legislative committees called on the university president and some of the regents to answer questions regarding the university’s compensation policies. In written testimony prepared for these meetings and published on the university’s Web site, the university president and the chair of the regents ( chair) admitted that the regents had not been informed of the compensation arrangements of the two high- ranking university administrators and other executives in violation of the university’s disclosure policies. The university president took responsibility for the fact that the university had not always met its obligations to the public in matters of compensation and compensation disclosure. The president and chair also discussed a number of actions the university was taking to address the problems identified by the recent controversy. In March 2006 the chair announced that the regents and president 10 California State Auditor Report 2006- 103
will be assessing how to best organize the president’s office and will be creating an independent compliance officer reporting directly to the regents. Table 1 summarizes the efforts of the university to review its past compensation disclosure practices and improve oversight of compensation matters in the future.
OVERVIEW OF THE UNIVERSITY’S COMPENSATION POLICY
The university provides various types of compensation and benefits to its employees, as shown in the text box. In addition to regular base pay, university employees may earn overtime, differential pay, and stipends for additional work performed. They are also eligible for several other forms of compensation, including incentive awards, bonuses, and compensation for performing teaching and research duties beyond their regular assignments, such as teaching summer classes or additional classes. The university provides most employees with medical, vision, dental, retirement, disability, and life insurance benefits. University employees are also eligible for numerous types of leave, including sick leave, vacation leave, and administrative leave. Some academic personnel are eligible for sabbatical leave.
Believing that it needs to compete with other universities for candidates for senior management or key academic positions, the university may offer candidates incentives such as housing and relocation allowances, eligibility for the Mortgage Origination Program and the Supplemental Home Loan Program, reimbursement for moving expenses and travel, and the costs associated with relocating to their new positions. The university may also offer other incentives, like discretionary research funding; guarantees of spousal employment; capital improvements to university- provided housing, offices, and laboratories; and budget supplements to the candidate’s future academic department.
Selected Types of Compensation
Provided by the University
• Auto allowance: Use of a university- provided auto, a monthly cash allowance in lieu of an auto, or payment for using an employee’s personal auto for business use.
• By agreement: A broad category in which the university groups various sorts of compensation items.
• Clinical pay: A term used in our report to refer to Health Sciences Compensation Plan pay and other medical- related payments.
• Differential pay: Premium paid to employees, mostly at the university’s medical centers, for performing non- overtime work on an evening, night, weekend, holiday, or “ on- call” shift.
• Housing allowance: Payment to provide support for housing costs.
• Lump- sum payments: A broad category in which the university groups various sorts of compensation items.
• Mortgage Origination Program loan: Home loan made through a university- sponsored program at below- market interest rates designed to recruit and retain faculty and senior managers.
• Moving expenses: Payment for expenses associated with moving household goods and personal effects to a residence at or near a new job site.
• Relocation allowance: Payment to a new employee intended to offset higher living costs in a new location.
• Sabbatical leave: Paid extended leave of absence.
• Severance pay: Payment under the Senior Management Severance Pay Plan to an eligible senior manager who separates from employment and was funded by university contributions at either 3 percent or 5 percent of an employee’s salary per year. In 2005, this plan was replaced, and the university’s contributions now go to the eligible employee’s defined compensation plan.
• Stipend: Compensation for undertaking temporarily assigned responsibilities that are outside the scope of an employee’s regular responsibilities and usually of a higher- level position.
• Supplemental Home Loan Program: Secondary home loan made available to qualified employees at below- market rates.
Sources: Various university policies, procedural manuals, brochures, and fact sheets. California State Auditor Report 2006- 103 11
Table 1
Actions Taken by the University of California to Respond to the Compensation Controversy
Fact Finding Efforts
Efforts to Improve Oversight
New Policies
Audit of compensation practices: The Board of Regents ( regents) in concurrence with the Office of the President retained PricewaterhouseCoopers, LLP, to examine compensation for University of California ( university) employees who hold or have held 32 senior management positions from 1996 through 2005.
Compensation committee: The regents created a special committee on compensation that will review and make recommendations to the regents on all matters related to university compensation and benefits, including all matters requiring regental action. The committee can conduct any studies or audits as necessary.
Separation agreements: In January 2006 the regents adopted an interim policy requiring all separation agreements for designated officers of the university and for all other employees involving consideration of $ 100,000 or more to be submitted to the regents for approval.
Compensation task force: The regents assembled a task force of state and national figures to review university compensation, accountability, and transparency. The task force, assisted by Deloitte Consulting, is reviewing the university’s current disclosure policies
and practices.
Ethics training: In April 2006 the university said that it will implement mandatory ethics training for all its employees. The university president recommended that training be expanded for senior managers to include a focus on compliance requirements.
Exceptions to policy: In February 2006 the president announced an interim policy requiring all employment- related exceptions ( including compensation) for senior managers to be acted on by the president in consultation with the regents and the committee on compensation.
Internal audit: The university’s auditor is conducting a review of the compensation for all members of the university’s senior management group, excluding the 32 positions already being examined by PricewaterhouseCoopers, LLP.
Information systems: To meet its obligation of public accountability, the university announced in April 2006 that it will invest in the first- phase development of a comprehensive human- resources information system that will allow it to quickly analyze compensation data. The university president said that the focus will first be on capturing senior management compensation information starting in October 2006.
Delegation of salary approval: In January 2006 the regents approved a salary structure in which all designated senior management and other high- level administrative positions with salaries above the indexed compensation level are placed in salary ranges. The policy gives the university president the authority to raise salaries within these ranges without prior approval by the regents subject to certain limitations. The regents will approve the total budgetary funding available for salary increases for the entire senior management group. For the top 32 designated positions, the regents maintain the authority for all compensation actions. In addition, the regents will continue to approve all salary increases in excess of 15 percent of base salary that result in a salary above the salary grade midpoint or above the salary range maximum for the employee’s position. For fiscal year 2005– 06, the regents must approve all total compensation in excess of $ 200,000 and all salary increases exceeding 7.5 percent for senior managers.
Renovation and remodeling of chancellors’ residences and offices: In March 2006 the president approved a policy that will require all minor and major capital projects ( i. e., projects costing $ 25,000 to $ 5 million, inclusive) involving chancellorial residences or offices to have prior approval of the president.
Sources: Bureau of State Audits’ summary of information available on the university’s Web site and information provided by the university auditor. 12 California State Auditor Report 2006- 103
Senior managers are eligible for additional benefits, including special severance pay ( changed to contributions to a senior manager’s defined compensation plan in 2005) and life insurance plans, salary continuation during disability, and increased business travel accident insurance. In addition, senior managers who hold academic titles that qualify them for accrual of sabbatical leave credit continue to accrue such credit while in an administrative position. Certain senior managers are also eligible for auto allowances, and the university provides the president and chancellors with university- owned homes. Medical school or center employees receive clinical pay that is covered by separate compensation plans.
SCOPE AND METHODOLOGY
The Joint Legislative Audit Committee ( audit committee) requested that the Bureau of State Audits review the compensation practices of the university. Specifically, the audit committee asked us to determine the extent to which the university used various benefit programs to compensate employees by performing the following analysis:
• To the extent data are centrally maintained and reasonably consistent among campuses, identify systemwide compensation by type and funding source.
• Subject to the same limitations, categorize by type and funding source the compensation of highly paid individuals receiving the most funds from state appropriations and student tuition and fees.
• For the same highly paid individuals, determine whether any additional compensation or employment inducements not appearing in the university’s centrally maintained records have been recorded in any employment agreements with the university.
The audit committee also asked us to determine the extent to which certain aspects of university compensation programs are disclosed to the regents and to the public, including the types of programs that exist, their size and cost, and the benefits that participants receive. To the extent that this information is available and is not publicly disclosed, the audit committee asked us to include these items in our report. Finally, we were California State Auditor Report 2006- 103 13
asked to survey selected major universities to identify their disclosure practices related to compensation programs and the number of participants and expenses for those programs.
To identify systemwide and individual compensation by type and funding source, we obtained data from the Corporate Personnel System ( CPS) for all employees of the university during fiscal year 2004– 05. This system consolidates information from the payroll systems of each university campus and the national laboratories. To understand the CPS and the consolidation of data, we interviewed university staff and reviewed relevant documentation. To present systemwide information in a concise form, we recategorized the compensation classifications provided by the president’s office. To do so, we reviewed campus- level compensation classifications and general categorizations created by the president’s office, and when necessary we obtained clarifying information from the president’s office staff. After doing so, the president’s office reviewed our categorizations and agreed that they were reasonable.
We obtained information from the CPS and president’s office staff that allowed us to identify state appropriations and student tuition funding sources. However, the president’s office was unable to assign eight fund groups, and a portion of a ninth, to the funding sources we identified because the source is either not represented in the categories we defined or is a mixture of the categories we identified. Because it was not feasible to individually evaluate each fund contained within these fund groups— which numbered 3,000— we included the fund groups in our selection of highly compensated individuals to avoid excluding relevant individuals. For the reasons described above, we present the “ Other” funds discretely in each of our tables.
The standards from the U. S. Government Accountability Office ( GAO) require us to assess the reliability of computer- processed data. The GAO asserts that data are reliable when accurate, reflecting the data entered from source documents, and complete, containing all data elements and records necessary for the audit. Although we conducted procedures to attempt to ensure the reliability of the data we reviewed as required by GAO standards, we were unable to fulfill data reliability requirements to ensure the completeness of the information in the CPS. We are aware that to some extent the compensation for any given fiscal year is not entirely complete because it does not include adjusting payroll entries that occur after the president’s office closes the CPS for the fiscal year, which occurs after campuses 14 California State Auditor Report 2006- 103
submit their July data, according to a university analyst. For example, we found that CPS data for fiscal year 2004– 05 did not include a $ 40,500 performance bonus that was paid after the CPS was closed in October 2005 to an employee for work performed in fiscal year 2004– 05. To determine the extent to which the CPS was not complete, we would need to reconcile the CPS with its audited financial statements. We requested that the president’s office provide the information necessary for us to reconcile the figures in the CPS to the wage and salary figures in its audited financial statements. However, the president’s office informed us that such a reconciliation would take substantial time and resources because each campus generally uses a different general ledger system and chart of accounts, which would require us to visit each campus to obtain the understanding and information necessary to perform this work. Given the short time frame available to us, we were not able to obtain this information and complete this work.
In addition, as noted earlier, we were unable to obtain information from the university on the funding sources for some of the fund groups in the “ Other” category. Further, as noted in the Audit Results, we found inconsistencies in how the president’s office and the campuses classified compensation within the CPS. We were not able to determine the extent to which certain compensation categories and funding sources would need to be adjusted to precisely present the university’s compensation information. Consequently, we concluded that the systemwide data totals from the CPS that we present in Tables 2, 3, and 4 in the Audit Results are of undetermined reliability. However, the university indicates that the CPS is the most detailed and complete data source available for presenting systemwide compensation for its employees; therefore, we believe that it is relevant to include the data contained in Tables 2, 3, and 4. Further, to obtain assurance on the accuracy of CPS data, we performed data reliability tests on the compensation provided to a sample of employees, as described later in this section.
Our systemwide summaries of compensation by type and funding source include university campuses and medical centers, the three national laboratories it manages, and the Hastings College of the Law ( Hastings). However, the national laboratories and Hastings are otherwise excluded from the scope of our audit because, according to the university, funding for the laboratories comes from federal sources and because a separate board governs Hastings. California State Auditor Report 2006- 103 15
To determine whether highly compensated university employees received any additional employment inducements beyond what is recorded in the CPS, we examined the personnel files of the 100 university employees receiving the greatest percentage of their compensation from funding sources made up entirely or partially of state and student sources. Of the 100 employees selected, 54 held administrative positions and 46 held academic positions. Of the 54 administrators selected, 51 were part of the university’s senior management group, 21 of which are or were members of the top 32 administrative positions in the university.
By selecting our sample using state- and student- sourced funding as a basis, we do not imply that we are less concerned with how the university manages its use of funds from other sources. On the contrary, because the university exists as a constitutionally based public trust, it is an entity of the State; as such, all university funds are state funds and should be expended with similar regard for the university’s responsibilities as a public trust. However, we selected our sample in this manner because the audit committee asked us to focus on individuals receiving the most funds from state and student sources.
For further verification of the reliability of CPS data, we chose 30 of the 100 employees and determined whether payroll or personnel records outside the CPS supported the compensation data for those employees. In each case we found compensation amounts to be accurate. However, as discussed in the Audit Results, some forms of compensation appeared to be misclassified. In addition to testing data reliability using the sample of 30 employees, we performed a limited review of the appropriateness of the compensation they received. Specifically, for those compensation types and amounts that we determined needed additional review, we obtained relevant documentation to determine that the compensation provided was consistent with university policy and asked the university to explain why certain employees received particular compensation items. Our review was limited by the short time frame in which the audit committee asked us to report our results. We judgmentally selected the sample of 30 employees to achieve a spread among campuses, administrators, and academic staff.
Finally, to test the university’s disclosure practices for employees receiving compensation in fiscal year 2004– 05, we reviewed regents’ minutes for meetings concerning a sample of 20 university employees, including 10 officers, chosen from the 100 university employees listed in Appendix A. We determined 16 California State Auditor Report 2006- 103
whether salary and nonsalary compensation provided to university employees was approved by the regents under appropriate circumstances. The university provided us with access to confidential information relating to personnel decisions; however, state law prohibits us from releasing detailed information.
Also, to compare the public disclosure policies of the university with those of comparable institutions, we selected a sample of 15 universities and asked them to complete a survey. Specifically, we asked business officers at the 15 universities recently surveyed by the task force to provide information about their disclosure practices regarding various types of compensation and benefit programs they offered, including the amount of annual program expenses, the number of participants in each program, and means of disclosure for the benefits individual participants receive. Additionally, we asked the university to complete the survey. We present the responses of the university and the seven responding universities in Appendix B. n California State Auditor Report 2006- 103 17
AUDIT RESULTS
LACK OF CONSISTENCY WITHIN THE CORPORATE PERSONNEL SYSTEM LIMITS ITS USEFULNESs
The personnel information reporting system used by the University of California ( university), the Corporate Personnel System ( CPS), contains inconsistencies and overly vague categorizations. Therefore, we could not determine the reliability of the amounts recorded in various compensation and funding source classifications contained within the CPS. In addition, the weaknesses of the CPS limit its usefulness as an oversight tool for the Office of the President ( president’s office) to monitor campuses’ compliance with compensation policies. We were asked to identify university systemwide compensation by type and funding source to the extent that data is centrally maintained and is reasonably consistent among campuses. Although we found inconsistencies within the CPS, we provide the data in the tables of the next two sections because the CPS is the most detailed and complete centrally maintained source of this information.
The CPS provides management and staff in the president’s office with demographic, personnel, and pay activity data on employees paid at the university’s campuses and laboratories. Established in 1983, the CPS contained the records of more than 250,000 university employees for fiscal year 2004– 05. The CPS uses two types of compensation descriptions: campus- specific categories and general categories maintained by the president’s office. While the president’s office manages the CPS, individuals at various university campuses and laboratory sites perform data entry on payroll systems that feed into the CPS. The current university practice is to allow campuses to both establish their own unique codes for classifying compensation and to assign them to general categories of compensation maintained by the president’s office.
In addition, as discussed later in the report, university policy allows campuses to assign funding sources to the various fund groups the president’s office has established. However, we found problems with the classification of compensation to each of the two types of compensation descriptions. First, we found specific types of payments that are intended to be separately accounted for, such as sabbatical leave or auto allowances, were
Specific types of payments that are intended to be separately accounted for, such as sabbatical leave or auto allowances, were sometimes placed within other categories, such as regular pay. 18 California State Auditor Report 2006- 103
sometimes placed within other categories, such as regular pay. This precluded us or the university from computing an exact total paid for these categories. Second, we found specific campus categories inconsistently spread among various general categories in the CPS that precluded us from using the general categories in our analyses and minimizes the usefulness of the CPS to the president’s office in fulfilling its responsibility to monitor campuses’ compliance with compensation policy.
One example of vague categorization that we found is the use by the president’s office and university campuses of the “ By Agreement” category for numerous types of compensation, including payments related to the Health Sciences Compensation Plan, fellowships and scholarships, relocation incentives, housing allowances, bonuses, and certifications. In addition, campuses are inconsistent in the assignment of specific categories into general categories. For example, some housing allowances were assigned to the general categories of “ Employment Allowances,” “ Perquisites,” and “ By Agreement.” In addition, the general categories of “ Sabbatical Leave” and “ By Agreement” contained sabbatical leave payments while the “ Regular Pay” category contained “ Sabbatical Leave Supplements,” which are payments to provide a recipient of a sabbatical leave at less than full salary with additional salary for research. Consequently, to present a concise overview of compensation by type and funding source, we had to recategorize the CPS information provided to us by the president’s office to ensure similar payments were grouped together. However, because of inconsistencies and overly vague compensation descriptions in both specific and general categories as discussed above, it is difficult to precisely quantify some types of compensation using the CPS.
Although these practices offer campuses a flexibility that may be more convenient for gathering the information they need, we observed that the practices also create inconsistency and uncertainty when data from the campuses are combined. This occurs because campuses may use the same compensation classification code but sometimes include items that do not relate to that code. For example, as discussed later, the University of California at Irvine ( Irvine) inappropriately classified its basketball coach’s $ 4,800 auto allowance as regular pay, and the University of California at Los Angeles ( Los Angeles) inappropriately classified $ 75,000 from future summer compensation as part of a professor’s housing allowance. We also found that some campuses made errors in the classification of some compensation. For instance,
Because of inconsistencies and overly vague compensation descriptions in both specific and general categories, it is difficult to precisely quantify some types of compensation using the CPS. California State Auditor Report 2006- 103 19
the University of California at Davis incorrectly classified $ 60,500 of sabbatical leave as regular pay, and Irvine incorrectly classified $ 100,000 of clinical pay as a stipend.
In addition, we found that campuses may classify a compensation item under a general category even though greater transparency could have been obtained had they classified the compensation under a more specific classification code available to them. For example, despite specific categories within the CPS for these items, the University of California at San Diego ( San Diego) classified its dean of medicine’s clinical pay of $ 195,000 and incentive pay of $ 47,000 under the “ By Agreement” category. As discussed later, using a complex arrangement that resulted in an overpayment to this dean, the university increased the dean’s clinical pay to essentially allow him to retain external earnings. Although having his clinical pay coded in the CPS correctly likely would not have prevented the eventual overpayment, this case highlights the lack of transparency that sometimes exists within the CPS and the difficulty facing the president’s office in using the CPS as an oversight tool.
Similarly, campuses have assigned certain funds within the CPS to the “ Other” category of funds, though in some cases they seem relevant to more specific fund groups. Each item of employee compensation in the CPS is charged to a particular fund that is subsequently combined with similar types of funds into a fund group. University campuses are responsible for assigning funds to the appropriate fund groups as defined by the president’s office. Although most fund groups clearly indicate the sources of their funding, some salary expenditures were charged to fund groups classified as “ Other.” Some of these designations may be appropriate because the funding source may not fit within the categories we defined; however, the president’s office was unable to assure us that others did not contain state appropriations or student tuition and fees. Furthermore, after reviewing a list of 1,200 funds included in one fund group described as “ Current Funds– Other Sources Other,” we found that it appears to include medical- related revenue, fees, and contract and grant funds, which would seem to relate to specific fund groups already established for these types of activities. The assignment of different types of funding to a single generic fund group decreases the usefulness of the CPS as a tool for review and oversight by the president’s office.
Furthermore, we found entries with invalid codes in the data provided to us. For example, 327 payments totaling about $ 195,000 did not include one of the fund- group designations
The assignment of different types of funding to a single generic fund group decreases the usefulness of the CPS as a tool for review and oversight by the president’s office. 20 California State Auditor Report 2006- 103
noted in Appendix D. The president’s office informed us that this information was missing because some of the payments were erroneously charged to invalid fund numbers. In addition, we identified title codes that were not recognized by the CPS and which cause an invalid entry in the personnel program field, both of which indicate employees’ eligibility for certain types of pay and benefits. These errors have implications for CPS data. For example, the charging of expenditures to invalid funds presents a concern that other expenditures may be charged to incorrect funds. The university should consider developing additional automated controls and edits, such as only allowing the entry of information considered valid for the field in question or ensuring that expenditures are charged to the proper fund, to help avoid the possibility of such errors.
SUMMARY OF EMPLOYEE COMPENSATION AT
THE UNIVERSITY
Table 2 summarizes the systemwide compensation for university employees by funding source, based on data from the CPS. The top portion of the table contains items considered regular compensation, which totaled about $ 8.9 billion of the $ 9.3 billion paid to university employees during fiscal year 2004– 05. These include base pay in the form of hourly or salary compensation, payments for the university’s Health Sciences Compensation Plan and other medical- related services, differential payments, and the payout of accrued leave on an employee’s separation from the university. The remainder of the table— roughly $ 334 million— contains items considered additional pay above an employee’s regular compensation. Forms of compensation in this category include additional teaching or research, such as summer classes; housing and auto allowances; and stipends for performing duties outside the normal requirements of the position held.
Of the four funding source categories shown in Table 2, the source of the largest amount of funds is the category comprising federal and other grants and contracts, endowments, and other auxiliary operations. Income from state sources and student tuition and fees represent the second and third most significant sources, respectively. Funding that the president’s office was unable to assign to any of the categories appears in the column labeled “ Other.”
To provide perspective on the amounts of various types of compensation received by employees in different income levels within the university, we calculated the percentages of the
The charging of expenditures to invalid funds presents a concern that other expenditures may be charged to incorrect funds. California State Auditor Report 2006- 103 21
TABLE 2
Systemwide Compensation by Funding Source, Fiscal Year 2004– 05 ( in Thousands)
State Appropriations
Student Tuition and Fees
Other*
Subtotal of State Appropriations, Student Tuition and Fees, and Other
Federal and Other Grants and Contracts, Endowments, and Auxiliary Operations
Totals
Regular Pay
Base pay†
$ 1,565,165
$ 779,994
$ 755,871
$ 3,101,030
$ 4,815,101
$ 7,916,131
Off- scale/ non- base pay‡
5,102
2,085
1,812
8,999
2,267
11,266
Health Sciences Compensation Plan and other
medical- related pay §
65,171
24,931
63,429
153,531
528,293
681,824
Fellowship and scholarshipll
916
984
149
2,049
18,993
21,042
University extension#
378
23,813
1,202
25,393
395
25,788788788
Overtime, compensation time, and call- back pay
5,083
2,817
12,512
20,412
114,352
134,764
Differential pay
1,377
543
2,058
3,978
51,924
5555
,
9
02
Leave
2,003
796
1,090
3,889
43,179
4747
,
068
Leave payout
7,035
3,651
4,739
15,425
31,169
4
6,594594594
Subtotals of Regular Pay
1,652,230
8
39,614
8484
2
,862
3,334,706
5
,605,673
8
,94940,37979
Additional Pay
Sabbatical leave
29,007
11,005
491
40,503
3,695
4444
,
19898
Additional teaching and research
22,171
28,436
4,656
55,263
70,447
125,710
By agreement**
6,976
10,489
11,327
28,792
29,172
5757
,
9
64
Stipend
9,763
4,581
3,297
17,641
8,502
26,143
Tips, honoraria, and continuing education
91
475
200
766
1,632
2,39898
Bonus
3,737
2,945
7,714
14,396
31,464
4545
,
8
60
Hiring, referral, and retention incentives
41
20
59
120
1,323
1,44443
Relocation incentive
1,320
529
298
2,147
489
2,636
Other miscellaneous payments
3,848
1,515
304
5,667
3,282
8
,949949949
Lump- sum payments
903
346
989
2,238
5,091
7
,329
Housing allowance††
2,228
1,688
576
4,492
3,223
7
,715
Moving expense reimbursement
40
11
39
90
91
181
Automobile allowance
22
8
103
133
413
5454
6
Other perquisites
13
31
1,308
1,352
483
1,835
Perquisite deductions‡‡
( 226)
( 110)
( 1,324)
( 1,660)
( 5,330)
( 6,99990)
Severance pay
884
557
1,512
2,953
2,965
5
,918
Senior management group severance pay
104
190
1,650
1,944
631
2,575575575
Subtotals of Additional Pay
8
0,922
62,716
33,19999
176,837
15757,57573
334,410
Totals
$ 1,733,152
$ 902,330
$ 87876,061
$ 3,511,54543
$ 5,763,246
$ 9,27474,789789789
Source: Bureau of State Audits’ review of data from the Corporate Personnel System ( CPS) of the University of California ( university).
Note: As mentioned in the Scope and Methodology, because of concerns with the data in the CPS, we concluded that the data in it that we present in this table is of undetermined reliability.
* The Office of the President ( president’s office) was unable to assign the eight fund groups and a portion of a ninth that are included in the “ Other” category to the funding sources we identified because the source of funding is either not in the categories we defined or is a mixture of the categories.
† This category includes workers’ compensation payments and deductions for the Staff and Academic Reduction in Time Program, an arrangement whereby employees accrue their regular benefits and leave, but pay is reduced by a percentage equal to a negotiated reduction in work hours.
‡ According to the president’s office, a significant amount of off- scale compensation is contained within the “ Base Pay” category; however, we were unable to identify these amounts and only present the amounts charged as a separate category by the campus.
§ According to the president’s office, this figure represents base, negotiated, and incentive pay to faculty in the Health Sciences Compensation Plan ( plan), staff physicians and dentists, and to faculty who do not qualify for the plan because their appointment is at 50 percent or less.
ll According to the president’s office, the university acts as a fiscal pass- through for some individuals receiving fellowships and scholarships. The university receives the funds on behalf of these individuals and pays them from the funds received.
# According to the president’s office, the compensation in this category represents money paid to individuals who are primarily employed at the university extensions. However, it is possible that there may be some compensation paid to individuals who are primarily employed at a university campus and are providing additional instruction at an extension.
** Although the president’s office informed us that this category may contain base salaries for some individuals, for example, it stated that the funds in this category paid to individuals with a title code relating to medical positions should be categorized as plan compensation, because we found that campuses use this category for many different types of compensation, and because of inconsistencies in the title code field, we have chosen not to adjust the campus “ By Agreement” categories.
†† This category does not include the value of some university- owned housing provided to employees.
‡‡ According to the president’s office, this category is an offset for nonmonetary and nontaxable perquisites such as housing and meals provided at the convenience of the university. For tax purposes, the value of the benefit, which is recorded in other categories, is subsequently offset by this perquisite deduction to reduce the tax liability of an employee. 22 California State Auditor Report 2006- 103
compensation totals paid to employees in three income brackets in fiscal year 2004– 05. As shown in Table 3, the 4,071 university employees earning $ 168,000 or more received 10 percent of the total regular pay in fiscal year 2004– 05 while receiving about 26 percent of the total additional compensation in that same year. Moreover, these employees received most of the compensation for auto allowances and much of the pay for relocation incentives and moving expenses. Conversely, these employees received little of the pay for bonuses; hiring, referral, and retention incentives; and lump- sum payments.
SUMMARY OF THE COMPENSATION OF UNIVERSITY EMPLOYEES RECEIVING THE MOST FUNDS FROM STATE AND STUDENT SOURCES
We were asked to categorize by type and funding source the compensation of highly paid individuals receiving the most funds from state appropriations and student tuition. Table 4 on page 24 summarizes the compensation for 662 individuals receiving at least $ 168,000 from those funding sources. These individuals received $ 138 million of the $ 3.5 billion, or 4 percent, of the total state appropriations, student fees, and other sources shown in Table 2. However, these individuals received a much greater percentage of their total from additional compensation than did all other university employees: 18 percent compared with 4 percent. We chose $ 168,000 as a threshold for defining a highly paid individual because, prior to the recent policy change described in Table 1, it was the threshold the regents used to determine whether a salary would need their approval.
For a sample of the highly paid individuals represented in Table 4, we were asked to determine whether any additional compensation or employment inducements not appearing in the university’s centrally maintained records have been recorded in any employment agreements with the university. In our sample of the 100 employees receiving the most compensation from funding sources made up entirely or partially of state and student sources, we found that an employment agreement did not exist for each employee. Rather, many employees in our sample received offer letters outlining the initial compensation packages offered to them, and an assortment of other documents in their personnel files collectively represented the university’s employment agreements with the individuals. Also, we frequently
A compact disc containing detailed information for the 662 university employees earning more than $ 168,000 from state and student sources will be available shortly after the release of this report from the Bureau of State Audits on request.
The 4,071 university employees earning $ 168,000 or more received 10 percent of the total regular pay in fiscal year 2004– 05 while receiving about 26 percent of the additional compensation total in that same year. California State Auditor Report 2006- 103 23
TABLE 3
Systemwide Compensation by Income Bracket
Fiscal Year 2004– 05
( Dollars in Thousands)
Employees Receiving Total Compensation of:
Category
Number of Participants
Totals
$ 84,000
or Less
Between $ 84,000 and $ 168,000
$ 168,000
or More
Number of Employees
259,293
230,356
24,866
4
,071
Regular Pay
Base pay*
243,959
$ 7,916,131
64.7%
29.9%
5.4%
Off- scale/ non- base pay†
1,023
11,266
28.3
52.6
19.1
Health Sciences Compensation Plan and other medical- related pay‡
6,924
681,824
9.0
29.6
61.3
Fellowship and scholarship §
1,293
21,042
99.9
0.1
0.0
University extensionll
5,489
25,788
92.7
4.6
2.7
Overtime, compensation time, and call- back pay
51,751
134,764
68.1
31.3
0.6
Differential pay
32,588
55,902
75.5
24.2
0.3
Leave
7,726
47,068
84.3
14.6
1.1
Leave payout
19,307
46,594
77.0
16.3
6.8
Subtotals of Regular Pay
8,940,379
60.9
29.6
9
.5
Additional Pay
Sabbatical leave
1,025
44,198
20.4
58.1
21.4
Additional teaching and research
8,981
125,710
22.6
46.9
30.5
By agreement#
14,734
57,964
57.3
13.7
29.0
Stipend
6,563
26,143
32.4
41.2
26.4
Tips, honoraria, and continuing education
3,511
2,398
60.4
23.6
16.0
Bonus
44,118
45,860
63.7
29.1
7.2
Hiring, referral, and retention incentives
1,049
1,443
74.9
18.8
6.3
Relocation incentive
77
2,636
4.9
36.5
58.6
Other miscellaneous payments
7,994
8,949
14.3
56.8
28.9
Lump- sum payments
7,626
7,329
71.3
23.5
5.2
Housing allowance**
256
7,715
6.9
57.1
36.1
Moving expense reimbursement
125
181
43.1
15.5
41.4
Automobile allowance
72
546
1.1
16.3
82.6
Other perquisites
1,063
1,835
99.7
0.3
0.0
Perquisite deductions††
4,690
( 6,990)
99.8
0.2
0.0
Severance pay
511
5,918
47.9
28.6
23.4
Senior management group severance pay
31
2,575
3.8
25.4
70.9
Subtotals of Additional Pay
334,410
34.7
39.5
25.8
Totals
$ 9,27474,789789789
59
.9%
29.9%
10.1%
Source: Bureau of State Audits’ review of data from the Corporate Personnel System ( CPS) of the University of California ( university).
Note: As mentioned in the Scope and Methodology, because of concerns with the data in the CPS, we concluded that the data in it that we present in this table is of undetermined reliability. Percents may not add to 100 percent due to rounding.
* This category includes workers’ compensation payments and deductions for the Staff and Academic Reduction in Time Program, an arrangement whereby employees accrue their regular benefits and leave, but pay is reduced by a percentage equal to a negotiated reduction in work hours.
† According to the Office of the President ( president’s office), a significant amount of off- scale compensation is contained within the “ Base Pay” category; however, we were unable to identify these amounts and only present the amounts charged as a separate category by the campus.
‡ According to the president’s office, this figure represents base, negotiated, and incentive pay to faculty in the Health Sciences Compensation Plan ( plan), staff physicians and dentists, and to faculty who do not qualify for the plan because their appointment is at 50 percent or less.
§ According to the president’s office, the university acts as a fiscal pass- through for some individuals receiving fellowships and scholarships. The university receives the funds on behalf of these individuals and pays them from the funds received.
ll According to the president’s office, the compensation in this category represents money paid to individuals who are primarily employed at the university extensions. However, it is possible that there may be some compensation paid to individuals who are primarily employed at a university campus and are providing additional instruction at an extension.
# Although the president’s office informed us that this category may contain base salaries for some individuals, for example, it stated that the funds in this category paid to individuals with a title code relating to medical positions should be categorized as plan compensation, because we found that campuses use this category for many different types of compensation, and because of inconsistencies in the title code field, we have chosen not to adjust the campus “ By Agreement” categories.
** This category does not include the value of some university- owned housing provided to employees.
†† According to the president’s office, this category is an offset for nonmonetary and nontaxable perquisites such as housing and meals provided at the convenience of the university. For tax purposes, the value of the benefit, which is recorded in other categories, is subsequently offset by this perquisite deduction to reduce the tax liability of an employee. 24 California State Auditor Report 2006- 103
TABLE 4
Compensation for Individuals With More Than $ 168,000 in State and
Student Tuition and Fee Income by Funding Source
Fiscal Year 2004– 05
( in Thousands)
Category
State Appropriations
Student Tuition and Fees
Other*
Subtotals of State Appropriations, Student Tuition and Fees, and Other
Federal and Other Grants and Contracts, Endowments, and Auxiliary Operations
Totals
Regular Pay
Base pay†
$ 58,857
$ 25,482
$ 16,588
$ 100,927
$ 6,330
$ 107,25757
Off- scale/ non- base pay‡
596
312
10
918
57
975975975
Health Sciences Compensation Plan
and other medical- related pay §
2,192
1,385
9,380
12,957
6,146
19,103
University extensionll
—
3
442
445
2
447447447
Differential pay
42
16
1
59
4
63
Leave
188
71
80
339
18
35757
Leave payout
447
167
202
816
88
9
04
Subtotals of Regular Pay
62,322
27,436
26,703
116,461
12,64545
129,106
Additional Pay
Sabbatical leave
1,661
703
27
2,391
161
2,55552
Additional teaching and research
2,924
3,683
1,186
7,793
4,530
12,323
By agreement#
195
951
1,557
2,703
693
3,396
Stipend
1,283
663
339
2,285
255
2,54540
Tips, honoraria, and
continuing education
—
12
9
21
4
25
Bonus
14
34
993
1,041
161
1,202
Relocation incentive
514
222
267
1,003
212
1,215
Other miscellaneous payments
930
349
34
1,313
156
1,469
Lump- sum payments
34
13
2
49
208
25757
Housing allowance**
765
299
275
1,339
286
1,625
Moving expense reimbursement
4
1
35
40
29
69
Automobile allowance
18
7
99
124
213
337
Severance pay
—
—
503
503
—
5
03
Senior management group
severance pay
86
183
1,133
1,402
91
1,49493
Subtotals of Additional Pay
8
,428
7
,120
6,459459459
22,007
6,999999999
29,006
Total
$ 70,75750
$ 34,55556
$ 33,162
$ 138,468
$ 19,64444
$ 15858,112
Source: Bureau of State Audits’ review of data from the Corporate Personnel System ( CPS) of the University of California ( university).
Note: As mentioned in the Scope and Methodology, because of concerns with the data in the CPS, we concluded that the data in it that we present in this table is of undetermined reliability.
* The Office of the President ( president’s office) was unable to assign the eight fund groups and a portion of a ninth that are included in the “ Other” category to the funding sources we identified because the source of funding is either not in the categories we defined or is a mixture of the categories.
† This category includes workers’ compensation payments and deductions for the Staff and Academic Reduction in Time Program, an arrangement whereby employees accrue their regular benefits and leave, but pay is reduced by a percentage equal to a negotiated reduction in work hours.
‡ According to the president’s office, a significant amount of off- scale compensation is contained within the “ Base Pay” category; however, we were unable to identify these amounts and only present the amounts charged as a separate category by the campus.
§ According to the president’s office, this figure represents base, negotiated, and incentive pay to faculty in the Health Sciences Compensation Plan ( plan), staff physicians and dentists, and to faculty who do not qualify for the plan because their appointment is at 50 percent or less.
ll According to the president’s office, the compensation in this category represents money paid to individuals who are primarily employed at the university extensions. However, it is possible that there may be some compensation paid to individuals who are primarily employed at a university campus and are providing additional instruction at an extension.
# Although the president’s office informed us that this category may contain base salaries for some individuals, for example, it stated that the funds in this category paid to individuals with a title code relating to medical positions should be categorized as plan compensation, because we found that campuses use this category for many different types of compensation, and because of inconsistencies in the title code field, we have chosen not to adjust the campus “ By Agreement” categories.
** This category does not include the value of some university- owned housing provided to employees. California State Auditor Report 2006- 103 25
found that to identify additional employment inducements, we could not rely solely on a centrally maintained personnel file on each campus but had to view documentation from the various schools and departments in which the individuals worked. Because this information was in several locations, we are uncertain that we identified all additional employment inducements for our sample. Consequently, we obtained additional information from the university’s fiscal year 2004– 05 annual compensation report for the university officers and high- level administrators included in our sample.
Appendix A presents the compensation and additional employment inducements provided to the 100 university employees in our sample. Among the inducements we found were the granting of low- interest home loans, allocation of research and administrative funds, transference of sabbatical credits from former employers, reduction in normal teaching loads, spousal appointments, and improvements in either the facilities or operating budgets of the incoming employees’ departments.
THE PRESIDENT’S OFFICE REGULARLY GRANTED EXCEPTIONS TO COMPENSATION POLICY
It appears that the president’s office has regularly granted exceptions to university compensation policy. Of the 100 highly compensated employees whose personnel files we reviewed, 17 benefited from such exceptions. University policy authorizes the president’s office to approve exceptions that provide employees with benefits for which they otherwise would not be eligible. For example, the president’s office has the authority to grant a university employee a housing allowance exceeding the limit established by policy. In two particular instances from our sample, the president’s office granted exceptions that allowed a dean at Los Angeles to receive a $ 270,000 housing allowance and a dean at the University of California at Riverside ( Riverside) to receive a $ 187,500 housing allowance at a time when policy limited such allowances to no more than $ 53,300. In addition, the president’s office granted auto allowances of $ 8,916 to a senior vice chancellor and a medical school dean as exceptions to the university policy that limits such allowances to the president, chancellors, laboratory directors, vice presidents, principal vice chancellors, vice chancellors for university relations, hospital directors, principal officers of the regents, and the associate treasurer of the regents.
The president’s office granted exceptions to policy that allowed a dean at Los Angeles to receive a $ 270,000 housing allowance and a dean at Riverside to receive a $ 187,500 housing allowance at a time when policy limited such allowances to no more than $ 53,300. 26 California State Auditor Report 2006- 103
The president’s office also approved an exception to policy for a senior vice chancellor at San Diego to restore 220 hours of accrued vacation leave she lost under a university personnel policy that requires employees to schedule time off within six months of accruing the maximum number of vacation days. Moreover, the president’s office granted six executives in our sample who held academic appointments, including four chancellors and a campus provost, exceptions permitting them to participate in the university’s senior management severance pay plan. By doing so, the university agreed to contribute the equivalent of 5 percent of the employees’ salary into an interest bearing account that they receive when they leave the university. For three of these executives, the exceptions were requested because the university inadvertently informed them during the recruitment process they could participate in the severance plan.
The president’s office also granted the University of California at Berkeley ( Berkeley) chancellor exceptions to policy to reduce the number of years he needed to qualify for increased health care contributions provided by the university and obtained approval from the regents to have his retirement income calculated based on his full salary of $ 390,000 rather than on the earnings limit of $ 205,000 dictated by the Internal Revenue Service ( IRS) code. According to a July 2004 meeting of the regents, if the university does not obtain approval from the IRS to use an employee’s entire base salary in the calculation of retirement benefits, the university will pay the enhanced retirement benefit to the Berkeley chancellor from its own funds.
Frequently granting policy exceptions that allow certain employees to receive additional compensation and benefits can undermine the credibility of the policy and create an environment of noncompliance. The findings in the next section, that university policies were circumvented to benefit particular employees, highlights the need for an environment demanding compliance to established thresholds and procedures. By regularly granting policy exceptions, the president’s office weakens its oversight of the university campuses. As described in Table 1 on page 1111, the president announced in February 2006 that on an interim basis all exceptions for senior managers would be acted on by the president in consultation with the regents. This type of high- level attention to exceptions should help increase overall compliance. However, the university will need to develop a permanent exception approval process to ensure that exceptions to policy do not become commonplace.
Frequently granting policy exceptions can undermine the credibility of the policy and create an environment of noncompliance. California State Auditor Report 2006- 103 27
THE CIRCUMVENTION OF POLICY CAUSED A SIGNIFICANT OVERPAYMENT AND INAPPROPRIATE INCREASES IN RETIREMENT- COVERED COMPENSATION
Some university campuses circumvented and in some cases violated university policy, resulting in an overpayment to an employee and inappropriate increases to other employees’ retirement- covered compensation. Although we were not specifically asked to review the appropriateness of the compensation paid to university employees, as discussed in the Scope and Methodology, we performed a limited review of the appropriateness of compensation for a sample of university employees as part of our work to determine whether the data in the CPS is reliable. Our review revealed two examples of campuses creating complex compensation arrangements that circumvented policy, which in one case caused an employee to receive overpayment of approximately $ 130,000, and one example in which a university included questionable forms of compensation in a vice chancellor’s sabbatical pay. Additionally, we found that some campuses included inappropriate forms of compensation, such as housing and auto allowances, in individuals’ retirement- covered compensation, which could result in employees receiving retirement pay at a rate higher than they are entitled to receive.
San Diego Approved a Compensation Arrangement That Circumvented University Policy and Resulted in a Significant Overpayment to an Employee
To avoid directly violating university policy by permitting its dean of medicine ( dean) to retain certain external earnings, San Diego approved a complex arrangement that circumvented university policy and eventually resulted in an overpayment to the dean. In August 2001 San Diego asked the president’s office for advice on obtaining an exception to allow the dean to retain, in violation of the university’s Health Sciences Compensation Plan ( plan), the value of stock received as compensation for service on a scientific advisory board. Under the plan in effect at the time, the value of any stock that a plan member received as compensation for services provided to a for- profit entity had to pass through the university, which retained a percentage of the outside earnings for overhead expenses.
In October 2001 a president’s office assistant vice president indicated that she was supportive of the exception to allow the dean to retain his outside earnings but pointed out to the then‑chancellor of San Diego ( chancellor) that the dean
A president’s office assistant vice president was supportive of the exception but pointed out that this special treatment would put the dean in “ a difficult spot in terms of imposing the Plan provisions on the School faculty.” 28 California State Auditor Report 2006- 103
would be getting special treatment not available to other plan members, and this special treatment would put the dean in “ a difficult spot in terms of imposing the Plan provisions on the School faculty.” Instead, the assistant vice president proposed that San Diego increase the dean’s clinical pay by the estimated value of the stock and then have the dean use this increase in compensation to “ pay into the Plan the value of the stock . . . just like any other faculty member.”
The assistant vice president then suggested that, to avoid “ a big financial burden [ on the dean] to come up with the money,” San Diego authorize a payment schedule that would not start immediately and would allow the dean to pay into the plan slowly over time. Subsequently, San Diego increased the dean’s clinical pay by $ 5,000 per month, starting in November 2001 and continuing to the present. San Diego deducted $ 5,000 per month from his salary from October 2002 through October 2004, with a final deduction of $ 1,351 occurring in November 2004. These deductions totaled $ 126,351, which was the estimated value of the stock that the dean needed to pay into the plan. Although the arrangement was intended to compensate the dean only for the amount he had to pay into the plan, as of January 2006 the dean had received $ 255,000 related to the increase in clinical pay and was continuing to receive $ 5,000 per month despite the ending of deductions apparently designed to offset that increase. Consequently, rather than violate its policy by allowing the dean to keep the value of the stock, San Diego circumvented the policy and used university funds to pay the dean an extra $ 128,649 ($ 255,000 minus $ 126,351).
In February 2006 we informed San Diego’s Audit and Management Advisory Services ( auditors) of the apparent failure to discontinue the additional pay of $ 5,000 per month to the dean. In March 2006 San Diego sent a letter informing the president’s office that its auditors had reviewed the dean’s records and concluded that the dean had received a salary overpayment of approximately $ 130,000 and that the increase in his clinical pay was not properly disclosed to the regents. In the letter San Diego agreed that “ policy and procedures were not handled appropriately in this transaction” but argued that the resulting total compensation would still be warranted based on the dean’s performance and based on a salary comparison with deans at three of the university’s other medical schools.
The campus then argued that, despite the conclusion of its auditors that there was an overpayment, it would be inappropriate to penalize the dean by asking for repayment because the problem
Rather than violate its policy by allowing the dean to keep the value of the stock, San Diego circumvented the policy and used university funds to pay the dean an extra $ 128,649. California State Auditor Report 2006- 103 29
was related to a series of university administrative errors in which the dean played no role. Further, San Diego asserted that it was inappropriate to discontinue paying the dean the additional $ 5,000 per month as doing so would place his salary well below that of his peers. As of April 2006, the president’s office indicates it is reviewing this matter.
Los Angeles Created a Complex Compensation Package That Circumvented Policy and Obscured the Nature of the Eventual Compensation Received
In the summer of 2004 an interim dean of the law school at Los Angeles proposed a compensation package that would allow an incoming law professor to receive in his first year of employment a $ 75,000 advance payment for the summer research compensation he was authorized to receive in 2005 and 2006. The interim dean proposed that this $ 75,000 be paid as an additional housing allowance, on top of the housing allowance of $ 53,300 that Los Angeles had already agreed to provide the incoming professor. After the arrangement was approved by the campus’s vice chancellor of academic personnel, the law professor received a total housing allowance of $ 128,300 as part of his initial compensation package.
According to the audit manager at Los Angeles ( audit manager), although university policy does not specifically allow for an advance payment to an employee for future summer research compensation, the audit manager determined that all elements of this compensation arrangement were within university policy. However, if paying summer compensation in advance is within university policy, we question why the campus would include the advance within the housing allowance payment instead of classifying the payment in the payroll system as summer compensation.
In addition, the policy in effect at the time limited housing allowances to $ 53,300 unless the president’s office approved an exception. A June 2004 letter speaks to a verbal approval obtained from an assistant vice president in the president’s office, but Los Angeles was not able to provide anything in writing to that effect. By choosing to pay summer compensation in advance, but categorizing it as a housing allowance payment that then exceeded housing allowance limits, the Los Angeles law school circumvented, if not violated, existing policy and obscured the nature of this professor’s compensation. Further, university policy should not have to specifically state that an individual is not to receive advance payments for work that
After the arrangement was approved by the campus’s vice chancellor of academic personnel, the law professor received a total housing allowance of $ 128,300 as part of his initial compensation package. 30 California State Auditor Report 2006- 103
may or may not occur in the future. Even if the employee agrees to repay the money if work is not performed, a promise that appears to have been made in this case, this does not adequately ensure that the university’s interests are protected because under various circumstances the campus may not be able to obtain repayment should that become necessary.
In addition, in June 2005 the Los Angeles law school paid $ 7,460 to the professor to cover the cost of health insurance premiums and dental expenses, including a four- month advance payment of health insurance premiums, plus estimated taxes that he would have to pay for being reimbursed for those premiums. Reimbursement of dental expenses, estimated health insurance premiums, and estimated taxes were not part of the school’s agreement with the professor. As of April 2006, the president’s office indicates that it is reviewing this compensation arrangement.
San Diego Included Questionable Forms of Compensation in a Vice Chancellor’s Sabbatical Pay
Despite being on sabbatical for much of fiscal year 2004– 05, San Diego’s vice chancellor of academic affairs ( vice chancellor) continued to receive a $ 68,100 administrative stipend for a position she had vacated and also an $ 8,900 auto allowance. In October 2003 the vice chancellor was appointed to acting chancellor of San Diego until the appointment of a new chancellor could be accomplished. The vice chancellor’s previous base salary of $ 212,600 and auto allowance of $ 8,900 were continued and an additional administrative stipend of $ 68,100 was granted to compensate her for being acting chancellor. As indicated in the Introduction, a stipend is compensation for undertaking temporarily assigned responsibilities that are outside the scope of an employee’s regular responsibilities and usually those of a higher- level position.
In June 2004 the university completed its recruitment for a new chancellor at San Diego. In a July 2004 letter, the university’s former provost agreed to pay the vice chancellor $ 280,700 ( both the $ 212,600 base salary and the $ 68,100 stipend) during her sabbatical, which was to begin at the start of the new chancellor’s appointment in August 2004 and end one year later in August 2005. Consequently, despite a policy that states that senior managers’ sabbatical compensation shall be based on their administrative salary, the vice chancellor received the
Despite a policy that states that senior managers’ sabbatical compensation shall be based on their administrative salary, the vice chancellor also received a $ 68,100 stipend and an $ 8,900 auto allowance during the sabbatical. California State Auditor Report 2006- 103 31
stipend throughout her sabbatical. The campus also allowed her to continue to receive her $ 8,900 auto allowance during the sabbatical.
As a result of our inquiries, San Diego stated in an April 2006 letter to the president’s office that university policy is silent on whether sabbatical compensation would include either a stipend or an auto allowance; it pointed out, however, that special circumstances should be considered when evaluating these payments. San Diego noted that the vice chancellor traveled to and from San Diego to assist with administrative matters throughout her sabbatical. The campus also said that in 2001 a base salary increase to $ 250,000 for the vice chancellor had been approved but deferred due to budget constraints and would have been received in September 2004 had she not been scheduled for a sabbatical. San Diego argued that it was therefore reasonable to view a significant portion of the stipend received during her sabbatical as the deferred compensation that she would have received had she not taken the sabbatical. San Diego also concluded that because the former provost’s July 2004 letter stated the sabbatical compensation as outlined was “ in accordance with policy,” it would not be appropriate to question the payment of the stipend at this time. San Diego further concluded that in retrospect it would not seem appropriate to permit an auto allowance in the calculation of sabbatical compensation.
Despite San Diego’s conclusion that it would not be appropriate to question the stipend payment, we found that the payment is questionable for a number of reasons. First, university policy should not have to specifically disallow every form of compensation that is not to be included in sabbatical pay. If a stipend or auto allowance is not part of the definition of an administrative salary, then it should not be included in sabbatical pay. In a discussion of administrative personnel that take administrative leave in lieu of sabbatical, the university’s personnel manual indicates that administrative leave pay would include an administrative stipend if the individual will return immediately following the leave to the administrative position associated with the stipend. This same principle would seem to apply to administrative personnel, such as the vice chancellor, that take sabbatical.
In this case, it was known that the vice chancellor would not be returning to the acting chancellor position after her sabbatical because the campus had already appointed a chancellor. Therefore, we question why the campus would continue to pay a stipend that is ostensibly for someone to act in the place
It was known that the vice chancellor would not be returning to the acting chancellor position after her sabbatical. Therefore, we question why the campus would continue to pay a stipend that is ostensibly for someone to act in the place of a chancellor when it had already filled that position. 32 California State Auditor Report 2006- 103
of a chancellor when it had already filled that position. As of April 2006, the president’s office indicates that it is currently evaluating the sabbatical pay provided to the vice chancellor to determine whether it was appropriate.
Some University Campuses Violated Policy by Including Inappropriate Forms of Compensation in the Retirement Calculations of Certain Individuals
By improperly including compensation such as housing and auto allowances in retirement- covered compensation, the university risks inflating retirement payments for its employees. Retirement payments are calculated based on a percentage of the average of an employee’s 36 highest monthly salary payments, less certain contributions, such as Social Security. The percentage is based on the employee’s service credit and age at retirement. The university’s retirement plan and accounting manual specify that certain forms of compensation may not be included in retirement- covered compensation. As shown in the text box, regular base pay, most types of differential pay, administrative stipends, and several types of leave are included in retirement- covered compensation, while other types of compensation, including housing and auto allowances, are specifically excluded. In addition, the IRS code sets a limit for annual earnings on which retirement benefits may be based. For employees joining the university’s retirement plan on or after July 1994, the limit is $ 205,000; for those who joined the plan before July 1994, the limit is $ 305,000.
We identified four instances from our sample of 100 highly paid employees in which excluded types of compensation were improperly included in an employee’s retirement- covered compensation. Two officials at Riverside, the vice chancellor of research and the executive vice chancellor and provost, received housing allowances of $ 53,300 each in fiscal year 2004– 05 and, according to data contained within the CPS, the allowances were included in the individuals’ retirement- covered compensation. Another example is the men’s basketball coach at Irvine, who received $ 4,800 in auto allowance payments and $ 42,373 in profit associated with basketball camps he coordinated on campus. In the CPS, Irvine classified
Retirement- Covered Compensation
Includes:
• Regular base pay
• Differential pay ( except on- call pay)
• Administrative stipends
• Sabbatical leave pay
• Vacation, sick, and military leave pay
Excludes:
• Overtime
• Additional teaching and research pay
• Housing and auto allowances
• Consulting fees and honoraria
• Senior management severance pay
• Relocation incentives
• Bonuses and incentive awards
• Terminal vacation pay
Source: University of California Retirement Plan and Accounting Manual. California State Auditor Report 2006- 103 33
the auto allowance as regular pay and the basketball camp profits as a stipend and included both items in the coach’s retirement‑covered compensation. Finally, $ 5,513 in auto allowance payments received by the former acting chancellor at the University of California at Santa Cruz were classified as a stipend and were inappropriately included in his retirement- covered compensation.
In each of these examples, the respective university campus agreed that the compensation items should not have been included. The university’s retirement policy director ( retirement director) also agreed, indicating that his initial assessment was that these items do not appear to be appropriate forms of retirement- covered compensation. The retirement director said that he would pursue this matter further with the campuses.
Because only the highest 36 consecutive monthly salary payments enter into the university retirement calculation and because of the federally imposed limits described earlier, amounts inappropriately included in an employee’s retirement- covered compensation do not always impact the eventual retirement benefit the employee receives. Except for possibly the coach ( depending on the results of the university’s retirement policy review), the employees’ salaries in the examples above already exceeded the $ 205,000 limit. Therefore, under current policy their retirement benefits would not have been affected by the inclusion of additional types of compensation, appropriate or not. However, the university is currently seeking approval from the IRS to remove the limits of $ 205,000 and $ 305,000 on retirement- covered compensation. Therefore, if not corrected, the amounts inappropriately included in retirement- covered compensation in the examples above could have an impact on these individuals’ retirement benefits in the future. In addition, the examples we found in our review are instructive because they indicate a lack of adequate control over the classification of retirement- covered compensation.
According to the retirement director, the university occasionally audits data input into the retirement membership system and issues retirement- related guidance when it becomes aware of practices inconsistent with policy. For example, the university auditor conducted audits related to retirement plan membership in November 2003 and the compensation of retired annuitants in September 2004. According to an audit director, the
Irvine classified an auto allowance as regular pay and basketball camp profits as a stipend and included both items in a coach’s retirement- covered compensation. 34 California State Auditor Report 2006- 103
university auditor is currently conducting an audit of service credits, and plans on conducting an audit of retirement- covered compensation in fiscal year 2006– 07.
Also, in May 2004 the president’s office, in response to some campus administrative decisions that were inconsistent with retirement policy, issued a letter reminding university administrators that any liability incurred as a result of a deviation from retirement policy will be charged back to the appropriate location. However, the retirement director agreed that the university does not currently use data from campuses, which feed into the CPS and other corporate information systems, to determine on an annual or otherwise periodic basis whether campuses are complying with retirement policies. Rather, the university reviews each individual’s retirement- covered compensation in detail when the employee retires if its information system related to retirement generates any warning messages concerning an individual’s retirement- covered compensation. For example, the retirement director indicated that the coach’s compensation generated three warning messages that would have required a review.
Conducting a detailed review when an individual retires is certainly appropriate, but this practice would not catch mistakes until years later. A more effective approach would find errors up front to avoid perpetuating them into the retirement- covered compensation of other employees. For instance, had the university reviewed the data contained in the CPS for housing allowances being included in retirement- covered compensation, it would have found the two examples we uncovered at Riverside. It also would have found an additional total of $ 52,560 in housing allowances included as retirement- covered compensation for five different employees at Riverside and another $ 13,875 of the same at Berkeley.
However, the overly vague classifications and the misclassification of compensation in the CPS, as discussed earlier, would have limited the university’s use of CPS data as an oversight tool. If the university were to improve its oversight of retirement- covered compensation, it would need to standardize campuses’ use of compensation classifications, ensuring that only certain defined codes are used for retirement- covered compensation. The university would also have to eliminate or severely restrict the use of classifications, such as “ By Agreement,” that do not clearly express the exact nature of the compensation.
Had the university reviewed the data contained in the CPS for housing allowances, it also would have found an additional $ 52,560 included as retirement- covered compensation at Riverside and another $ 13,875 at Berkeley. California State Auditor Report 2006- 103 35
THE UNIVERSITY CONSISTENTLY VIOLATED POLICIES THE REGENTS ESTABLISHED TO ENSURE ADEQUATE REVIEW OF EXECUTIVE COMPENSATION
The regents’ policies require them to approve all forms of compensation for officers of the university. Although the university consistently complied with this policy by obtaining regents’ approval of each officer’s salary, it did not always submit officers’ nonsalary compensation, such as housing and auto allowances, to the regents for consideration as required by university policy. Further, even though the president’s office prepares an annual report on compensation, it did not submit the fiscal year 2003– 04 and 2004– 05 reports to the regents until March 2006. Because of their lateness and because of inaccuracies we found, the usefulness of the reports is limited. Also, because the regents are required to approve nonsalary compensation only for officers, they are not informed of allowances provided to other university employees whose salaries they must approve. Consequently, we question whether the regents’ and the university’s policies provide the transparency necessary to ensure effective oversight of compensation by the regents.
Summary of the University’s Disclosure Policies
The regents’ policies require them to approve all forms of compensation for officers of the university, including the university president, senior vice presidents, vice presidents, associate vice presidents, and assistant vice presidents; chancellors and vice chancellors; laboratory directors and deputy directors; hospital directors, university auditor, and controller; and principal officers of the regents, including the treasurer, general counsel, and secretary. In addition, regents approve rates of compensation and subsequent changes in rates of compensation for other university administrators with salaries of at least $ 168,000. This threshold for regents’ approval does not apply to academic employees unless they hold administrative titles as well. However, the regents did not and still do not have to approve nonsalary compensation for any employee who is not an officer. Earlier this year, the regents approved a new pay structure authorizing the president to raise the salaries of university employees, other than the university’s top 32 officers, within broad salary ranges without prior approval of the regents if individual salary increases do not exceed 15 percent and if total salary remained within the salary budget.
Because the regents are required to approve nonsalary compensation only for officers, they are not informed of allowances provided to other university employees whose salaries they must approve. 36 California State Auditor Report 2006- 103
The full Board of Regents is required to meet in open session when taking final action on compensation for specified officers of the university. However, the regents’ finance or compensation committee may consider and recommend compensation for these officers in closed session. The regents are not required to meet in open session when taking final action on compensation for other university employees. The university’s compensation disclosure survey response presented in Appendix B shows the methods it uses to disclose employee compensation.
The University Violated Policy by Not Disclosing All Forms of Officers’ Compensation
Although the university consistently obtained regents’ approval for the salaries of officers and other employees at the levels required in policy, it did not consistently disclose officers’ nonsalary compensation to the regents as required by university policy. To test the university’s disclosure practices for employees receiving compensation in fiscal year 2004– 05, we reviewed regents’ minutes for a sample of 20 university employees, including 10 officers, chosen from the 100 university employees listed in Appendix A. We determined whether salary and nonsalary compensation provided to these 20 university employees was disclosed to the regents when their salaries were approved as required by university policy.
Of the 20 employees, the university obtained regent approval of salaries for all officers and for any other university employee whose salary exceeded the appropriate threshold. In addition, for the 10 officers in our sample, the university appropriately obtained approval from the regents for four relocation allowances and, in one instance, an increased retirement benefit. However, for these 10 officers, the university violated its executive compensation policy by not disclosing to the regents a total of eight auto allowances, four housing allowances ( two related to one officer), two transfers of sabbatical credits, and an acceleration of university- provided health insurance contributions at the time the regents considered the individuals’ appointments. The university’s Office of the General Counsel ( general counsel) agreed that such allowances “ should have been disclosed to the Board of Regents at the time the Office of the President was seeking approval of compensation for those individuals.” In addition, the general counsel stated that under university policy “ every element [ of compensation] should be reported [ to the regents] at the time approval is sought.”
For 10 officers we reviewed, the university violated its executive compensation policy by not disclosing to the regents eight auto allowances, four housing allowances, two transfers of sabbatical credits, and an acceleration of health insurance contributions. California State Auditor Report 2006- 103 37
In one instance, the president of the university agreed to grant an incoming university provost a housing allowance of $ 125,000 and then, during a regents’ meeting less than a week later, failed to disclose it. In a June 2004 letter to the incoming provost, the president stated that he had agreed on February 17,  2004, to provide her a $ 125,000 housing allowance to be paid over a period not to exceed four years. Because the amount of the allowance exceeded the then- current maximum amount established by university policy—$ 53,300— the president later authorized an exception to policy to grant the allowance. In addition, he authorized an exception to policy to provide the incoming provost temporary housing in Oakland for six months or until she made a permanent decision about her living arrangements ( policy limits this benefit to one month).
On February 23, 2004, six days after the president had agreed to provide the provost with the above- mentioned items, he proposed a base salary of $ 380,000 for the incoming provost to the regents. Although this represented a 41 percent increase in salary and a significant increase over the previous university provost’s salary, there is no documentation that the regents, who were responsible to make the salary approval decision, were ever told about either the housing allowance or the temporary housing allowance features of the compensation package. The regents approved the $ 380,000 salary the president recommended; the provost received the $ 380,000 salary and both housing allowances.
The university provided the following statement in regard to this example:
“ The UC President advised that the $ 125,000 was not a housing allowance, but was a relocation allowance under the faculty housing assistance program. He has acknowledged that although it is his recollection that the Senior Vice President- Business & Finance had disclosed the relocation allowance of $ 125,000 for the provost to the board committee considering her compensation, the practice at that time was not to include all elements of compensation in the documents provided and that the disclosure may have been in informal conversation with some but not all of The Regents involved. He noted that he has personally committed to and already begun implementation of disclosure of all elements of compensation in each and every case where The Regents
For the purposes of the audit, we defined payments under this program, which is known as the Faculty Recruitment Allowance Program, as housing allowances.
The president of the university agreed to grant an incoming university provost a housing allowance of $ 125,000 and then, during a regents’ meeting less than a week later, failed to disclose it. 38 California State Auditor Report 2006- 103
are called upon for approval and that UC is developing the processes and documentation standards to fulfill this commitment in the future.”
Information about salary and nonsalary compensation to officers was retroactively provided to the regents in the university’s annual report on compensation. However, the president’s office did not present the annual reports for fiscal years 2003– 04 and 2004– 05 to the regents until March 2006, and the reports included a number of inaccuracies. In the case of the incoming university provost described earlier, it was not until March 2006, more than two years after her appointment and salary were approved by the regents and more than four months after she resigned from the university, that the regents were informed of the now- former provost’s housing allowances in a footnote to the university’s fiscal year 2004– 05 annual report on compensation. Further, the report that was eventually presented to the regents inaccurately stated that while in office the provost received the $ 125,000 housing allowance in 48 installments of $ 2,600 each. In fact, she received it as a lump- sum payment of $ 125,000 in fiscal year 2004– 05. In addition, the report incorrectly stated that the provost did not receive an auto allowance, when she actually received an annual auto allowance of $ 8,916. The report also failed to note that two officers at Riverside received Mortgage Origination Program loans of $ 675,000 and $ 350,000, respectively. However, we did not perform a review of the report’s accuracy to determine whether other errors exist.
The inaccuracies and lateness of these annual compensation reports limit their usefulness because they do not provide timely and accurate notification to the regents of compensation matters. According to the president’s office, both of these reports were late “ principally due to the fact that the HR [ Human Resources] unit responsible for this report lost staff at the same time as their workload increased. This is also the unit responsible for coordinating and processing senior management actions, including hirings and retirements, which contributed to the significant increase in workload.”
University Policy Does Not Require the Regents to Consider All Forms of Compensation Provided to Employees When Approving Salaries
Since the regents are required to approve nonsalary compensation only for officers, they are not always informed of allowances provided as nonsalary compensation to other university employees
The president’s office did not present the annual reports for fiscal years 2003– 04 and 2004– 05 to the regents until March 2006, and the reports included a number of inaccuracies. California State Auditor Report 2006- 103 39
whose salaries they must approve. The six employees in our sample who were not officers but earned salaries exceeding the level requiring regent approval, all received some form of nonsalary compensation. Although university policy does not mandate disclosure of the compensation of employees who are not officers, five of these six employees were provided significant housing and/ or relocation allowances ranging from $ 100,000 to $ 270,000. The president’s office did not disclose these allowances to the regents when they approved four of the five employees’ salaries. Providing the regents with details about all compensation these individuals receive would allow the transparency necessary to ensure effective oversight.
In other instances, spouses of employees were granted permanent or temporary academic appointments that the university funded. For instance, in a letter to an incoming vice chancellor, Riverside agreed to loan $ 11116,800 in permanent funding to the College of Humanities, Arts, and Social Sciences for his wife’s appointment as a professor in the Department of Anthropology. The $ 11116,800 was intended to fund her salary, benefits, and support costs. Although the university indicates that the hiring of a spouse or partner is an accepted practice at most private- sector corporations and other academic institutions, there is an associated cost with this practice that the regents may consider relevant.
The president’s office indicates that it is implementing new compensation disclosure practices to provide more information to the regents when they review salaries. Specifically, the university is developing a form to disclose detailed information about all forms of compensation, including salary and other cash payments, benefits and perquisites, one- time payments and reimbursements, future benefits, and other compensation, as part of the action item presented to the regents at the time of an employee’s appointment. This form, which would be completed for all officers and administrative employees earning salaries in excess of a specific threshold, would allow the regents to be informed about all forms of compensation an employee is receiving or will be receiving when they are asked to approve the individual’s compensation. The president’s office states that this form would not be completed for faculty who hold only academic titles, which is consistent with the regents’ current practice of approving compensation for highly paid faculty only if they hold both academic and administrative titles.
The president’s office indicates that it is implementing new compensation disclosure practices to provide more information to the regents when they review salaries. 40 California State Auditor Report 2006- 103
OUR SURVEY OF COMPENSATION PRACTICES AT COMPARABLE UNIVERSITIES SHOWED THAT THEY GENERALLY DID NOT DISCLOSE MORE INFORMATION THAN THE UNIVERSITY OF CALIFORNIA
To compare the public disclosure policies of the University of California with those of comparable institutions, we selected a sample of 15 universities and asked them to complete a survey. Although we received a limited number of responses, and the ones we did receive were incomplete, our survey revealed that other universities do not disclose more information about employee compensation than does the University of California. Of the 15 universities to which we sent surveys, seven responded, including three public and four private institutions. Seven universities chose not to respond, citing the short time frame within which to complete the survey, the detail of information requested, and other campus priorities, while one institution, the University of Wisconsin, provided only the salaries and benefits of its senior executives along with information about the benefits available to executive staff ( which discussed benefits that would appear to be available to all employees, such as health insurance) and also referred us to its Web site for further information about its compensation practices. The University of California’s response and the seven universities’ responses are documented in Appendix B. The text box summarizes which of the 15 universities chose to respond.
Most of the seven universities responding to our survey offered only limited information. However, the information about compensation disclosure practices that these seven universities provided did not reflect that they were more proactive than the University of California in disclosing compensation information to their governing boards or the public. All seven indicated whether they offered the compensation or benefit items we asked about to their employees, but only the Massachusetts Institute of Technology, the University at Buffalo, the State University of New York ( SUNY Buffalo), and Duke University gave us partial information on the number of participants and annual expenditures on these items.
We requested responses by February 24, 2006, two weeks after we delivered the surveys. However, we accepted responses until April 4, 2006.
Universities We Surveyed
Respondents:
California Institute of Technology
Duke University
University of Illinois
Massachusetts Institute of Technology
( including Lincoln Laboratory)
University at Buffalo,
the State University of New York
Stanford University
University of Washington
Nonrespondents:
University of Colorado at Boulder
Harvard University
University of Michigan
University of North Carolina
University of Texas System
University of Virginia
University of Wisconsin
Yale University California State Auditor Report 2006- 103 4 4 1
Although several universities responded that they proactively disclose certain compensation information to their governing boards, others said they make such information available to the public on request, in accordance with disclosure statutes. For example, Stanford University ( Stanford), a private institution, indicated that it releases individual employee compensation on the IRS Form 990, which requires organizations that are exempt from income tax to disclose the compensation of current officers, directors, trustees, and key employees. Stanford also indicated that a committee of its board of trustees approves the salaries and benefits of the most senior and highly compensated faculty members and employees. Some universities post compensation information on their Web sites or in their annual reports. SUNY Buffalo stated that it provides electronic disclosure to its board on most types of compensation and benefits for individual employees.
In contrast, the University of California responded more completely to our survey, withholding only certain expenditure and participation information. The university did provide more detail on its disclosure practices, which we discussed earlier in this section. In general, the university indicated that it did not proactively disclose details about individuals’ compensation and benefits, but it noted that most of this information would be released in response to a Public Records Act request.
RECOMMENDATIONS
To improve its ability to monitor campus compliance, the president’s office needs to issue clear directives prescribing consistent use of the CPS. These directives should include a requirement that campuses consistently classify compensation into standard categories that best describe the compensation provided to employees. Also, the president’s office should standardize the categories that can be included in retirement- covered compensation and restrict the use of classifications, such as “ By Agreement,” that are too vague to allow the president’s office to ensure that the compensation complies with university policy.
The president’s office should consider developing additional automated controls and edits within the CPS, such as only allowing the entry of information considered valid for the field in question or ensuring that expenditures are charged to the proper fund, to help avoid the possibility of errors.
Several universities responded that they proactively disclose certain compensation information to their governing boards; others said they make such information available to the public on request, in accordance with disclosure statutes. 42 California State Auditor Report 2006- 103
To preserve the integrity of the compensation policies it issues, the president’s office needs to limit the number of exceptions to policy it allows. This objective could be accomplished by the regents requiring the university to track and annually report exceptions to compensation policy that the president, provost, vice chancellor of academic affairs, campus chancellors, and other university officials grant during a fiscal year and provide justification for each exception.
To preserve the integrity of the compensation policies it issues, the president’s office needs to improve its oversight of campuses’ compliance with those policies. One mechanism it should use to improve oversight is to annually identify unauthorized exceptions to policy, such as housing and relocation allowances paid above allowable limits and auto allowances being granted to individuals who do not qualify.
The president’s office should determine if it is appropriate to require repayment of university funds for the instances we identified in which a university employee received compensation in violation of university policy, and if so, develop a repayment plan with each employee.
To eliminate inappropriate compensation included in employees’ retirement earnings, the president’s office should remove the amounts we identified from the employees’ retirement earnings and establish a mechanism to detect, on at least an annual basis, compensation that campuses have incorrectly classified as retirement covered.
To increase transparency as it relates to the compensation of highly paid university employees, the regents should require the president’s office to disclose all forms of compensation for university officers and for all employees whose compensation exceeds an established threshold. This disclosure should occur when the regents approve the employees’ salaries and at least annually in a report to the regents. If the president’s office continues to submit its annual report on compensation to the regents, it should ensure that it is accurate and timely. California State Auditor Report 2006- 103 4 4 3
We conducted this review under the authority vested in the California State Auditor by Section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. We limited our review to those areas specified in the audit scope section of this report.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
Date: May 2, 2006
Staff: John Baier, CPA, Audit Principal
Benjamin M. Belnap, CIA
Gregory B. Harrison, CIA
Jonnathon D. Kline
Richard J. Lewis
Jasdeep Uppal 44 California State Auditor Report 2006- 103
Blank page inserted for reproduction purposes only. California State Auditor Report 2006- 103 45 45
APPENDIX A
Compensation for the 100 Highest‑Paid University Employees From Funding Sources Made Up Entirely or Partially of State and Student Sources
Table A on the following pages details the compensation of the 100 most highly paid University of California ( university) employees during fiscal year 2004– 05 and the funding sources for their compensation. As described in the Scope and Methodology, these 100 university employees received the most compensation from funding sources made up entirely or partially of state and student sources. Although other university employees may have received more compensation, the compensation they received from state and student sources was less than that of the 100 employees in Table A. For example, one coach earned almost $ 1.6 million during fiscal year 2004– 05, but none of his pay was funded from state or student sources.
The compensation items listed in Table A for each employee are those contained in the university’s Corporate Personnel System ( CPS). The campuses used approximately 800 different descriptions in fiscal year 2004– 05, and many descriptions are not entirely clear, such as “ SELF SUPPORT PROG- BYA 120,” which represents compensation for teaching additional classes. To help readers interpret the compensation descriptions included in Table A, we have included in Appendix E a list of the descriptions used by campuses and the equivalent categories we used to classify each compensation item.
In addition, when we were able to obtain more specific information from the employees’ personnel files, the footnotes to Table A explain the nature of certain compensation items. For example, the university includes a wide range of compensation items in the “ By Agreement” category, even though more specific categories exist. Further, we described other benefits or additional incentives provided to these employees, such as loans, research funding, or sabbatical credits for time at other universities, when our review of personnel files revealed them. 46 California State Auditor Report 2006- 103
We did not include in Table A some types of benefits or employment inducements that are standard to all employees or employees of a certain category. For instance, we did not include the payment of moving expenses, even if they occurred in fiscal year 2004– 05, because this inducement is available to most new hires who are managers, professionals, or academic appointments. Also, university employees who are members of the senior management group are eligible for additional benefits, including salary continuation during disability and increased business travel accident insurance. Senior managers who hold academic titles do not qualify for the special severance pay but rather accrue sabbatical leave credits. However, as noted in Table A, some senior managers received excepti