A Risky Loan

By Chelsey Davis • Staff Writer


The cash-strapped state of California has utilized some drastic measures to solve its money issues, most recently in the form of taking a $200 million loan next month from the UC system, an institution from which it has just cut $650 million. The UC system is taking a leap of faith to support its main financier, who cannot operate properly without these funds. When it comes down to it, the UC system doesn’t have much choice but to loan the money. In the end though, this venture could prove beneficial to the universities as long as California reciprocates the assistance in the future.

The purpose of the loan from the UC system is to contribute to the necessary $2.5 billion financial cushion that the state needs in the event that revenues start to plummet dramatically. California’s staggering debt has caused its credit rating to dip from A-plus to A in 2009, while most states have AA and AAA ratings. As a result, any loans that the state might potentially take out from private institutions would have impractically high interest rates. On the other hand, the UC system has retained a good credit rating despite state budget cuts it has faced in recent years, and therefore can take out loans from an outside source at a much lower interest rate. The plan is to have the UC system borrow from a private source at an interest rate of 0.005 percent and then loan the money to the state at a 2 percent interest rate. As of now, California is slated to pay the money back with interest to the UC system by April 20 of this year.

The California may have every intention to pay the UC loan back by April, but given its past track record, it looks unlikely. The state is already in debt to the UC system for a whopping $1.7 billion due to this borrowing-lending plan in the past. In 2009, the UC system loaned the state $200 million in exchange for ten voter-approved building projects on the UC campuses, which are still in the works. Again in July 2011, a bill was passed to establish an investment fund that the UC system and other agencies could contribute to as a way of maintaining the state’s cash flow. The UC system invested one billion dollars into the fund, which the state won’t have to pay back until October of this year. With yet another loan on the state’s wishlist, it seems unlikely that any of these loans will be paid back by the scheduled time. While the loan may not be paid back promptly, the interest generated from the loan, though modest, will pump some extra funds into the universities. Therefore, once the state follows through with the payment, the UC system will come out on top while also assisting the state. 

Dianne Klein, spokesperson for the UC system, sums up the catch-22 the UC system is in. “By loaning the state money and risking that they don’t pay [the UC system] back on time, we’re putting ourselves on the line,” she said. “It’s a show of good faith when the university lends money to the state.” The situation leaves the UC system in a tough place: they can loan the money with little assurance that it will be paid back in a timely way or risk the state losing money.

The UC Board of Regents, which has the final say in 

the decision over the loan, needs to devise a solid plan with the state in order to get the money back on time in April, but it should also add a few stipulations to this loan. Mainly, they should make sure the state sees the UC as a priority for funding in times of economic crisis, not something that is first in line to get cut. In time, this should become a long-term plan, where the UC has a reserve fund from the state as money to fall back on in case of another economic recession. 

For now, it’s wise that the UC is willing to work with the state in hopes of extra support in the coming years, but history is known to repeat itself —and our history with the state isn’t a good one. The UC needs to make a bold move with this loan in order to make sure its relationship with the state takes a turn for the better.

Readers can contact Chelsey Davis at [email protected]

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