455.Paper.Peter Qu.UC Budget Cuts.AUT08

455.Paper.Peter Qu.UC Budget Cuts.AUT08 - MSandE455...

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MSandE 455 Stanford University Final Paper Peter Qu [email protected]
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I. Decision: University of California Budget Cut 2008 is a difficult year for both the State of California and the University of California system. The housing slump and financial crisis have left a $24.3 billion deficit in the California State Budget (Schwarzenegger, May Revision 2008‐09, Governor's Budget, 2008). In order to balance the budget, the Governor Schwarzenegger proposed deep cuts in the fuding to the state agencies, including the UC system. Due to the severity of the deficit and the wide impact of proposed cut, the this year budget process broke the record as the longest budget stalemate in California history (The California Budget Project, 2008). The stalemate ended on September 23, 2008 when the California Governor Arnold Schwarzenegger signed the state budget for the year 2008/2009 (The California Budget Project, 2008). Included in the new budget is a $233.4 million reduction in state funding to the UC system. In this paper, we will use decision analysis techniques to analyze this decision of UC budget cut. II. Background: Financial Crisis, State Budget and University of California Financial Crisis: The root causes behind the budget cut are the financial crisis and housing slump that have recently hit the United States. After decades of home value appreciation and rapid economic expansion, the housing prices peaked in early 2005 and began to decline in 2006 (United States housing bubble, 2008). Since majority of the mortgages have been repackaged and sold worldwide as asset‐backed securities, the subsequent decline in house price and rise in mortgage default rate have caused rapid depreciation in the value of securitized mortgages (Financial crisis of 2007–2008, 2008). What started as a loss on confidence in the securitized mortgages, involved into a global scale credit crunch and liquidity crisis (Financial crisis of 2007– 2008, 2008). By October 2008, it has been speculated that U.S. and European financial institutions have lost an estimated of $2.8 trillion (Coen, 2008). The damage was not limited to financial institution and it soon spilled over to the Main Street. California was hit especially hard. The State of California has benefited from the housing bubble in the early 2000s. Nearly six out ten jobs created in California between 2000 and 2005 were in housing‐related industries (The California Budget Project, 2008). After the bust of the housing bubble, unemployment rate in California soon rose to 7.7% as of August, 2008 (Abowd, 2008). The loss in revenue and rise in employment have caused a rapidly widening budget deficit in the State of California. When Governor Schwarzenegger first proposed the 2008/2009 state budget on January 10, 2008, the budget gap was projected to be $14.5 billion (Schwarzenegger, Governor’s Budget Summary 2008‐09, 2008). By the time Governor Schwarzenegger proposed a revised version of the budget on May, 2008, the projected budget gap has significantly widened to $24.3 billion (Schwarzenegger, May Revision 2008‐09, Governor's Budget, 2008). The rapid deterioration in the financial standing of the State California means many difficult decisions have to be made.
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455.Paper.Peter Qu.UC Budget Cuts.AUT08 - MSandE455...

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