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
Background: Financial Crisis, State Budget and University of California
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.