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Robert Birgeneau had planned to step down from his role as chancellor of the University of California, Berkeley, almost two years ago, but the institution's financial future was looking too precarious. During the eight years he has been at the helm of the US' top public university, Berkeley has suffered the most extreme budget cuts to higher education ever made by the state of California. Dropping a successor into the middle of such turmoil, he felt, "just wouldn't be fair".

The 70-year-old Birgeneau recalls the counsel a fellow university leader gave him when the full extent of the budget reductions became clear. The first piece of advice was not to panic. The second was to try to find a silver lining to the cloud: once so much public funding had been lost, no future cuts could ever be as severe.

Berkeley has gone from being 30 per cent state funded in 2005 to a mere 10 per cent today. "Suppose the 10 per cent becomes 9 per cent or 8 per cent," says Birgeneau, who has been required to seek reappointment to the job on a year-by-year basis since turning 67. "It is now a sufficiently small fraction of our total budget that although it would be disturbing to have further cuts, they will not have a profound effect."

Although the institution is not yet on rock-solid financial ground, it is in a "much more stable situation". "In terms of our ordinary operating budget, we are over the worst of it."

So the professor of physics recently announced that he will retire from his leadership role this December to return to teaching and research as one of Berkeley's regular faculty members. The search is on for his successor.

For the mild-mannered Canadian with a penchant for Diet Coke (he keeps a stash in his office fridge), it will be a significant change. Since becoming president of the University of Toronto in 2000 (before that he was dean of the School of Science at the Massachusetts Institute of Technology) and then moving to Berkeley, Birgeneau has spent the past 12 years living life as an "activist" university leader, criticising everything from Arizona's controversial immigration law to the academic boycott of Israel proposed by some members of the UK's University and College Union.

That record notwithstanding, his response to last year's student Occupy protests drew ire. He raised no objection at the time to the aggressive use of batons by police on campus, even if he did later apologise for the events and explicitly prohibit police from using tear gas or pepper spray. Birgeneau and several other officials from the university - which as the home of the free-speech movement has campus protest woven into its very fabric - are now being sued by students and other protesters (a situation he says prevents him from discussing the subject).

Although this incident may somewhat mar his tenure, he has won much praise for charting Berkeley's course through stormy economic waters - the euphemism for this, he explains, is "managing transition to a new financial model" - and his approach will doubtless provide food for thought for UK universities entering a new landscape of higher education funding starved of public grants for teaching.

University leaders managing such transition must be guided by a clear set of values and must not allow themselves to be distracted by the "exigencies of the day", he advises. "When you are leading a large public institution, you get buffeted by forces from every direction", so it is "really important to have a very well-defined set of ideals and principles".

In tackling the funding crisis, he is "most proud" of an overall strategy that has allowed Berkeley to retain its pre-eminence, he says. "When the cuts first began, there was story after story - particularly in the East Coast press - about California and its universities being in a death spiral that would end outstanding public education in California ... but we have actually gotten stronger."

As evidence, he cites the institution's performance in the Times Higher Education World Reputation Rankings 2012, in which Berkeley sits fifth, behind only Harvard University, MIT, the University of Cambridge and Stanford University. It also remains the first-choice destination, along with MIT, for winners of US National Science Foundation Graduate Research Fellowships, he notes, showing that it still attracts the best young scientists.

Birgeneau's strategy was, he says, one of doing "many things in parallel" and "hoping that enough [of them] would work" to counter the cuts.

The single most important element was an aggressive private fundraising campaign - the annual value of philanthropic gifts that Berkeley receives is now double what it was in 2005, providing more than $300 million (£186 million) a year.

Controversially, that fundraising push came alongside a doubling of undergraduate tuition fees over the period (the fee, which is set centrally by the University of California system, is the same across all 10 of the constituent campuses). About 40 per cent of the state government cuts have been made up by higher student fees, Birgeneau says. Berkeley also significantly increased the number of out-of-state and international undergraduates, who pay nearly three times as much for their education as California residents.

Other schemes have included boosting research funding, which has risen by about 40 per cent since 2004. Most of this income comes from the federal government and foundations, but industrial sources are important, too.

The institution also introduced a large efficiency programme - which it is only halfway through - intended to save $75 million a year. The bulk of the savings has come from job losses, although employees' hours and benefits have been trimmed as well. There were three years with almost no hiring of faculty at all - a trend that is now being reversed. "We are now back in the market of hiring professors at an aggressive rate," Birgeneau says, adding that Berkeley is currently seeking to fill 70 positions.

How does an institution retain its public character when the public becomes a minor investor? At Berkeley, the key focus has been on preserving access for low-income students, Birgeneau says. "What we haven't done - which would have made us more private - is made compromises in our commitment to supporting low-income students." Some 40 per cent of Berkeley's undergraduates continue to pay no tuition fees at all, and the institution educates about the same number of low-income undergraduate students as all of the eight Ivy League universities combined.

And, last December, Berkeley became the first public institution in the US to launch a financial aid programme aimed at helping middle-class students: it reduces tuition costs for undergraduates from households earning $80,000 to $140,000 (about £50,000 to £90,000) a year.

But Birgeneau is not Pollyannaish: he is realistic about the challenges his successor will face. One big struggle will be to retain the university's highly skilled administrators, such as the heads of its IT and finance departments, who are essential to the functioning of the institution. Over the past year or so, it has become clear that Berkeley simply cannot compete with the salaries such senior personnel are being offered in nearby Silicon Valley, which is booming.

"It is a problem that appears to be particular to Berkeley [other UC campuses have been relatively unaffected], and we didn't anticipate it," he says. Paying higher salaries to retain the best would be a worthwhile investment, but it is impossible: Berkeley simply does not have the flexibility to offer much more because rates of pay are determined centrally by the UC system.

This example illustrates a bigger issue that will doubtless also face Birgeneau's successor: should institutions of the UC system have more autonomy? "It is necessary," Birgeneau says. "We need to stay as one system, but we need more local control over matters that affect us immediately."

In the longer term, he predicts, faculty salaries will also become a problem. They are "significantly lower" than those at Berkeley's private rivals. A full professor at Berkeley earns on average about $40,000 a year less than he or she would earn at an elite private institution, he says. The problem is particularly acute when it comes to science and engineering, where faculty members can be offered large incentives to jump ship.

So far, Berkeley has been able to hold on to its best academics - the root of its excellence - because of their loyalty, Birgeneau says. The strategy, which he hopes his successor will maintain, has been to foster that loyalty by hiring scholars when they are young and nurturing their careers so that staff are not tempted to chase more lucrative positions.

But that position is not stable in the long run, he says. "You can't sustain holding faculty indefinitely when you have salary gaps that large and have the possibility of them getting larger." He also has concerns about how any salary increases might be funded - a leadership team with different values could, for example, pay for rises by reducing financial aid for needy students.

Berkeley's next chancellor will also have to find some way to deal with an underfunded pension pot - a "huge challenge that has to get solved", Birgeneau says. And there is the perennial problem of trying to increase the numbers of under-represented minorities, as students and staff, at Berkeley. On that issue, Birgeneau admits that progress has been too slow despite the hard work that continues to be done.

In addressing the funding crisis, Berkeley has had options that have not been available to other institutions. With California disinvesting in higher education generally, Birgeneau worries about the "devastating effect" on state universities and community colleges that have not been able to draw on private fundraising to help them through. "Their success and health is important to us as well, so we need to figure out how to reverse that trend," he says, driving home the interconnectedness of the system. California community college students who successfully complete their courses can automatically transfer to the University of California system.

Although it may be easy to blame politicians for all the troubles, he traces the root of the problem to a distinct shifting of priorities among the electorate: many people no longer view higher education as a "public good" that benefits society but rather consider it to be a "private good" that profits solely the individual who receives it. Such a mindset affects not just California but the whole of the US. In his campaign for the Republican presidential nomination, Rick Santorum publicly called Barack Obama a "snob" for wanting people to go to university. "The fact that a [potential] presidential candidate thought that statement would gain them votes shows that this is a very deep problem in the United States," Birgeneau says. "I couldn't have imagined that happening in any previous time in American history."

Educators at every level, he believes - himself included - must do a better job of making the case that higher education serves the public interest. A new UC campaign to drive home that message is planned.

So although he is headed back to the coalface, Birgeneau intends to continue advocating better support for public universities. One of the issues he is most passionate about is financial aid for students without immigration documents. After helping last year's passage of the so-called California DREAM (Development, Relief, and Education for Alien Minors) Act, which has at the state level delivered aid to undocumented students who were brought into the US before the age of 16 but attended Californian schools regularly, he also plans to plough his energy into resurrecting a similar federal act backed by the Obama administration: "It's a matter of social justice."

Shrinking coffers in The Golden State

Historically, the budget for the University of California has reflected the state's economy. In recession, state support has either declined or held constant.

But the past decade has seen unprecedented turmoil owing to two multi-year fiscal crises, running from 2001-02 through to 2004-05 and from 2008-09 to the present. As a result of the state's ongoing fiscal woes, constraints are expected to continue for several more years.

The University of California system's state funding fell by about a quarter between 2007-08 and 2008-09 via a series of budget cuts, dropping by more than $800 million (£506 million) from $3.2 billion to $2.4 billion.

Both 2009-10 and 2010-11 saw increases that partially restored the earlier cuts, but this year state funding was again cut by more than $600 million on the previous year to $2.3 billion.

The 2011-12 budget provides state support for the UC system that is below 1998 funding levels - and at that time it had 75,000 fewer students than the 237,000 it has today.

In a bid to lessen the impact of the cuts, recent years have seen a series of tuition fee hikes. For the first time in the history of the system, this year students contributed more to its budget than did the state.

State funding for 2012-13 is due to be decided by mid-June. Although no immediate cuts are proposed, UC has warned of a further 6 per cent tuition hike unless an extra $125 million flows into the system.

Meanwhile, Californians will vote in November on whether to raises taxes to fund education and public safety. State governor Jerry Brown has warned that if the measure is not approved, both UC and the institutions making up the California State University network face a $250 million cut next January, while California's public community colleges will each face a loss of almost $300 million from their budget.

"The stark truth is that without new tax revenues, we will have no other choice but to make deeper and more damaging cuts to schools, universities, public safety and our courts," Brown wrote in an open letter to the electorate last December.