Colleagues,
On May 20, the state Office of Economic Analysis released its first revenue forecast since the onset of the pandemic. As expected, the state is facing a record revenue shortfall which, if realized, means funding reductions in the current biennium and ongoing state cuts through 2025. This update offers an overview of the current budget situation and the work underway to prepare for a likely reduction in state support.
Budget Challenges Pre-date COVID-19
As the president noted in previous communications, at the root of the financial difficulties is a decade of declining enrollment and concurrent annual increases in expenses. The impact was partially mitigated by significantly improved state investment and higher tuition rates. It was not a sustainable model, and we must now address a shortfall that is at least $29-31 million and may grow due to changes in state funding.
What makes up the $29-31 million general fund shortfall for the 2020-21 academic year?
Estimated increase in expenses to maintain current service level: $13 million
Reduced net tuition revenue: $18 million
What does the reduction in state revenue potentially mean for PSU?
The state is projecting reductions of $2.7 billion in the current biennium and $4.4 billion for 2021-23 - 10% and 20% reductions, respectively. We were asked by the governor to plan for a decrease of approximately $18 million for the 20-21 academic year. The state may use some reserves and make strategic reductions to help mitigate the impact to key state services. The state is also seeking additional federal relief. Nevertheless, cuts are coming and we are preparing for additional FY 21 reductions of $5 million up to the full $18 million. We must also anticipate continuing and larger impacts through 2025.
COVID-19 Impacts
As previously noted, cash losses in our auxiliary enterprises are significant and growing. They are currently forecast to be $13.7 million for spring due to COVID-19 and approximately $7 million for summer. We anticipate additional losses for fall 2020. Some of these overall losses qualify for funding from the federal CARES Act, yet they far exceed the $8.3 million in institutional funds we were awarded.
How Will PSU Address the Budget Challenges?
Administrators across the university are working with units to develop a budget that achieves the necessary savings and preserves our academic mission.
To address the existing $30 million general fund shortfall we will expend reserves ($11-13 million); continue divisional reductions, including hiring freezes ($12 million); and increase the tuition rate ($6 million).
- Use of Educational and General (E&G) Fund Reserves ($11-13 million): The Board of Trustees gave guidance in January that the institution use up to $13 million in institutional reserves.
There are two E&G reserves: Central reserves, which are held centrally for the benefit of the university, and Operating reserves, which are held and managed at the divisional level. E&G fund reserve balances at end of FY19 were:
- Central reserves: $49,899,000
- Operating reserves: $44,162,000
- Total: $94,061,000
We intend to use up to $11 million of the current E&G reserves, 50% each from central and operating reserves. We also anticipate authorizing divisions a limited use of one-time expenditures on operating reserves. It is absolutely critical we retain sufficient reserves due to the ongoing uncertainty around enrollment and state funding.
- Divisional level cuts and hiring freeze ($12 million): Each unit prepared a 2020-21 budget that keeps expenditures at 2019-20 levels. To get to this point the divisions had to find approximately $12 million in savings. These have come predominantly from not filling positions as they are vacated in accordance with the strategic hiring freeze.
- Tuition increases (up to $6 million): The university is recommending a resident undergraduate tuition increase of 4.9%. Increases are always difficult, but it is necessary to avert deeper cuts that would jeopardize vital academic programs, student support and campus services.
To partially address the forecast $21+ million cash loss on our auxiliary operations through December, we will use up to treasury reserves ($7 million) and some of the CARES Act funds ($8.3 million) and realize some cost savings.
- Use of Treasury Reserves ($7.3 million): Auxiliary enterprises are required to set aside and restrict cash reserves equal to their respective maximum annual debt service. These funds are known as Treasury Reserves. Given the cash losses, the Board approved use of up to $7.3 million of the total $21.4 million of treasury reserves that were restricted at the end of FY19. A portion of the $8.3 million in CARES Act funding will also be used to offset losses.
The likelihood of a significant reduction in funding from the state and the continued losses from our auxiliary enterprises into FY21 requires additional steps to both contain costs and grow revenue across the university.
- Workforce reductions: The shift to remote services left some employees without work. A temporary leave without pay program was instituted so that those employees were able to retain key benefits as we continue to address the impacts of the pandemic. Additionally, the university is currently working with SEIU and AAUP to institute a state program called Work Share. The program, which is being implemented by many universities and school districts, provides prorated state unemployment benefits to employees who are temporarily furloughed between 20% and 40%. When combined with augmented federal benefits, the program preserves or even increases pay for university employees and creates substantial savings for the participating institution. Details on this plan will be announced by President Percy.
- Enrollment and revenue: It is difficult to anticipate the effects of COVID-19 on fall enrollment, but as the immediate health and safety impacts of the pandemic begin to recede, the economic impacts will persist. In the past, recessions have strengthened enrollment. Marketing efforts are ongoing and increasing. The leadership team is working with the deans to explore a targeted list of new revenue opportunities.
Collectively, these actions will allow PSU to navigate the year ahead and are designed to ensure our long term success and viability. To be clear, they will impact services, create disruptions across our workforce and significantly reduce our reserves. We continue to carefully monitor the state legislature and assess the resiliency of our enrollment and will work with the university community to implement additional measures if they become necessary. The path forward will require collaboration, creativity and a shared commitment to considering every alternative.
Sincerely,
Kevin Reynolds
Vice President for Finance and Administration