Á½ÐÔÉ«ÎçÒ¹

Dear Members of the Á½ÐÔÉ«ÎçÒ¹ University Community,

I am sharing with you this annual financial update, which is a portrait of Á½ÐÔÉ«Îçҹ’s financial health and sustainability during the COVID-19 pandemic. Everyone reading this message has contributed greatly to the university’s reopening, and your trust and dedication to Á½ÐÔÉ«ÎçÒ¹ are appreciated. In short, even amid a pandemic, there is good news to report – and that good news is the fruit of your efforts.

Because of the pandemic, Fiscal Year 2020 was a year like none we had seen before. The financial impact on university revenues was nearly $25 million. Through it all, our desire to be a student-ready university, to make college affordable and accessible, and to commit to graduating record numbers of students has not wavered. You have not wavered. Thank you!

In this email, we provide the following information regarding the university’s budget:

• A summary of our Fiscal Year 2020 financial performance, the current Fiscal Year 2021 budget and our projections for Fiscal Year 2022.
• An overview of key challenges and trends, and their expected impact on the university.
• A brief review of actions the university is taking to sustain its financial health.
• A roadmap for how we will continue to manage our resources to be a student-ready university.

Á½ÐÔÉ«Îçҹ’s financial health and sustainability efforts are a shared responsibility. We are stronger when all of us are involved and engaged, and it is my hope that a clear and transparent sharing of budget information will aid us all as we pursue our common goal of educating our students and creating a better world for Northeast Ohio and beyond.

Fiscal Year 2020 Performance Results

Executive Summary: This spring, we received $9.6 million in Coronavirus Aid, Relief and Economic Security (CARES) Act funding from the federal government. Without this emergency relief, we would have finished Fiscal Year 2020 with a deficit of $8.1 million. Instead, we finished Fiscal Year 2020 with a $1.5 million operating budget surplus, which we will use to help cover the considerable costs of our fall 2020 reopening plan.

Revenue Summary:

Total revenues were $636.5 million, $23 million less than the $659.5 million for which we budgeted. Tuition and fees, which account for more than 60% of the university’s operating revenue, performed within 0.5% of budget at $2.0 million less than the budgeted amount of $401.4 million. This variance from budget was primarily due to enrolling 1,003 fewer students compared to the budgeted amount of 993 and the mix of students (in-state, out-of-state, undergraduate, graduate). Enrollment declined for the sixth consecutive year – from a headcount of 41,891 in fall 2013 to 37,411 in fall 2019 (-11% for this six-year period).

For the first time in five years, the Á½ÐÔÉ«ÎçÒ¹ Board of Trustees authorized tuition increases for all students not on a tuition guarantee: a 3.5% increase on the Tuition Guarantee for the incoming freshman cohort, a 2% increase for continuing undergraduate and graduate students and a 2% increase in the nonresident surcharge.

The State Share of Instruction (SSI) revenue, the state’s subsidy of public higher education, is awarded entirely based on student outcomes (courses passed and degrees awarded) and totaled $154.2 million, or 24% of budgeted revenues. In April 2020, the governor announced a 20% cut to SSI in response to the pandemic; as a result, SSI was $4.9 million less than budgeted for the year. The good news is that because we are doing a better job graduating our students, we have increased our share of the state subsidy from 9.8% in Fiscal Year 2015 to 10.3% in Fiscal Year 2020, which equals nearly $7.5 million in additional funding.

In April, the university received two allocations of CARES Act funding: $9.6 million dedicated to emergency grants awarded directly to students for use on emergency expenses, including technology, childcare, food, transportation, etc., and $9.6 million for institutional purposes, which were used to offset the significant impact of issuing nearly $14 million in refunds to students for the unused portions of room and dining plans and parking permits.

Investment income on our short-term investments (not on funds managed by the Á½ÐÔÉ«ÎçÒ¹ University Foundation) met the budgeted amount for the year. This amount represents realized capital gains (investment earnings), dividends and interest income. Losses in our investments at the onset of the pandemic were offset by market gains this summer.

Expense Summary:

Salaries and wages totaled $305.7 million, $3.5 million above our budget forecast, primarily the result of not achieving the budgeted $8.5 million in vacancy savings from the hiring freeze that was implemented in September 2019. Benefits, comprising retirement, healthcare, compensated absences and other fringe benefits, totaled $116.6 million and matched the budgeted amount for the year.

In response to the challenging budget conditions resulting from the COVID-19 pandemic, the Board approved a Voluntary Separation Incentive Program. The program incentivized employees to end their employment with the university, thereby reducing the number of personnel subject to layoff or job abolishment. The overall cost of the program was $14.7 million in salary and sick leave payouts, which we will more than recoup in savings for Fiscal Year 2021 (see below).

Financial aid in the form of merit scholarships and need-based aid grew 267% over the last decade and now totals $80 million, or 13% of total expenses. We currently are working to reduce this expense, even while preserving the benefits in enrollment we receive from the strategic use of scholarships. The strategic plan now being developed for enrollment, led by Vice President for Enrollment Management Mary Parker, Ed.D., will include a plan to offer more scholarships that are funded by the Á½ÐÔÉ«ÎçÒ¹ University Foundation, thereby freeing up institutional dollars for other uses.

The university’s auxiliary operations, Residence Services and Dining Services in particular, were dealt a significant blow because of refunds of nearly $14 million. Due to the timing of the pandemic so late in the fiscal year, operating expenses could not be reduced significantly enough to balance these budgets. The CARES Act institutional funding provision of $9.6 million was critical in helping manage these auxiliaries to the reasonable result of a $2.2 million deficit for the year.

All other expenses – supplies, utilities, maintenance and repairs, travel, print and postage – decreased nearly $15 million compared to budget as a result of reduced operating expenses after classes went remote in March 2020.

An additional impact of going remote in March was our decision to pause most campus construction projects. This approach was driven in part by the postponement of the biennium 2021-2022 state capital budget process by the General Assembly (we are still waiting to see if and when the state will consider a state capital bill). Notable projects on hold include: the College of Business Administration Building, the Main Street Parking Deck, the Main Street Gateway (improving and realigning roads) and renovations to Rockwell, White and Verder halls. The restarting of these projects will be explored in the spring based on the future availability of funding from university, state and fundraising sources. Despite this pause, the university did spend $56.3 million on construction and renovation projects funded by several sources, such as university facility funds, previously received funding from the state, bond proceeds and donations. Examples of significant projects include the Design Innovation Hub, expansion of the research space in the Integrated Sciences Building, improvements to White Hall, exterior windows in Fletcher and Manchester halls, and the relocation and renovation of nursing program space on the Trumbull Campus.

Debt service payments, a considerable expense to the university, totaled $36.6 million ($17.8 million in interest and $18.8 million in principal payments). In January 2020, the university reaped the benefits of market conditions to issue bonds for the purpose of 1) refinancing $158 million of existing bonds to reduce interest expense and 2) issuing new bonds to generate $28 million in proceeds to finance the construction of the Main Street Parking Deck. The refinancing generated aggregate savings of nearly $26.6 million and annual reduction of debt service expense by an average of nearly $1.1 million. Furthermore, the university has flexibility to repurpose the bond proceeds from the parking deck to other construction projects if the decision is made not to proceed with the parking deck project.

Our efforts to improve efficiencies over the past six years have continued to help us manage the decline in revenues due to decreasing enrollment. Strategies such as employee separation plans in 2017, 2018 and 2020, continued strategic hiring and position control, bond refinancing, investment management, healthcare plan redesign, reducing energy costs and innovative sourcing strategies, such as group purchasing, have led the way. This strategic focus on cost-saving measures has prevented harsh and abrupt budget cuts as enrollments decreased.

The results of our stewardship yielded a state of Ohio financial health score of 3.6 on a 0-5 scale, positioning Á½ÐÔÉ«ÎçÒ¹ in the upper half of public universities in the state. This is a statutory measure of financial health consisting of three key ratios: primary reserve, viability and net income. Our score for Fiscal Year 2020 shows that our reserves are sound, outstanding debt is reasonable and that we must continue to align expenses with declining tuition and fee revenues.

In addition to the state financial health index, other independent, external measures of our university’s financial health are provided by the Moody’s and Standard & Poor’s rating agencies. While many institutions are experiencing ratings downgrades and negative outlooks, our current bond ratings were affirmed in December 2019 at Aa3/Stable Outlook (Moody’s) and A+/Stable Outlook (Standard & Poor’s). Both cited our leadership, solid management and governance, the university’s reserves, manageable debt and our decisive steps to balance the Fiscal Year 2021 budget while reinforcing that our challenges continue to be declining enrollment, thinning operating margins and challenging demographics (a projected 20% or more decline in the number of high school graduates in Northeast Ohio over the next decade).

Fiscal Year 2021 Approved Budget

Executive Summary: We prepared a balanced budget by right-sizing expenses to the significantly reduced revenue projections as a result of the COVID-19 pandemic, a decrease of $65 million, or 10%, compared to the approved budget for Fiscal Year 2020. The Kent Campus Educational and General budget and the College of Podiatric Medicine are projecting a small surplus. Regional Campuses have balanced budgets, but the auxiliaries have a projected deficit of $1.7 million.

In December 2019, we began our customary budget development process in anticipation of a June 2020 Board review and approval. Abruptly, as a result of the COVID-19 pandemic and the extreme uncertainty in reasonably projecting enrollment and state support, we needed to change course and recommended that the Board consider an authorization of expenditures at 80% of the Fiscal Year 2020 budget to afford us time to develop a budget based on more reliable assumptions. The Board approved this approach at its June 2020 meeting.

In April 2020, we initiated the Fiscal Year 2021 budget process with an emphasis on planning for the worst and working for the best, and we identified the following objectives:

• Originally, deliver an overall 20% budget cut due to a projected 20% cut in state support and the worst-case scenario decline of 20% in tuition and fee revenue (we reached the former projection because the state reduced our funding by 20% for the last quarter of Fiscal Year 2020, and the latter projection because in May, our year-to-date enrollment was running 17% behind 2019). This was revised to a still conservative 8.6% cut in state support and 6.5% decline in enrollment.
• Deliver reorganization and other changes to operations in order to reduce dramatically our expenditures.
• Preserve our sound financial position.

On Sept. 16, 2020, the Board approved a balanced budget of $595 million in revenues and $595 million in expenses, which is $65 million, or 10%, less than the Fiscal Year 2020 budget.

Revenue Summary:

Tuition and fee revenue, based on a conservatively projected 6.5% decrease in enrollment coupled with tuition and fee rates authorized by the Board, are budgeted at $383.4 million – $18 million less than last Fiscal Year. A tuition increase of 4.1% for new freshman Tuition Guarantee students (which is then frozen for four years) and no increases for continuing non-Tuition Guarantee students, graduate students and nonresident surcharge were implemented for fall 2020.

Our focus on strategic enrollment management continues, and the great work done by all noticeably reduced our expected decline in enrollment. Incredibly, our retention rate (the percentage of freshmen who return for the sophomore year) increased on the Kent Campus even during this unprecedented pandemic. And while new freshmen in fall 2020 on the Kent Campus decreased to 3,819 from 4,270 in the prior year as a result of the pandemic, we nevertheless boosted our historic commitment to accessibility across all incomes, and we increased the amount of need-based aid by $1.6 million, which allowed us to offset the impact of the Fiscal Year 2021 tuition increase for students and families with the greatest financial need.

The funding we receive from Ohio’s SSI is projected to decrease by 8.6%, or nearly $13.7 million, compared to last fiscal year. Currently, the official SSI schedule released by the Ohio Department of Higher Education indicates a 4.5% decrease. However, the chancellor warned that this support is subject to further cuts as the state continues to revise its budget based upon the pandemic’s impact on the economy. As a result, we have conservatively based our SSI projection on a 4.5% reduction for the first three months of the fiscal year and 10% for the remaining nine months of the fiscal year. Considering that the SSI is allocated based upon performance, by continuing our commitment to student success we have an opportunity to realize even more revenue if we continue to outperform our peer Inter-University Council of Ohio (IUC) institutions in terms of course and degree completions.

Our biggest revenue challenge resides in our auxiliaries, whose revenues are projected to decrease by nearly $28 million, primarily as a result of a decrease of nearly 2,500 students living in our residence halls, with a similar decrease in the number of students participating in dining plans. Intercollegiate athletics revenues will also decline dramatically as a result of the postponement of fall sports, thereby negating the anticipated $5.2 million in football revenue from canceled games with Penn State University, the University of Alabama and the University of Kentucky.

Investment income dedicated to support operating activities also has been reduced to $2 million compared to $9.3 million in last year’s budget to acknowledge the volatility of the market and uncertainty about the amount of investment income that will be realized during the upcoming year.

Finally, the university received $14.7 million in CARES Act funding to support reopening activities for the 2020-21 academic year. This amount, coupled with the $1.5 million operating budget savings previously noted, will provide much needed, one-time funding in support of the university’s Flashes Safe Seven reopening priorities. This funding and related expenses, which are not included in the Board approved budget, will be tracked separately in accordance with federal requirements and must be spent by Dec. 30, 2020. The planned expenditure of these funds will be directed to the following priorities:

• Health Services: expand activities such as consultations and testing to identify and slow the transmission of COVID-19.
• Remote Instruction and Learning: seamlessly deliver the 60% of courses being taught via remote modalities.
• Space Reconfiguration: accommodate physical distancing in instructional, lab, residential, administrative and social gathering spaces.
• Cleaning and Sanitizing: provide supplies, materials and support needed to safeguard health and well-being.
• Telework: improve productivity through enhanced network access, security and collaboration technologies.

Expense Summary:

Based on the projected $65 million reduction in revenues, our daunting challenge was to reduce expenses by $65 million, with an understanding that a significant reduction in staffing was inevitable. A four-pronged staffing strategy was quickly developed consisting of 1) a hiring freeze, 2) salary reductions, 3) the Voluntary Separation Incentive Program and 4) job abolishments. These efforts yielded the following:

• Salary reduction: $5.7 million expense reduction, impacting 1,753 employees.
• Memorandums of understanding with the Á½ÐÔÉ«ÎçÒ¹ Chapter of the American Association of University Professors (AAUP), Full-Time Tenured/Tenure-Track and Full-Time Non-Tenure Track Faculty Units: $2.6 million cost avoidance.
• Voluntary Separation Incentive Program: $26.5 million expense reduction (292 employees, including 53 faculty).
• Abolishing positions: $1.5 million expense reduction (66 employees).

The total combined budget reductions and cost avoidance of the four-pronged staffing strategy is estimated at $36.3 million, with 358 employees leaving the university – a 9% decrease in full-time employee headcount. Special thanks go to our AAUP leadership and members for volunteering to delay a scheduled raise for professors. This gesture was both meaningful in terms of helping us balance our budget and in terms of expressing a community spirit. And of course, thanks are extended as well to all employees who are working harder for less pay.

Healthcare costs also drive our expenses. We continue to emphasize quality and affordable healthcare benefits while, at the same time, combatting inflationary factors that could render this vital benefit financially unsustainable. As a result of our collective work and the significant reduction in the number of employees, the healthcare fund budget will decrease by 2%, or nearly $1.5 million, compared to the prior year.

In addition to staffing and benefits savings, the university’s leadership – deans, vice presidents, chairs and directors – developed budgets in their respective areas under a variety of scenarios. As more clarity emerged in terms of enrollment and SSI, the final planning scenario initiated an aggregate reduction of 10% across the colleges and 20% in the divisions, which yielded total budget reductions of $21.3 million in the colleges and $20.6 million across the vice presidencies.

Even in a year of dramatic budget cuts, we will nevertheless increase spending on key items driving student safety and success. To address the extreme economic hardships many of our students and their families are experiencing, we have increased the student financial aid budget by $1.6 million. Furthermore, as we reviewed the general fee allocation for the year, we realized that our priorities and expected service levels have changed dramatically in this budget year in response to the pandemic. As a result, we reduced some student fee allocations (e.g., athletics) while enhancing funding for mental health services ($1.6 million) and general health services ($600,000).

Fiscal Year 2022: A First Glimpse

Executive Summary: Uncertainty looms as a result of the pandemic as we prepare for the state operating budget cycle, a possible lapse in state capital appropriations, challenging enrollment numbers and a gradual recovery from the pandemic.

As we look forward to next fiscal year, in Columbus the work to establish the state budget for the biennium 2022-2023 will begin this winter. At that point, we will begin to see the direction with respect to funding of SSI and tuition rates. We will also have a better understanding of whether the state will fund a capital appropriation to assist with our construction projects.

The leadership and staff of the Division of Enrollment Management continue to excel in attracting students to Á½ÐÔÉ«ÎçÒ¹ despite the region’s ongoing demographic decline. Their challenge (our challenge!) has now been amplified by the pandemic. As a result, we will continue to broaden our reach and optimize student aid in order to successfully recruit and enroll students locally as well as from outside Northeast Ohio.

As we reflect on the ramifications of the pandemic, particular attention must be paid to envisioning what the future will bring. The questions on the forefront of our minds include: How many students will be enrolling and attending classes in person versus remotely? How many students will be living on campus, and what will they desire in terms of the type, nature and capacity of residence halls and dining options? How much instructional, research, administrative and social space will be needed? Are we at a point that we must consider reducing density and our physical footprint? Can we sustain our current approach to intercollegiate athletics in a new enrollment and budgetary environment?

Each of these questions has a common thread: How much funding will be needed, and what will the source of the funding be in order to enhance our university’s commitment to teaching, learning and research in a fiscally responsible manner?

In Conclusion

I once wrote a book about the Brazilian explorer and engineer Mariano da Silva Rondon, who for more than 30 years directed telegraph construction through the most isolated and difficult terrain in the Amazon. Each year, he delivered a lengthy, weighty report on construction activities replete with pages and pages of tables and graphs of telegraph lines installed, foodstuffs consumed, paths cleared, postholes dug, medical emergencies confronted and so forth.

One year, Rondon noted in his annual report that the numbers alone told less than half of the story. He fretted that the pages of tables and graphs failed to capture the heroic work of his team. No report delivered in Rio de Janeiro could capture the breadth of the endeavor nor his appreciation to those who made it all possible.

I now understand better what Rondon was saying. The numbers presented here are large and daunting, and their size threatens to crowd out the work done by people, by our Á½ÐÔÉ«ÎçÒ¹ employees, to teach our students and generate knowledge under the most trying of circumstances. The numbers threaten to erase the contributions, big and small, made by all of you to keep our community intact and our students safe and secure. The numbers threaten to crowd out your commitment to this institution.

Therefore, I will end this annual budget message not with numbers but with two simple and heartfelt words: thank you.

Sincerely,

Todd Diacon 
President