Dear Members of the Á½ÐÔÉ«ÎçÒ¹ University Community,
During my undergraduate years, I was a DJ for my college radio station. (You’re listening to KSWC, the Sound of the Mound in Winfield, Kansas.) As is the case everywhere, our studio featured a red blinking light to warn others outside the booth that someone was on air. As I write this year’s financial update, which is the fifth one of my presidency and the topic for this month’s Talking With Todd, that red blinking light signals something different for Á½ÐÔÉ«ÎçÒ¹: the roiling financial waters ahead of us.
I have explained in the past that we aim to finish each fiscal year with a fund balance equivalent to 1% of the university budget (usually $6 million to $7 million). Achieving this balance means that we were not so conservative in our projections so as to miss opportunities to invest in new programs and efforts, and not so off the mark as to create a deficit, which would not be good for any of us, and which the Á½ÐÔÉ«ÎçÒ¹ Board of Trustees would not allow, anyway.
We finished Fiscal Year 2023 on June 30, 2023, with a fund balance of only $1.4 million, which is far, far less than our goal. Below, I will explain how this happened, and what we are doing to improve for this year.
As we get started, I want to thank you for reading this update, and to thank you for all that you do for Á½ÐÔÉ«ÎçÒ¹. Your efforts do not go unnoticed, and indeed they are the reason for all our successes.
Fiscal Year 2023 Performance Results
Executive Summary. In May 2022, the Board of Trustees approved a balanced budget for Fiscal Year 2023 with proposed revenues of $661.3 million and expenses of $661.3 million, a $14.4 million, or 2.3%, increase from the prior year. We ended Fiscal Year 2023 (July 1, 2022, through June 30, 2023) with an estimated $1.4 million (or 0.2%) university-wide operating budget surplus. In total, revenues exceeded budget by $14.8 million, and expenses were over budget by $13.4 million.
The budget surplus included a deficit of $6.6 million at the Kent Campus, surpluses of $6.8 million in the Kent Campus Auxiliaries and $1.7 million at the College of Podiatric Medicine, and a deficit of $0.5 million at the Regional Campuses.
As per standard accounting practice, this $1.4 million in savings is available for one-time expenditures but not for balancing annual budgets going forward. These funds will be used by the respective areas – colleges, vice presidencies, Regional Campuses and auxiliaries – for one-time expenses aligned with their respective strategic priorities.
Revenue Summary. Total revenues were $676.2 million, $14.8 million higher than the $661.3 million for which we budgeted. Actual tuition and fees, which account for 56.9% of the university’s operating revenue, were $385 million, $600,000 or 0.2% lower than the budget of $385.6 million due to higher than budgeted enrollment on the Kent Campus, offset by lower than budgeted enrollment at the College of Podiatric Medicine and the Regional Campuses. Furthermore, with the passage of Senate Bill 135 in July 2021, the Regional Campuses were required to remove the additional fully online instructional fee for lower and upper divisional courses, which totaled nearly $4.8 million in budgeted annual revenue that could not be charged beginning in Fiscal Year 2023.
For the academic year 2022-2023, our Board of Trustees approved tuition increases of 4.6% for the Tuition Guarantee Model for incoming freshmen, which will remain constant during their four years at Á½ÐÔÉ«ÎçÒ¹; 2% for continuing undergraduate students not on a Tuition Guarantee (those who started prior to fall 2018); and a 2.6% increase in graduate student tuition and the surcharge for non-Ohio residents.
The State Share of Instruction (SSI), which is the state’s subsidy of public higher education, constitutes 23% of our university operating budget and is awarded entirely based on student outcomes (courses passed and degrees awarded) rather than strictly on enrollment, as is the case in most other states. Our commitment to student success generates additional state funding when we outpace our peer universities in Ohio.
Unfortunately, upon receiving the SSI allocation for Fiscal Year 2023 in June 2022, we learned we would receive a $684,000 decrease from the prior year instead of the $1 million increase for which we had budgeted. Upon further analysis, we realized that there was a redistribution of funding among institutions driven by a decrease in course and degree completions at Á½ÐÔÉ«ÎçÒ¹ due to the ongoing declining enrollment trend at our Regional Campuses and a shift of funding from access-focused institutions to more selective institutions that experienced better enrollments and degree completions than we did during the pandemic.
As a result, although we budgeted for $161.1 million, the combined shortfalls of SSI funding and tuition and fees meant we actually received $158.8 million, $2.3 million lower than budget.
Income on our investments (not on funds managed by the Á½ÐÔÉ«ÎçÒ¹ University Foundation) performed very poorly to start the year but finished strong in the months of January through June 2023, largely due to continued rate hikes by the Federal Reserve Bank, gradual decreases in inflation and improving consumer confidence. As a result, we ended the year with investment income of $17.5 million compared to a loss of $17.3 million last year. Therefore, for the first time in two years, we achieved our budgeted $12 million of investment income to support operations.
Revenues generated by the university’s auxiliary units (think housing and dining, the bookstore and the like) rebounded significantly in this first academic year post-pandemic. Coming out of the pandemic, and with all of the unknowns at that moment, our budget approach was to project revenues in a conservative manner. For example, when we presented the budget to the Board of Trustees in May 2022, it was very early in the enrollment and housing/dining sign-up cycle, so we planned cautiously and, thankfully, beat our annual housing target by 11% (5,500 beds occupied compared to budget of 4,900 beds), generating $4.8 million in revenue higher than budget. Increased occupancy drove dining plan sales, with 6,058 dining plans sold compared to the original budget of 5,795, generating $5.5 million in revenue higher than budget. Student housing and dining were not the only noticeable changes in our auxiliaries. We saw a further return to pre-pandemic levels of intercollegiate athletic competition, generating higher than budgeted results of slightly over $5.6 million in football and basketball guarantee game revenue, ticket sales and sponsorships.
Expense Summary. Budgeting expenses to projected operating revenues continues to preserve the university’s sound financial position and means that we make hard decisions under challenging circumstances. The results speak for themselves.
Salaries and wages totaled $303.8 million, $6.5 million (or 2%) below the budget of $310.3 million. This directly reflects our reduction in workforce via several rounds of voluntary early separation programs, as well as challenges in retaining and hiring staff – most notably in facilities management and dining services. Delivering on our commitment to maintaining lower staff counts will allow us to continue treating our staff well with competitive wages, benefits and work-life balance/enhancements, even during these years of enrollment declines. This is evidenced by the following example: Although we originally prepared the Fiscal Year 2023 budget with a planned 2% wage increase for non-represented staff, we were instead able to implement an actual 3% wage increase effective Oct. 1, 2022.
Benefits expenses such as healthcare, pharmacy, disability, retirement, leave time and workers compensation represent 17.3% of the annual university expenditures. These were budgeted at $114.4 million, an increase of $2.4 million from the prior year. Actual benefits expenses for the year were $121.2, nearly $6.8 million higher than budget. Upon further analysis, we discovered that the primary driver for this unexpected increase was due to 21 high-cost medical claims paid during Fiscal Year 2023 compared to 13 in each of the prior two fiscal years. Overall, our combined salary and benefits expenses in Fiscal Year 2023 were $425 million, or $300,000 higher than budget. We employ 400 fewer faculty and 566 fewer staff compared to Fiscal Year 2017, which allows us to fund increased wages for our employees.
Merit scholarships and need-based aid grew 285% over the past decade, and was budgeted at $87.4 million, or 13.2% of total university expenses. We offer student scholarships to meet enrollment goals, and we do so especially to ensure access and degree completion. We underscored our focus and commitment to student access and success when we announced the Flashes Go Further Scholarship Program in July 2021. This massive, first-of-its-kind student aid program is focused on getting even more Golden Flashes to graduation, and beyond. The program benefits entering Á½ÐÔÉ«ÎçÒ¹ freshmen through graduating seniors from the state of Ohio whose annual family incomes are less than $75,000. These recipients receive aid so they can graduate free of debt from tuition and general fees. We included an additional $5 million in the student aid budget for Fiscal Year 2023 to fund the second year of Flashes Go Further, and we expect that full funding for the program will reach $14 million by Fiscal Year 2025.
As noted earlier, the university’s auxiliary operations, primarily University Housing, University Culinary Services and the Department of Intercollegiate Athletics, returned to a normal mode of operation – occupancy, meal plan purchases and competition. This translated to a large increase in expenses for personnel benefits and non-personnel expenses such as travel, which cost an additional $1 million this fiscal year for our Department of Intercollegiate Athletics alone, as a result of inflation on airfare, hotels and transportation. Furthermore, the cost of food and housing/dining supplies continued to rise as we began our self-operated University Culinary Services auxiliary on July 1, 2021, and grew room occupancy and dining plan participation. Overall, auxiliary expenses totaled $101.2 million, approximately $9.4 million (or 10.3%) higher than budget.
All other non-auxiliary, non-personnel expenses (supplies, utilities, travel, maintenance and repairs, travel, print, postage and the like) totaled $68 million, approximately $11.7 million (or 20.8%) higher than budget of $56.3 million, the direct result of stubbornly high inflation throughout the year and a continued increase of on-campus operations and activity post-pandemic.
As you venture across our campuses, you see a variety of construction projects underway: Crawford Hall (the new home for our Ambassador Crawford College of Business and Entrepreneurship), the College of Aeronautics and Engineering Building addition, the Ice Arena/Band Educational Facility Renovations, Terrace Drive Realignment, White Hall Front Chilled Water Loop, Eastway Roof Replacement, Stark Campus Loop Road and Parking Improvements, Tuscarawas Campus Founder’s Hall HVAC Replacement, and the list goes on. This fiscal year, the university spent $80.1 million on construction and renovation projects funded from several sources, such as university facility funds, previously appropriated funding from the state, bond proceeds and donations.
Our annual expenditures also include paying down our long-term debt. Over the past seven years, we refinanced our bonds four times, saving us an average of $2.6 million a year. Additional restructuring we executed in June 2022 reduced payments even further. Nevertheless, our debt service payments continue to be a considerable expense to the university, totaling $34 million this year ($21.7 million in principal and $12.3 million in interest payments).
Other Observations
Reducing expenses over the past six years has helped us manage the decline in revenues in the wake of decreasing enrollment. Strategies such as employee and faculty separation plans in 2017, 2018, 2020, 2021 and 2022, continued strategic hiring and position control, investment management, healthcare plan redesign, the comprehensive office print initiative, the reduction of energy costs through performance contracting and sustainability measures (solar, geothermal and recycling), shared services in Facilities Planning and Operations and the Division of Information Technology (IT) and innovative sourcing strategies such as group purchasing and reverse auctions for electricity have led the way.
Our careful stewardship yielded a state of Ohio financial health score of 3.6 on a 0-5 scale, placing us in the upper half of Ohio’s public universities. This financial score is mandated by state law and is a measure of financial health comprising three key ratios: primary reserve, viability and net income. Our score for Fiscal Year 2023 shows that our reserves are sound and our long-term debt is under control. Nevertheless, we must continue to align expenses with declining tuition and fee revenue (due to lower enrollments) and a state subsidy that is not keeping up with inflation.
Other independent, external measures of our university's financial health are provided by the Moody's and S&P Global Ratings agencies. While many institutions have experienced ratings downgrades and negative outlooks as of late, our most recent bond ratings were affirmed in May 2022 at Aa3/Stable Outlook (Moody’s) and A+/Stable Outlook (S&P Global). Both cited our leadership, solid management and governance, the university’s reserves, manageable debt and our decisive steps to balance the annual budgets, while reinforcing that our challenges continue to be declining enrollment, thin 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). We anticipate that a review of our ratings will occur again this year with similar results.
Fiscal Year 2024 Approved Budget
Executive Summary. Our Board of Trustees approved a balanced budget of $687.5 million, an increase of $26.2 million, or 4% from the prior year’s approved budget. Because of the inflationary moment in which we operate, which is aggravated by a nearly flat state subsidy for the next two years, we were forced to reduce projected expenditures by $18.4 million in order to balance our budget for the coming year. To achieve this reduction, the Office of the President and several vice presidencies reduced projected expenditures by 3.1%, while the Division of Academic Affairs reduced its expenditures by 2.7%, The Division of Enrollment Management was exempted from cuts as we are mindful that enrolling students drives our revenues, as well as all we do as a university.
Our best news of the state budget was the successful amendment to the SSI formula to include, for the first time, College of Podiatric Medicine students as eligible for SSI under the Medical I funding line item. Inclusion in this funding line will now provide approximately $3.4 million in annual state subsidy that will be used to significantly decrease tuition for Ohio residents while expanding clinical and research opportunities for these students. A $13,866 decrease in the current annual tuition rates for in-state students effective the 2024 Spring Semester was approved by the Board of Trustees, along with a $3,139 decrease in the current annual tuition for out-of-state students. This tuition decrease provides a new competitive advantage for enrolling more students from Ohio and the Midwest region. Á½ÐÔÉ«Îçҹ’s College of Podiatric Medicine tuition is now the lowest in the nation for Ohio students and ensures that the college offers Ohio podiatric medicine students the highest-quality education and training at the most affordable tuition across any of the 11 U.S podiatric colleges.
Revenue Summary. Tuition and fee revenue is budgeted at $389.5 million, $4 million higher than last fiscal year based on a conservatively projected 1% increase in enrollment at the Kent Campus. This amounts to an increase of 262 full-time equivalent students (FTE), which is calculated by dividing the total number of credit hours enrolled per semester by 12 credit hours. We also budgeted a 4% decrease across the Regional Campuses (-209 FTE). This represents the first time in 10 years that our year-over-year system-wide enrollment has not been projected to decline from the prior year. Fall 2023 tuition and fee rate increases authorized by the Board at the June 28, 2023, meeting are as follows: 3% for new freshman Tuition Guarantee students (which is then frozen for four years) and 4% for graduate student tuition and the non-resident surcharge.
Our focus on enrollment continues, and considerable efforts by all are mitigating the ongoing demographic and regional shifts that are negatively affecting our enrollment trends. Our retention rate (the percentage of freshmen who return for the sophomore year) declined noticeably during the pandemic but has improved beginning fall 2023 as we continue to work with our students to provide them with the support services they need to persist and graduate in this period of post-pandemic recovery. The retention rate grew at the Kent Campus from 78.5% in fall 2022 to 79.7% in fall 2023.
We especially appreciate the good work being done by our Regional Campuses, as their retention rate grew from 52.9% to 56.6%. On the Kent Campus, we welcomed 4,226 new freshmen in fall 2023, which represents the 10th largest incoming freshman class in our university’s history (the largest was 4,363 in fall 2018). The fall 2023 entering Á½ÐÔÉ«ÎçÒ¹ class also boasts the additional distinction of being the most diverse class in history, with 20.1% of new students coming from traditionally underrepresented groups.
The funding we receive from the state of Ohio, the so-called SSI, is budgeted at $158.9 million, approximately the same amount we received last year. As of this year, Ohio State University and the University of Cincinnati now receive over 40% of the state subsidy because of their continued enrollment growth, translating to a higher number of course and degree completions.
University auxiliary revenues continue to grow on the Kent Campus as we rebuild enrollments post-pandemic. Auxiliaries are budgeted at $4.7 million (4.5%) higher than last year’s actual revenue due to improved on-campus student residency, dining plan participation and a return to full mode of intercollegiate athletic competition. This fall, we welcomed 5,720 students into our residence halls, nearly 30 more than last year, with dining plan sales increasing by 473 thanks to more sales to commuter students and faculty/staff. Although Intercollegiate Athletics revenue is expected to grow slightly from ticket sales, sponsorships and conference revenue share (Mid-American Conference and NCAA), the largest external source of revenues – football guarantee games – will drop-off significantly this year from $5.4 million to $3.8 million, a decrease of $1.6 million, and is not expected to increase materially in future years as the financial model for NCAA Intercollegiate Athletics continues to rapidly evolve and transform.
The investment income we use for operating activities is budgeted at $15.1 million, a $3.1 million increase from the prior year’s budget. This increase is reasonable considering that money market accounts are now earning 5.3% interest compared to near zero 16 months ago. This $15.1 million is 2.2% of our total budgeted revenue.
Expense Summary. As noted earlier, inflationary costs combined with a poor state budget for higher education means we had to trim $18.4 million in expenses for this fiscal year. As a result of the dedicated effort of our deans and Cabinet, we delivered on the budget target while prioritizing a wage increase of 3% for non-represented staff (among the highest of all Ohio public universities). The budget funds scheduled raises for represented (union) employees, and it maintains employee benefits at previous year levels.
These actions were not easy – but necessary – in order avoid a deficit this year, which would grow into an unmanageable budget deficit in future years, as has happened recently at West Virginia University, for example.
The budgeted expense for employee benefits (retirement, medical, leave time, workers compensation and the like) is $118.1 million, $3.7 million or 3.2%, higher than last year’s budget. Healthcare costs drive our expenses, and although there are no expected medical plan design changes for benefits year 2024, we know that inflation will likely increase our costs this year, as it did last year.
Student scholarships, which are comprised of both merit-based scholarships and need-based aid, are budgeted at $89.3 million. Academic deans have partnered with the Division of Philanthropy and Alumni Engagement to spend $3 million in endowment balances available this award year, which reduces expenditures by the same amount from the university’s operating budgets.
A primary contributor to the $18.4 million projected expense cut we needed to balance the budget has been ongoing and sustained inflation. The cost of IT software and hardware has increased 11.6%, meaning $1.4 million in additional budget needed for these important expenditures. The continuing saga of extraordinary increases in insurance costs (property, casualty, liability, travel and cybersecurity) appears to have no end in sight – an additional $1 million is budgeted this year to pay for these critical coverages. The cost of property and casualty insurance for the university has now grown 322% over the past six years – from $900,000 per year in Fiscal Year 2018 to $3.8 million in Fiscal Year 2024. We are pooling our risk through shared coverages with 12 other Ohio public universities, and we will continue to explore all avenues to reduce these unsustainable costs going forward.
Looking Ahead Further to Fiscal Year 2025
Executive Summary. Uncertainty continues to loom in the wake of the pandemic as we anticipate further enrollment challenges, prolonged inflation, volatile investment markets and the ongoing risk of reduced state funding (operating and capital), all of which will have a bearing on our university’s financial viability going forward.
Coming out of the pandemic, we began to create five-year financial forecasts. Based on realistic assumptions (such as flat enrollment, flat state support, slight increases in tuition for non-Tuition Guarantee students, 5% healthcare inflation, maintaining current staffing levels, competitive wage increases, fully funding the Flashes Go Further scholarship program and no new debt issued) an annual deficit of nearly $10 million can be expected by Fiscal Year 2027. This forecasted deficit uses the current balanced Fiscal Year 2024 budget as its baseline, and keep in mind that we reduced expenses by $18.4 million this year. Had we not reduced projected expenditures for this year the projected deficit would be over $30 million by Fiscal Year 2027.
In Conclusion
I appreciate your effort and salute your stamina in reading this year’s update to its conclusion. You now have the same understanding of, and knowledge about, our university budget as I do. If that knowledge is power, then all of us are now empowered to be good stewards of our institutional resources even while we continue to do our best for our students.
Thank you to Senior Vice President and Chief Financial Officer Mark Polatajko for your leadership of the university’s finances. Thank you as well to Faculty Senate Chair Tracy Laux and to the members of the Faculty Senate Budget Advisory Committee for your wise advice and counsel.
Go Flashes!
Sincerely,
Todd Diacon
President