The current economic downturn has created a variety of challenges for Ohio University -- as it has for institutions and individuals around the world. This compilation of answers to common questions about budget issues is aimed at keeping the university community informed of important developments and background.
What led to contingency planning for a current fiscal year budget deficit?
Last fall, when it became evident that the state and national economies were in trouble, the university began to plan for the loss of $13.4 million in revenue and developed a budget contingency plan using the best information available in a rapidly changing environment.
The budget contingency plan included these anticipated shortfalls:
|Projected deficit ||Source |
|$5.1 million ||Investment income for general fund |
|$1.5 million ||Investment income for University Advancement operations |
|$1.5 million ||Endowment assessment for University Advancement |
|$5 million ||State funding |
|$300,000 ||Announced reduction in State Challenge Funds as of October 2008 |
|$13.4 million ||TOTAL |
Since this initial forecast was put together, more information is available:
- The $1.5 million endowment assessment, a 1 percent administration fee charged to The Ohio University Foundation for management of endowment accounts, will be collected for FY 2009 as originally budgeted.
- The university experienced a shortfall of $1.1 million in Success Challenge funds. Reductions of $300,000 were announced in both October and December, and the formula allocation that was $500,000 less than anticipated.
- Graduate fee waivers exceeded the amount budgeted by $1.5 million.
- The university took in $1 million less than projected in instructional-fee revenues as of December 2008.
Planning units have been asked to identify and set aside one-time funds to cover the contingency plan. Our planning assumptions are still based on the $13.4 million and will be adjusted as more information becomes available. It is important to keep in mind that fiscal 2009 continues until June 2009, and as the situation changes, we will adjust accordingly.
The state has cut funding to several specific university programs. How have these cuts been managed?
Although SSI funding has remained intact so far, the governor has ordered reductions to budget lines supporting the WOUB Center for Public Media, the Voinovich School for Leadership and Public Affairs and the College of Osteopathic Medicine. These units are working to identify plans for managing these cuts.
Does the university have budget shortfalls that are not directly associated with state funding?
Yes. Although state funding cuts have affected our budget, there are other challenges, such as losses of investment and instructional fee revenues and a projected over-expenditure for graduate fee waivers, that have caused budgetary pressure in the current fiscal year. In addition to the current-year budget shortfalls, the university also is experiencing a structural deficit, as explained below.
How much of the university's operating funds come from investment income?
In fiscal 2009, the Athens campus budget included $5.1 million for the general operating budget and an additional $1.5 million to support University Advancement operations.
Will Wall Street's problems and the impact on investment income continue to affect our budget?
Yes. Investment income is not expected to grow in the short-term.
Should we be relying less on investment income for operating funds in the fiscal 2010 budget?
Yes. Before the downturn in the financial markets, the university began developing a multiyear strategy to reduce and ultimately eliminate the university's reliance on investment income for operating funds. Unfortunately, the events of the past six months -- and what is expected from the markets for the remainder of fiscal 2009 -- have driven the university to implement this strategy immediately. As a result, the university's fiscal 2010 budget will not include revenue from investment income. Any positive income earnings will be used to strengthen the university's fund balance.
Can departments that charge fees for services simply raise fees to offset budget reductions?
No. All planning units have been advised that cost shifting is not a viable or reasonable budgeting strategy. While cost shifting provides support for an individual unit or program, it does not bring stability to the university as a whole.
This year, the university established the Internal Fee Committee, a subcommittee of the Budget Planning Council that has been charged with developing an inventory of all internally assessed fees and a standard rate development methodology that planning units will adopt. Beginning next year, the Internal Fee Committee will be responsible for reviewing all requests for internal fees. There often are reasonable justifications for assessing fees, but the committee will closely monitor the situation and ensure that departments are not shifting costs.
What is a structural deficit and how does it impact our budget?
At the end of fiscal 2008, the university's fund balance was approximately $62 million, while planning units had remaining spending authorization of approximately $75 million. The remaining spending authority, also known as the carry-forward budget, represents unspent budget authority accumulated over multiple years. This difference between the carry-forward spending authority and the fund balance resources to support it is referred to as the structural deficit.
At the end of fiscal 2008, the university's structural deficit was $13 million -- the difference between the fund balance and the carry-forward authority granted to planning units. This structural deficit would become a real deficit if planning units used all of their spending authority within a fiscal year.
Why is it important to address the structural deficit now?
It is always important to ensure that the university's finances are sound. It is paramount in the current economic environment. The likelihood of spending down the carry-forwards could increase as units reduce their budgets, so the structural deficit must be addressed now.
How did the university end up with the structural deficit?
In fiscal 2000, the university took $10 million out of the fund balance to establish a quasi-endowment and invest the funds with the intention of generating investment income. The income was to be used for debt service associated with the purchase of the Oracle enterprise business system and to return the borrowed $10 million to the fund balance. Soon thereafter, the events of Sept. 11, 2001, caused a precipitous drop in the stock market. As a result, approximately $4 million of the original $10 million investment was lost. The remainder has been used to make debt service payments for the Oracle system, and the final payment will be made in early fiscal 2010
Subsequently, the university used $1 million from the fund balance to balance its operating budget in lieu of implementing planning unit budget reductions.
The university expected the market to experience a customary rebound, which would have enabled it both to pay off the debt associated with the Oracle system and return revenue to the fund balance. However, the anticipated rebound did not occur, and in fiscal 2006, the university began to discuss the need to address the structural deficit problem. University leadership is developing a strategy to resolve the structural deficit for implementation by fiscal 2010.
How is a structural deficit different from an annual operating budget deficit that we would experience if we did not reduce spending to make up for state funding cuts and investment losses?
As the language suggests, the structural deficit relates to the existing financial issue that resulted from the failed quasi-endowment strategy, and that impacts the university's financial strength.
A current-year operating deficit relates to the difference between projected current-year revenues and current-year planned expenses. It is resolved or returned to a "balanced budget" through the university cutting expenses in the current year so that income is greater than or equal to revised authorized spending levels.
How large should the university's fund balance be?
A good rule of thumb is that the university should have an amount equivalent to approximately six months of operating costs in reserve to enable it to react and manage serious and unexpected revenue or expense problems.
How are these budget issues being resolved?
Planning units are developing plans to meet their anticipated savings targets to close the projected fiscal 2009 revenue gap. The units are to complete these plans and report to Budget Planning and Analysis by Friday, Feb. 6. As the fiscal 2009 budget picture continues to evolve, a decision will be made on implementation of the savings targets.
Meanwhile, a plan to resolve the structural deficit will be implemented yet in fiscal 2009. The plan will involve reduction of carry forward budgets and a change in the carry forward policy.