Dear Red Wolves:
I am bringing you budget news today. These are challenging times for higher education (both at the institutional level and at the individual level) as we all struggle in our own worlds to adapt to the new normal of COVID-19 response. The news I present below may seem overly detailed (and perhaps a bit depressing), but I want you to be informed about how COVID-19 is affecting your university. If you want to save some reading, here is the summary: we are currently managing an end-of-year budget cut, and we anticipate a significant budget shortfall for next year (details on how we will manage that shortfall are still being developed). The bright spot for students is that I am committed to creating next year’s budget without increasing tuition or fees in Fall 2020. So, here goes…
1. Fiscal Year 2020
Last month, the State of Arkansas followed the federal government’s decision to delay tax day to July 15, which is in the next fiscal year for Arkansas. That resulted in a COVID-19 related shortfall of $350M for the state in the current fiscal year, ending June 30, 2020 (FY20). As a result, A-State was required to make a permanent cut to our current FY20 budget by $2.35M. Our finance office worked with each division on campus to determine year-end savings and other reallocations that we could use to cover that amount.
Since mid-February, for example, we have significantly reduced university operations, which will allow us to reduce the FY20 budgets for travel, supplies and services, and other expenses like utilities. The other sources of the end-of-year FY20 cut include unbudgeted funds from the Educational Excellence Trust Fund, the university’s matching funds related to the phasing out of the ICC Perkins Loan program, and delaying planned capital projects. Finally, we assessed the balances of all carry forward accounts approximately 2%. Carry forward accounts are funds that build up over time. Chairs, Deans, and Vice Chancellors will have the discretion to determine the specific reallocation for each carry forward account within their respective areas of operation (some carry forward accounts may have already obligated their funds to a specific project). We completed this effort last week.
2. Fiscal Year 2021
Our next fiscal year (FY21) begins on July 1. In spite of the fact that our applications, admissions, and enrollments were up for Fall 2020, we had already created a conservative FY21 budget earlier this year. We had budgeted for “flat” enrollment. But, after seeing the impact that COVID-19 was having on our state, our budget team proactively began to reconsider the original plans we had made for the FY21 budget. Unfortunately, that anticipation turned out to be correct.
Because of the projected impact that COVID-19 is having on next year’s state budget, we are now planning on a decreased FY21 state appropriation. The reduction in state funding is driven by two major forces. First, there has been a huge impact on the state budget because of the coronavirus pandemic, both in terms of diminished tax collections because of reduced economic activity, and increased costs for emergency response. Second, the delayed state income tax collection will delay the ability of the state to fully fund its agencies at the beginning of the fiscal year. As a result, the governor recently asked the legislature to reduce the FY21 state budget by $205M.
What does that mean for A-State? We are building our FY21 budget based on only about 90% of what we received in our FY20 state appropriation. The exact numbers are difficult to say right now because several factors remain in play (including how productivity formula funding plays itself out). There is a very small possibility that we could receive an additional appropriation late in the fiscal year, but I don’t feel comfortable adding that to our budget, except as a contingency. As we build the FY21 budget, we are also being mindful of the impact of the Spring 2020 room and board refunds/credits on the budget, how COVID-19 might affect our summer and fall enrollments, and the extent to which we will be able to offer classes face-to-face in the Fall 2020 semester.
3. FY21 budget shortfall mitigation strategy
I anticipate that our new FY21 budget will not be complete until early May, but here are some guiding principles our finance team and campus leadership will use throughout the process.
a. Tuition. When state-supported universities have faced budget shortfall as large as 10% in the past, a common response has been to pass that shortfall on to students and parents by raising tuition. Let me be very clear on this issue. I will not recommend an increase in tuition and fees for Fall 2020. I understand very well the challenges that our students and their families are facing, so we will create an FY21 budget that does not include an increase in tuition or fees.
b. CARES Act. The federal government has allocated $9.2M to A-State to help offset some of the costs to the university related to our COVID-19 response. About $4.6M of those funds are “reserved to provide students with emergency financial aid grants to help cover expenses related to the disruption of campus operations due to coronavirus.” The remaining $4.6M could be used to help cover some, though not all, of the FY21 shortfall, but we are still two weeks away from knowing how that money may be spent.
c. Budget cuts. Just as we did this year, we will identify line items in the FY21 budget that can be cut or eliminated without interfering with our central mission to educate leaders, enhance intellectual growth, and enrich lives. We will follow our existing budget cut protocols when making these changes (e.g., all divisions will participate in any reductions, focus on protecting currently filled employee lines, and curtailing non-essential travel and other expenditures).
d. Reserve funds. We are fortunate that A-State’s disciplined financial management has resulted in developing recommended institutional reserves to invest in strategic planning priorities or to prepare for times of financial crisis. While it is important to maintain recommended reserve levels to satisfy bond ratings and accreditation financial ratios, if additional funds are needed to cover the FY21 budget shortfall we will seek to draw upon those reserves to complete the budget. It is impossible to know at this time how much of our reserves we might have to use, but it is comforting to know that we have built sufficient reserves to see us through FY21 (barring unforeseen circumstances).