Corvey outlines university's financial challenges
 
The following memo from Candace Corvey, vice president for finance and administration, outlines some of the university's financial challenges in the short-term and long-term.

The purpose of this memorandum is to provide an update on the finances of the university as we work together to bring our operating budget into balance for this year, next year, and beyond. Every year at this time, we face a challenge. Some years are worse than others, and the last few years have been tough, but we seem always to find ourselves in a struggle to live within our means while maintaining quality. The struggle is persistent because there is a virtually perennial gap between the growth rate of our revenue streams and that of our costs. This gap has caused us to begin to use our reserves (akin to our savings account) to cover ongoing expenses. We must undertake some structural changes to reverse this trend, because the current course is not sustainable.

FY02-FY07 Big Picture
As we look at the five-year period between fiscal year 2002 and fiscal year 2007, which is the end of the upcoming state budget biennium, the challenge becomes apparent. Revenue to our Education and General (E&G) Budget, which comes from multiple sources, is growing by an average annual rate of 4.8 percent. (This assumes that our state appropriation will grow by 3 percent annually for the next two years.) In contrast, our expenses are growing by 5.5 percent. On a budget the size of ours, this gap will automatically grow our deficit by $1.7 million annually. This is a universitywide figure.

Some units are experiencing larger deficits and others are able to balance their budgets or, even better, to contribute to reserves. The colleges experiencing the greatest financial strain are COLSA and CEPS. Significant efforts are underway in both colleges to develop and implement deficit mitigation plans; COLSA is further along in the process. Cooperative Extension and NHPTV are also struggling considerably with financial problems due to their heavy reliance on state funding. Among our auxiliary operations, the greatest financial difficulty resides in the Department of Intercollegiate Athletics.

Our revenue is growing by only 4.8 percent per year for two major reasons. First, the growing cost of undergraduate financial aid is causing the so-called tuition discount rate to rise; in fiscal year 2002, 21.7 percent of tuition had to be reinvested in financial aid in order to make UNH economically accessible to all enrolled students, and by fiscal year 2007 that figure is projected to be 25.7 percent. This means that a smaller proportion of tuition revenue each year is available to the schools and colleges. Although gross tuition is growing by 7.2 percent annually, net tuition is only growing by 6.4 percent.

Second, the state appropriation, which represents 25 percent of our E&G revenue, will average 2.6 percent annual growth over the period, assuming the budget submitted to the Legislature by Governor Lynch is passed.

There are four major categories of expense that are growing at rates in excess of our revenue growth; fringe benefits (9.3 percent), utilities (12 percent), repair and renovation; (8.4 percent), and support of USNH (6.8 percent). The escalating cost of health care has caused continuing increases in the fringe benefit rate, in spite of cost containment efforts and increases in the portion of the cost paid for by faculty and staff. There is every reason to expect this difficult trend to continue.

The cost of energy is driven by world markets. Fortunately, UNH has taken aggressive steps to become more efficient and less vulnerable to fluctuations in fuel prices by building a co-generation power plant. That plant is expected to be on line in November of 2005. We are vigorously exploring other avenues to further reduce utilities costs.

The university spends roughly $7 million a year on repair and renovation of the nonauxiliary part of our physical plant, and that figure is mandated by board policy to increase by $500,000 a year. The nationally accepted rule of thumb would suggest we should be spending at least $11 million annually. We are very fortunate to have received State capital funds to address the condition of Murkland and Kingsbury, and there is reason for some optimism that another infusion of funding will enable us to begin to address DeMeritt, James, and Parsons. Still, we simply never have enough money for the many serious challenges we have regarding adequacy and quality of space, as any casual tour of campus will show.

Finally, the USNH support line is the UNH pro rata share of systemwide services such as the Chancellor's Office, Controller's Office, Purchasing Office and the USNH portion of CIS.

In summary, many of the factors that cause persistent budget problems are more or less outside our control. We must continue to try to influence those external factors, of course, but we must put even more focus on that which we can control so as to avoid a future crisis. We must reduce administrative costs wherever possible so as to maximize resource flow to academic units, re-think financial aid policies, cooperate with USNH efforts to contain growth in fringe benefit costs, moderate salary increases consistent with fairness and the market, ensure stable undergraduate enrollment, grow graduate enrollment and place more graduate students on external funding sources, ensure that our curricular offerings are attractive and deployment of faculty is efficient and effective, and be aggressive in grant-writing and private fund raising. Essentially, we must keep focused on the priorities contained in the Academic Plan, particularly in those areas related to general education reform, our commitments to diversity and inclusion, outreach, and resourcefulness. It is this last goal and all that it entails that will enable us to achieve the others. FY05

The approved E&G budget for this year was not balanced. It relied upon the use of $1.91 million in reserves. Some of the planned uses of reserves were strategic, such as for improvements in facilities or faculty start-up packages. However, far too large a portion of the planned reserve use was simply to plug holes in the operating budgets in some of our schools and colleges. During the year we faced a number of material financial challenges that were partially offset by some unexpected good news.

1. Ninety-one people chose the Separation Incentive Program for faculty and staff. The one-time cost to the E&G budget was $2.7 million, all of which had to be funded this year. The long term budgetary benefit is estimated to be between $2 million and $3 million per year.

2. Undergraduate net tuition is $1.1 million under budget, in part due to lower spring undergraduate enrollment than expected and in part due to a precipitous decline in Outreach Education and Summer Session (formerly DCE) revenue.

3. The cost of utilities is projected to exceed budget by $600,000 due to rate increases from PSNH. This figure would have been far worse had UNH not taken steps to purchase its full year supply of oil when the price per barrel was $36. (It is now in excess of $55 per barrel).

4. Graduate net tuition and indirect cost recovery in combination will exceed budget by $2 million.

We expect to end the year with an overall net use of reserves lower than the $1.91 million in the approved budget. That is the good news. The bad news is that two of our six schools and colleges are projecting material year-end operating deficits.

FY06
The budget process is still underway for next year. Until the outcome of the State legislative process and the size and demographic mix of the freshman class are known, we will be operating with enormous uncertainty. What is clear is that each year the process of budget balancing gets harder, because each year we have a leaner base with which to start. We are currently assuming that the governor's budget, which calls for a 3 percent increase in our state appropriation for next year, will be approved by the House and Senate, that the freshman class will be 2,650, and that the USNH Board of Trustees will approve a tuition rate increase of 6.5 percent. In that scenario, the projections we are receiving from units suggest that we will once again not have a balanced budget next year. The necessary use of reserves is currently projected at $900,000. This is a net figure across all units that rely on E&G funds; some units are far worse off than others. We will continue to work hard to reduce the deficit.

FY07 and the RCM Review
The five-year review process of Responsibility Center Management (RCM) is underway. Provost Mallory and I co-chair this effort, which is slated to provide recommendations to President Hart by February of next year toward implementation of any changes effective in FY07. We have recently completed an extensive process of hearings throughout the campus to gather opinions and suggestions about the ways in which the decentralized model is perceived to have worked well or not.

It is unfortunate that the review process is occurring in the context of such extreme budget pressure in some of our academic units, because there is a tendency simplistically to blame the budget problems on RCM. As one of the primary architects of the RCM model we have today, I assure you that I do not regard it as perfect. But, I do disagree with those who suggest that any given budget deficit is simply the fault of the model. The RCM model is just a resource allocation and financial analytic tool. It attempts, albeit imperfectly, to match revenue with the expense associated with it. It does so at the school/college/unit level, recognizing that within any unit there will be activities that are essential to our mission and that require subsidization.

Since its inception, the RCM model has shown a bright light on pockets of the University where "right-sizing" and curricular reform needed to occur. A number of our schools and colleges have successfully undertaken these efforts and have reaped the rewards. I do anticipate and fully support serious consideration of important alterations in the model. The RCM Review Committee has gathered a great deal of information from the hearings and other sources and will shortly digest it all in order to develop a list of areas for further analysis and exploration of alternatives. Certainly the structure of the assessments, the division of indirect cost recovery, and the flow of State Appropriations are areas for extensive review. All areas for review in the RCM model will be fully explored over the spring and summer and options will be shared and discussed in the RCM Review Committee and with the entire campus community in the fall.

As you may have heard, this will be my last budget season at UNH due to my decision to retire in the end of December. While December is many months away, this may be my last financial status letter to the community. I, therefore, want to take this opportunity to thank everyone at UNH with whom I have had the pleasure and privilege to work. Since I arrived here in 1996, UNH has never ceased to amaze me in its capacity for doing more with less and maintaining high quality in the face of daunting financial challenges. This can only be because our faculty and staff are committed, resourceful, and extremely hard-working. It has been an honor to be part of this community.