Letter on the State of UNH's Financial Health
December 16, 2009
We write to provide an update on the state of UNH‘s financial health. This has been a difficult time for all of us, yet UNH has been able to navigate through this period with relative success because of the extraordinary efforts all of you – faculty, staff, and students—have made. Because of your dedication, hard work and sacrifice, UNH continues to accomplish its core missions with distinction. We still have much work to do to stabilize our financial health in the short and long term. Outlined below are UNH’s audited financial results from 2009, trends in our sources of revenue over the past five years, and projections for the current and next two budget years.
Summarizing our financial results for 2009, operating revenues were up 3.6% over 2008 while operating expenses were up 3.5%. As a result, a small operating surplus occurred. However, like most universities, we experienced substantial losses in the market value of our endowment. The combined effect on our balance sheet was a $10.9 million reduction in our net assets, an important measure of our sustained fiscal health. Our net assets were $581.2 million in 2009 vs. $592.3 million in 2008.
Despite level to declining funding in three of our major revenue streams (state funding, grant and contract revenue, and gift/endowment income) and large increases in institutional financial aid obligations to students, we submitted a balanced budget to the USNH Board of Trustees for 2010. In order to achieve this balanced budget, we had to take some significant actions: increase tuition by 7% for residents and 5% for non-residents; leave 30-40 faculty and staff positions unfilled; implement a separation incentive plan; institute a hiring freeze; implement a salary freeze for employees; announce the closing of the New England Center in June 2010; reduce the work force by seven; reduce support costs (travel, printing, business meals, supplies) by $1 million; and, by USNH Board of Trustee decision, add a new deferred maintenance fee to address the condition of our physical assets.
As we look ahead, we all recognize that this is an extraordinary time in our economy and in the higher education sector. Much uncertainty exists around federal and state funding, student enrollments and financial need, health care costs, and the investment and borrowing markets. As a result of this uncertainty, our fiscal policy and practices must be cautious and conservative. We believe it is essential to continue careful and restrained decision making to minimize added expenses to the base budget for at least the next two years.
We do, however, note two important exceptions to this general rule at UNH:
First, we must identify flexible funds of sufficient size to steer the University toward reaching institutional goals. We face the double challenge of active restraint while choosing wise investments in our future. Standing still is a short-sighted and ill-advised approach.
Second, we must continue to attack the huge volume of deferred maintenance in our buildings. Years of underfunding the upkeep of our facilities have caught up to us.
Several key trends establish the context for our financial planning:
- Grant and contract funding as a share of total revenue dropped from 25% in 2005 to 22% in 2009.
- State support for operations has dropped from 14.8% of total revenue in 2005 to 13.9% in 2009. While initial budget plans included a 5% increase for the FY2009/2010 biennium, there was a “give-back” to the state which reduced our funding. The fact is that state appropriation funding in terms of net cash decreased by 1% from FY2008 to FY2009. UNH’s FY2010 state funding budget has been restored to the FY09 budget level through the use of one-time federal stimulus funding.
The level of state funding is very uncertain given state use of stimulus funding, state revenue projections through October that are $38 million short of budget figures, and the fact that the current state budget is, in part, dependent on $110 million from the Joint Underwriting Association medical malpractice fund which is under review within the New Hampshire court system. Further, independent estimates are that the State of New Hampshire has a 2011 budget deficit of $250 million.
- Current use gift revenue in FY2009 has reached a 10-year low. The value of UNH’s endowment has declined by $60 million since FY2007 which, in turn, has returned fewer dollars to UNH than in prior years to fund financial aid, endowed professorships, research and outreach activities, and advancement functions.
- As a consequence of the aforementioned trends, we have had to garner a greater share of revenue from our students in the form of tuition and fees, which comprised 58.1% of revenue in 2009 vs. 54.2% in 2005. This has occurred even as the economy has put greater pressure on student families’ income.
- UNH is very dependent on non-resident students to balance the budget. Fifty-nine percent of UNH’s net undergraduate tuition revenue comes from non-resident students. Dependence on funding from non-resident students is risky, particularly as competition for these students escalates and the number of high school graduates from the Northeast region of the U.S. is projected to decline steadily through 2017.
- UNH now has approximately $280 million in outstanding debt. This debt must be serviced by annual payments of $20 million. To keep debt service payments from rising, UNH must maintain a ratio of at least 40% of unrestricted net assets to debt to satisfy the national bond rating agencies that our bond rating is secure and that we are giving the financial markets confidence that we can repay our debt. Considering the current amount of debt we have outstanding, our unrestricted net assets-to-debt ratio status, and uncertainty in our revenue streams, our capacity to incur new debt in the next few years is extremely limited.
- And finally, UNH is already one of the most expensive public universities in the United States, which limits our ability to increase our price to address budget needs.
Expense growth must be modest until sustained net revenue growth occurs. We see positive signs in terms of what we know about 2010 and are encouraged about UNH’s efforts in the following areas:
- Undergraduate enrollments are strong. We are 400 students ahead of budget as of Fall R+30, but this required $3.6 million in unbudgeted financial aid. Future growth in the number of students living on campus as a solution is limited. We have exceeded capacity in housing, dining, and student support areas, and are straining our academic resources as well.
- A new advancement software system will be available soon to enhance our database of alumni, potential donors, foundations, and corporations. Our ability to steward contributions will grow in sophistication.
- The volume of proposals for grant and contract funding remains high and we anticipate that will translate into a higher volume of awards than we have had in the past two years.
- The University, in cooperation with State agencies and private entities, is pursuing aggressive marketing of intellectual property that could lead to significant increases in returns.
- We are also anticipating an increase in our federal Facilities and Administrative recovery rate, which will help offset the indirect costs of conducting research.
- A new January term may give rise to new revenue as it grows in popularity.
- An expanded summer term is also under discussion.
- Revenue growth from international students and academic and research programs is promising.
To sum up, we believe this all translates into the following courses of action:
- Build capacity to increase revenue from gifts, endowment, public-private partnerships, and intellectual property.
- Develop and expand revenue from the January term and summer program.
- Restore grant and contract annual awards to a steady state of at least $120 million.
- Fully explore other, new sources of revenue.
- Continue to exercise significant restraint on expense growth by continuing the salary freeze, the limited hiring freeze for selected units, and maintaining reductions in support costs.
We know that the staff Council Chairs have raised concerns about discussion of further benefits cost containment at the University System level. UNH will continue to monitor these discussions and be a strong advocate for a competitive compensation program for its faculty and staff.
We expect to provide another update in the spring, at which time more will be known about enrollments for FY10, applications for FY11, and the state funding situation. In the meantime, we again thank all members of the UNH community for their help in getting the University through this challenging period.
Vice President for Finance and Administration
Assistant Vice President for Planning and Budgeting