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Letter to the Kutztown University Community Concerning our Budget Challenges

Feb. 8, 2018

Dear KU Campus Community,

As we enter a new year and we look forward to a successful spring semester, the University continues to be faced with significant financial challenges.  Last month's 'welcome back' letter mentioned the fiscal challenges faced by the institution, which unfortunately have not yet been resolved.  

The following is an excerpt from the January 2018 letter:

...While many good things are happening, we have several challenges to meet in the coming semester, most notably the insufficient resources from the commonwealth and a smaller pool from which to recruit new students. While we are optimistic that the many initiatives in our Enrollment Management Plan will result in an increase in new students next year, we are still graduating large senior classes. It is unknown at this time if our overall enrollment will be up. As explained last year and in previous messages, our personnel and operating costs continue to outpace our revenue, and with shortfalls from previous years, have left us with huge deficits. We simply do not have the resources coming in from the state or from tuition to balance our budget. After the governor's budget address on Feb. 6, I will distribute a budget letter to campus with greater detail on our challenges in this area, and some actions we will need to take to address our deficit...

2017-18 E&G Budget Update

The University entered the 2017-18 academic year with a budget deficit of approximately $6 million.  The University drew $5.25 million from its central discretionary reserves to satisfy the majority of this shortfall.  This transfer has exhausted the central discretionary reserve balance.  In addition, this past fall, the divisional vice presidents contributed $750,000 in a mid-year funds rescission program to satisfy the remaining amount needed to balance the budget.

Because of this, it is anticipated that any one-time funds needed to offset the 2018-19 budget deficit (see below) will need to be drawn from monies held at the department/unit level.  As of June 30, 2017, funds held at the department/unit level totaled approximately $9 million.  Unlike many universities, we do not sweep these funds each year but allow them to roll over for future department/unit use.

2018-19 E&G Budget Planning

The governor's budget is requesting a 15 million appropriation increase for the State System. If this amount is approved by the legislature, the University is currently projecting a $5.1 million budget deficit for 2018-19.  This projection reflects cost increases of nearly $3 million related primarily to personnel costs, an anticipated tuition increase and an anticipated 1.2% increase in enrollment. 

The chart below shows that the University has experienced increasingly large financial losses since fiscal year 2012, when we went from a nearly $6 million surplus to $6.7 million deficit in 2017.  We implemented more than $7 million in base budget cuts since that time which included the following (note our enrollment dropped around 2,400 students during this period):

$3.9 million     - Elimination of 47 Positions
$2.3 million     - Reduction of operating budgets                   
$  .9 million     - Reduced utility and student bad debt expense

These cuts were in addition to $12 million in budget reductions associated with retirement savings, and other budget reductions, over that same time period.

Financial Results E&G and Unrestricted Plant from FINRPT   (graph showing 2012-2017 deficit/surplus)

In addition to these base budget reductions, we still needed to draw nearly $14 million from our E&G unrestricted net assets to balance the budget for the past four years.  Our E&G reserves have dropped from $52 million to $38 million as of June of last year.  Please note that funds in auxiliary accounts cannot be used for instructional purposes such as paying salaries and other expenses.  Auxiliary funds are restricted to pay for expenses associated with student housing, food service, and other activities that support students. 

The drawing down of our central E&G reserve accounts, along with funds that were needed to balance the current year budget, and investments that were made to improve the University's recruitment and retention practices, have exhausted unrestricted central E&G available reserves (last year at approximately $4 million) as of December, 2017.  Although significant funds remain at the department/unit level, the bulk of those monies have been designated to support documented department/unit priorities, such as deferred maintenance, faculty/staff travel, purchase of commodities, student help, computer and technology enhancement/replacement, and other infrastructure improvements. 

Our falling reserves, high budget deficits, and falling enrollment have resulted in Kutztown University falling from "yellow--or warning" to "red--moving toward failure" in the State System's financial risk assessment of our university.  While we believe we have put into place initiatives that will result in an increase in enrollment and hence, an increase in our income for next year, we still carry a high level of risk with regard to our financial stability, and must act now to improve our standing. 

We are exploring the following options this semester to reverse the fiscal decline and achieve a balanced budget for 2018-19:

  • Budget reductions - As happened last year, the vice presidents have been asked to identify base budget reductions to reduce the 2018-19 budget deficit. These dollars come from suspending the hiring in non-essential positions, and reductions in other areas.

  • Funds rescission - As mentioned above, University departments maintain millions of dollars in separate accounts to support operational and special programs, as well as fund large purchases over several years.  The vice presidents may be asked once again to return a portion of these funds to apply to next year's budget deficit.  Each vice president will identify specific accounts and amounts by working with appropriate college and unit heads.  The total funds rescission amount will be identified later in the spring semester.

  • Student Success Fee - Considerable declines in enrollment over the past seven years and state funding levels that have not kept up with rising costs, have resulted in millions of dollars of lost revenue.  In addition, rising costs have significantly outpaced modest tuition revenue growth.  At the same time, the need for student support services and intervention continues to rise.

    The University has implemented millions of dollars in expenditure reduction plans; further reductions will compromise KU's ability to provide a high-quality student learning experience.  As explained above, the University has been operating in a structural budget deficit which has required drawing millions of dollars from reserves.  The financial model that has been used in the past is no longer sustainable.

    In difficult financial times, universities, including KU in the past, often turn first to student services to recover financial resources.  However, such reductions often result in lower retention and graduation rates and, after the recent investments in student services we have made, it would not be in the interests of our students to cut these budgets.  The revenue from a new Student Success Fee would safeguard access to these important services that benefit all students, protect and enhance the quality of programs offered outside the classroom, and ensure that high-quality programs are available so students will be retained and graduate on time.  Funds raised from this fee would pay for current student success initiatives such as first year experience costs, personnel costs associated with student activities, career services, support for study abroad programs, and other services provided directly to students to assist with their retention and graduation.  Additional uses of these resources could include additional institutional financial aid, funds to provide better access to textbooks, and other initiatives. This fee is currently in place at six of our sister universities.

These deficit reduction measures, and the possible creation of a Student Success Fee, will allow us to continue to invest in programs to strengthen our recruitment, retention, and persistence to graduation practices.  We are convinced that the measures we speak of in this letter will not only improve the success of our students, but they will also contribute to a fiscally solid institution. 

Please contact Matt Delaney, the assistant vice president for Finance & Business Services, if you have questions about any of the budget-related information in this correspondence.

Despite this challenging fiscal situation, I remain convinced that, working together, we will all ensure that Kutztown University remains vibrant and continues to provide the environment to make a difference in each of our student's lives.

Sincerely,
Dr. Kenneth S. Hawkinson
President