Office of the President, University of Cincinnati


	Office of the President

Frequently Asked Questions

Budget Q&A, Winter/Spring 2004

How did the University of Cincinnati get into this deficit situation?
Couldn't this budget crisis have been avoided?
How much is the Athletics program contributing to the budget deficit?
To what extent is Kingsgate responsible for this deficit?
What about all the new buildings? How can we continue to afford those? Can't we use that money for operations?
Why aren't we using the endowment to address our shortfalls?
How can we afford to loan money to redevelopment corporations in the area around campus if we can't afford our own operating expenses?
How can we afford a new house for the President, and buy land in Warren County, if we are having financial troubles?
Will there be lay-offs?
Will the university pass the deficit to the students by charging higher tuition?
Has the university considered out-sourcing to provide budget relief?
Isn't the new utility plant supposed to save money? Why haven't those savings helped the budget?
Isn't this "crisis" just a ploy to play poor before going into negotiations with the faculty union?
Will the University of Cincinnati ever be able to avoid budget cuts?
What plans does the university have to minimize budget cuts?
How will we ever be able to afford to implement the Academic Plan?
Will the University be doing so many layoffs that the option of a retirement incentive buyout would be made?

1. How did the University of Cincinnati get into this deficit situation?

There are five factors combining to create the deficit this year:

Ongoing declines in state support for higher education, shifting, in recent years from flat funding to actual cuts in support. In fiscal year 1985, the State provided just over 34.2% of the university's operating budget; today the State provides only about 19.4 percent of our budget. In the past three years alone, actual state support has dropped from $160 million to $141 million, for the central campus alone.
The cumulative effects of a decade-long enrollment shortfall, with its accompanying loss of tuition income. In 1996, the University enrolled 34, 951 students. Today - despite a concerted effort to boost recruitment and retention - enrollment is 33,823, a decline of more than 1,000.
Rapid inflation in the cost of health care for our employees, particularly in the past four years. Approximately $120 million of UC's total budget goes toward employee benefits. Rapid inflation in this area results in a huge impact on the budget.
Threats of additional cuts in state funding as the legislature and governor wrestle with the effects of the nationwide recession and the possibility of a partial or full repeal of the one-cent increase in sales tax that was instituted last year by the state government to help offset potential cuts in funding;
And the ongoing need to revisit assumptions about staffing and programming required to meet ambitious academic plans.

2. Couldn't this budget crisis have been avoided?

Even with 20-20 hindsight, it would have been difficult. The best economic minds in the nation couldn't avoid a recession, massive deficits at the state level across the nation, the "dot.com" bust, and related economic woes. In general, the University has done better than many other institutions of higher education.

The University has announced big increases in research funding, the endowment has been growing, and we admitted the largest freshman class in a decade - how can we be in budget trouble?

When we talk about the current budget crisis, we are talking about our general-funds budget, the areas in the university supported by state funding and student fees. Research funding is restricted to research activities, endowment funds are generally restricted by donors to specific activities, and enrollment, while moving in the right direction, is not yet at break-even levels.

3. How much is the Athletics program contributing to the budget deficit?

Not at all. The Athletics program is run as a self-sustaining auxiliary. The Athletics budget - around $20 million, or about 2.5 percent of the total budget - is funded by Athletics revenues.

4. To what extent is Kingsgate responsible for this deficit?

None. Kingsgate was budgeted to operate at a loss for its first three years while it was brought up to full operating capacity, and it has been profitable for the past two years. For the past year, Kingsgate has had the highest occupancy rate of any hospitality site in the Cincinnati region.

5. What about all the new buildings? How can we continue to afford those? Can't we use that money for operations?

In general, new construction is financed from four sources, none of which can be used for operating costs:

State capital funding (limited by law for construction)
Gifts from donors (restricted by the donor)
Auxiliary units (for instance, Athletics or Housing Services)
Designated Funds (the Student Life fee paid by students).

These funds cannot be shifted to operating funds. In addition, they are one-time funds. In other words, when they are spent, they are gone. Operating expenses require permanent funding that renews continually, like subsidy, endowment income or student fees. (As a personal example, the difference between permanent funding and one-time funding is the difference between your paycheck and your bank account. If you earn $100 a week, but spend $200 dollars a week, you can continue as long as you can withdraw $100 a week from your bank account. But, when your one-time bank account funds are gone, they're gone.)

6. Why aren't we using the endowment to address our shortfalls?

To a certain extent, we are. The endowment, which provided 5 percent of UC's operating costs 20 years ago, today provides about 10 percent of our budget. This is income from the endowment. The endowment itself is off-limits because it is generally made up of gifts restricted by the donor to particular uses - and those uses are almost entirely for academic purposes. In addition, the endowment capital is one-time funds. Even if the capital could be tapped, it would be a temporary solution. The university's strategy for distribution of endowment income has allowed us to continue paying dividends to academic departments, even while the endowment was losing money.

7. How can we afford to loan money to redevelopment corporations in the area around campus if we can't afford our own operating expenses?

The funds loaned to area development corporations are just that - loans. The university loaned this money as a conscious decision to diversify our endowment. The repayment of those loans is currently bringing in more money than if the funds had been invested in the stock market.

8. How can we afford a new house for the President, and buy land in Warren County, if we are having financial troubles?

Those purchases are investments, intended to generate income through eventual sale. The properties are included in the university endowment, and their purchase is part of a strategy to diversify the endowment by investing in things other than stocks.

9. Will there be lay-offs?

It is very likely that there will be layoffs. The average UC employee receives approximately $40,000 annually in total compensation (salary and benefits). A $6 million deficit translates into approximately 150 jobs. Layoffs will not be used to meet the entire deficit, but some programs will be closed, and some employees will be laid off.

For information about the possibility of retirement incentives, see question 17.

10. Will the university pass the deficit to the students by charging higher tuition?

Students at the University of Cincinnati pay less than 27 percent of the actual cost of their education. The remainder is made up from state funds, grants and donations. The University of Cincinnati has a consistent and long-standing operating philosophy to draw on state funds and to take budget cuts before asking the students for additional tuition. Over a 15-year period, the University of Cincinnati has taken more than $120 million in budget cuts before asking the students to provide an additional $90 million in tuition increases. In other words, for every $1.00 in increased tuition over the past 15 years, UC has taken about $1.35 in budget cuts. This is particularly important for the next fiscal year, when the state will cut support to UC by $3 million. For the next fiscal year, the university will take budget cuts and reallocations approximately equal to the amount of additional funding brought in by the tuition increase that will go into effect for summer quarter.

11. Has the university considered out-sourcing to provide budget relief?

Out-sourcing has been considered, as far back as 1989. The fact is the University of Cincinnati is extremely efficient. It is highly unlikely that we could save any money by out-sourcing tasks that currently serve as national models of efficiency.

12. Isn't the new utility plant supposed to save money? Why haven't those savings helped the budget?

First, the new utility plant is not yet fully operational. Second, the plant will save money by avoiding higher costs for utilities, but the first years of savings will be used to pay for the plant itself. Its budgetary impact will not be felt in the short term. As a return-on-investment project, we expect some budget relief on utilities in the long term.

13. Isn't this "crisis" just a ploy to play poor before going into negotiations with the faculty union?

Look around the country. State universities are suffering everywhere. State governments are straining to balance their budgets. There is general agreement that the recent recession is over, but jobs are not being refilled - and those employees pay the payroll taxes and make the taxed purchases that support state institutions.

14. Will the University of Cincinnati ever be able to avoid budget cuts?

Probably not. There are two kinds of budget cuts - those needed to balance the budget, and those that reallocate funds within the university to fund new initiatives and priorities. The budget-balancing cut may fade away as we restructure the planning process, but reallocations will probably be a useful strategy for years to come.

15. What plans does the university have to minimize budget cuts?

We have to expect that state support will continue to wither away, so we must wean ourselves from this source of funding. Toward that end, we must put more emphasis on private fund raising, with a comprehensive fund-raising campaign at the soonest opportunity.

16. How will we ever be able to afford to implement the Academic Plan?

How can we not implement the Academic Plan? A long-range strategic plan will help guide budget decisions and focus the efforts and resources of the University as we go into the future. It is at difficult budget situations that the need for such a plan is made all the more important.

17. Will the University be doing so many layoffs that the option of a retirement incentive buyout would be made?

The Ohio Revised Code requires the establishment of a retirement incentive plan if the “state employing unit will have a layoff within a six month period that equals or exceeds the lesser of 50 or 10% of the persons employed at the institution…” This applies only to employees covered under the Ohio Public Employees Retirement System.

With the potential of meeting the minimum threshold, UC’s Office of Human Resources is monitoring the number of people that may be subject to a layoff or job abolishment during the budget assessment over the next several years. If the university reaches the threshold, a retirement incentive will be put in place. UC has had three such incentives since 1979.