Focus Area D: Achieving Financial Stability and Eliminating the Budget Deficit

The CIHE cited UMass Dartmouth's need to succeed in "achieving financial stability and eliminating the budget deficit" as one reason for a focused visit in spring 2003:

We remain concerned ... that the relationship between program objectives and financial planning and controls is not yet fully defined and that the University has not yet arrived at a condition of financial equilibrium. (Report of findings, October 19, 2000)

Specifically, the CIHE cites Standard 9.4 on Financial Resources:

The institution insures the integrity of its finances through prudent financial management and organization, a well-organized budget process, appropriate control mechanisms, and timely financial reporting, providing a basis for sound financial decision-making. The institution has and implements a realistic plan for addressing issues raised by the existence of any operating deficit.

The CIHE then stipulates, "We anticipate learning of [UMass Dartmouth's] success in achieving fiscal stability and eliminating the budget deficit in the 2003 report."

The visiting team found UMass Dartmouth in an unstable financial condition in 2000, evidenced by a negative unrestricted fund balance. This finding occurred during a period of rising state appropriations and a robust economy in Massachusetts. There was also an implicit assumption in the visiting team report that the University's financial condition had reached a low point at the time of the visit. Although both the Commonwealth's fiscal environment and the institution's fiscal condition have worsened in the subsequent two years, the return-visit team will find UMass Dartmouth successfully building financial stability in a situation of decreasing state appropriations and a slow state economy.

6.1 Fiscal context, 2000 to present

A decrease in state funding is, at UMass Dartmouth, exacerbated by the lack of financial reserves. The University's negative unrestricted fund balance grew from $4.9m in 2000 to $8.4m in 2001 and to $9.7m in 2002 (all numbers are presented in the format in use prior to Government Accounting Standards Board Statement 35). On the other hand, controls have been developed to halt that decline and begin the turnaround necessary to build a financially healthy UMass Dartmouth in the coming years. There is merit in considering the causes of the change in the unrestricted fund balance for each of the past two years because therein lies the basis for the optimism about the future.

For the year that ended June 30, 2001, the negative unrestricted fund balance for the University grew to $8.4m from $4.9m at June 30, 2000, for reasons largely internal to the institution. In this context, expenses ran ahead of revenue due to the momentum of the existing structural budget deficit as control structures were being created to resolve the problem. Salary expenses rose, as did those for PeopleSoft (discussed below) and utilities, and housing/dining expenses outstripped revenue by more than a million dollars. In addition, not all of the expenditures for plant improvements, equipment acquisitions, and capitalized expenses for PeopleSoft were budgeted, and this helped tip the scales from operating balance to imbalance in fiscal 2001.

In fiscal 2001, UMass Dartmouth experienced continuing difficulties with budgetary processes. Some significant steps were taken in fiscal 2000 to implement better budgetary processes, including initiation of a personnel database called the GoldBook and budgetary review processes for each division and the colleges. Nevertheless, in fiscal 2001 there was still ineffective collaboration among campus constituencies regarding overall budget development and execution, and stakeholder committees like the Budget Review Board stipulated in the faculty union contract were neither advised nor consulted about budget matters. In a labor-intensive organization, there was no fully accurate control over personnel expenses and, indeed, no agreement about the parameters of personnel budgets. There was no comprehensive all-funds budget, merely a series of separate fund budgets that were subject to the more narrow interests of fund managers than to the university as a whole. Although planning took place, the final budget was not completed until the state appropriation was made, thereby delaying the final institutional budget allocations until well into the academic year after many expense commitments had already been made. Operational funds were allocated to units on a percentage basis from the prior year.

The next fiscal year brought continuing financial pressures. Fiscal 2002 occasioned a late state appropriation (November) that also reduced funding from the prior year and was followed by an additional reversion of $363k in the spring. At the same time, UMass Dartmouth continued the implementation of significant budget process improvements started in fiscal 2000. From June 30, 2001, to June 30, 2002, the negative unrestricted fund balance went from $8.4m to $9.7m, but this change can be attributed mainly to uncontrollable factors external to the University.

The first external factor was a statewide early retirement program that actually increased expenses for the year because all future costs attributable to the program naturally had to be recognized in full in 2002. The latter included an increase in the compensated absence accrual to be paid over three years to retirees that produced a current year expense of $800k, an expense that was not budgeted. It is significant and important to note that the fiscal 2002 budget was balanced on a cash basis, although not on an accrual basis.

The second external factor that had a negative effect on the financial statements was short-term borrowing for working capital. In the face of the state budget cuts, other campuses of the University were able to increase fees at mid-year, but UMass Dartmouth was precluded from this approach because students had already been billed. The President's Office and the other campuses provided Dartmouth with $1.8m, of which $750k was a loan. The borrowed cash was used in operations but liabilities grew by the loan amount, further diminishing the unrestricted fund balance. As these liabilities are paid in future years the fund balance will rise as funds are budgeted to meet this obligation. Current strategies for balanced institutional budgeting will ensure this occurs.

Internally, funding for the UMass-wide PeopleSoft commitment continued to be problematical through fiscal 2002. All five campuses of the University have moved to common software, PeopleSoft; the human resources segment has been operational since March 15, 2002, the finance segment since June 30, 2002, and implementation of the student component (ISIS) is in progress. It has been difficult to develop a financing strategy for this infrastructure expense over the past several years because this UMass-wide project has taken multiple tracks of activity as a project. In addition UMass Dartmouth has tried to meet project expenses on a pay-as-you go basis without knowledge of all elements of long-term project development and implementation. A plan has been put in place for fiscal 2003 that includes a combination of budget allocation, borrowing and capital funding provided by the State. This comprehensive plan for financing the commitment to PeopleSoft also covers the period retroactive to 2000 and forward to 2012, and will be used to make future decisions about the UMass Dartmouth obligation to the PeopleSoft project as the vagaries of both project objectives and external funding are clarified over time.

6.2 Restoration of financial stability

Earlier it was stated that there is a basis for optimism about the restoration of financial stability in spite of the negative numbers. Such a favorable view is merited by changes initiated for the fiscal 2003 budget that will be expanded as budgets for fiscal 2004 and beyond are prepared.

UMass Dartmouth is successfully introducing a comprehensive system of budgetary controls to balance revenue and expenses. Fundamental financial control is established by developing prudent revenue estimates that set the boundaries around which the expenditure budget is built. Planned expenditures, absent reasonable revenue estimates, cannot be the basis on which the budget is built. The estimates of income must cover all sources of funds, thereby establishing an overview of the financial operation. The tendency to permit multiple funds to stand apart from the total UMass Dartmouth financial plan creates an unnecessarily fragmented budget and, perhaps more importantly, permits internal organizations to gain and expend resources independently of administrative controls.

The revenue budget for fiscal 2003 was built on a reasonable estimate of enrollment and included housing occupancy and resident dining participation (see Table 6.2). The enrollment numbers were projected for the year, included an evaluation of second semester attrition, and covered the day and continuing education divisions and both undergraduate and graduate students.

A budget was built for each fund and combined to produce a total institutional budget (see Table 6.3). While use of each fund is circumscribed by specific purposes established by the Board of Trustees, an aggregate perspective takes into account the interrelationship of funds to provide maximum benefit to the institution. For example in regard to the necessity to build fund balances, certain funds may be useful to achieve a surplus rather than spending all of the funds in a given year. The practice noted here also helps to accomplish an objective aimed at the financial statements such as reducing the negative unrestricted fund balance rather than the annual budget, which is often seen as merely the balancing of cash income and expense in a given year.

Table 6.3: SUMMARY OF REVENUE AND EXPENDITURES FOR THE FISCAL 2003 OPERATING BUDGET

The fiscal 2003 enrollment, housing, and dining budget estimates were accurate, as seen from the fall semester numbers. Enrollment will continue to be the basis for building the fiscal 2004 budget. However, the enrollment estimates will now be carried out through fiscal 2010 or beyond to support longer range financial and institutional planning. The intent is to create a rolling multiple-year enrollment projection that will establish the boundaries for decision-making at the University instead of the previously prevailing one-year time horizon.

The use of enrollment in budget building coincides with UMass Dartmouth planning initiatives that are also the subject of the NEASC focused visit. In the summer of 2001 Strategic Planning Focus Groups were established, including the Enrollment Implementation Team. This Team was charged with developing a model for a multiple-year detailed enrollment plan that integrated cross-divisional factors such as housing, dining, financial aid and the like. The Enrollment Implementation Team has produced its first multiple-year plan that will be the subject of continuing refinement as program and departmental enrollment evolves from the aggregate numbers. The plan will also be the subject of periodic assessment and evaluation so that prior year projections will be reviewed to fine-tune future enrollment predictions. A rolling multiple-year enrollment projection model is the result of this exercise.

In addition to enrollment, another element in our new revenue-based structure for financial management is to base future budgets on estimates of state revenues. The state appropriation is more predictable than is often thought, and extrapolating from the current status of state finances, one can make a prudent estimate of campus funding for the coming year. This estimate would be a calculation of the University's percentage share of the increase or decrease in funds available for discretionary (i.e., not entitlement) spending by the Commonwealth. The University of Massachusetts state funding represents 3.4% of the total discretionary state budget, and UMass Dartmouth represents 10% of the University-wide budget. Hence, when predictions are made about the state's finances by a group such as the Massachusetts Taxpayer Foundation, for planning purposes 0.34% of the increase or decrease will fall to UMass Dartmouth. This straightforward estimate can then be tempered by experienced judgment from the University President's Office and locally by the Chancellor and her advisors. In this matter, prudence is clearly the watchword. The comprehensive expense budget can be prepared once all revenue elements have been calculated to set the upper limit on expenditures for the budget year.

To address revenue constraints but also to implement a procedure to gain systematic and meaningful input, the budget process for fiscal 2003 consisted of hearings with each vice chancellor and the respective deans and directors. The Chancellor, together with the Vice Chancellor and Associate Vice Chancellor for Finance, conducted these hearings. The lack of historical information by area on a line item basis was felt, but still each hearing provided the opportunity for deans and directors to demonstrate their command of the budget. The Budget Review Board met at least monthly to consider the process as well as the assumptions used in building the budget. A preliminary budget was prepared in June and a few adjustments had to be made for items that did not arise in the hearings. A final budget was issued in August 2002.

Control of salaries has been established through a position-specific document referred to as the GoldBook. This document listed fiscal 2003 full time positions and salaries funded by the state appropriation and had been several years in development. The GoldBook is a planning and management tool that provides data to vice chancellors, deans, and directors to allocate manpower to accomplish objectives and to plan replacement and future hiring. With the enrollment planning and budget development efforts now underway, the GoldBook is clearly an integral link in the planning and budgeting process at UMass Dartmouth. The immediate objective in regard to salary and wage budgeting is to expand the GoldBook to include trust funded employees and part-time faculty during fiscal 2003 in anticipation of fiscal 2004 and beyond. This will enhance budgetary control of positions and salaries at the University and will facilitate the implementation of institutional plans.

6.3 Future challenges

The University faces environmental uncertainties that could have an adverse effect on its financial condition in both fiscal 2003 and fiscal 2004. The Governor and the Legislature have not funded the three-year collective bargaining agreement effective July 1, 2001, and the incremental money involved is substantial: $2.9m (FY02), $2.5m (FY03) and $2.6m (FY04). UMass Dartmouth is not in a position to carry the ongoing burden of the contract in any material way, and contract language requires appropriation. Dialogue is continuing on this issue between unions and state officials to find a solution that does not place an unreasonable burden on existing university resources.

However, the potential for UMass Dartmouth to absorb some of the costs associated with collective bargaining should be viewed alongside the risk that accompanies the reversion of state appropriated funds amounting to $317k in November 2002 and $625k in January 2003. This current shortfall of nearly $1.0m will be addressed by a combination of permanent and one-time budget cuts to maintain a balance in both cash and accrual accounting statements. Furthermore, a taxpayer group has suggested that the state is facing a $2 billion revenue shortfall in fiscal 2004, a condition that will clearly have an adverse effect on the amount of funding UMass Dartmouth receives from the state. As of February 2003, the Governor is stating the budget shortfall for fiscal 2003 is $3.2 billion. Since a tax increase is not on the Governor's agenda at this time, expense reductions are necessary. Fiscal 2005 is expected to be the year state finances hit bottom with an estimated deficit of $1 billion or more.

Finally, about $3m ($1.5m in fiscal 2003 and fiscal 2004) of the PeopleSoft funding plan for UMass Dartmouth was derived from State IT bond proceeds, but that aspect of the plan has not materialized. Given the current financial situation, the additional planned increase in operational funding for PeopleSoft cannot be met as planned. The bond funds and additional operating funds for PeopleSoft have been earmarked for the student system. The student segment of PeopleSoft (ISIS) is a collaborative effort of three campuses of the University: Boston, Dartmouth and Lowell. A representative cabinet of Chancellors, Vice Chancellors, and others governs the project. This cabinet met on February 12, 2003. At this meeting the group was advised that, based on financial projections for the next two and a half years, the Dartmouth campus would have to "stop-out" of the project. This action will have a positive effect on Dartmouth finances for 2003, 2004, and 2005. During this period the University will rely on its current student software system that is fully capable of supporting the student operation. In 2005 the Dartmouth campus will determine a method of installing the PeopleSoft student system from three alternatives: Rejoining the current ISIS project; going through a campus based installation, or developing a cooperative agreement with the Amherst campus that has already installed the system.

In light of all these financial constraints, the university is considering a significant fee increase to provide a hedge against anticipated state revenue losses. At the currently projected statewide deficit of $3.2 billion, the University is facing the prospect of significantly reducing operating expenses for fiscal 2004 that could include program eliminations and a reduction in force. UMass Dartmouth is developing a plan that will allow the campus to gain sufficient revenue and reduce expenses to address these state reductions, continue to budget for accrual debt reduction and meet student financial aid needs. Clearly the percentage of the various revenue sources is changing as appropriations decline and fees rise. Grants in support of the expanding research mission of UMass Dartmouth will continue to rise as an important element of our revenue pattern. Increasing enrollment is likewise a planned component of revenue growth for the institution. External fundraising is an opportunity that will be emphasized over the next several years for both large capital gifts and the annual fund. The potential in regard to fundraising is significant because a relatively small percentage of our graduates are donors.

Notwithstanding these uncertainties, this institution is in a far better position to deal with the situation than it was at the time of the evaluation team's spring 2000 visit. We have the structures in place to deal with the issues. Enrollment growth and a fee increase for fiscal 2003 provided incremental revenue that helped support operations in the face of state budget cuts. In addition, the added funds were used to overcome the difficulties created by an early retirement program that included 35 faculty members and came at a time when the freshman class grew by 30%. Plans are in place to fill the faculty vacancies created by early retirement over several years. Room and Board charges also increased to meet the debt service arising from the bond issue for new dormitory construction and to fund deferred maintenance projects. Increases in fees and room and board charges are anticipated for fiscal 2004 as well.

UMass Dartmouth has made the following significant strides toward the goal of establishing financial stability and eliminating the deficit in operations in spite of the difficulties inherent in the current economic condition of the Commonwealth:

• The UMass Dartmouth operating budget was balanced on a cash basis in fiscal 2002.
• Fiscal 2002 divisional spending was within budget limits.
• At the point of the mid-year budget review for fiscal 2003, the University's finances are on a track that will produce a positive financial statement operating result that will begin to diminish the negative unrestricted fund balance (net asset) condition.
• The budget process is simplified but well organized, with improvements planned for fiscal 2004 and beyond.
• Control mechanisms and timely reporting have become a norm even with the disruption that accompanies the transition to new software.
• The use of enrollment projection as the driving force behind the budget not only yields a prudent and controlled budget but will serve as the basis for institutional planning as well.

UMass Dartmouth is now in compliance with NEASC Standard 9.4. "Prudent financial management and organization, a well-organized budget process, appropriate control mechanisms, and timely financial reporting, providing a basis for sound financial decision-making" have all been implemented. Furthermore, "a realistic plan for addressing issues raised by the existence of [our present] operating deficit" has been implemented.