Office of the Chancellor

» back to Campus Budget

Understanding the Campus Budget Process Ahead

October 22, 2009

To the Campus Community,

As many of you know, the campus is facing a serious budget situation in the coming fiscal year when the one-time federal stimulus funding we received this year will no longer be available. We are fortunate to have this grace period to develop a financial strategy that will help us address the $38.2 million shortfall that looms ahead. Once again, I am asking the Budget Planning Task Force and my leadership team to recommend ways that we can reduce costs, create efficiencies and most importantly, develop new revenue sources to carry us forward in the years ahead.

These difficult budgetary situations will be our focus for the coming months and it is important that all members of the campus community, particularly those who may be unfamiliar with the budget process, understand the basic concepts of campus budgeting. To that end, I am sharing this budget primer, which has been revised this year to include new notions that have become important (e.g. stimulus funding) and brought up-to-date. Like last year, this document will be available on the Chancellor’s Office Web site.

Revenues and Expenditures

Although we have several sources of revenues, many of these sources are directed at specific items (that is they are “restricted”) and are therefore not subject to discretionary use. For example, money that is given to us by government agencies or by industry for research must be used for that purpose and cannot be reallocated elsewhere. Similarly, capital projects are often the result of direct appropriations to build a building or to renovate a building and cannot be used for general instructional purposes.

In our General Funds, the two major sources of funding for our campus are state allocations and tuition/fees. We receive smaller amounts of money from the indirect cost recoveries associated with grants and contracts, though these monies are typically used to pay costs associated with sponsored research. The campus also receives interest we earn on deposits in our accounts (some of which is explained below). We do have several other unrestricted sources of revenue, but the revenue from these sources must go to support the activities that produced the revenue (e.g., auxiliaries, continuing education).

When we budget for the year we estimate the amounts available to us from all available sources; thus there are already claims on almost every dollar of revenue prior to the start of a fiscal year. In general, the only way we can add something (more faculty, more staff, more supplies, etc.) is by receiving extra funding in one or another category, or by taking funding away from one category to support another activity (hire fewer staff and more faculty; buy fewer supplies and purchase additional equipment, etc.)

Operating and Capital Budgets

There are two sorts of funds on public campuses: operating budgets (current funds) and capital budgets (plant funds). Operating budgets encompass all facets of daily operation: salaries for faculty, staff, graduate teaching assistants, research assistants, supplies and equipment, fuel costs, etc. These costs are almost always recurring, meaning that they must be supported by a funding stream that will be available every year.

Capital budgets involve major equipment and capital projects, such as the construction of a building or the renovation of a building. These projects are funded with one-time budgets, that is, with a specific allocation that is given once and that need not be given again the following year. Very often a campus will save money for a capital project in a special account (Plant Funds). It may thus appear that a campus has a great deal of unclaimed money, when in fact that money is designated for a specific capital project.

At times, the campus may need to transfer money from the operating budget to pay for capital expenses. For example, during recent years we have borrowed money to do many construction projects. We have to pay a debt service on those projects, which is an expense that recurs for many years, but at some point will disappear from our expenses. We also need to allocate some funding to capital expenses for emergencies and to address the most critical deferred maintenance that cannot be accomplished with borrowed funds, since on a campus as large and as old as ours we average over $11M per year in smaller projects that have to be done to ensure the safety of the campus community and for critical maintenance. The repair of roads, or leaking roofs, or of heating systems would fall into this latter use of funding.

Money transferred from operating to capital therefore most often involves sums that cannot be simply used for other operating expenses, such as hiring faculty members. We cannot renege on our debt payments for projects under way or recently completed. Nor can we endanger our campus employees and students by not having a fund to support emergency repairs, especially involving health and safety issues.

Temporary Reserves and the Resultant Interest

Every year students pay tuition and fees. The campus takes the allocation of tuition and fees from students (as well as any other payments that come into the campus) and places it in an interest-bearing account. At certain times it may appear that the campus is flush with money. But this money is already budgeted for operating expenses and therefore cannot be used for other operating expenses.

To understand this concept, you might think of your own checkbook. At one point or another during the month you may have a rather large amount of money in your checking account. But you can’t simply spend that money on anything you would like to spend it on, since you know that you must pay your rent or mortgage, your utility bills, your grocery expenses for the month, etc. For that reason looking at a snapshot or even an average of the balance you have in your checking account does not really disclose anything about discretionary funding at your disposal.

Some banks will also give you interest on the average balances in your accounts. In the average checking account this interest does not amount to very much, and it may not be something you incorporate into your budget. But when the balances are tens of millions or even more than $100M dollars, as it is on a large university campus, then the interest on the cash flow can be considerable. We do accrue a great deal of money in this fashion: in recent years we find $9M in interest for a given year. But this money is also not free to be used for any expense. It is part of our calculation of revenues right from the start and is already destined for use in the operating budget—paying salaries, buying supplies, paying fuel costs, etc.

People versus Capital Construction

Because the sources for funding salaries for people and for funding capital construction are very different, it is most often not possible simply to choose one or the other, or to transfer funds from capital expenses to “people” expenses. In difficult times for employees, I have often been asked here and at other institutions why we don’t simply devote the millions of dollars in ongoing capital projects to paying salaries, or paying increases in salaries, or even hiring additional people.

There are many reasons that it is not possible to shift funding in this way. For many construction projects the funding is restricted, either by a private donor or by the state or federal government, or by the covenants on the bonds for funds borrowed and cannot be used for other purposes. In some cases the project is already ongoing: shutting off the funding would result in additional costs resulting from having to start the project up anew, and would probably result in layoffs of people working on the construction, or cost the campus resources resulting from breaking legal contracts with contractors and subcontractors. Finally, even if it were possible to stop all construction without incurring any additional costs, even if none of our construction had restrictive funding, the funding we have available is one-time money and would be quickly exhausted. The reason: hiring people into permanent positions or paying salaries for permanent employees is a recurring expense.

You might think of the following situation. Say that you received from an aunt the sum of $10,000 to remodel your kitchen. You go out and hire a project manager and sign contracts to have the work done. In the middle of the project you decide you’d rather devote the money to hiring a housekeeper to clean your house and manage the affairs of the house; the housekeeper you have in mind would cost you $40,000 per year. It is obvious that you cannot simply cancel your plans and hire this individual since you would be subject to legal actions against you for violating signed contracts. But even if you had not yet started the project, you can see that the $10,000 could be used to hire the housekeeper for only a finite period of time, and that unless you can count on your aunt supplying this sum every three months, you cannot really commit to hiring a new employee.

The general principle of budgeting in higher education is thus that capital funds cannot be easily exchanged for operation funds, and that in order to put something on the recurring operational budget (hiring permanent faculty or staff; making permanent additions to departmental budgets for supplies and expenses, etc.), you must have a steady source of funding. As we have seen above, the two main sources of steady funding for a public institution of higher education are state allocations and tuition/fees.

Stimulus Funding and the Funding Cliff

This year (FY10) we have an additional source of funding for our budget: stimulus funding. The money we receive comes from the federal government under the American Recovery and Reinvestment Act and is allocated to us by the state. The money we will be receiving for the current fiscal year restores our budget to the level at the beginning of the last fiscal year (FY09). We are very grateful to receive this money, but it is obvious that we cannot use it as we planned to use the same money we had in FY09. The reason is simple: the stimulus money is one-time. Many of the things we wanted to do with the funding we were to have received in FY09 involved recurring expenses, such as hiring faculty. So while we are pleased to have stimulus funding, since it will keep our budget healthy for a year, it does not solve our long-term financial problems, but simply gives us another year to prepare for FY11.

State revenues have continued to fall over the past months, and until we experience a turnaround in state revenues, we cannot anticipate receiving additional funding from the state. We estimate on the basis of expert opinions that our state allocation in FY11 will be no more than our allocation in FY10. In FY11, however, we will not have the stimulus funding. For that reason we often speak of a “funding cliff” we are facing in FY11. The size of this funding cliff will not be known exactly until we have a better idea of state revenues and appropriations for FY11 later this year. But we anticipate it will be as much as $50M. To balance our budget for FY11 we will have to close that funding gap by a combination of additional revenues and budget reductions.

9(c) or Mid-Year Reductions

Last year we received a budget over the summer, but because of reduced revenues to the state, that budget was cut in mid year. In fact, the budget was reduced twice during the last fiscal year, once in October, once in January. In all we had to reduce our base budget by over $13M to accommodate the two 9(c) cuts. This year falling revenues make mid-year cuts likely again. Although we are hoping they will not be severe, and that they will be filled wholly or in part by remaining stimulus funding, we know that any reduction in the budget will make the “funding cliff” steeper and necessitate greater revenue generation or budget cutting for FY11.

Revenue Generation

We receive an allocation from the state to operate the campus. But we also have other sources of funds that we use for operations. All of these sources of income taken together are the revenues for UMass Amherst. The largest source of revenues outside of the state allocation comes from student tuition and fees. We retain no tuition for in-state students, but we retain tuition for out-of-state students and fees for all students. We also earn money on interest from money we have on hand. Other sources of revenue include money from continuing education, from professional masters programs, from fundraising, from overhead returns, or from faculty buy-outs of teaching and/or research time (actually a reduction in expenses).

During FY10 we are seeking to maximize our revenue generation from a number of sources in order to reduce the amount of cuts we need to make to campus budgets. The principle is rather simple: for every dollar we add to campus revenues we have one less dollar we have to account for in budget reductions.

Revenue-generating activities may need some start-up funding; we plan to use stimulus funding to encourage the development of initiatives that will add revenues to departments, colleges and the general campus.

Helpful Input Wanted

I hope that this short explanation of campus budgeting assists the campus in understanding the real options that are open to us as we deal with financial choices. I want to encourage input from the campus community regarding the budget, and I am determined to listen carefully in establishing priorities in these difficult times. I will be meeting and speaking with people throughout the academic year, and you can also send your suggestions in writing to budgetcomments@chancellor.umass.edu.

Robert C. Holub
Chancellor