Understanding Carolina’s budget

Assets totaling $11.8 billion. A $4 billion annual budget. A $4.25 billion fundraising campaign. A $3.6 billion endowment. How do all these numbers fit together to keep Carolina running?

Carolina relies on many revenue sources, including state appropriations, tuition and fees, federal research grants, patient revenues and private gifts to operate. Given the recent news about projected budget deficits and cost-cutting measures to address them, there is renewed interest in Carolina’s finances. Today, we are launching a new series called Behind the Numbers, an in-depth look at the figures and policies that make up Carolina’s finances. With this series, we aim to shed light on the University’s financial situation, how various financial buckets fit together and what policies guide decision-making.

In Part 1, we examine Carolina’s evolving budget model, the sources of some of the budget challenges and concrete measures the University is taking to address these challenges. In the coming weeks and months, we’ll look at the University’s funding sources, how Carolina allocates resources and how tools like the endowment and Campaign for Carolina can and cannot help.

The University of North Carolina at Chapel Hill’s operating budget was $4 billion for fiscal year 2018-2019. But until recently, that number was hard to pin down.

That’s because prior to this year, Carolina did not have a centralized budget, due to the University’s historically decentralized operational model. While this gave the University’s many schools and departments flexibility in how they distributed funds, it also created challenges, as each unit distributed resources differently. As interdisciplinary work and initiatives have grown, this practice made it difficult to pool resources to fund University-wide goals and objectives.

“Our environment is very decentralized and that has contributed to some of our financial challenges,” said Interim Vice Chancellor for Finance and Operations Nate Knuffman.

In February 2019, the University began the process of creating a centralized budget for the first time. This entailed creating a singular framework to ensure that everyone budgeted funds the same way, with a universal understanding of funding sources and expenditures, as well as establishing standards for budgeting funds. A year later, the Division of Finance and Operations distributed budget templates to each school and department to prepare the FY20-21 budget, which runs from July 1, 2020, to June 30, 2021. Chancellor Kevin M. Guskiewicz is expected to present budgets for FY20-21 and FY21-22 to the Board of Trustees this spring.

What is the source of Carolina’s budget challenges?

As Knuffman told Faculty Council in November, “Our financial challenge this fiscal year is really three challenges.”

Nate Knuffman (Jon Gardiner/UNC-Chapel Hill)

First, the University came into FY20-21 with a $100 million structural deficit. These are recurring expenses, such as salaries and rents, that exceed the University’s revenues.

Coming into the COVID-19 pandemic, the structural deficit was particularly problematic because it meant the University had little to fall back on. While other universities have been able to rely on rainy-day funds, Carolina’s resources are much more limited. The deficit also hinders day-to-day activities, as there are not funds available to invest in new initiatives.

The pandemic has caused significant loss of revenue for the University since classes and most operations went remote last March. These losses are primarily centered in the University’s auxiliary business units, like housing, dining, transportation and parking, athletics and the faculty practice of the School of Medicine. With a drastic reduction in students living and eating on campus, people buying athletic or performing-arts tickets or undergoing elective medical procedures, these units have seen a dramatic loss of revenue: $97 million in spring 2020, and the possibility of as much as $200 million in FY20-21. This loss of funds impedes the University’s ability to pay salaries and service debt.

The University also has more than $850 million in deferred maintenance. Deferred maintenance results when an institution lacks the resources to do basic maintenance on buildings — fixing roofs, maintaining HVAC systems and lighting. Over time, this lack of investment leads to deterioration of the University’s physical structures. Small problems, like a leak, turn into bigger and more expensive problems, like mold. The University is working to identify predictable and dedicated funding to address this problem.

The University’s Comprehensive Annual Financial Report for 2019 indicated that the University was in “a solid financial position” with a net position of $2.3 billion. How is there a problem?

The annual financial report is not a budget. While a budget looks forward to set parameters for spending for the next year, the annual report describes revenues, expenses and net position for the prior year, presented in accordance with standards set by the Governmental Accounting Standards Board. Carolina’s 2019 annual report covers the fiscal year that ended June 30, 2019, well before the pandemic impacted operations.

In addition, the annual report takes a holistic approach to reporting financial position, enabling some areas that may have annual surpluses, such as the medical school, to compensate for the losses of others. However, the University is constrained in how it can spend any surpluses and balances may have to remain in the school or department where they originated.

The University received CARES Act funding last spring. Shouldn’t this have made up for pandemic-related losses?

The University received a total of $52 million in Coronavirus Aid, Relief and Economic Security funds. However, large amounts of these funds were allocated for specific purposes. For example, $29 million was allocated by the State to the NC Policy Collaboratory for coronavirus research, including vaccine development and COVID-19 testing. The U.S. Department of Education allocated $8.6 million for emergency support to students. The University has allocated the remaining $14.3 million to support community safety through the purchase of community/personnel protective equipment, investments in technology for remote learning, student COVID-19 testing and additional financial support to students. These funds have been exceptionally helpful to the University as it faces pandemic-created challenges. However, CARES Act funds are one-time allocations and are not sufficient to address all the financial challenges, specifically the loss of auxiliary revenues, which constitutes the most sizable financial impact to the University.

What is the University doing to address these budget deficits?

Since April, the University has sought to implement more disciplined financial management, including limitations on spending, restrictions on hiring and postponement of capital projects. The Office of Human Resources meets weekly to review open positions and determine whether to fill them, and the budget office is reviewing all expenditures over $5,000.

These actions are making a difference. The University has saved approximately $70 million as a result of spending restrictions.

“Our primary goal is to make progress and address our structural budget issues, while aligning our spending with our highest priorities,” Knuffman said.

How will the budget reduction plan announced on Jan. 15 impact the budget challenges?

After months of analysis and deliberations, including input from school and unit leaders, faculty, staff and students, University leaders announced a plan calling for a 1.5% reduction to certain central personnel funds and a 7.5% reduction to certain central operating funds across schools and units for FY20-21, followed by another 1.5% reduction to personnel funds and a 7.5% reduction to operating funds in FY21-22. The reductions in central funds will be balanced with revenue-generating strategies to help the University maintain critical financial momentum.

Implementing intentional and strategic budget reductions now will enable the University to balance its budget in 18 months. That will put the University on stronger footing, allowing it to continue facing down the still unknown pandemic impacts and tackle the deferred maintenance deficit.

How will decisions be made about the budget reductions?

The budget plans will be developed and implemented over the next several months by deans at the school levels and vice chancellors at the unit levels. A Finance and Human Resources team will consult with schools and units on potential tools and strategies for meeting the scheduled reductions.

To help guide decision-makers, the University outlined eight budget reduction principles:

1. Reductions should be consistent with the role and mission of Carolina and the University’s strategic plan, Carolina Next: Innovations for Public Good. Protect activities that are central to the University’s mission.
2. Reduce budgets strategically, not across the board.
3. Streamline current processes and procedures to help reduce expenditures, eliminate redundancies and mitigate impacts on staff workload.
4. Ensure any non-recurring reductions used to meet FY20-21 targets are complemented with longer-term budget decisions that convert non-recurring reductions into recurring adjustments.
5. Decisions about cost reductions should always consider the impact on revenue generation.
6. Reductions that have the effect of shifting costs to other areas will not be permitted.
7. Consult broadly to determine the best reduction options. Units should communicate openly, honestly and frequently about their budget reduction process and their reduction decisions.
8. Balance personnel reductions across all layers of the University with a focus on reducing the number of senior administrators in our organization.

In our next installment of Behind the Numbers, we’ll look at the University’s revenue sources and how the COVID-19 pandemic has strained them.