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U prepares for cuts in state funding


Final resolution of state's, U's budget not likely until late spring

By Rick Moore

StateCapital165


February 25, 2009

As the state of Minnesota tries to address a projected $4.8 billion budget deficit--as of this writing--over the next two fiscal years, the University of Minnesota is bracing to deal with its own daunting fiscal challenge. In late January, Governor Tim Pawlenty announced a biennial budget proposal for the state that included a $151 million cut in funding for the U. That, coupled with a $2.5 million recurring cut passed in 2008, has left the University stretching its imagination to deal with potential budget cuts of approximately $75.5 million (or more) for each year of the biennium.

For those who were at the University a few years ago, this may sound eerily familiar. In May 2003, the Minnesota State Legislature reduced funding for the U by $195 million for the ensuing 2004-05 biennium. That cut, representing 15 percent of the state appropriation, was the largest in the U's history.

The University responded with a variety of measures, including cost reductions, cuts to programs, a pay freeze for employees, and a larger-than-anticipated tuition increase for students. The current budget challenge is bound to be even more challenging. Said President Bob Bruininks recently: "Once you go through deep reductions and you prune the tree, there are fewer branches to prune the next time around."

Unfortunately, the news may get worse before it gets better. The next Minnesota revenue forecast is scheduled to be announced on March 3, and Pawlenty has predicted that the state budget deficit could grow to as much as $7 billion.

Planning for the future

A potential reduction in state appropriations hasn't exactly caught the University by surprise. The downturn in the state economy has been readily apparent for many months, and U officials have been planning accordingly since last spring. Still, that doesn't make the numbers at hand any less daunting.

If the U were to address the proposed budget cut from the state solely with tuition revenue, it would mean a tuition increase of approximately 12 percent for 2009-10. And if the cut were addressed strictly with reductions in personnel, about 900 jobs would be lost.

Bruininks points out that the actual challenge to the U is even greater than the cut proposed by Pawlenty. The University has cost commitments--including facility operating costs, debt, leases, legal and contractual obligations, financial aid, and academic program improvement costs--that compound the challenge.

Factoring these in, the actual budget challenge for fiscal year 2009-10 is $134 million. If that were addressed solely with tuition revenue, the increase would be approximately 18 percent for 2009-10. And if it were addressed strictly with reductions in personnel, about 1,500 jobs would be lost.

Bruininks says that neither of these options is acceptable--especially in the current economy--and the University is committed to recruiting and retaining exceptional faculty and staff to meet the needs of students. So the search is on for the middle ground.

Academic and administrative units all across the University are currently modeling cost and programmatic reductions ranging from 5 percent to 8 percent, and faculty and staff are facing the prospect of a pay freeze for the upcoming fiscal year. (It should be noted the collective bargaining process determines compensation plans for unionized faculty and staff, and plans are subject to Board of Regents approval.)

Bruininks says that raising tuition beyond the planned 4.5 percent increase will only be considered after the other available cost reductions have been maximized. And he stresses that the University has been a leader in keeping higher education affordable for students and their families and for increasing financial assistance for those students with the greatest need.

A boost from Washington?

In addition to next week's state budget forecast, the other big variable affecting both the state's and the University's budget is potential funding from the $787 billion federal economic stimulus package signed last week by President Barack Obama.

Some of the package's benefits for higher education are clearly spelled out:

  • An increase of up to $500 for students who are eligible to receive a Pell grant (although in Minnesota, state aid is tied to Pell grants);
  • An increase in the Hope Scholarship Tax Credit to $2,500, including to families earning up to $160,000;
  • A $200 million increase in work-study funds available for students nationwide; and
  • Approximately $16 billion to be distributed to federal agencies for research grants. These are funds that University of Minnesota faculty will compete for.

 

Beyond that, the state of Minnesota stands to receive approximately $670 million for all levels of education, from early childhood through higher education. But exactly how that will be distributed remains unclear. According to Vice President and CFO Richard Pfutzenreuter, Governor Pawlenty will have the discretion to spend that stimulus money.

"There's an interplay between what the Legislature does for higher education and K-12 and what the governor does with the stimulus money," Pfutzenreuter says. He adds, "In the grand scheme of balancing the state's budget and the federal stimulus [money], it's going to be incredibly complicated."

Where do we go from here?

Pawlenty's January budget recommendations were just the first step in a lengthy process that will determine the U's state appropriation. The March 3 state revenue forecast will likely spur Pawlenty to release a revised budget recommendation, Pfutzenreuter says. Then, at the Capitol, both the House and Senate will formulate their own biennial budget proposals (which may differ substantially from the governor's recommendations). Those will be reconciled in conference committee.

That's likely to last into the waning hours of this year's legislative session, which by statute is required to wrap up by May 18. Once Pawlenty signs off on the final higher education funding bill, the University will be able to implement its own operating budget for fiscal year 2009-10.

In the meantime, the University will continue to make the strong case for minimizing the cuts to higher education and making funding for the U a long-term priority. Unlike many trends in the economy, student demand for a University education is actually growing; applications to the U are at an all-time high. And cuts to the University hamper its ability to leverage other revenue sources, including federal research dollars.

"A strong University is an essential part of the economic solution, not just for the next biennium, but for the next decade and beyond," Bruininks says. "We must protect the University's future--not for our own sake, but because our economy and quality of life depend on it."