President Engh’s remarks on SCU budget shortfalls

An interesting thing happened on the way to implementing Sustaining Excellence. Our operating budget for FY17 inherited more challenges from the previous year than originally estimated. In FY16 we ended up with a $4.5 Million net operating loss — the first operating loss in over 20 years. If repeated, such a deficit would have a negative impact on the University’s financial rating. Think of it this way. When you manage your household finances, you thoughtfully plan a budget for the year by making careful estimates of your income and projected expenses. All goes well until something unexpected occurs. Maybe the transmission on your car falls out. Maybe the orthodontist announces that your child needs braces. Possibly your water heater explodes. You suddenly face an unforeseen bill that blows the budget, and you have to adjust your spending to cover the costs. In planning for our current year budget, FY 17, our original calculations of needs to operate the university was short $8.4 Million. We reworked this budget and balanced it by June 2016, with a reduced merit increase, a 5% reduction in operating expenses, and a small contingency. Believing all was well, in the Fall we discovered a reduced enrollment in certain graduate programs and an under-realization of gift funds held in various departments to support operations. Just like your household, we had to adjust. This meant an additional 1.25% reduction across all cabinet areas in operating expenses. This was not quite the perfect storm, but stormy enough. These cuts in operating funds have caused a number of our colleagues to question the university’s financial health. Some have even speculated that we face a financial crisis. Others wonder about the possibility of a further budget shortfall. For these reasons, the annual Budget Forum, one week from today, will be a particularly important opportunity to learn more and to ask questions. There you will hear a deeper explanation of the issues of cash flow, construction, pledged donations, and university debt capacity.

My few comments.  (1) I hate analogies of budgets of large complex organizations to households.  Such analogies are shrouded in an earnest language of “let me help you children understand” but the real intent is to obfuscate with a poor analogy.  The intertemporal budget constraint (i.e. over time) of a large, complex organization is usually quite different from that of a household.  (2) This sentence: “In planning for our current year budget, FY 17, our original calculations of needs to operate the university was short $8.4 Million.”  “Needs” seems to be referring to “revenue flows.”  That is, “Our projected revenue flows were $8.4m below projected expenses.”  Odd choice of language.  We “need” this money!  (3) A 6.25% cut in total budget (he isn’t clear) amounts to about $28m.  Pres. Engh attributes the shortfall to declining graduate enrollment, but let’s say graduate students pay $35,000 in tuition per year, then enrollment would have had to go down by 800 students (almost one third of total enrollments).  Is that what happened?  How did our leadership allow graduate enrollments to decline so precipitously?  Where is the urgent task force to restore graduate enrollments?

Source: State of the University Address, 2017 – Public Addresses – Selected Writings – Office of the President – Santa Clara University

About mkevane

Economist at Santa Clara University and Director of Friends of African Village Libraries.
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