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Dear Members of the Â鶹ӰԺ Community,

I am sharing with you this annual financial update, which is a portrait of Â鶹ӰԺ State’s financial health and sustainability during the COVID-19 pandemic. Everyone in our community continues to contribute significantly to the university’s ongoing operations, and your efforts are greatly appreciated. Even during a pandemic there is good news to report — and that good news is the direct result of your hard work.

Because of the pandemic, Fiscal Years 2020 and 2021 were like none we had experienced before, and the uncertainties of the moment made it difficult to build a budget as we usually would. As a result, we adopted the guiding budget philosophy of "planning for the worst and working for the best." We were conservative in our revenue estimates, which in turn drove us to reduce expenditures, including wage cuts or freezes for all employees. A special thank you to our colleagues represented by the Tenured and Tenure Track Unit and the Non-Tenure Track Unit of the American Association of University Professors for delaying the implementation of their scheduled raises. At the time we built the Fiscal Year 2021 budget, we assumed that the state of Ohio would continue to reduce our State Share of Instruction (SSI). At the time we built the budget, our investments were declining in value, and we reduced our investment income accordingly.

Luckily for the university, neither scenario played out for the Fiscal Year 2021. The state did not further reduce our allocations, and far from declining in value, our investments actually grew noticeably with the return of market growth. As a result, in February 2021 we restored our employee salaries to their July 1, 2020, levels and reimbursed wages to make up for the pay cuts.

Typically, we budget for roughly a 1% surplus each fiscal year. Doing so allows for some flexibility to absorb unexpected revenue declines or unexpected increases in expenses. On a $600 million budget, that amounts to about $6 million, which then becomes available as one-time funding for projects and expenses.

When a yearly budget surplus surpasses 1%, I worry that we are not spending enough to support everyone in our community and/or we are not promoting the strategic interests of the university. For Fiscal Year 2021, we were too conservative in our planning, and instead of a 1% surplus, we generated a surplus of 3.7%, or nearly $21.9 million. I will take responsibility for this, as I was the one who insisted that these conservative projections shape our budget during these unpredictable pandemic times. In addition to our revenues not declining as much as we predicted and our investment gains not shrinking, our costs came in lower than expected as well because fewer students were living on campus and fewer employees were working on campus.

While we may not have been as strategic in our budgeting as I would have liked us to be, rest assured that this one-time surplus of nearly $22 million will be applied toward many worthy projects across our campuses. We still face obstacles, including a noticeable and continued decline in enrollment on all our campuses, which translates to lost revenue. Ongoing enrollment and revenue declines will continue to challenge us and are addressed further in this report under the topic of planning for future fiscal years.

In this message you will find the following information regarding the university’s budget:

• A summary of our Fiscal Year 2021 financial performance, the current Fiscal Year 2022 budget and our initial assumptions for Fiscal Year 2023.
• An overview of key challenges and trends, and their expected impact on the university.
• A brief review of actions the university is taking to sustain its financial health.
• Concluding remarks on our commitment to being a student-ready university.

Â鶹ӰԺ State’s financial health and sustainability efforts are a shared responsibility. We are stronger when all of us are involved and engaged, and it is my hope that this information will assist us all as we pursue our common goal of educating our students and creating a better world for Northeast Ohio and beyond.

Fiscal Year 2021 Performance Results

Executive Summary: The Board of Trustees approved a balanced budget for Fiscal Year 2021 with proposed revenues of $595 million and expenses of $595 million — a $65 million, or 10%, reduction from the prior year. We ended Fiscal Year 2021 with an estimated $21.9 million university-wide operating budget surplus. This surplus may be attributed to unexpected increases in revenues during the year compared to our conservative budget planning assumptions, specifically, restoration of $13 million of SSI dollars, a better than expected investment income of $9 million and an enrollment decline of 3.5% compared to the initial projected decline of 6.5%.

Â鶹ӰԺ State ended Fiscal Year 2021 (July 1, 2020, through June 30, 2021) with an operating surplus of $21.9 million on a total budget of $595 million: $6.6 million at the Â鶹ӰԺ Campus, $4.5 million at the College of Podiatric Medicine and $10.8 million at the Regional Campuses.

As per standard accounting practice, this $21.9 million is now savings that are available for one-time expenditures but not for balancing annual budgets going forward. These funds will be used by the respective areas — colleges, divisions, Regional Campuses and auxiliaries — for one-time expenses aligned with their respective strategic priorities as well as navigating through the uncertain horizon of the pandemic.

Revenue Summary

Total revenues were $610.1 million, $14.9 million greater than the $595.2 million for which we budgeted. Actual tuition and fees, which account for 64% of the university’s operating revenue, were $390.4 million. This was $6.9 million, or 1.8%, better than the budgeted $383.5 million. Our better than expected performance was the result of enrollment declining by 3.5% compared to the planned-for 6.5% decline. Enrollment declined for the eighth consecutive year, from a headcount of 42,513 in fall 2012 to 36,264 in fall 2020 (down 14.7% for this period.)

At the beginning of the pandemic, our funding from the state was cut by 20% for the remainder of Fiscal Year 2020. This source of revenue, known as SSI, represents the state’s subsidy of public higher education and is awarded entirely based on student outcomes (courses passed and degrees awarded). On July 6, 2020, we were notified by the Ohio Department of Higher Education that the initial cut in SSI would be 4.38% to begin the year and that further cuts would be applied on a quarterly basis if economic conditions worsened as a result of the pandemic. In alignment with our "planning for the worst and working for the best" philosophy, we budgeted for an 8.6% reduction in SSI revenue for the year, for a total of $145.3 million. In January 2021, we received the fortunate news that SSI was being fully restored for the fiscal year at $158.3 million, $13 million more than we budgeted. As a result, we immediately restored all non-represented salaries to June 30, 2020, levels.

The university’s investment income (not on funds managed by the Â鶹ӰԺ Foundation) was $9 million, exceeding the amount budgeted for the year by $7 million. This amount represents actual dividends and interest income received. At the time the budget was being finalized in August 2020, the investment markets were experiencing significant turmoil and volatility, and the stability of the economy was highly uncertain given the course of the pandemic. As a result, we exercised extreme caution and budgeted only $2 million in investment income to fund operating activities.

As expected, the Â鶹ӰԺ Campus auxiliaries experienced a significant decrease in revenues due to drastic reductions in on-campus activity, student life, community events and intercollegiate athletic competition. Actual revenues were $39.7 million, nearly $7.6 million below the approved budget of $47.3 million. The primary drivers of this revenue shortfall were University Housing (formerly the Department of Residence Services) and University Culinary Services (formerly University Dining Services) with budgeted occupancy of 72% for the year, while actual occupancy was 62% in the fall and 48% in the spring. As we approached the beginning of the 2020 Fall Semester and knowing that only 25% of courses were going to be in person, we followed our students-first philosophy and allowed students to opt out of their residence hall contracts. Furthermore, we shortened the number of weeks students would be in the residence halls for both the fall and spring semesters from 17 to 13, recognizing that once students returned from either Thanksgiving or spring break, the risk of an outbreak of COVID-19 was a high probability. Both residence hall and dining plan rates were adjusted during the year to recognize this new reality. The Department of Intercollegiate Athletics’ revenues exceeded budget by $1.3 million, slightly offsetting the revenue shortfalls in University Housing and University Culinary Services, while the other auxiliaries performed reasonably on target to budget.

At the time we developed the budget, we were working with only two funding sources to meet our pandemic management expenses: $14.7 million in Coronavirus Aid, Relief and Economic Security (CARES) Act funding and $1.5 million dedicated from the Fiscal Year 2020 operating budget surplus. As countless pandemic expenses and commitments grew — lost revenues; student residence hall, dining plan and parking refunds; and health and safety supplies — new funding from state and federal sources appeared in the nick of time as a safety net guarding against a potential financial cliff. Overall, nearly $90 million in pandemic relief funds have been awarded to Â鶹ӰԺ State for institutional expenses, while another $57 million has been awarded for direct payment to students to meet their emergency and financial needs during this public health crisis and to support them in continuing their educational journeys.

Expense Summary

Our guiding philosophy of "planning for the worst and working for the best" meant that we needed to make hard decisions to align our budgeted expenses to our projected revenues under very extreme and challenging circumstances.

Salaries and wages totaled $276.3 million, which was $585,000, or 0.2%, above the budget of $275.7 million. In February 2021, all non-represented salaries were restored to June 30, 2020, levels as a result of slightly better than budgeted enrollment trends and the restoration of SSI, which added an additional $5.1 million of salary expense. Benefits, comprised of retirement, healthcare, compensated absences and other fringe benefits, totaled $111.1 million, nearly $2.1 million, or 1.9%, above the budget of $109 million, primarily the result of additional retirement and other benefits associated with the salary restoration.

Financial aid in the form of merit scholarships and need-based aid has grown 267% over the last decade and now totals $78.8 million, or 13%, of total expenses. Our ongoing work continues to focus on optimizing the balance between merit and need in alignment with our strategic enrollment plan goals and future student demand and demographics, with a keen focus on our core mission of access, completion and outcomes. The new Strategic Enrollment Management plan presented to the Board of Trustees in June emphasizes these optimization strategies while also focusing on realigning and expanding current and future funding sources — Â鶹ӰԺ State, the Â鶹ӰԺ Foundation and external benefactors.

The university’s auxiliary operations, primarily University Housing, University Culinary Services and the Department of Intercollegiate Athletics, continued to deal with substantial impacts to their operations. For example, although room occupancy and dining plan participation decreased significantly, the need for providing services to those students who were on campus did not. Although intercollegiate athletic competition was dramatically impacted for the beginning of the 2020 Fall Semester, football and basketball commenced in late fall, and all the other sports competed during the 2021 Spring Semester, albeit with less travel than in past years. As a result, overall auxiliary expenses totaled $63.5 million, approximately $5.2 million, or 8%, above budget and $6.5 million less than the prior year actual expense.

All other expenses — supplies, utilities, maintenance and repairs, travel, print and postage — totaled $86.2 million, approximately $1 million, or 1%, above the budget of $85.2 and $13.7 million less than the prior year’s actual expense due to a significant reduction of on-campus operations and activity.

In September 2020, we paused work on several construction projects in order to revisit scope, budget and funding strategies through a post-pandemic lens. In collaboration with the Board of Trustees and various stakeholders (Faculty Senate Budget Advisory Committee, Cabinet and deans), we considered the remaining Â鶹ӰԺ Campus Gateway Master Plan Phase 1 projects and made key decisions that were approved by the Board in June 2021, primarily forgoing the Main Street parking deck project and redirecting the $28 million in parking deck bond proceeds to strategic enrollment growth priority projects, including the College of Aeronautics and Engineering building expansion, the College of Business Administration building and renovations of a portion of the Â鶹ӰԺ State Ice Arena into a marching band musical educational facility. At the same time, we did proceed with $19.5 million in construction and renovation projects funded by several sources, such as university facility funds, previously appropriated funding from the state, bond proceeds and donations. Examples of significant capital project work during the past year include the Design Innovation Hub, the Integrated Sciences Building research labs, the Power Plant turbine rebuild, improvements at the College of Podiatric Medicine, the Purinton Hall roof replacement on the East Liverpool Campus and improvements to the heating, ventilation and air conditioning on the Trumbull Campus.

Debt service payments, a considerable expense to the university, totaled $35.9 million ($21.5 million in principal and $14.4 million in interest payments). No new debt was issued during the year; however, we continue to develop strategies to restructure and refinance our current outstanding bonds to reduce costs as market opportunities present themselves. Over the past five years, we have successfully refinanced our existing bond debt four times, translating to an average $2.6 million in reduced annual cost.

Our efforts to improve efficiencies over the past six years have continued to help us manage the decline in revenues due to decreasing enrollment. Actions such as employee separation plans in 2017, 2018, 2020 and 2021, continued strategic hiring and position control, healthcare plan redesign, reducing energy costs and enhancing sustainability measures, and group purchasing discounts have led the way. Our Flash Books program, which features significant group discounts on book prices, continues to reduce textbook expenses for our students.

As noted previously, the university has been the recipient of nearly $90 million in combined federal and state pandemic relief to assist with institutional expenses resulting from the ongoing COVID-19 pandemic. Through June 30, 2021, we have spent nearly $56.3 million in pandemic-specific funding that was budgeted separately from the Fiscal Year 2021 operating budget. Examples include $11.7 million for instructional delivery and network upgrades; $8.7 million for COVID-19 testing, contact tracing and mental health services; $7.8 million for personal protective equipment, cleaning, signage and protective barriers; and nearly $28.1 million in refunds and lost revenues for student housing and dining. Approximately $33.7 million in funding remains available for eligible expenses through March 2023.

The results of our stewardship yielded a state of Ohio financial health score of 4.4 on a 0-5 scale, positioning Â鶹ӰԺ State in the upper half of public universities in the state. This is a statutory measure of financial health comprised of three key ratios: primary reserve, viability and net income. Our score for Fiscal Year 2021 shows that our reserves are sound, outstanding debt is reasonable and that we must continue to align expenses with declining tuition and fee revenues.

In addition to the state of Ohio financial health index, other independent, external measures of our university’s financial health are provided by the Moody’s and Standard & Poor’s ratings agencies. While many institutions have experienced ratings downgrades as of late, our most recent bond ratings were affirmed in December 2019 at Aa3/Stable Outlook by Moody’s and A+/Stable Outlook by Standard & Poor’s. Both cited our leadership, solid management and governance, the university’s reserves, manageable debt and our decisive steps to balance the Fiscal Year 2021 budget while reinforcing that our challenges continue to be declining enrollment, thinning operating margins and challenging demographics (a projected 20% or more decline in the number of high school graduates in Northeast Ohio over the next decade). We anticipate that a review of our ratings will occur again this year with similar results.

Fiscal Year 2022 Approved Budget

Executive Summary: At its September meeting, the Board of Trustees approved a balanced budget of $646.9 million, an increase of $51.7 million from last year’s budget. The Â鶹ӰԺ Campus Educational and General Budget projects a $4.9 million deficit, which is offset by projected surpluses in the auxiliaries, the College of Podiatric Medicine and the Regional Campuses.

In April 2021, we initiated the Fiscal Year 2022 budget development process with the following objectives:

• Focus on core activities: access and completion, research and creative activities, and employee well-being.
• Limit new hires so that we can provide raises to non-represented employees and offer one-time enhancements to ease a return to in-person work.
• Continue to limit administrative and non-academic expenditures through reorganization, shared services and the like.
• Preserve our sound financial position (budget expenses to projected operating revenues).

Revenue Summary

Tuition and fee revenue, based on a projected 4% decrease in overall enrollment, is budgeted at $381 million, nearly $9.4 million less than last fiscal year. Tuition increases of 2.9% for new freshman Tuition Guarantee students (which is then frozen for four years) and 0% for continuing non-tuition guarantee students, graduate students and non-resident surcharge were implemented for the 2021 Fall Semester. For the ninth consecutive year, we are experiencing a year-over-year enrollment decline, and as a result, tuition and fee revenue is our biggest revenue challenge for this budget year.

Â鶹ӰԺ State President Emeritus Lester A. Lefton used to say that "enrollment is life." Our focus on Strategic Enrollment Management continues, and the great work done by Interim Vice President for Enrollment Management Sean Broghammer, Ph.D., and his colleagues continues to address the ongoing demographic decline in Northeast Ohio through innovative admissions tactics, such as last year’s KSU2U drive-in events for high school seniors. This kind of creative effort and our Flashes Go Further program, which enhances tuition and fee financial support for roughly 20% of the freshman class with the highest levels of unmet need, are two reasons new freshman enrollment on the Â鶹ӰԺ Campus increased from 3,819 to 3,982 for the 2021 Fall Semester. Overall, all enrollment, though, was down 1.2% on the Â鶹ӰԺ Campus and 11.5% on the Regional Campuses.

Our retention rate (the percentage of freshmen who return for their sophomore year) declined from 81.6% to 80.5% on the Â鶹ӰԺ Campus because of the pandemic. Retention is important because we must retain students to eventually graduate them. Led by University College Dean Eboni Pringle, Ph.D., and her team, we continue to work with students to help them succeed academically and provide them with the support services they need to persist and earn a degree despite the challenging times. Last year, we spent an extra $1.6 million to enhance student mental health services, which will make a positive impact on our student community, its health and our success going forward.

The funding we receive from the state of Ohio, SSI, which is allocated based upon performance, is projected to increase by $1.5 million, or 0.9%, compared to last fiscal year. By continuing our commitment to student success, we have an opportunity to realize even more revenue if we continue to outperform our peer Inter-University Council of Ohio (IUC) institutions in terms of course and degree completions. The good news is that because we are doing a better job graduating our students, we have increased our share of the state subsidy from 9.8% in Fiscal Year 2015 to 10.1% in Fiscal Year 2022, which translates to an additional $4.8 million.

Our biggest revenue recovery this budget year is in the auxiliaries, with nearly $30 million in additional revenue compared to last year. This improvement is driven by more normal on-campus student residency and dining plan participation and a return to a normal mode of intercollegiate athletic competition. For fall 2021, we welcomed 5,300 students into our residence halls, nearly 2,500 more than in the 2021 Spring Semester, with a similar increase in the number of students participating in dining plans. The Department of Intercollegiate Athletics also is doing better this year compared to last. Revenues are budgeted to increase $6.1 million as a result of once again playing three football guarantee games in which opposing teams pay us to play in their stadiums, the return to pre-pandemic NCAA and Mid-American Conference revenues and a slight increase in the general fee allocation. As we grow out of the pandemic in our auxiliaries, our emphasis has been on budgeting expenses to reasonably projected revenues, and all the auxiliary budgets are either balanced or projecting small surpluses, keeping in mind that last year these same activities generated a deficit of $7 million.

Investment income dedicated to support operating activities has increased to $12 million compared to $2 million last year and $9.3 million in the year prior to the pandemic. In analyzing the trend of realized gains for the past six years, we believe this is reasonable and achievable given that we have consistently received $12 million to $15 million in realized gains in each of these years.

Finally, the university has an available balance of approximately $33.7 million in unexpended federal pandemic relief funds. We will continue to use this money to operate effectively throughout the pandemic with an emphasis on student, faculty and employee health and well-being, coupled with investments that will serve the university strategically in the long-term, such as improving classroom technology.

Expense Summary

As we grow out of the pandemic, we must continue to balance expenses to projected revenues. The surest way to do this is to curb growth in staffing levels.

We truly value our faculty and staff, and a meaningful example of how much we value them is the 2% wage increase, which we are implementing in spite of considerable financial challenges and uncertainty. Our valued team members represented by Â鶹ӰԺ State’s American Federation of State, County and Municipal Employees bargaining unit were scheduled to receive only a 1.5% wage increase effective Oct. 1, 2021. Instead, we collaborated with their leadership and executed an agreement for a 2% wage increase.

Overall, our employee headcount is expected to remain about the same as last year, allowing us to maintain the significant budgetary reductions realized from last year’s highly successful voluntary separation incentive program. We continue to emphasize quality and affordable healthcare benefits while at the same time combatting inflationary factors that could render this vital benefit financially unsustainable. As a result of our collective work and maintaining our reduced staffing levels for the coming year, the healthcare budget will not increase. This is an enormous accomplishment because in years past, increases in healthcare costs created significant budget shortfalls.

Finally, several vice presidencies are absorbing further budget cuts totaling $2.3 million so that we can maintain or increase spending in the divisions of Academic Affairs, Student Affairs and Enrollment Management.

Fiscal Year 2023: Looking Ahead

Executive Summary: Uncertainty continues to loom as a result of the COVID-19 delta variant, ongoing enrollment challenges and our continued emphasis on the university’s financial viability as we gradually recover from the pandemic.

As we look forward to the next fiscal year, we know that the current state operating budget maintains an estimated 3.8% tuition cap for the Tuition Guarantee Model for the incoming freshman cohort for fall 2022 and that SSI is planned to increase approximately 1%, for an additional $1.5 million in revenue for Â鶹ӰԺ State. We also anticipate another round of state capital funding, which has received on average $23.7 million over each of the most recent five biennia. This state funding helps us address deferred maintenance and basic renovation needs of our campus buildings.

The leadership and staff of the Division of Enrollment Management recently launched a Strategic Enrollment Management plan for the years 2022-2024. The plan emphasizes action steps to attract more students to Â鶹ӰԺ State despite the region’s ongoing demographic decline and the lasting effects of the pandemic. We look to broaden our reach into new markets, driven primarily by leading academic programs, such as the School of Fashion, and by new programs in the College of Aeronautics and Engineering.

In Conclusion

A single thread winds its way through this report: the importance of enrollment to Â鶹ӰԺ State’s ongoing financial health. We literally cannot graduate students if we do not enroll them. Because tuition and fee revenue funds more than two-thirds of our university budget, we cannot avoid further budget cuts if slides in enrollment continue. Our effort to enroll students is led by the Division of Enrollment Management, but it will only succeed when all of us do our part to facilitate student belonging, student success and degree completion. All universities these days are striving to grow enrollment. This will be an enormous challenge for Â鶹ӰԺ State and the other Ohio public universities because our state’s population is declining. The number of high school graduates likewise is declining. It is hard to see how all of us, or any of us, can confidently build our budgets on the expansion of enrollment revenues.

In the end, dollars and cents matter because while we are not a "business" per se, we do carry enormous financial obligations, including the obligation to protect and promote the health and success of everyone in our community. If we do the right things, like focusing on improving our students’ sense of belonging, expanding mental health offerings and maintaining the beautiful grounds of our amazing Â鶹ӰԺ Campus and our well-maintained Regional Campuses, we will graduate more students even while becoming stronger financially.

Hard decisions will continue to be made — more so if the pandemic continues, as it appears it will. Through it all, we will be driven by our history and mission of student access and degree completion, and our commitment to Flashes Taking Care of Flashes. We will agree on many decisions, and we will disagree on others. We will never waiver, however, in our fierce commitment to higher education and its power to change lives and improve society. This commitment is our North Star — it drives all our decisions, and it makes Â鶹ӰԺ State the special place it is. It is a commitment that is needed now, more than ever.

Thank you for the role each of you plays in making us who we are. You are valued, you are vital and together, We Are Â鶹ӰԺ State.

Sincerely,

Todd Diacon
President