�鶹ӰԺ

October 29, 2019

Dear Members of the �鶹ӰԺ Community,

From my first days as �鶹ӰԺ State's 13th president, I have expressed my intention to bring greater transparency and open communication regarding the university's budget and financial health. I am pleased to share with you the first of what will be an annual, public financial update. �鶹ӰԺ State's financial health and sustainability is a shared responsibility – we are stronger when all of us are involved and engaged. It is my hope that through enhanced transparency, we can create open dialogue and a better understanding of the financial state of the university.

In this letter, we provide the following information regarding the university system's unrestricted fund budget:

• A summary of the prior Fiscal Year 2019 financial performance, the current Fiscal Year 2020 budget and what we see on the horizon for Fiscal Year 2021.
• An overview of key challenges and trends, and the resulting impact on the university.
• A brief review of proactive measures the university is taking to sustain its financial health.

Fiscal Year 2019 Performance Results

Summary: The University Employee Separation Plan reduced our expenditures, but these savings were offset by lower-than-expected revenues from tuition and fees due to continued enrollment declines.

�鶹ӰԺ State ended Fiscal Year 2019 (July 1, 2018, through June 30, 2019) with a surplus of $3.3 million on a total budget of $644 million, meaning our projected revenues and expenses came within one-half of one percent of our actual, year-end amounts. As per standard accounting practice, this $3.3 million is now savings that are available for one-time expenditures, but not for balancing annual budgets going forward. Auxiliaries, Regional Campuses and College of Podiatric Medicine budgets realized surpluses of $10.7 million, $3.7 million, and $2.2 million, respectively. Bear in mind that our auxiliaries (residence halls, KSU Airport, Student Health Center, bookstores and the like) cover all of their ongoing maintenance and other costs from their surpluses.

Revenue Summary:

Tuition for all students was frozen for the fifth successive year, although we were able to implement a Tuition Guarantee for incoming freshmen that provided $2.4 million in additional revenue. Tuition and fees, which account for more than 60% of the university's operating revenues, totaled $400.5 million, which was nearly $2.8 million below the amount we budgeted due to a larger-than-expected decline of 600 students. Enrollment has declined for the fifth consecutive year – from a headcount of 41,891 in fall 2013 to 38,323 in fall 2018.

The State Share of Instruction, the state's subsidy of public higher education, totaled $155 million, or 23.6% of our budgeted revenues. Considering that 100% of State Share of Instruction is allocated based upon performance (course and degree completions), our strategic focus on improving graduation and retention rates increased our share of the state subsidy from 9.8% of the state provision in Fiscal Year 2015 to 10.2% in Fiscal Year 2019, which equals nearly $6.1 million in additional funding realized in Fiscal Year 2019.

Although conservatively budgeted at $5.3 million, investment income on our short-term investments (not on funds managed by the �鶹ӰԺ Foundation) was $8.6 million, in the form of capital gains, dividends and interest income.

Expense Summary:

Salaries and wages, excluding restricted funds, totaled $300.3 million, and were nearly $2.9 million below our budget forecast, largely due to ongoing position control and strategic hiring oversight since the successful implementation of the University Employee Separation Plan in 2017 and 2018. Benefits, comprised of retirement, healthcare, compensated absences and other fringe benefits, totaled $120.8 million, a decline of $9.7 million or 7.4% from the prior year. Benefits expenditures were lower due to the University Employee Separation Plan and because benefit plan modifications reduced the level of inflationary growth in healthcare expenses. We must continue to emphasize our commitment to competitive salaries and benefits, which is dependent on matching staffing levels to the number of enrolled students. A summary of University Employee Separation Plan participation and results is provided below:

University Employee Separation Plan: Summary of Participation

Financial aid in the form of merit scholarships and need-based aid grew 266% over the last decade and now totals $79 million, or 13.1% of total expenses. Efforts are currently underway to balance student need and available funding, as will be noted below.

Other expenses increased $4.6 million over the prior year mainly due to the increasing costs of supplies, equipment and building materials.

During Fiscal Year 2019, the university spent $36.4 million on construction and renovation projects funded by a number of sources, including university facility funds, state capital appropriations, bond proceeds and donations. Examples of significant projects include the FedEx Aeronautics Academic Center, the new entry road on the Tuscarawas Campus, windows and masonry repairs to a number of residence halls, and the Design Innovation Hub.

Debt service payments, a considerable expense to the university, totaled $38.7 million ($16 million in interest and $22.7 million in principal payments).

Our efforts to improve efficiencies paid off, generating $25.6 million in savings for Fiscal Year 2019, with more than $75 million achieved over the past five years. Strategies including employee separation plans, position control, bond refinancing, investment management, healthcare plan redesign, energy management and innovative sourcing strategies, like group purchasing, have led the way. This strategic focus on proactive cost-saving measures, such as the University Employee Separation Plan, prevented harsh and abrupt budget cuts as enrollments decreased.

Our efforts to be good stewards of the university's resources produced a Senate Bill 6 score of 3.6 on a 0-5 scale, positioning �鶹ӰԺ State in the upper half of public universities in Ohio. Senate Bill 6 is a statutory measure of financial health comprised of three key ratios: primary reserve, viability and net income (). Our score for Fiscal Year 2019 shows that our reserves are strong, outstanding debt is reasonable and that we need to continue to align expenses with declining tuition and fee revenues.

In addition to Senate Bill 6, other independent, external measures of our university's financial health are provided by the Moody's and Standard & Poor's ratings agencies, which, in March 2019, affirmed our current bond ratings at Aa3/Stable Outlook and A+/Stable Outlook, respectively. Both cited our leadership in solid management and governance, sizable reserves and liquidity, and manageable debt 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).

Fiscal Year 2020 Approved Budget

Summary: Our auxiliaries, Regional Campuses and College of Podiatric Medicine have balanced budgets, but the �鶹ӰԺ Campus projected a $12.5 million deficit due largely to predicted enrollment declines.

In January 2019, we initiated the Fiscal Year 2020 budget process with an emphasis on the following:

1. Aligning expenses to projected revenues.
2. Funding any new initiatives only through the redirection of existing resources.
3. Preserving our sound financial position via effective budget management, maintaining reasonable debt levels and increasing the amount used to cover expected expenses to maintain our buildings, also known as funding capital depreciation.

The positive news is the state budget was approved for the 2020-2021 biennium with a welcomed improvement over past years. The challenging news for Fiscal Year 2020 is the continued decline in enrollment combined with increasing costs of operations (wages, benefits, increased need-based aid and non-personnel expenses). In the aggregate, auxiliary, Regional Campuses and College of Podiatric Medicine budgets are balanced, but the �鶹ӰԺ Campus budget continues to be a challenge. We projected a �鶹ӰԺ Campus deficit of $12.5 million, which we have addressed by announcing a hiring freeze for the �鶹ӰԺ Campus ($8.5 million), along with a plan to marginally increase the spending of our short-term investment income ($4 million).

On Sept. 11, 2019, the Board of Trustees approved a balanced budget of $659.5 million in revenues and $659.5 million in expenses.

Revenue Summary:

Tuition and fees revenue, based on anticipated enrollment and tuition and fee rates authorized by the Board, are budgeted at $401.4 million – the same amount as last fiscal year. Although tuition increases of 3.5% for new freshman Tuition Guarantee students (which is then frozen for four years), 2% for continuing non-tuition guarantee students and 2% for graduate student and non-resident surcharge were implemented, enrollment is projected to decline by 612 full-time equivalent students on the �鶹ӰԺ Campus, which completely negates the nearly $8.4 million incremental revenue projected from the increased tuition rates had enrollment stayed at last year's levels. 

For Fiscal Year 2020, we are shifting our enrollment management emphasis from the number of students enrolled to emphasizing net tuition revenue. As a result, although new freshmen in Fall 2019 decreased to 4,270 from 4,362 in the prior year, net tuition revenue increased by more than $1.5 million, driven by a reworking of our merit scholarships. To boost our historic commitment to accessibility across all incomes, we increased the amount of need-based aid by $2 million, which allowed us to offset the impact of the Fiscal Year 2020 tuition increase for students and families with the greatest financial need.

The funding we receive from the State of Ohio, the State Share of Instruction, will increase by 2% or nearly $3.4 million in additional revenue compared to last fiscal year. 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.

Expense Summary:

We exist and excel as a university because of our people. Our commitment is to provide highly competitive salaries and benefits that are fiscally responsible. Wages and benefits are our largest expenses, which they should be. Yet, in our current environment, we must review and adjust staffing levels commensurate with declines in enrollment. To give us the time we need to study our staffing needs, compare ourselves with like institutions and to rightsize and realign our workforce, we have implemented a hiring freeze for the �鶹ӰԺ Campus.

Healthcare costs also drive our expenses. We continue to emphasize quality and affordable healthcare benefits while, at the same time, combating inflationary factors that could render this vital benefit financially unsustainable. As a result of our collective work, the university's annual increase in healthcare cost is projected at 4.75%. Increases have averaged 4% over the past three years in contrast to national increases in the range of 8% to 10% annually.

To further control our expenses, all non-academic divisions submitted zero-based budgets, building their respective budgets from the ground up with a target of 95% of the Fiscal Year 2019 budget (i.e. a 5% budget reduction). These savings are the reason we will be able to make 6-12 tenure-stream hires on the �鶹ӰԺ Campus this year, in spite of the hiring freeze.

The approved budget provides for fully funding the university's payment on outstanding debt. Additionally, our careful stewardship allows us to better fund our deferred maintenance needs – even with decreases in enrollment. In previous years, we were forced to limit building maintenance projects to balance our budgets. Such underfunding cannot continue, otherwise we will not be able to continue to make our buildings safe, dry and secure. An additional $4 million in this year's budget is devoted to this category compared to Fiscal Year 2019.

Fiscal Year 2021: Looking Toward the Horizon

Summary: The second year of the state biennial budget provides us with some revenue predictability, but enrollment continues to be a concern.

As we look forward to next fiscal year, the state budget for the 2020-2021 biennium, established on July 18, 2019, includes a 1% increase in State Share of Instruction as well as permission to increase tuition for new freshmen, and students not on the Tuition Guarantee. Any increase in tuition is subject to approval by the Board of Trustees.

Stabilizing enrollment through a variety of strategies will be critical. Ohio's current demographics show a steady and then abrupt decline in high school student graduations over the next 10 years, and we must broaden our reach and successfully recruit and enroll students from outside Northeast Ohio. 

Our focus on net tuition revenue will continue. We likely will readjust one more time the amount of merit scholarships we award as net tuition is vital for our financial well-being. We also will likely continue this year's effort to make tuition increases cost neutral for our students with the highest levels of financial need.

The university's work on the Gateway Master Plan will continue as well, complemented by anticipated state capital appropriations for the Fiscal Year 2021-2022 biennium. Projects are being prioritized at this time by a variety of university leaders and stakeholders across all our campuses.

In summary, the ongoing tensions and challenges of matching operating expenses to projected revenues will continue into the near term. Therefore, we will need to continue to be strategic, prioritize and become more efficient with an emphasis on the holistic institutional view.

In Conclusion

We know higher education faces challenging times ahead, and �鶹ӰԺ State is actively preparing for agile and strategic action to maintain our standing as a top-tier national research university offering exceptional educational experiences consistent with a Student-Ready University.

We continue to employ deliberate, thoughtful, decisive and proactive measures – including program cost review, the Delaware Cost Study, hiring freeze, a zero-based budget and strategic staff realignment – to meet “the new normal” in terms of student enrollment. I have often said that I don't yet know what the right enrollment number is for �鶹ӰԺ State, but I do know the right budget: one that is balanced.

The work that lies ahead will not be easy, but I have every confidence in our faculty, staff, community and stakeholders to meet our challenges and advance our institution. We have already seen positive results to one of our most proactive measures: the University Employee Separation Plan. Had we not implemented the separation plan in 2017-2018, we would certainly be facing more drastic steps today to retain our financial viability. Because of this and other proactive measures, we can maintain our commitment to providing generous, fiscally responsible salaries and benefits while realigning our employee numbers to match more closely with our student enrollment.

Thank you for everything you do to make �鶹ӰԺ State a great place to work, learn and grow. We look forward to continuing our communications with you, and I hope you will reach out to me at president@kent.edu if you have questions or ideas about our finances, challenges or strategies to ensure a healthy and sustainable financial future.

Together, we can create a brighter future for our students, our community, Northeast Ohio and beyond.

Sincerely,
Todd Diacon
President