Should We Continue to Plan for a Budget Cut?
May 13, 2020
We plan based on current information and current expectations of what the fall and the coming fiscal year will look like. This underpins our planned reduction in expenses for FY21 by 12.5% while also maintaining the flexibility to review every quarter as new information becomes available. Last week and over the weekend, we read about the possibility of our state withholds coming back. Some of you rightly asked why we should continue with cuts given this information. Your question is valid, and I take the liberty of sharing my analysis which concludes with a strong YES – we must plan a reduction in our expenses, and reassess on a quarterly basis.
1. Data provides the context.
Our budget (exclusive of MU Health Care) for fiscal years 2018-2020 is shown below. I note that state appropriations account for about 15% of our revenue, tuition and auxiliaries together account for almost 61% of our revenues, grants and other sources for about 24%.
2020 Percent of Revenues
State $214.00 15.35%
Tuition $261.00 18.72%
Auxiliary $585.00 41.97%
Grants $255.00 18.29%
Other $79.00 5.67%
Tuition and auxiliaries are linked in that if enrollment were to decline, this would impact both tuition and auxiliary revenue (residential halls, dining, athletics, and other facilities). In short, taken together, over 76% of our revenues depend on students and the state.
2. State appropriations remain uncertain.
Even with the passage of a budget bill last week, the original cuts made to the university allocation were being made up, based on a contingency-future federal appropriations. In the absence of these federal funds becoming available, the university will see a substantial cut in state funds. I note that only a small part (18%) of the General Revenue fund (which is the source of our university’s state allocation) is discretionary. The numbers are such that every $1 decrease in discretionary dollars, would translate at a minimum to a $0.20 decline to the university. The state of Missouri’s annual budget is around $35 billion of which about $10 billion is the General Revenue Fund. 82% of the General Revenue Fund is allocated to mandatory spending programs like Medicaid and employee pension contributions, public safety and elementary and secondary education, and 18% is discretionary general revenue. The general revenue fund is funded via income taxes (70%), sales taxes (20%), and corporate income taxes (5%). A 1% decline in state income, sales and corporate tax collections implies a $100 million decline in general revenue which then results in state allocations to the UM system being cut by $20 million, and a reduction in the university’s state appropriation by about $10 million. Lower tax collections and/or decisions by the state to increase allocations for mandatory programs result in lower allocations to the UM system and to Mizzou. In April 2020 (last month), net revenue collection for Missouri dropped more than 54% compared to April 2019. This was largely driven by a change in the tax deadline from April 15 to July 15. Even ignoring this effect, state revenues decreased more than 6% this year compared to the same time last year.
3. Student enrollment will be an unknown until September.
At the moment, Mizzou’s enrollment numbers are holding steady. Under normal circumstances, weekly enrollment reports offer a reasonable preview of fall enrollment. Ominously, national surveys of students and parents conducted over the last month point to why these traditional markers may be invalid for Fall 2020. A summary of these surveys can be found here. The numbers suggest that nationally, around 11 to over 16% high school seniors who had paid deposits may decide to change their mind and not attend college. Decisions to defer, to drop out, to enroll in institutions closer to home for international or out-of-state students, and to consider certificate programs or courses related to specific careers that may be in demand (in lieu of a traditional degree) are also more important considerations today, compared to previous years. In addition, the surveys suggest that with more programming likely to move online, parents expect tuition to be lower. The American Council on Education estimates a 15 percent decline in the number of traditional students attending college in Fall 2020, and a 25% decline in auxiliary revenues. McKinsey & Company estimates that even under a controlled virus scenario and return to operations in the fall, 25 percent of public colleges and universities will experience a budget shortfall of at least 5 percent. As the numbers above suggest, for Mizzou, a 1% decline in tuition and auxiliary revenues driven by declines in student enrollment will mean a reduction in revenue of $8 million. As it currently stands, we expect a decline in summer tuition and fees given our cancellation of the Activity Fee this summer. For all these reasons, we would be unwise to not prepare for a decline in enrollment and in revenues from tuition and auxiliaries.
The data on state support and student enrollment hence, suggest that even if the state were to receive funds from the federal government which would then ensure that state allocation for higher education is held harmless, the uncertainty with respect to student enrollment, tuition and auxiliary revenue remains.
4. What is the probability of federal stimulus money helping Missouri?
On the one hand, we are deeply grateful to our legislators for their efforts and commitment to preserving funding for higher education. At the same time, there is a complexity to these revenue projections that goes beyond the commitment of our lawmakers. Unlike the Great Recession of 2008, the current crisis impacts the real economy and the financial stimulus can only go so far.
Data from previous crises whether pandemics, including the Spanish Flu to the Hong Kong Flu to the more recent SARS epidemic, as well as from financial crises like the Great Recession of 2008, suggests the following 3 scenarios for economic recovery:
1. V shaped – the growth rate declines typically for one or two years, and the economy rebounds to previous levels
2. U shaped – similar to V shaped but the recovery takes longer than a couple of years
3. L shaped – economy takes longer, and never fully recovers to original growth rate
The shape of the recovery has to do with the nature of the economic shocks associated with the crisis. The data on the current economic shocks is staggering. Last week (May 8, 2020) the Labor Department shared that the economy shed more than 20.5 million jobs in April, sending the unemployment rate to 14.7 percent. By way of context, job losses in the month of April alone exceeded the 8.7 million jobs lost in the last recession, when unemployment peaked at 10 percent in October 2009. Furthermore, there is reason to believe that these numbers understate the problem. The unemployment rate does not reflect the millions still working who have had their hours slashed or their pay cut, and who risk losing their jobs when the impact of the economic stimulus runs out. Service related industries have been decimated with closures, layoffs and bankruptcies. Dates Property Solutions which tracks rent payments paid by national retail and restaurants, reports that Foot Locker, H&M, Old Navy, Nordstrom, LOFT and The Gap, restaurants like Dave & Buster’s, and stores like Barnes & Noble, Kirkland’s, LA Fitness and Party City have not met their rent obligations for the year. The list also includes movie-theater chains: AMC Theaters, Cinepolis, Harkins Theaters and Regal Cinemas, Dick’s Sporting Goods, Panera Bread, Supercuts and 24 Fitness. Furthermore Neiman Marcus, Lucky’s Markets, J.Crew, Dean & Deluca among others have filed for bankruptcies.
You might ask – if our state allocation is not impacted, and knowing that we do not see any change in enrollment, why do these national unemployment or bankruptcy numbers matter to citizens in Columbia and Missouri? I offer three reasons for your consideration:
- These bankruptcies, layoffs and unemployment impact the real economy via job losses and the decline in purchasing power. A decline in purchasing power means lower income and consumption resulting in lower income and sales tax collections to state coffers. While the $3 trillion federal stimulus might delay the pain, it is useful to understand the source of these funds. To allow for an additional $3 trillion to pump the economy the Federal Reserve (Fed) has entered the market and is on a huge shopping spree, buying assets on a scale that is hard to imagine. The Fed has been purchasing bonds including corporate bonds and high-yield or ‘junk’ bonds. It is not surprising hence, that in the last six weeks, corporations have issued $560 billion in bonds. This intervention by the Fed has kept interest rates at historic lows and is helping to forestall bankruptcies. In the absence of positive changes in the real economy, this stimulus is only a temporary reprieve. Current estimates are that about 40% of those unemployed in the last two months will stay unemployed even if the economy recovers. In the absence of a lasting solution, the rising unemployment and the associated decline in income and sales tax receipts will cause a strain on state budgets increasing the probability of future withholds from the state. Even if we receive federal stimulus dollars for FY21, the fact that more people will not have a job next year and in the future means the total income and sales tax collections will be lower in the future. Assuming that the state will continue to fund us at the current rate, even as their general revenue collections continue to decline, is wishful thinking. In addition, the unemployment and resulting decline in purchasing power will mean that fewer families will be able to afford to send their children to college, hence reducing enrollment and university revenues.
- While the stimulus buys time and tries to avert a recession, the resolution of the current crisis lies in a vaccine, which in the best-case scenario, is expected to be available in 2021. This will require science and an organizational agility that creates capacity in areas such as spaces for treatment, mobilization of medical professionals and medical care to prioritize the COVID-19 crisis. Even if the approval process, the manufacturing process and the availability of professionals is greatly enhanced, we still need time to understand fully the short and long-term safety concerns related to the vaccine (a vaccine produced in a hurry could kill the COVID-19 virus but might result in other complications that are equally deadly). While we may have the ability to determine and control the size of the stimulus that our university receives, there is less predictability on the vaccine and its deployment and the subsequent return to normalcy, which is the only lasting solution to the current crisis.
- Given the nature of the current crisis, it is also reasonable to expect structural changes to the economy. Such structural shifts result in changes to technological and business models. What do we mean by structural changes – the SARS epidemic for instance, is credited with the adoption of online shopping by Chinese consumers, and the rise of Alibaba. While SARS accelerated the trend to online shopping, changes in shopping modality are here to stay. The data shows for instance that while there were 30,000 malls in the US in 1970, today there are 1,100. Of the ones that are still standing, a quarter are at risk of closing over the next five years, according to estimates from Credit Suisse. While COVID-19 could mean changes for several industries, the two that are most critical to Mizzou are health care and education. Telehealth is becoming more widely accepted, used, and will be improved going forward. Until the model of telehealth is integrated with face-to-face (F2F) care, the business model for an academic health center like ours will be in transition and can be expected to see soft revenue growth.
5. We must expect changes to the model of higher education.
While COVID-19 has highlighted the role of public universities and especially the critical role we play in providing a rich social learning experience, it has also shown that the decision between online and F2F does not have to be a binary choice. During the last two months, we learned that we can never replace F2F learning; we also learned that there are aspects of online learning that add value. The current crisis has accentuated the case for a blended model that gives the learner the option to choose the modality where appropriate, in a way that adds value.
The crisis has also hastened a move towards ‘decentralized global value chains’. On the one hand, this might mean that students from MO who were planning to go out of state will decide to stay close to home and attend Mizzou. Certainly the appeal of being together and attending social and athletic events on campus, especially in a setting as beautiful as that at Mizzou will never disappear. At the same time, this crisis has shown that online modality may have to become more integrated with face-to-face instruction. With this integration smart learners will try to optimize. Will students spend the entire year on campus? Will they live closer to home and be on campus for shorter durations? We observe that this crisis has impacted residential campuses more so than commuter campuses.
One other factor that underscores the need to make changes to the higher education model is the changing demographic of the population we serve. While the number of high school graduates in MO is expected to grow through 2025, over the next decade, this number is expected to decline by 3.4%. In addition, attracting students to college has become more expensive over time. Between 2018 and 2019, at Mizzou, the number of full-pay students declined by over 200. In short, and even pre-COVID we needed to prepare for:
1. Fewer high school graduates, hence a smaller incoming freshmen class at Mizzou
2. Fewer full-pay students, hence lower revenues for the same number of students
COVID-19 has accelerated the need to reimagine higher education in ways that increase options to the learner, and that reduce the cost of college and hence increase the value of a degree.
6. We can do something NOW.
We can consider new pedagogies that reduce the cost of a degree and expand access. We can consider changes to our administrative structure so as to drive down costs. We need to do both. To this end, we have convened the Program Audit and Restructuring Committee (PARC) to provide recommendations regarding academic restructuring on our campus. This program audit will allow us to take a closer look at our degree programs, academic units and other related entities to identify programs that can be modified, consolidated, suspended or discontinued.
In addition, the Academic Operations Team is preparing guidance for academic programming this fall. What we learned this semester and the innovations in pedagogy needed for the Fall semester could allow us to make lasting changes to the way we deliver content. Flipped classrooms and blended models that maintain the rigor of the learning environment can be innovations that emerge from the current crisis.
What can you/I/we do to help?
If you are a faculty member:
1. Consider parts of your course/s that can be successfully taught online, and design your syllabus, schedule, and preparation around this
2. Consider offering students the choice – use online components online, or F2F
3. Post as much material as you can, online and via video recordings, not as a substitute but as a complement to the F2F experience – I encourage you to participate in the preparatory workshops being hosted by the Office of eLearning (OeL) and our Teaching for Learning Center (T4LC).
4. Offer to be a ‘buddy’ for a colleague who teaches the same course or in an adjacent area and ask them to be your buddy – this will help smooth transitions in case you or your ‘buddy’ needs to take time off in the fall.
5. Know that we, i.e., the Office of the Provost is here to help.
If you are a department chair:
1. Encourage your faculty to consider adoption of online technology to complement F2F experiences
2. Encourage your faculty to participate in the learning workshops hosted by OeL and TLC
3. Consider ways to offer your program/major/minor in ways that accommodate all modalities.
If you are a dean:
1. Consider offering degree programs that reduce the time and cost of the degree
2. Consider offering experiential learning opportunities that may reduce time to degree
This report shared by OeL that describes current opportunities for online programs. This could form the basis for changes to current programs, pedagogy changes needed to offer online programs, and opportunities for the introduction of new programs.
In summary, Mizzou’s current budgetary challenge may appear to have been resolved as of last Friday but the macroeconomic reality of very high unemployment and high levels of national debt suggest otherwise. On the other hand, the current crisis has shown that we are resilient and agile. In addition, we know that some changes that we were forced to make in the last few months and that we will continue to improve on in the coming months will improve the way we live, work, teach and learn. At the same time, to survive and thrive we must work together to find solutions, and to adapt to a new environment knowing that such a “new normal” may take months or years to emerge. Thank you for your continuing support and understanding as we chart our course together.