Financial Situation Background
On Nov. 2, 2023, the University of Arizona presented a Financial Status Report to the Arizona Board of Regents outlining a significant change from the forecast in the University's Days Cash on Hand ratio. Days Cash on Hand is primarily about the University's required level of reserve funds compared to total annual expenses at the end of the fiscal year on June 30.
The Days Cash on Hand situation is not an operational liquidity issue. The University has no issues making payroll or meeting debt obligations. The Days Cash on Hand shortage, however, is a warning sign resulting from the University's expenditures outpacing its revenues, and the institution making up the difference with reserves. The University has also historically lacked the central budget and expenditure controls necessary to monitor institution-wide finances effectively in real time.
This is an important situation to address, but the University is not in a financial crisis. We need to correct our structural deficit and replenish our reserves.
- In recent years, the University used its reserves to invest in strategic plan initiatives supporting students, faculty and staff.
- The University's expenditures exceeded its revenues.
- The University's reserves are below the threshold required by the Arizona Board of Regents.
- The current issue centers on the University's structural deficit.
- The University is not in financial jeopardy and there are no concerns about the ability to pay employees or meet debt obligations.
How We Got Here
Over the past few weeks, Interim Chief Financial Officer and Senior Vice President for Business Affairs John Arnold has been diligently working with college and division leaders, shared governance partners and other members of our campus community to thoroughly review the University’s financial position. This in-depth review and analysis brought much-needed clarity. We are not in imminent financial jeopardy, but as outlined below, we must make significant changes to avoid such danger.
We face our financial challenges due to decades-long budgeting practices, decentralized budget and operations models, lower-than-expected revenues, investment in strategic priorities, and increasing costs in Athletics, as well as external factors including the COVID-19 pandemic and rising inflation. In addition, our revenues have not kept pace with rising costs in part due to tuition discounts to attract and retain exceptional students. It is important to note that the majority of spending across the University has been focused on strategic investments that benefit our students, faculty and staff.
Over the past ten years, the University has utilized three different budget models: Incremental, Responsibility Centered Management (RCM) and Activity Informed Budgeting (IAB), all of which led to significant decentralization and missed warning signs. Within those budget models, we did not properly account for the actual costs associated with running the University, which has impacted our ability to make effective financial decisions.
In addition, our institution has operated with longstanding and extensive decentralization in core functions critical to our operations and our mission, including business and finance, facilities management, human resources, information technology, marketing and communications, and University advancement (fundraising). Decentralized practices and decision-making in those areas prevented the institution from strategically and efficiently using those resources.
Our Investing in Excellence initiatives drove much success but have come at a cost. These include heavy investment in strategic plan initiatives, unit-level investment in scholarship and students, and investment into institutional-funded research. These investments brought us unprecedented success, including record applications, the enrollment of our most academically prepared students, and improved retention and graduation rates. We also accomplished record years in research activity, with $955 million in research expenditures in the past year.
Finally, our revenue projections fell short with significant discounting of tuition to attract and retain exceptional students. Net tuition revenue per student has remained relatively flat or has even shown a slight decrease in recent years. As a result, we have lacked revenue to offset our increasing expenses.
Externally, like other universities, we benefited from a temporary cash infusion through COVID-19 relief. Unfortunately, that somewhat camouflaged our budget issues.
Over the last decade, overall inflation has jumped considerably, resulting in significant additional unanticipated costs. Inflation in the cost of utilities, goods and services, coupled with investment in our employees through the salary increase program, further impacted the budget, especially without the implementation of a corresponding reduction in spending.
The Department of Athletics like many of its peers was ravaged by the pandemic. In addition, flat revenues from ticket sales, the deregulation of NCAA rules, which allowed for additional benefits for student-athletes, and highly-publicized issues within the Pac-12 Conference led to higher costs and significantly less distributed revenue. While the University entered the pandemic with a strong Athletics operation financially, it has been heavily impacted by these circumstances.
University Investment Successes
The University of Arizona began implementing its Strategic Plan initiatives in 2018. At that time, the University had built up reserves equivalent to 182 Days Cash on Hand and planned to strategically invest its surplus in key areas that advance the Strategic Plan; support faculty, staff and students; and best serve the state of Arizona. As a result, the University has achieved great success in critical areas.
For example, the University has:
- Achieved record applications, enrolled the largest, most diverse and most accomplished student class in the University's history, and improved retention and graduation rates.
- Opened the Student Success District to better support incoming students.
- Experienced record years in research activity, reaching $955 million the last fiscal year.
- Delivered the successful culmination of the OSIRIS-REx asteroid sample return mission.
- Received more alumni and donor support than ever before with the launch of the Fuel Wonder fundraising campaign in November, which is well on the way to its $3 billion goal.
- Celebrated meteoric Athletics achievements this fall.
That success has come at a cost as the University has operated at a structural deficit and has used reserves to cover the difference.