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False Ideal?

September 28, 2010

The bloom is off the rose.

Virginia’s “restructuring” agreements, which provided select universities greater autonomy over finances in exchange for less state support, have emerged as a model that some public institutions in cash-strapped areas of the country would like to emulate. But to hear it from finance chiefs at Virginia universities now covered by restructuring, the agreements with the state haven’t been fully honored during the budget crunch.

Among the most vocal critics of how restructuring has played out is Charles W. Steger, the Virginia Tech president who now has “a whole list of things” he says run afoul of the management agreement his university entered into in 2006. While there is much to applaud about how the agreement limited red tape for Virginia Tech, Steger says the state is not allowing universities to hang onto money raised from tuition and auxiliary services like dormitories, dining halls and student fees.

“By not keeping their promise, people lose faith in government, and I think that’s terrible,” Steger says.

The state, however, has always had an escape clause on the agreements -- and even critics like Steger don't dispute that. Indeed, state budget officials say the agreements were intentionally written to allow for a tweaking of the arrangements in dire budget times.

"The reason that language was written that way was understanding there could be extraordinary circumstances," said Michael Maul, associate director of the state Department of Planning and Budget.

"At the end of the day I would say it’s pretty remarkable Virginia has maintained its commitment," said Maul, noting that many aspects of the arrangements have been honored despite budget pressures. "In some ways those schools should be thrilled it’s worked as well as it has.”

In addition to Virginia Tech, the University of Virginia, the College of William and Mary and Virginia Commonwealth University have all entered into restructuring agreements.

Among the examples Steger and others have cited as a potential agreement violation is the state’s handling of contributions to the Virginia Retirement System. The state is required to make payments into the VRS for university employees and other public workers, but lawmakers chose this legislative session to reduce payments into the system by $620 million. Per their restructuring agreements, university officials assumed that the reduction in retirement contributions would translate into savings for their campuses. But that’s not what happened. The state clawed back those dollars to fill deficit holes in other areas, denying restructured universities the opportunity to use tuition and auxiliary funds for offsetting campus budget cuts, boosting financial aid offerings or investing in capital projects.

It would not have been unexpected for Virginia to recoup the amount of state appropriations that otherwise would have gone toward universities’ retirement contributions. The distinction in this instance, however, is that the state also collected “non-general” funds that are generated from university tuition and auxiliaries. That move has given rise to criticism that the state is redirecting students’ tuition payments toward priorities that may have nothing to do with the campuses the students have paid to attend.

The restructured universities may have the biggest beef with the state’s actions, because taking money from tuition and auxiliaries appears to break at least with the spirit of agreements that were designed to allow universities to function more like independent businesses that could fend more for themselves. Even so, all public universities -- restructured or not -- were taken aback by the raiding of funds previously viewed as sacrosanct, several university officials told Inside Higher Ed.

“This current budget I think encroached pretty far into [areas] we would not have anticipated,” said Colette Sheehy, vice president for management and budget at the University of Virginia. “There is quite a bit of money being reverted from what we call non-general funds.”

“When [retirement contribution] rates like that decline, the state usually recoups the general fund savings, but they have rarely gone after the non-general fund savings – the tuition savings,” she added. “What I would say is they have done that to a greater extent than ever before.”

The lost savings from the retirement contributions for universities are not chump change. Virginia Tech estimates $10.7 million in forgone funds over two years, and the University of Virginia estimates $11.4 million in unrealized savings over the same period. Virginia Commonwealth University, which became the latest institution to enter restructuring in 2008, estimates an $8.5 million loss. William & Mary, which only provided one year's worth of estimated losses, said the college took an $892,000 hit.

It is important to note that each university tabulated losses independently, and all may not have used the same methodology. Moreover, the Department of Planning and Budget's own estimates suggested the losses were considerably lower than those calculated by the universities.

'Backhanded Tuition Increase'

While none dispute that the General Assembly's budget has the final say on appropriations, it's clear the agreements that governed restructuring anticipated a scenario where the state might reduce its retirement contributions. In that instance, the agreements noted that the institutions should “retain non-general fund savings … rather than reverting such savings back to the Commonwealth.”

In addition to the retirement savings, universities and other public agencies saw the state take aggressive steps to draw money from interest earned on auxiliaries. Virginia Tech estimates $205,000 in lost interest, and Virginia Commonwealth expects $500,000 in lost interest. To get some sense of the collective losses, the University of Virginia anticipates that retirement savings and auxiliary interest losses combined will total $18.1 million over the biennium.

Since the auxiliaries are designed to run like independent businesses -- making their money from student fees and payments for amenities like meal plans -- universities are likely to simply raise the cost of those services to make up for the losses, said one university finance officer who asked not to be identified.

“It’s just a tuition increase by another name,” the official said. “They just did a backhanded tuition increase.”

Despite these criticisms, university officials collectively acknowledge real positives that have come from restructuring, particularly the greater freedom to streamline building projects and thereby save on borrowing costs. Some have also noted that state cuts to universities might have been larger had the freed up non-general funds been retained by the universities.

“What they’re doing is they are filling the hole in their revenue stream,” said Sam Jones, vice president for finance at William & Mary.

It was still unexpected, however, that colleges – particularly those covered by restructuring – would be asked to pony up non-general funds to backfill the state’s coffers, Jones said.

For Steger, the collective actions of the state represent a “paradigm shift … that takes money directly away from our students.”

Unsurprisingly, Maul disagrees. Had the state not taken non-general funds from all state agencies, including universities, then the budget reductions for universities would have been greater and the institutions would have had to raise tuition to compensate for that anyway, Maul said.

"It's sort of disingenuous argument to say we're taking the students' tuition money," he said. "It really helped the greater cause. It helped everybody so we wouldn't have to cut as much."

 

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