New Round of Budget Cuts Hitting Personnel

Financial fallout from the pandemic will continue to hit colleges for years, experts say.

October 7, 2020
 
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Fall has so far brought a flood of furlough and layoff announcements at colleges and universities large and small, private and public.

They include more than 200 furloughs at Smith College, 264 full- and part-time furloughs at Pomona College, and dozens of part-time furloughs at Scripps College. Boise State University furloughed some of its athletics employees, and the University of Utah's athletic employees all face at least short-term furloughs. The list goes on, and these latest announcements follow previously announced furloughs and layoffs across the country.

Last month, employment in state government education dropped by 49,000 jobs and employment in private education fell by 69,000 jobs, according to employment data released last week by the U.S. Bureau of Labor Statistics. Since February, the private education sector has lost more than 350,000 jobs. State government education is mostly publicly owned colleges and universities. Under the government's classification system, the private education line includes employment at schools, colleges, universities and training centers.

The latest cuts were the result of a second round of pandemic-necessitated budget tightening at many colleges that had already slimmed down their expenses in other budget categories last spring. Unless the pandemic ends suddenly, the short-term austerity measures are likely a precursor to larger, more comprehensive budget overhauls.

Many colleges and universities trimmed auxiliary spending in the spring as they staved off programmatic and personnel cuts. Travel budgets, proactive building maintenance and repairs, retirement contributions, professional development, and technology upgrades were often the first items to go. Colleges also implemented hiring freezes for some or all open positions, and others pushed voluntary retirement options for faculty and employees nearing retirement.

Looking ahead through the 2021 fiscal year, colleges created several financial contingency plans based on enrollment projections, said Ken Rodgers, director at S&P Global Ratings.

The first, best-case-during-a-pandemic scenario usually assumed a college would follow a hybrid instruction model blending in-person and online classes -- and that enrollment would remain steady or face only modest declines. Those assumptions resulted in a 2 percent budget reduction, Rodgers said.

Next was a middle-of-the-road scenario that accounted for greater declines in enrollment and a 4 percent to 6 percent budget reduction.

Few actually laid out their worst-case scenario for Rodgers.

“They just didn’t want to think about the worst case,” he said.

Higher education institutions have been forced to cut from their budgets for a second time this fall, said Jim Hundrieser, vice president for consulting and business development at the National Association of College and University Business Officers. But savings from this second go-round are minimal.

“For the most part, those are the small dollars. I don’t know anybody who’s got $100,000 of office supplies in their line for their department or their college,” Hundrieser said.

With all of the fat and more already trimmed, colleges are left with one substantial line item: personnel.

“Personnel is the largest line item, and personnel is going to be the area where most institutions are going to have to look for additional savings as they balance their budgets,” Hundrieser said.

Take a college that typically uses a third of its housing revenue to pay a portion of its administrative budget, he said. Now, housing revenue at this theoretical college is down by millions because fewer students are living on campus and the college had to shell out for room and board refunds last spring.

“That’s $6 million that the institution is short,” Hundrieser said. “With that same example of $6-ish million, you might be able to nickel-and-dime a million or two out of your smaller lines that will freeze up for this year. But $4 million is probably going to be personnel.”

Personnel cuts may be necessary, but they’re not easy, Hundrieser said.

“There hasn’t been a CFO I’ve talked to that hasn’t said that he or she and his team or her team have spent hours trying to find every dollar they can so that the last resort is furloughs or layoffs,” he said.

More than half a year into the pandemic, it’s still too soon to tell how colleges’ finances will be affected in the long term. So far, four-year public universities are faring better than Hundrieser predicted in the spring. Community colleges have not experienced a boom in enrollments typically associated with economic downturns and therefore have not seen the financial bump that comes with it.

Colleges that rely on international students are particularly vulnerable right now, Hundrieser said. The University of Illinois at Urbana-Champaign, for example, is forecasting a $26 million loss due to international student enrollment declines this fall.

“Anyone that is international student-dependent is feeling a big blow to their budgets,” Hundrieser said.

Early data show that international student enrollment is down across the sector, dropping by more than 11 percent for undergraduate students and 5 percent for graduate students.

The financial impact of the pandemic likely won’t appear on audits for the 2020 fiscal year. Because colleges shut down late in the spring, many were able to piece together their finances for the remainder of the year, Rodgers said. Timely dollars from the CARES Act, the federal stimulus package, kept many colleges afloat in the short term.

“Initially, I think the fiscal ’20 results may end up being to the good side,” Rodgers said. “Everyone's telling us fiscal ’21 results are likely to be the year in which the whole brunt of the changes that are being made are going to affect these schools. And in some cases, at the end of fiscal ’22 as well.”

Dennis Morrone, national practice director for higher education at the accounting firm Grant Thornton, agreed with this assessment. The next several years will likely bring about significant financial changes for some colleges, he said.

“Perhaps all that can be done has been done,” Morrone said about short-term cost-cutting. What’s left on the table will impact personnel in some way, be it voluntary retirement programs, changes to health-care plans or salary reductions.

Colleges' pandemic-caused budget woes add to an already changing higher education business landscape, in which traditional-age, wealthy, white college students are already expected to decline in number in the coming years. This has placed pressure on colleges to alter their traditional offerings and enrollment strategies and to focus more on nontraditional adult learners and nonwhite students.

Long-term budget options will focus on mission and programmatic changes, said Matt Unterman, a principal for higher education services at Grant Thornton. Though they’re not often referred to as such, colleges are still effectively businesses that offer services to customers, he said.

“Commercial enterprises have had to retool their overall business strategies in the past,” Unterman said. “We can actually learn something by saying, ‘We have a customer base out there. How well do we service that customer base? How are we serving our existing customers? How do we obtain new customers?’”

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