Reserve Judgment

Listening to Wisconsin state lawmakers talk this week, one could get the impression that University of Wisconsin System President Kevin Reilly is sitting on a $1 billion pile of cash that he’s been collecting from student tuition revenue over the years and not spending.

"There is so much money lying around I feel very uncomfortable moving forward today giving you more authority," Wisconsin General Assembly Speaker Robin Vos said Tuesday, at a hearing originally scheduled to be about whether the system should be given more authority over personnel decisions.

That hearing instead focused on a recent report by the state’s legislative audit bureau -- a nonpartisan office that conducts audits at lawmakers' behest -- that found that the system had a year-end balance of about $1 billion, roughly 25 percent of the university’s general operating budget, at the end of the 2012 fiscal year. After subtracting out funds it deemed to be restricted, the bureau said the university had about $648 million in unrestricted funds at the year's end.

The balance has been painted by lawmakers and faculty critics as a surplus fund, making them question why the system needs to continue raise tuition and cut budgets. “I can’t tell you how disappointed I am,” said State Sen. Alberta Darling at Tuesday’s hearing. “Here we have accounts of tuition being squirreled away at the same time you raised tuition. What was your intent?”

System administrators and higher education finance officials dispute the lawmakers’ characterization. In Tuesday’s hearing Reilly acknowledged that the system could have done a better job communicating the purpose of the funds, but he said it was necessary to build up reserves because the system faces a volatile funding picture over the next few years.

System administrators also argued that the funds are more complicated than many believe. While some of the money included in the audit bureau’s tabulation is held for reserves, much of it is tied to continuing projects, pre-approved expenditures and expenses that arise early in the academic year before other revenues materialize.

For these reasons, most public universities and systems have year-end reserves. Higher education officials said Wisconsin's reserves are comparable to those of other public universities and systems when measured as a percentage of the operating budget. While there is not common metric, it is common and prudent practice to have reserves equal to "a few months" worth of expenditures, which could be between 15 and 30 percent of an institution's overall operating budget, they said.

In several recent years, state appropriations to the Wisconsin system have not made up for the difference between operating revenues -- tuition, contracts and auxiliary revenues -- and operating expenses, according to the system’s financial statements. That means the university has had to cover the difference through gifts and other non-operating revenues.

“I don’t see anything unusual in the financial statements,” said Sue Menditto, director of accounting policy at the National Association of College and University Business Officers, "especially since state appropriations do not cover the operating loss. And if the 17 percent decline in state appropriations indicates a pattern, then the excess cash in question might be necessary."

The Wisconsin situation is an example of an issue that has recurred in higher education, particularly in the lean budget years since 2008. Lawmakers and individuals unhappy with administrative decisions highlight accounting items that look questionable. But finance officials say these items are often standard practice and prudent fiscal management.

The criticism directed at the Wisconsin system echoes a debate that occurred in several states in 2011, when lawmakers investigated universities for having large amounts of “unrestricted net assets” on their annual financial statements. That term, which many business officers say is misleading, applies to any money an institution has after expenses and restricted assets – typically gifts and contracts that have legal restrictions on how they can be spent – are subtracted from revenues. Like the Wisconsin balance, unrestricted net assets could include a range of funds set aside for designated purposes.

Several critics of the Wisconsin system have already pointed to the system’s “unrestricted net assets,” which totaled $860 million at the end of the 2012 fiscal year and have grown from $502 million in 2010, as further evidence of financial mismanagement by administrators.

The term also popped up in Maine this week, where administrators are preparing to make budget cuts. Local news reports alleged financial mismanagement because the university system’s unrestricted net assets grew in recent years.

Most large research universities have some form of cash reserves, said John C. Nelson, managing director of the health care, higher education and not-for-profit teams at Moody’s Investors Service. At a time when state politicians are likely to decrease appropriations for higher education while simultaneously put pressure on institutions to keep town tuition hikes, institutions have incentives to try to build up reserves to help them deal with diminished revenues, Nelson said.

Public universities are likely to continue to face such charges as state lawmakers look for ways to hold down tuition prices and control state spending on higher education in the face of growing expenses in other areas, particularly health care, pensions and public safety. “It’s somewhat surprising that this issue doesn’t come up more often than it does,” Nelson said.

Too Much Cash on Hand?

Administrators in the Wisconsin system said this week that the overall balance is a combination of hundreds of departmental budgets at the system’s 26 campuses. The growth in the balance over the past few years is the result of various individual decisions to have more cash on hand at the end of the year, they said.

Most of the funds, administrators said, are designated for specific approved purposes such as capital projects and future academic and research programs. Because financial statements are a snapshot in time, some of the money was likely spent on bills coming due in the first few weeks of July, a spokesman for the system said. Some of the money at the system level is set aside to cover potential large expenses such as health care. System officials, ratings agencies and others deem such planning to be prudent fiscal management.

The most problematic aspect of the appropriations balances at Wisconsin appears to be that much of the “unrestricted” balance -- $414 million, according to the legislative audit – consists of revenue from student fees, which the system has been increasing at a rate of about 5.5 percent a year in recent years.

Administrators said that while they probably could have done a better job explaining such funds before they became an issue, and that there’s room to debate how large the reserves should be, they do not represent any sort of financial mismanagement.

Given the size and diversity of public higher education systems, finance officials said there is no good comparison for how much money an institution should have on hand at the end of the year. A number of factors could influence what a university might deem a good year-end balance. Those factors could include whether the system operates its own health insurance, whether the system includes a hospital or whether there are planned capital projects.

University of Wisconsin officials, since the release of the report, gathered data on the size of other universities systems’ “primary reserve ratios” – the ratio of expendable net assets to total expenses. They range from a ratio of negative 5 percent at the University System of Georgia to a ratio of almost 95 percent at the University of Texas System, according to the Wisconsin data. Wisconsin’s ratio of about 25 percent put it at the median of the institutions listed.  

Unrestricted Criticism

Budgetary scrutiny this week hasn’t been confined to the Badger State. The University System of Maine is the latest institution to have its unrestricted net assets come under scrutiny. At the end of the 2012 fiscal year, after expenses and restricted funds were subtracted from revenues, the university appeared to have a balance of $177 million.

That balance was characterized as a “reserve” fund in an article by the Maine Center for Public Interest Reporting, and system officials said they have been fielding inquiries from lawmakers about the balance.

In an interview, System Chancellor James Page joked that he wished he had a reserve fund that large. In truth, he and Rebecca Wyke, vice chancellor for finance and administration, said, much of the money that makes up that budget line is tied up in ongoing projects, held for emergency purposes like health care.

This is the second time the university has come under scrutiny for the budget line. The first was in 2009 when the state cut appropriations to the system in the wake of the economic downturn and the system, in turn, froze salaries and increased tuition. At that time, the university had about $88 million in unrestricted net assets.

The university is again struggling with finances, pledging to hold tuition prices steady in exchange for no reduction in state appropriations. To achieve that, however, they university will have to make some budget cuts. Faculty members have argued that the university should pull from the unrestricted net assets instead of cutting budgets.

Wyke said that’s not a realistic option, in part because the funds are predominantly tied up in other uses and in part because it would use a one-time funding source to deal with a structural change, the decrease in state appropriations and increase in cost, only delaying the issue.              

Page said getting lawmakers and media to understand that unrestricted net assets aren’t what they sound like is a challenge he is likely to continue to face.