Financial Update, June 2020
Dear SCU Faculty and Staff,
I write to provide a financial update as the current fiscal year closes and outline our plans for next year. Over the last two months, our leadership team has consulted widely and received much helpful input from governance bodies, our financial integrity working group, staff and faculty forums, and individual members of our community. The multiple conversations demonstrated how much our community wants our response to financial challenges to be a collaborative effort, where everyone chips in for the good of the community. Thank you.
Still, I know that what I ask impacts you and your family very directly. I thus want to be as transparent as possible with you about the realities we are facing. At the same time, because of this community whom I have gotten to know in this very unusual year, I am more confident than ever that we will get through this momentous challenge, which we have not seen for generations. Because of the strength of our community and good will of its people, I am also convinced that, on the other end of this turbulent time, we will be strong and positioned well to lead as a preeminent Jesuit university.
Current Fiscal Year (ending June 30)
In late April, I wrote our faculty and staff members to detail the immediate financial impact of the shelter-in-place order. While we lost revenue from residence halls and other auxiliary services, we maintained much of our budgeted tuition revenue -- thanks to the heroic efforts of our faculty and staff to continue our teaching and learning in virtual formats. Moreover, I am grateful for your curbing discretionary expenses and adjusting to the hiring freeze. As I wrote in April, I decided that we would not resort to any lay-offs in the current fiscal year.
At that time, we projected a deficit between $4-5 million for the fiscal year ending June 30. Given the remedial measures we took, we expect to conclude this fiscal year with a lower deficit than we forecast. Our financial results for FY20 year will not be available until late July.
Next Fiscal Year (beginning July 1)
As you well know, there is still much in flux as our State and Country navigate the turbulent waters caused by the pandemic. Still, we must prepare for next year as best we can. Amid this uncertainty, we continue to be guided by three principles: protect the health and safety of our community; preserve the foundational experience of Jesuit education; and steward the financial resources entrusted to us.
In February, we concluded our budget process, with the Board of Trustees approving a budget for fiscal year FY21. Because of our desire to support salaries and make certain strategic investments, that budget included a very narrow contingency of just over $2 million. The pandemic has upended that budget. We must now adjust to changes in our forecasted revenues and expenses for next year.
Because we rely on student-driven revenue for 80% of our operating budget, enrollment projections are critical for our planning. We budgeted for 1450 new first-year undergraduate students for the coming academic year. At present, we project a shortfall of between 5-10% for first-year undergraduates. This reflects a national trend, with nearly three-quarters of all universities not hitting their admissions targets. At the same time, we are seeing an increase of deposited transfer students, which helps to offset these losses. Graduate enrollment is more uncertain because of the numbers of international students who may be restricted from traveling to campus. At this point, we project a decline of about 3% in total graduate admissions, though individual schools will vary significantly.
The admissions landscape will remain fluid all summer, and our admissions teams are working hard to recruit and retain students. Not surprisingly, the number of admitted students asking for a deferral has increased over past years. I have augmented our current and future financial aid budget to attract students during this challenging economic time for many families. At this point, we are retaining most of our currently enrolled students.
As we have announced, we are planning to welcome students back to campus, but in order to do so more safely, we are reducing the density of residence halls, that is, decreasing the number of students living on campus. In order to limit exposure that might come from travel, we are also asking students to leave campus before Thanksgiving and finish the term at home. This means that, as we did in the spring, we face another loss in income from residential living. At present, we expect a $16 million shortfall in auxiliaries revenue, compared to what we budgeted.
There are other expected revenue losses, including a decrease in various student fees, reduced income streams from events on campus, and lower than expected annual giving from donors, which naturally occurs in a recession.
While we always seek to increase revenue streams as a way to augment our budget, this is difficult to do in economic downturns. One immediate option for us is to increase the “spending rate” (the annual distribution from the corpus of the endowment) of unrestricted funds in the endowment. The Board of Trustees has approved a one-year increase in the spending rate from 4.5% to 5.75%, which allows us to take more from endowed funds not designated by donors. (Unrestricted funds make up about 17% of the endowment.)
In sum, we are projecting total revenue losses of $35 - $45 million. This presumes we are able to have students on campus and implement the hybrid model of education that we are planning and that most of our students want. If we encounter another shelter-at-home order from the County, requiring that the campus be vacated as we experienced this spring, the losses could be significantly greater, with more reduced tuition and housing revenue. If the public health measures turn measurably better -- for instance, with the distribution of a vaccine or therapy -- then the revenue forecast may improve.
We are planning in the midst of uncertainty, thus we must be nimble in our approach.
To offset the loss in revenue, we will implement some remedial measures for FY21, which our leadership team has discussed in various town halls and governance settings over the last two months. Though not a surprise, I share them understanding that they will negatively impact members of our community to varying degrees.
We will continue the hiring freeze, with limited exceptions granted by the Provost, Lisa Kloppenberg and Chief Operating Officer, John Ottoboni. This pause in hiring yields about $6 million in savings. Faculty searches for the 2021-22 academic year may proceed, subject to changes in enrollment impacting curricular needs.
We will also continue the limits on discretionary spending, which have proven very helpful in reducing the current year’s deficit. We seek to reduce our operational expenses by about $18 million. Instead of across-the-board cuts, I am giving unit leaders (e.g.,the provost and deans, vice presidents) discretion about how to achieve targets based on our living and learning environment for the fall and perhaps beyond. As you know, travel is a significant expense and carries risk of exposure to the virus. Restrictions on university travel will continue, with more details to follow.
I announced in April that merit increases for faculty and staff for FY21 would be delayed. The savings realized over a year is about $7 million.
I also announced in April that we would explore a reduction in the university’s retirement contribution, which is currently 10% of salary for eligible employees. We have considered thoughtful feedback from the Benefits Committee, Faculty Affairs Committee, Staff Affairs Committee, and others about this proposal and the extent of the reduction. I have decided to decrease the contribution for faculty and staff to 5%, yielding a savings of about $7 million over the next year. The reduction will take effect on August 16, 2020.
Though painful, the reduction in retirement contribution means that we do not need to resort to cuts of current salaries at this time. If in the future we need to institute salary cuts, we will explore making them progressive, that is, those making under a certain amount would be protected.
As was the case in the spring quarter, I thank members of the cabinet, deans, and other senior leaders who have joined me in taking a voluntary 10% reduction in pay for the first 6 months of the new fiscal year.
We will continue to invest in capital infrastructure around campus, such as technology, housing, and health and safety needs. We have suspended or delayed $4.5 million of non-critical campus renovations for FY21.
In the spring, I committed to no furloughs or lay-offs of staff members for the current fiscal year. In all candor, I cannot make the same promise as the new fiscal year begins given the financial headwinds and uncertainty we are facing. So much depends on our enrollment figures for the fall and beyond, our living and learning environment, and the restrictions that may be placed on our activity by health officials. My hope is that the cost-saving measures above will not require additional measures like lay-offs. At the same time, we may not be able to retain employees who support areas with significantly reduced workloads. If furloughs or lay-offs are necessary, unit leaders will work with those impacted, giving adequate notice and support in the transition.
The expense reductions outlined above are temporary measures. We will continuously review our financial status over the next six months to determine if other cost-saving measures are needed. If the economic environment improves substantially, we will also review restoring the merit increases and/or retirement benefits during the second half of FY21.
Support for Students and Families
Just as we reckon with financial impacts on the University and the people who work here, we are sensitive to the impacts of the financial downturn on our students and their families. Here are some steps we have taken to address these needs.
CARES Act funding
Santa Clara applied for federal government grants under the Coronavirus Aid, Relief, and Economic Security Act. We were awarded $3.5 million under the Act’s provisions. Half of the funding is designated for emergency financial assistance for students. We have set up a process for students to apply for this funding, and we are presently distributing funds according to the Act’s requirements.
Under the Act, the other half of the funding can be used for a variety of purposes. While we are permitted to use the second portion of the grant to cover the losses for services (such as housing revenues), we have decided instead to invest in our capacity to offer remote learning when students are not learning in the typical classroom environment. Accordingly, this summer, we are investing in classroom technology and faculty development for online learning. Any excess funds will be made available to students as emergency financial assistance.
Santa Clara Emergency Assistance Funds
As announced previously, two other funds were established at the University to offer emergency assistance to students, faculty and staff. Thanks to all who contributed to them. As of June 15, the SCU Student Emergency Special Assistance Fund totaled nearly $490,000, which has allowed us to make 690 grants thus far. The SCU Faculty and Staff Special Assistance Fund totaled $60,000, with 36 grants given thus far.
Recognizing that many of our families will require more financial assistance, we have increased the financial aid budget in FY21 by $4 million for undergraduates and $2 million for graduate students. To offset this unexpected increase and reduce the need to rely on more spending cuts to fund such aid, the Board of Trustees established the Heritage Fund, which is dedicated to awarding grants to current students whose financial situation has changed.
Thus far, our trustees and other faithful benefactors have generously donated $3 million to the fund. We have a target of raising $5 million total by summer’s end from members of our other university boards and our alumni and friends.
I write this letter at the end of a challenging academic year, my first at Santa Clara. I am grateful for your generous response as we dealt with the impacts of the pandemic and also your more recent recommitment to working together for greater racial justice on campus and off. This moment reminds us that even as we respond to these economic and social challenges, the work of the University continues. We invest time and resources in teaching, learning, and research. We double-down on our commitment to serve the common good. We keep our mission as a Jesuit university central.
I’m told that in a bike race, the leaders often emerge on the uphill part of the course. And so shall we on this difficult stretch of our 169-year journey. One difference from the biker pedaling alone: we will reach the finish and beyond because we strive together. I thank God that I am part of this exceptional team.
Kevin F. O'Brien, S.J.