|Message Sent To:||All Faculty, All Staff|
|Message From:||Message from the Office of the President|
|Date Sent:||Friday, July 24, 2020 11:45 AM CDT|
Update on Loyola's Budget and Operating Expenses
Dear Faculty and Staff,
The recently completed faculty and staff survey in anticipation of the fall semester prompted several comments, questions, and observations on Loyola University Chicago’s budget and operating expenses. We hope that this communication, as well as previous updates on the University’s finances, will be helpful in framing our current financial state, our potential revenue challenges, and opportunities we may have to align our resources in the year ahead.
Loyola’s Operating Budget
The University has made every decision about the fall semester with the health, safety, and well-being of the Loyola community as its guiding principle. As the University continues its planning for the reopening of campus this fall, we continue to monitor closely the financial impact of the uncertainties Loyola and all universities face. Loyola is a tuition-dependent institution; nearly 80 percent of our revenues (see pie charts below) are directly tied to undergraduate and graduate enrollment and on-campus housing and meal plans. Significant changes in these areas have an immediate and material impact on our ability to balance our budget and cover our operating expenses and debt obligations. Meanwhile, only 20 percent of our revenues are from philanthropy, grants, endowment draws, and other sources not tied directly to students (such as conference services). On the expense side, our people—faculty and staff and the accompanying benefits—are our biggest expense, accounting for over 60 percent of our operating budget. Our reliance on undergraduate tuition places us in a very different position from other schools you might have read about recently. The University of Southern California, for example, derives only 44 percent of its revenue from tuition and fees. For Harvard University and Williams College, both in the news recently for their fall plans, tuition and fees account for 14 percent and 13 percent of their total revenues, respectively.
For the past few months, the Strategic Financial Planning Team (SFPT) has been working to realign our operating budget for 2021. The SFPT is assisted by the Budget Realignment committee, which considers budget reduction initiatives, assesses alignment with faculty/staff survey data, and makes recommendations for potential action to the SFPT. [Membership of both committees is listed below.] So far, we have identified the following unfavorable budget variances across some key revenue areas:
- Freshmen enrollment and retention data remains below budget and continues to change daily. We are anticipating 200 or more fewer freshmen than budgeted;
- Housing revenues will be significantly reduced because of our decision to move to single-occupancy rooms to create a safer environment for our students;
- We decided to suspend the student development fee for the upcoming year ($419 for a full-time student). Nevertheless, we remain committed to providing as many on-campus events and programs as possible. This decision lowered our overall tuition and mandatory fee increase for full-time undergraduates to 1.2 percent from last year;
- Many of our auxiliary and other revenue areas—conference services, food service operations, parking, etc.—will see significantly reduced or, in some cases, no revenue for the foreseeable future.
All these moving parts translate into a projected revenue decline of at least $50 million. The number could be significantly more (or even double) should freshmen or returning students opt to withdraw or take a gap year given Loyola’s decision to move to a primarily online platform for the fall semester. In addition to these unfavorable revenue variances, we are anticipating no less than $8 million in new costs directly related to the pandemic, of which we are expecting partial reimbursement from the CARES Act: health safety supplies such as hand sanitizer and disinfectant wipes, COVID-19 testing kits, IT equipment to facilitate remote learning, and capital projects to further ensure the safety of the Loyola community on campus.
Our multi-phased budget reduction strategy, which has been communicated by Dr. Jo Ann Rooney at the beginning of June and again last week, will result in about $44 million of costs being removed for the current year. While some of the reductions implemented as part of Phases I and II are difficult, we have been able to avoid widespread layoffs or furloughs of staff or faculty so far. We have, however, taken steps to furlough some staff, primarily at campuses such as LUREC and Cuneo that are closed at least through the end of the calendar year.
Enrollment and Retention
Now more than ever, we cannot spend enough of our time and attention on enrollment and retention. Loyola has enjoyed four consistent years of large freshmen classes, a well-managed discount rate (the comprehensive financial aid and scholarship package we offer our students), and a market position and trajectory that is the envy of many other institutions. This fall, we are projecting that our incoming freshmen class will be at least 200 students short of our budget; if this materializes, it will only be the third time in 15 years that we have not met or exceeded our budgeted freshmen class. In nearly all of these years, we have increased scholarship packages and stayed within budget to maintain the size, academic quality, and diversity of our classes. For this fall, it appears as if our discount rate will need to increase by at least $1 million to enroll a freshmen class of 2,350. As the fall semester approaches and universities work to minimize their summer melt (those students who drift away and for some reason decide to not enroll), we will need to maintain our close contact with the incoming class.
The effective management of our discount rate will also continue to be an important part of our net revenues. The anticipated increased financial need of our students because of economic factors caused by the pandemic will likely result in an increase to our discount rate by even more than the $1 million overage mentioned above. We are allocating $10 million of University funds and are targeting an additional $5 million in philanthropy this year to establish the Loyola Commitment, which is an emergency financial aid pool to help support our students whose families have experienced a significant reduction in household income. We do not know if $15 million will be enough, but we are committed to supporting all our students who have financial needs.
The sensitivity analysis of our key revenue drivers below underscores how important it is that we monitor enrollment and retention of students at all levels:
- Every 25 undergraduate students = $500,000 - $750,000 in net tuition revenue;
- Every 25 students retained after their freshmen year = $2 million in revenue over three years;
- Every 25 graduate students = $250,000 - $750,000 in net tuition revenue;
- Every 1 percent change in the freshmen discount rate = $1.1 million
The decision we announced on July 13 to move essentially all of our fall classes online was based on the best medical and scientific evidence available, and was motivated by what is always our highest priority—the health and safety of both our Loyola community and the larger Chicagoland community in which we live. We anticipate that this decision may lead some students to reconsider their enrollment for this year. Since these are unprecedented times, we have no historical basis to estimate the potential enrollment and revenue loss. We will continue to work with our incoming and continuing students to keep them engaged on the fall semester, but we are also aware that additional enrollment declines could result in significant revenue shortfalls.
Compensation and Salary Reductions
Employee compensation and benefits is Loyola’s biggest expense, accounting for over 60 percent of our operating expense (see pie charts above). Suggestions have been made that salary reductions not disproportionately impact those that are on the lower end of the pay scale, if reductions need to be implemented. As part of Phase I budget reductions for FY ’21, Dr. Rooney announced pay reductions for all senior administrators—including all officers, provost staff, and academic deans—ranging from 2.5 to 15 percent. The overall salary and benefit budget savings of this move was $1.2 million for FY ’21. The reduction impacted 62 faculty and staff in leadership roles. A broader look at more widespread reductions for those higher-compensated faculty and staff shows that reductions of compensation by as much as five percent for those whose salaries are over $150,000 would yield about $2 million in overall savings. More importantly, it would economically impact over 200 additional faculty and staff. Consequently, many of our other Phase I moves—freezing most open positions and salaries, curtailing salary increases for next year, and collapsing open staff positions—has resulted in over $18.5 million in savings for FY ’21 without directly impacting compensation, except for a small number of senior administrators.
Depreciation and Capital Budget
For the past 15 years, as the University has continued to invest in its campus infrastructure with improvements to the teaching, research, and residential spaces, we implemented a board-endorsed discipline of fully funding our depreciation expense as part of our operating budget. The primary reason for this is to be sure that Loyola continues to stay ahead of repairs, maintenance, and improvements to our campuses and avoid massive amounts of deferred maintenance and increased debt to cover necessary renovations to our buildings. Prior to doing this, the University faced over $250 million in deferred maintenance and repairs that were needed at our Chicagoland campuses in the early 2000s. Since fully funding depreciation, the University has been able to plan for and fund projects like the Information Commons, Institute for Environmental Sustainability, Francis Hall and other residential dormitory projects, the flex lab on Broadway, and the Schreiber Center (with philanthropy). We’ve also acquired and made improvements to the Rome Center Campus and completed major renovation projects such as the multi-year improvements to the Mundelein Center and the current renovations of the Cudahy Science Building at the Lake Shore Campus. Moreover, our discipline has allowed us to keep up with campus building repairs and maintenance, thereby avoiding significant and unforeseen cash needs resulting from deferred infrastructure projects.
This year, as a result of the uncertainties we will face for the coming academic year, University leadership made the decision in early-May that capital projects for this current fiscal year would be reduced only to those that were mission-critical to the opening in the fall or those that were already underway and needed to be completed. This move will preserve our cash balances through the year and defer our capital spend by $26 million across all campuses. More importantly, should we experience significant revenue declines in the coming year, we will be able to utilize this cash to cover operating and payroll costs prior to other sources.
Loyola’s long-term investment pool is approximately $760 million. During the first several months of this calendar year, the endowment value has fluctuated by as much as $100 million. Of the long-term investment pool, 88 percent is endowed and restricted by donors or designated by the Board of Trustees to spend on defined uses like named scholarships, chairs/professorships, and other academic/research purposes. The remaining 12 percent of the long-term pool is composed of reserves for the payment of future debt obligations (of which the University presently holds about $400 million in debt), retiree health, and other institutional reserves.
Some have suggested that we can accelerate our spending rate on the endowment during this period to minimize further cuts in our operating budget. In 2000 and 2001, when the University’s medical center was no longer able to generate significant annual surplus that covered the University’s operating deficit, leadership decided to supplement its operations with the endowment. During those two years, Loyola spent about $100 million of unrestricted funds from an endowment that—at the time—was about $350 million. Had we not tapped into the endowment then, our endowment would have surpassed $1 billion. That would have allowed us to offset our dependence on hard-funded (tuition-dependent) operating dollars with return by an additional $4.5 million each year for the past 10 years. Spending above the normal endowment limits in 2000 and 2001 has reduced our permanent spend opportunities in the years since.
Further, the endowment is invested with long-term (over multiple years) growth in mind. Taking from the endowment today, at a time of depressed market values, will significantly impair its long-term recovery.
Loyola is committed to making principal payments as scheduled from the 2012 debt issuances, which includes a $57 million bullet payment due on July 1, 2022. Our approach to paying down our debt has earned us accolades from the ratings agencies that have upgraded Loyola’s credit profile in recent years. While the University is not intending to pay down all its debt, we are scheduled to have less than $300 million of outstanding debt after July 1, 2022 for the first time in nearly 15 years. This puts the University in a much stronger position to leverage its resources and take on new debt to fund capital projects when there is a need to invest in large, strategic initiatives.
While the University remains committed to managing our debt, we also continue to watch our debt expense (interest rates) and move quickly when it makes economic sense to refinance. Most recently, Loyola refinanced nearly all of its variable tax-exempt debt because of favorable market conditions and the ability to eliminate certain costs, compliance obligations, and usage restrictions on financed facilities.
Cash and Liquidity
Given the cadence of the University’s billing for tuition and ongoing expenses, especially bi-weekly and monthly payroll, the months of July and August are typically the times of the year when our cash reserves are smallest. Especially this year, given the uncertainty of enrollments and the financial needs of our students, we are carefully watching the levels of cash and short-term investments. In anticipation of this period, the University secured a line of credit a few months ago (when rates were very favorable) to ensure adequate cash availability until tuition revenue can be received.
The $44 million we have reduced as part of the Phase I and Phase II budget reduction moves have impacted some Loyolans acutely, like those who have had salary reductions or have received furloughs, and all employees by the elimination of the five percent non-contributory portion of the University’s 403(b) contribution. Many of the other moves, however, have been relatively benign and have taken some flexibility out of our operating budget. If our $50 million revenue shortfall holds after we see our fall enrollments, it is likely that we could avoid significant future reductions and cover the shortfall by remaining vigilant on our hiring freeze throughout FY ’21. However, should we experience additional enrollment erosion either in the size of our incoming freshmen class, the retention of our continuing students, or housing melt, it is likely additional measures will need to be taken to remove cost.
As many of you know, the finance division has conducted numerous town halls and school/division presentations over the past several years to explain our budget in an open and transparent way. We continue to be available to schools, divisions, or departments who are interested in a more detailed presentation of our current financial picture, the anticipated challenges we may face for the coming academic year, and steps that have been taken or are still available to us in order to ensure that Loyola remains financially strong on the other side of the pandemic. Please feel free to reach out to either me (wmagdzi@LUC.edu) or Alex Kormos, director of financial analysis (akormos@LUC.edu), to schedule a session.
Thanks for all you do for Loyola.
Sr. Vice President and Chief Financial Officer/CBO
Strategic Financial Planning Team
Norberto Grzywacz, provost
Tom Kelly, SVP, administrative services
Teresa Krafcisin, controller
Wayne Magdziarz, chief financial officer
Sheila McMullen, executive vice provost
Jim Prehn, S.J., president’s office/chief of staff
Paul Roberts, VP enrollment management
Jo Ann Rooney, president
Ben Smigielski, AVP, budgeting/financial analysis
Budget Realignment Committee
Sue Bodin, treasurer
Jo Beth d’Augustino, associate provost
Scott Hendrickson, S.J. provost’s office
Michael Kaufman, dean/associate provost
Alex Kormos, director, finance
Teresa Krafcisin, controller
Joanna Pappas, associate provost
David Slavsky, associate provost
Winifred Williams, VP, human resources