Why we need cost reduction scenarios
As we make our way through the budget development process, one question that we have been receiving from some college deans is, “If the Governor is recommending a biennial budget with an increase in State Share of Instruction, why does UT need to construct 7% and 15% cost reduction scenarios?” The short answer to this question is as follows:
- Based on the Governor’s recommendation, UT would receive approximately $6.7 million in additional funds over two years. Projected salary and benefit increases alone over the two years will exceed $16 million (based on existing collective bargaining agreements). Given that the Governor is also recommending an undergraduate tuition freeze, we have very little choice but to consider other revenue enhancements and cost reduction scenarios. The 7% and 15% scenarios are intended to address both revenue enhancement (up to 50% of the scenarios) and cost reduction possibilities. We need to explore these possibilities.
- There will be other cost pressures: student financial aid, debt service, utilities, structural deficits and carry-forward spending, the threat of a lower academic subsidy from the hospital, etc.
- The legislature might choose to change the Governor’s recommended budget, so anything is still possible at this point in the legislative process.
- The Governor’s recommended budget is based on the receipt of substantial federal stimulus funds, and most of the federal funds are front-loaded into the first year of the biennium. In a best-case scenario, federal funds will stimulate the economy and restore lost tax receipts. In a worst-case scenario, federal funds will simply buy the state some time to adjust its finances downward. In other words, we may be living on borrowed time.
- UT’s academic (non-hospital) operating margin was already inadequate prior to the national recession. Some improvements were budgeted for 2008-09, and more improvements were already planned for 2009-10. The academic operating margin is too low to generate enough funds to pay debt service and reinvest in the physical plant and IT infrastructure in adequate amounts. As a short-term strategy, UT borrowed funds to address deferred maintenance. As debt capacity is maximized, however, the operating budget must be adjusted to fund adequate levels of capital reinvestment. If we allow the plant and IT infrastructure to deteriorate, nobody will want to join or attend the university.
- We still need to make further investments in the university’s implementation of its strategic plan. To do so will make us a stronger university. Academic quality will improve. The university’s academic reputation will improve. The student experience will improve. Patient care will improve. The region’s economy will improve. Our finances will improve, which will enable us to adequately fund and sustain full-time employment at the university.
- Cost reduction scenarios are ways to spur creative thinking. It is good for us to ask the question, “Can we become more cost effective and move existing funds to strategic priorities?”
These are the top seven reasons why we need to continue to develop the 7% and 15% cost reduction scenarios. I hope this is helpful.
Scott Scarborough
March 10th, 2009at 1:12 pm
[...] to the interview, Scarborough had explained on Budget Exchange why the 7 and 15 percent budget planning scenarios were [...]