UT Budget News

This week The University of Toledo Medical Center (UTMC) eliminated approximately 56 FTE positions in the hospital and its outpatient clinics. This is a sad day for those employees.  I’d like to provide a brief explanation as to why this is happening.

First, it is important to note that there has been a purposeful attempt to take money out of this nation’s healthcare system for many years.  Beginning in 1984, Medicare significantly revamped how hospitals were reimbursed with one main goal in mind—reduce payments to hospitals.  That trend continues today.  Most of the rhetoric coming out of Washington, D.C., is how this nation’s healthcare system costs too much money.  The bottom line going forward is that healthcare will see less and less money—both hospitals and physicians.  For many years, hospitals and physicians have had to find ways to be more productive and cost-effective to make ends meet.  As a result, healthcare has seen a shifting of care over time to more cost-effective settings; from inpatient to outpatient, from outpatient to home health, from home health to the workplace, etc.

Add to this persistent long-term trend of cost-cutting a national and regional economic recession over the past year that has resulted in high levels of unemployment.  Hospitals and physicians are now seeing more and more uninsured patients and fewer and fewer commercially insured patients.  Furthermore, Medicare and Medicaid patients are moving to managed care plans that pay hospitals less for services.  Hospitals across the country and in this region are laying off large numbers of employees and cutting low-margin services to keep their economic models viable and sustainable.  The healthcare market continues to be a dynamic and fast-changing industry.  Those organizations that adapt to the speed of change remain viable and thrive.  Those who are slow to change usually fold, or they merge with another organization that is quicker and more nimble.

At UTMC, we have seen a steadily increasing number of uninsured patients, and like most hospitals, UTMC is adapting its healthcare delivery and economic models to adjust to these new demands.  The good news is that UTMC has great physicians and nurses who have been innovating daily for many years—always finding ways to do more with less—always finding ways to deliver university-quality healthcare with increasing levels of cost-effectiveness.

My heart goes out to those employees to whom we must say goodbye.  They deserve our thanks and our best wishes.  Similarly, the employees who remain deserve our thanks and support.  Once again, we will find ways to do more with less.  We will combine professional experience with new technologies and paradigms to deliver university-quality care while simultaneously teaching the physicians, nurses, and other healthcare providers of tomorrow.  I am honored to be a member of this team.

Scott Scarborough

We now have a sense of how the university’s state funding will be affected by the State of Ohio’s latest budget bill.  In short, the university (not including the hospital) will lose approximately $8 million in state funding.  In addition, the hospital will lose about $1 million as a result of a new hospital assessment.  Lastly, low income students who qualify for Ohio College Opportunity Grants (OCOG) will lose about $4 million in state financial aid.

To offset a portion of this lost funding, the State of Ohio has authorized public universities to raise undergraduate tuition by 3.5% for both years of the biennium.  At UT, we will likely raise tuition this fall, but scholarship every dollar back to students.  Beginning in the spring, however, we will not scholarship the tuition increase back to students.  Raising tuition in this way allows the university to recoup approximately $2 million in lost state funding, and it preserves the university’s ability to raise tuition by the full compounded rate of 3.5% in the fall of 2010.

Beginning this week, the university will implement a process to adjust its operating budget to account for the loss of state funding.  The process will be guided by the following principles:

(1)  We will be transparent, seek the input of shared governance constituencies, and communicate as effectively as possible throughout the budget adjustment process.

(2)  We will value and respect every employee adversely affected by the budget adjustment, and attempt to retrain and place these employees into open positions that we must refill.

(3)  We will stay student-centered and patient-centered throughout the budget adjustment process.

(4)  We will stay strategically focused and committed to excellence as we continue to implement the university’s strategic plan and move the university toward a brighter future.

(5)  We will recognize the current economic challenges for what they are—an ongoing challenge to make the university of the future a leaner and more narrowly focused organization that continues to deliver academic quality in a dynamically changing world.  This is our new reality, and it isn’t a short-term challenge—it is here to stay.

The budget amendment process will be a three-step process.  First, the university will closely examine all non-revenue producing programs, non-essential support services, and all cost-saving and revenue-enhancing ideas offered by the university’s internal Finance and Strategy Committee (this committee has representatives from faculty senate, student government, deans, and administrators).  Second, the university will have informal conversations with the unions about voluntarily rescinding negotiated salary increases.  Third, if steps 1 and 2 are insufficient, the university will work with deans and vice presidents to reduce the workforce.

The university’s budget adjustment will be taken to the board of trustees at its August 24 Finance Committee meeting.

We will talk more about the budget adjustment process at Tuesday’s Town Hall meeting (which will be broadcast live on the Web at 11:00 a.m. Send questions to Townhallquestions@utoledo.edu).  In the meantime, I want to emphasize that throughout all these difficult financial challenges, the university continues to move forward, accomplish many great things, and work to create a brighter future for students, patients, faculty and staff.  I am honored to be a part of what we are doing here…improving the human condition one person at a time.

Scott L. Scarborough. Ph.D., CPA
Chief Financial Officer

The Ohio State Senate’s version of the state’s budget bill is very close to what we budgeted for Fiscal Year 2010—within $120,000 of what we budgeted.  Nevertheless, there is still great uncertainty in Columbus.  The president of the IUC sent the following email to all Ohio public universities earlier this week:

“As a follow up to the last email – I want you to know that NOTHING is settled in this budget process.  We may end up with a budget that looks like the Senate or House version, and we may end up with a huge cut in the SSI.  This financial situation is too perilous to know anything for sure, and even if we get a budget with some growth, if the revenue projections don’t pick up, we will remain at-risk.  Key members are talking about cutting higher education – so it is not off the table.”

Thus, we continue to follow what is happening in Columbus very closely.  In the meantime, we continue to exercise strict position management control.

More to follow…
Scott Scarborough

On Friday, May 15, Dr. Jacobs will recommend a 2009-10 operating budget to the Finance Committee of the Board of Trustees.  It is a balanced budget—at least for now.

The university’s recommended budget is based on many assumptions, one of which is the amount of funding the university will receive from the State of Ohio, which is still very much an open question.  As you may know, the State of Ohio is now projecting that its current year budget is $900 million short.  Not only is this a problem for the current year budget, it also means that next year’s budget is once again a major question mark.  State legislators are now saying that they will need to “start from scratch and reevaluate everything.”

We as a university community began working on the university’s 2009-10 operating budget in January.  The university’s Finance and Strategy Committee, which includes representatives from Faculty Senate and Student Government, helped write the budget instructions that were delivered to deans and vice presidents.  In addition, the committee helped to identify a listing of cost savings and revenue enhancements.  Finally, the committee reviewed the final recommended budget and unanimously endorsed both the process and the outcome.  Every sector of the university was represented in a budget process that was highly participatory and transparent.

We’ve been working to communicate the budget outcomes to the university community for the past two weeks.  Although we have held numerous public meetings to explain both the process and the outcomes, many in the campus community still struggle to understand why this year’s budget was so difficult and why it resulted in the layoff of approximately 90 filled positions and the elimination of approximately 200 vacant positions.  The short answer is relatively simple: projected increases in budgeted expenses greatly exceeded projected increases in budgeted revenues, and expenses had to be cut to balance the budget.  The longer answer goes something like this: When one considers the financial impact of (1) a state-mandated tuition freeze, (2) new collective bargaining agreements, (3) the affects of a national recession on need-based student financial aid and interest expense, (4) the need to address structural budget deficits, carry-forward spending, and a historically negative academic operating margin, (5) normal inflationary costs such as healthcare and utilities, and (6) the need to make strategic plan investments that gives this university and this region a chance to rejuvenate and improve itself, then one should begin to understand why it was difficult to get the numbers to balance.  The one positive variable in the budget equation was the news coming from Columbus—until recently.

Despite these difficulties and the ongoing uncertainty in Columbus, the 2009-10 budget that Dr. Jacobs will recommend to the Finance Committee of the Board of Trustees on May 18 has some very positive outcomes.

First, the university has honored its collective bargaining agreements even though they were negotiated in far better economic times.  Second, there is more need-based financial aid for students who are struggling in this economy.  Third, the budget is a solid budget in that it fills many historical holes (i.e., structural budget deficits and carry-forward spending).  Fourth, the budget is balanced and cash flow positive—it has a 3% operating margin for the clinical enterprise and a 0% operating margin for the academic enterprise, and it fully funds depreciation for both.  Fifth, $10 million is being moved from administrative budgets to academic budgets.  Sixth, the university will continue to make strategic plan investments that will advance the university and the region’s economy (e.g., investments in the School for Solar and Advanced Renewable Energy and increased graduate student tuition waivers that support research programs).

At the same time, the 2009-10 recommended budget will challenge the university to become more efficient and more productive.  Administrative areas will have to function on far less financial resources, and there will be less money for part-time and visiting faculty members.  This means that full-time faculty will have to teach more students than they have historically done.  Like other industries in the world, higher education including the University of Toledo will have to do more with less and become more productive.  Also, there are fee and housing rate increases in the budget, which means many students will pay/borrow more to finance their education.

In closing, I do want to emphasize the sadness of laying off 90 employees—we pray the very best for each person.  Every manager knows, however, that if one fails to make these difficult decision, it puts ALL jobs and the institution at risk.  In all we do, we try to make decisions and operate in a way that is consistent with the university’s values: discovery and learning, outreach and engagement, diversity and teamwork, innovation and excellence, wellness and safety, and professionalism and respect.  I believe the 2009-10 operating budget serves our value system…and that’s what really counts.

Scott Scarborough
Senior Vice President for Finance & Administration

The original timeline for the development of the university’s 2009-10 operating budget has been extended by three weeks.  Originally, the plan was to present the university’s recommended budget to the Board of Trustees Finance Committee on April 20.  Instead, the recommended budget will be presented to the Board of Trustees Finance Committee the week of May 11 (the exact date is still being determined).  The full Board of Trustees will consider the university’s recommended budget on May 18 as originally scheduled.

In the meantime, the university’s Finance and Strategy Committee, which includes representatives from Faculty Senate and Student Government, has begun its work to review summaries of draft budgets for the purpose of providing input and feedback to Dr. Jacobs before he recommends a budget to the board’s Finance Committee. Last week, the Finance and Strategy Committee reviewed a summary of draft administrative budgets; academic and hospital draft budgets are still being developed.

Again, I’d like to extend my thanks to everyone who continues to work diligently on the development of the university’s 2009-10 budget.

Scott Scarborough

In an interview with newly elected student body president, Krystal Weaver, Dr. Jacobs answered the following question:  “What’s more important— the quality of education or the bottom line?”  Dr. Jacobs answered this question by explaining that our value system is what is most important, and then he punctuated his answer by saying, “The budget serves the value system.”  He also added, “We have to make ends meet.”

In the twelve years I have functioned as CFO of a university, I have heard various versions of this same question that attempts to pit educational quality and mission attainment against budgeting and financial decision-making.  In some ways, however, it is like asking the question, “What’s more important—driving a nice car or being able to afford it?”  A better question would go something like this: Given the things we value at this university and given the current realities of our economy, what activities should we prioritize and how should we deploy our limited resources (human, financial, and capital) to achieve our desired outcomes?

As Dr. Jacobs said, the budget is simply a tool that serves our value system, and we have to make both ends meet.  It is not one or the other (educational quality or the bottom line)—it must be both.

The earliest known use of the idiom, “to make ends meet,” is from The History of the Worthies of England (1661): “Worldly wealth he cared not for, desiring only to make both ends meet; and as for that little that lapped over, he gave it to pious uses.”  The idea of making both ends meet is the idea that income must equal expenditures.  One of my favorite quotes (attributed to Bill Earle) is the following: “If your OUTGO exceeds your INCOME, the UPKEEP will be your DOWNFALL.”  Others believe the idiom, “to make ends meet,” is derived from dressmaking, where both ends of a cloth must meet to make a dress.  When both ends of the cloth do not meet, the person wearing the dress is exposed and embarrassed, and the dress is of no value and thrown away.  Thus, it is a necessity to make both ends meet.

So what do we value?  At the University of Toledo, among other things, we value discovery and learning; we value outreach and engagement; we value diversity and teamwork; we value innovation and excellence; we value wellness and safety; and we value professionalism and respect.  If these are our values, then we strive to develop a budget that actualizes these values.  A preacher once said to me, “Show me your checkbook for a year, and I’ll tell you what you value most.”  The same can be said of a university’s budget—show me a university’s budget, and I’ll tell you what that university values most.

So the budget is just a tool, but it is an important tool because it forces our dreams into the real world, where real people live—it forces us to prioritize our activities and the use of our limited resources—it forces us to make ends meet so that we have a little left over for “pious uses.”  No margin—no mission.

While the budget process is still ongoing, I want to thank everyone who is working so hard to produce a 2009-10 budget that serves our value system and makes ends meet.  To everyone involved, thank you.

Scott Scarborough

Over the past month, I’ve watched two television commercials for Kaplan University that have caused me to pause and reflect. These commercials have reminded me that the world of higher education is indeed changing: students learn and communicate regularly using new and developing technologies, and higher education options available to students are expanding.

Before I get too far into this brief commentary, let me go ahead and answer the question, “Do you want UT to become Kaplan University?” No, absolutely not. I want UT to be synonymous with academic quality and rigorous learning. The Kaplan commercials remind me, however, that traditional universities can use new and developing technologies to expand their educational boundaries both inside and outside the classroom. The definition of academic quality now includes these new and developing technologies, and traditional universities can use these technologies to deliver high quality education to historically underserved students—perhaps at a cost they can more readily afford.

UT is already a leader in the number of distance learning courses it offers. We are on the right path. We just need to make sure we keep pace with the speed of change that is occurring in higher education and the world at large.

Kaplan Commercial #1

Kaplan Commercial #2

­­­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:

1. 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.
2. 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.
3. The legislature might choose to change the Governor’s recommended budget, so anything is still possible at this point in the legislative process.
4. 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.
5. 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.
6. 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.
7. 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

The budget pre-hearings are underway.

Drs. Haggett and Gold are meeting with all the colleges and academic support units, and I am meeting with all of the non-academic support units to review their budget scenarios—both the 7% and 15% scenarios.  Up to one-half of each budget scenario may include proposed revenue enhancements, so the pre-hearing conversations typically begin by assessing the reasonableness of revenue enhancement proposals.

To date, I have held pre-hearings with Information Technology, Budget Office, Advancement, Human Resources, Athletics, and Students Affairs.  I am happy to report that all areas were fully prepared and made excellent presentations.  My goal for the pre-hearings is to make sure the budget scenarios are thoughtfully and accurately prepared and clearly presented.  Decision-making does not really begin, however, until after the pre-hearings and formal budget hearings have concluded, which is around the end of March.  After that, input is solicited from the university’s Finance and Strategy Committee.

In summary, it is still very early in the process, but I am optimistic that the university non-academic support areas are making a very serious attempt to be as cost-effective as possible.  To the extent they are successful, this maximizes the financial resources that go to our core academic areas.  More to come…

Hello, everyone.

I thought you might like to see the budget development guidelines that were sent to vice presidents and deans on January 9th.

You can also see income statements from the various colleges and a document detailing the right way to cut costs.

The governor’s recommended budget makes a worst case scenario less likely.  It should be noted, however, that his budget depends on receiving more than $3 billion in federal stimulus funds; let’s hope that money is forthcoming.  Also, the governor’s recommended budget must make it through the legislative process.  A timeline of Ohio’s budget process can be found here or in the right-hand column of this page.

In the meantime, we will continue to implement strict position management control and continue the budget development process as designed.  Like last year, the goal of the process is creative thinking and healthy dialogue.

There is no question that we will need to make adjustments—the question is how much and where.  Also, it cannot be overemphasized that this is not an across-the-board cost reduction process.  If anything, it is an across-the-board conversation that will result in revenue enhancements, strategic reallocation of funds, productivity improvements, and strategic cost reductions.

If we do this right, we will emerge stronger.  Together we can do this.

Scott Scarborough