CHRONICLES XI: YET ANOTHER BUDGET CRISIS
October 31, 2008
SSU is facing a profoundly serious budget crisis that cannot be tied to the global market or the State Budget. It is the result of over a decade of bad decisions made by
SSU’s Administration in the absence of consultation with the faculty. It is time for the faculty to ask hard questions and to demand consultation. Debt related to the Green
Music Center (GMC) has grown so large that it cannot be resolved by fundraising, entrepreneurial events, or increased student enrollment. National and state events are beginning to make themselves felt at SSU. Unless we solve our local problem immediately, the combination of questionable management and external pressures will be devastating. SSU is now caught in an endless cycle of fundraising whose primary role is to cover debts and to pay costs associated with a building that is not central to the
University’s mission. There is no external help. The faculty must take initiative.
Chronicle XI briefly outlines SSU’s current financial situation and asks important questions that require immediate answers from the Administration. Minutes of the
President’s Budget Advisory Committee (PBAC), the main source of financial information to the campus, have not been released since April 2008 despite four meetings. This could be interpreted as a desire for secrecy and non-collaboration. The
Academic Senate officially notified the Administration and CSU leaders of its concerns by passing both a vote of no confidence and a resolution asking for an external audit of the campus. The President and CSU officials have ignored these calls for action. It is now up to the Senate to take stronger action. The Senate must act in the interest of the
University’s academic integrity. The Administration’s plea for trust must be viewed in the context of its history of indifference to faculty concerns and advice.
To paraphrase
Ronald Reagan, faculty must “trust, but verify” the financial solvency of SSU, too much is at stake not to do so.
General Fund
In 07-08 the General Fund allocation to SSU increased by nearly $8,500,000, of which over $5,000,000 covered employee salary and benefit increases and $2,226,000 should have gone to support “enrollment growth.”
Citing the no-confidence vote, the Provost announced “noteworthy developments” to support academic quality in November 2007. These included (1) 100% funding of the marginal cost formula; (2) $200,000 for faculty development; (3) reviewing School budgets in relation to “repairing the base”; and (4) directing 100% of fees associated with excess enrollment of 340 FTEs to direct instruction in the sum of
$870,000 (e-memo, 14 November 2007). In connection with repairing the base, the CFO met with schools and departments across campus to gain an “an understanding of the particular issues that the faculty face as well as the particular work they do for the
University.” The Academic Senate had “a full agenda” so time could not be found to
“begin to work on a strategy to form a more positive relationship” (CRC, 9 May 2008).
The President meanwhile continued to speak on upcoming budget shortfalls.
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So despite a budget increase of nearly $8,500,000 from the General Fund and student fees alone, SSU instituted a hiring freeze in anticipation of the next State Budget crisis. Despite available funds, few replacement faculty were hired, and $250,000 in excess fees appear to have been returned to the University’s General Fund rather than being used for classes in Spring 08. While the Administration has not been forthcoming with data regarding Full-Time Faculty Equivalents (FTFEs) for the current year, SSU appears to be down another 16 to 17 FTFEs, with Student Faculty Ratio (SFR) expected to increase by at least 1. This situation directly impacts the quality of our students’ education.
It is clear that the Administration greatly overestimated the magnitude of the cuts in 07-08; there were none, but they saved the funds for 08-09 which is now upon us. In
May 2008, the CFO announced that all divisions were “projected to finish the year in a balanced position and will have money to roll forward.” He noted that the campus would need this “money to shield ourselves from likely budget cuts” (CRC, 9 May 2008). He was correct.
The Chancellor recently issued a CSU Budget Update. He announced that the
CSU received essentially the same amount as in the previous year, but without the
$215,000,000 to meet enrollment growth. The only significant source of additional revenue is $73,000,000 in student fee increases to cover cost increases in energy and employee benefits. Due to revenue shortfalls, the CSU must now cut an additional
$31,000,000 this year. The Chancellor anticipated that this could be done “without disrupting campus operations or impacting instruction, student services or public safety.”
He encouraged campuses to curtail travel, defer purchases, and delay filling vacant positions. He brought up the possibility of additional cuts and asked campus presidents to review their possible impact, stressing that this was just a “precautionary move” (ememo, 23 October 2008).
SSU’s President issued a budget update the next day. SSU’s portion of the budget cut amounts to $710,800. According to the President, the “Chancellor has requested that we accomplish this cut by using reserves and unspent fund balances from last year. This will empty Sonoma State University's reserve account. Should any requests for reserve spending be approved between now and June 30, 2009, this will mean assessing divisions. Given this, requests for reserve spending will be highly scrutinized by the
President's Budget Advisory Committee (PBAC) and recommendations made to me. In addition we will immediately eliminate non-essential travel, defer purchases and hold open vacant positions.” He continued stressing the “very strong possibility” of additional mid-year cuts in the neighborhood of 3 to 5% (e-memo, 24 October 2008).
To put this in perspective, the current budget cut to SSU is less than 1 percent
(0.8%) of its General Fund and Student Fee allocation from last year. As in 07-08, the
Administration is once again anticipating budget cuts to keep funds from flowing to
Academic Affairs. Make no mistake, budget cuts—real or purported—fall disproportionally hard upon teaching and learning.
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The General Fund, however, is only one source of income for SSU. The CSU is
“state assisted” and campuses must supply a portion of their own funds through investment, enterprise, and development. Starting in July 2006, the State’s Revenue
Management Program (RMP) allowed campuses to invest student fees. In that year,
SSU’s net investment income increased by over $1,000,000 to $2,482,023. The net income from SSU’s auxiliary enterprises increased $1,500,000. Meanwhile, the
Foundation’s net assets increased by $9,000,000 (Blackbook 07-08). How were these funds spent? How were lottery funds spent? Education should not take second place to development and debt in the allocation of unrestricted funds.
The Academic Senate must ask the Administration for a full accounting of the campus debt and budget alignment. What happened to last year’s promised funds and budget surpluses?
Foundation
We believe that debt related to the GMC is a bigger long-term threat to the SSU
Academic Foundation than the current upheaval in the financial market. Current liabilities for the GMC exceed $18,000,000. Funds needed to complete the project stand at $32,000,000. And once completed the GMC will run an annual deficit exceeding
$1,000,000. These sums dwarf current investment losses, which of course must be added to the tab.
In June 2007, the Foundation had over $28,000,000 invested in mutual funds within the Commonfund. An undisclosed sum is held in the Short Term Fund, which imposed significant limitations on withdrawals as reported by the CFO (e-memo, 6
October 2008). This, however, is a short-term problem and Commonfund recently informed investors “we currently expect that investors should be able to recover their fully invested fund balances” (Commonfund letter to clients, 8 October 2008). It would be a mistake for the Senate to assume that the current problems facing the campus are due to the emerging fiscal crisis facing the country.
The returns on Foundation investments have “exceeded benchmarks and averages” for other universities for years now. The CFO’s recent figure was 18.5% returned on investment (PBAC, 24 April 2008). But less than 4% was returned to endowees, with the remainder “designated as an operational reserve” and
“intergenerational growth and inflation hedge for long-term investments” (SSUAF
Financial Statement, pg. 5, 18). An 18.5% return on investment is surprising and we hope investments didn’t suffer a similar decline. More significant, however, are important questions that the Academic Senate should demand the Administration answer:
 The value of the Endowments was ca. $37,400,000 in June 2007, yet the “assets” totaled over $87,000,000. What is the current asset value? Are the liabilities of nearly $20,000,000 against the Endowments or investment returns?
 How does the Foundation spend the “operational reserve” portion of its earnings beyond the 3.7% credited to Endowment accounts?

Do all Endowments receive the same percent income on their investment?

How are unrestricted contributions distributed?
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
What proportion of the earnings went to the reserve and what portion to intergenerational growth?

If the value of Endowments does not increase with increase in earnings, how are
Endowment accounts protected against inflation?
 “Intergenerational growth” means not passing debt to the next generation. In keeping earnings within the Foundation pool rather than crediting to Endowment accounts as earned principal, the Foundation has stripped Endowments of their ability to keep up with inflation. How does the Foundation justify this?
In addition, other troubling problems that the Senate should be investigating linger within the Foundation, according to audited financial statements and other sources:

Custodial Risk
, June 2007: “The Foundation had cash, cash equivalent and restricted cash deposits of $29,259,326 . . . of which $28,771,925 is not covered by FDIC or SIPC." The majority of this is held by the Bank of NY as trustee for the GMC (SSUAF Financial Statement, pg 21). What is the current value/status of these investments ?

GMC Bonds ($12,650,000) mature 3-1-09. The Cumulative Rebate Liability is due to the US 60 days later and is $5,545,816. These bonds are backed by seven stand-by letters of credit (SSUAF Financial Statement, pg. 30, 32). We do not pretend to understand tax-free bonds and the required rebate. We do know that these monies are listed as liabilities against the Foundation. The Senate should request that the CFO explain their significance and how they will be repaid. What is the status of these bonds? Has the Foundation received sufficient donations to reimburse them? Will unrestricted pooled assets be used? Wouldn’t this be to the detriment of other Endowments and against the wishes of other donors?

Foundation payments for debt service exceeded student scholarships by 37% in
05-06 and 06-07 (SSUAF Financial Statement, pg. 5). This is a potentially striking example of the GMC hurting students. Was debt service paid from GMC donations, GMC’s 3.7% earnings on investments, unrestricted donations, or pooled assets?
 SSU’s Development Office charges a 5% fee
on incoming donations. The
Foundation only pays 3.7% a year on endowments. Thus, beneficiaries lose over
1% in the first year on their assets. Where does this money go?
Development already has annual expenditures exceeding $1,000,000. At least one multimillion-dollar donor will invest his money elsewhere if SSU doesn’t remove this fee. And of course, Development focuses on the GMC and not the needs of schools or departments. The Academic Senate should request a full accounting of the expenses of the Development Department, including an organizational chart that describes the roles of each staff person in terms of their benefit to SSU’s academic mission .
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Sharing the Debt: SSU and Auxiliaries
The CSU Advocacy Group succeeded in getting most of the funds restored to the
08-09 budget. All in all SSU has suffered a cut much less than anticipated, some of which will be offset by increased fees. A “relatively modest reduction” according to the CFO.
SSU, however, will feel the cut disproportionally to other CSUs because of debt service related to the GMC. Monies that could be used for teaching go instead to debt service and
Development. Interest on State Revenue Bonds cannot be paid by the General Fund, but they can be paid through auxiliaries including Parking, Student Union, Housing, and
Extended Education. Through debt service and facilities (EO753) chargeback, funds are being shifted to the GMC.
The Academic Senate should request an accounting of the debt, particularly related to the GMC, facing SSU. How much money is owed? To whom? And under what terms? What does this mean to units already bankrupted by debt service such as
Extended Education and the Student Union? In June 2007, the Debt Service Coverage
Ratio (DSCR) for SSU was 1.86, what was it in June 2008? Other avenues for questions include the following:

School of Extended Education has been saddled with an annual debt service obligation of $400,000 under SRB #2 for the GMC . Is it any surprise that they are running in the red by approximately the same amount? How can this be remedied?

The Student Union has a debt obligation of $15,000,000 for the Recreation
Center, with debt service payments of ca. $1,000,000 a year in 06-07 as reported by the CFO in 4-2008. The budget for 07-08 assessed them for $650,864 in
EO753 chargebacks. Is it any surprise that they are operating in the red? And they are investors in the upcoming University Center. How will this be remedied?

Athletics now has a deficit of $600,000. The majority of their funds come from student Instructional Related Activity (IRA) fees. How can they have amassed such a deficit? Are they getting less IRA funds now that these are also being used for the GMC? How will the deficit be repaid?
The last shortfall came as an assessment to SSU’s four divisions.
 The CFO’s current budget allocation is listing unfunded costs for health care and utilities (SBC, 21 October 2008), despite the Chancellor’s Office stating that these are covered by student fee increases. Vacation accruals for General Fund employees are also discussed as a debt facing the campus ($4,200,000 cited in
PBAC 24 April 2008), despite the fact that vacation is part of salary funded by the
General Fund. It only becomes a liability when it is taken upon leaving employment. What is the actual liability for accrued vacation? What happened to the “permanent reserve” of $625,000 established in June 2006? (PBAC, 14
September 2006).
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 The Foundation’s commitment to the GMC total project cost was $43,000,000 of projected total costs of $87,000,000 in June 2007 (SSUAF Financial Statement, pg. 33). This exceeds current donations and restricted funds being held in connection with the project. As of April 2008, all CSU funds and bonds funds for the GMC had been spent. As of June 2008, the total cost of the GMC was ca.
$120,000,000 according to the CFO with $32,000,000 in new donations needed to complete the project (SSUAF, 13 June 2008). When will the project be complete ? At the current rate of donations, how long will it take to cover project costs? What happens if money for construction runs out before the project is completed? How is the Hospitality Center being funded? Is there any way to cut project costs now?

In 06-07, SSU received a $5,000,000 demand deposit from the Foundation, for which the agreed upon interest rate was the Wall Street Journal Prime rate plus
1.25% or 9.5% in June 2007 (SSUAF Financial Statement, pg. 22). The prime rate is the rate charged by banks to their favored customers. To give perspective, the
CSU pays 4% interest on funds deposited with them. Why would SSU pay more than the prime rate to the Foundation? Which department paid the $475,000 in interest, and where did the interest go? Are outsized payments to the Foundation from other sectors of the campus the way the Administration achieved the high investment return it claims for the Foundation?

The Music Department must pay $260,000 from its IRA funds over the next five years for the installation of the organ at the GMC. This seems another example of the GMC hurting students . How is the Music Department to put on performances when its budget is heavily assessed? Is it appropriate for student fees to be used for construction?

Most significantly, the Press Democrat (25 August 2008) reported that the GMC is projected to run an operating deficit of $1,150,000 a year. After over 11 years in the planning, design, and construction phases, A&F only recently commissioned a Business Plan, which has not yet been made public . Many promises have been made over the years regarding GMC financing. In 2001, the
CFO pledged to the CRC: “the intent is to use instructional dollars for instructional programming only” (12 October 2001). In February 2006, he presented a detailed PowerPoint to the PBAC that showed all Technical,
Instructional and Performance-Related (TIP) operating expenses met and pledged that “No campus programs will have chargebacks associated with usage of the
GMC” (23 February 2006). After selling the GMC to the campus as a revenue source, the CFO stated that the operating deficit (to be offset by $500,000 in instruction funds and $650,000 from endowments and fund raising) “is not unexpected” as this is the reality across the country ( Press Democrat 25 August
2008). As recently as this month, however, he told faculty that bonds could be repaid by profits from the Hospitality Center. The Academic Senate must ask:
W hen will the Business Plan be available for campus review? How will SSU
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cover this additional, never-ending debt when it has yet to meet the current challenge of constructing the GMC? Is it realistic that the “Hospitality Center” will generate $500,000 a year in excess profits which can be used to pay off debt or is this just another red herring (as when it was formerly said that Extended
Education and Campus Special Events would generate excess revenue for paying back loans form the Chancellor’s Office)?
It is time for the Academic Senate to demand answers . The national and state financial crises make it even more imperative for the SSU Administration to provide clarity about the debt burdening SSU and how that debt will be repaid without impacting teaching and learning, the reason our university is here. While the GMC may be looking to the future, we have to do our best for students walking our halls today. The Senate should add to the questions in this edition of the Chronicle and demand detailed verbal and written responses before the end of term. To do anything else at this point would be irresponsible.
We urge the Senate to work collaboratively with the Administration to find solutions, but it must first demand full honesty about the true problems facing SSU. The time has come to verify and then to trust.
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