Dear Spartan Colleagues:
The onset of the pandemic introduced significant uncertainty and concern for the well-being of members of our campus community. It also impacted the financial position of Michigan State University, as it did for all of higher education and the U.S. economy. Since that time, we have placed the health and safety of our community at the forefront and made several tough operational and financial decisions, taking into consideration the unpredictability and fluidity of this pandemic. The decisions made in response to our financial challenges have been among the most difficult, as we have worked to address significant short-term challenges while preserving the long-term viability of the university.
As we made these difficult decisions over the past two years, we used a set of values and guiding principles. Among these were:
There isn’t an employee at the university who hasn’t been impacted in some way throughout the pandemic, and I deeply appreciate the perseverance and commitment of all in these difficult times.
Over the past 22 months, we’ve shared several financial updates, all of which can be viewed on the president’s webpage. Understandably, given the complex and ever-changing circumstances, we continue to get questions about university finances and impacts related to the pandemic. We want to take this opportunity to again communicate the challenges we face, our decisions to address those challenges and why those decisions were needed.
First, the university experienced a decline in tuition revenue during the prior two academic years (before the pandemic) due to substantial changes in the mix and number of students across international, out-of-state domestic and in-state students. Second, the university experienced increased costs related to COVID around testing, personal protective equipment and other measures to maintain the health and safety of the campus community. Third, the university continued to experience increased costs unrelated to COVID as a result of inflationary increases to the cost of health care, utilities, supplies and services, while still honoring contractual raises the university previously committed to and continuing to increase financial aid allocations to support students during the pandemic. This combination of declining revenue and increased expenses resulted in the university’s general fund facing a $108 million general fund budget deficit in fiscal year 2021 and an additional $169 million general fund budget challenge in fiscal year 2022.
In keeping with the principles outlined above, we responded with a series of actions to close the budget challenges in each year. In fiscal year 2021, the $108 million budget challenge was addressed with a 3% budget reduction for all units, support staff furloughs and temporary reductions in executive management, faculty and academic staff wages and retirement benefits, totaling $47 million cumulatively. The remaining $61 million need was addressed through receipt of federal relief funds and institutional reserves.
In fiscal year 2022, the $169 million budget challenge was addressed through a combination of a modest tuition increase, a one-time increase in state appropriations, an additional 3% budget reduction for all units and temporary retirement benefit reductions across most employee groups, totaling $80 million cumulatively. The remaining $89 million need was addressed through receipt of federal relief funds and institutional reserves. More detailed descriptions of these numbers are provided for both fiscal years 2021 and 2022 here.
Overall, a balanced approach of temporary reductions, the use of federal relief funds and the prudent use of university reserves has allowed us to manage through our current situation. Throughout that decision-making period, active discussions in academic governance meetings helped to shape the final decisions we made and the feedback provided by faculty representation was greatly appreciated. One recommendation that specifically stands out for me was approaching faculty and academic staff wage reductions on a graduated scale, rather than an across-the-board percentage. I also appreciated the collaborative nature of working with our unionized employee groups.
Despite our challenges, as our financial picture stabilizes, we have been able to remove and mitigate many of the reductions originally put in place:
Although we could have forgone some of these restorations and placed less strain on the use of one-time university reserves, the restorations and newly announced pay increase and bonuses were the right things to do.
Some people have asked why we aren’t using more endowment funds to address the financial shortfalls. Nearly three-quarters of those reported annual earnings are based on the change in market values of the investments (unrealized gains), rather than cash returns (realized gains). Accounting standards require that we include both components in our reported revenue, even though last year most of that increase was not realized. Also, we are required to be prudent fiduciaries of endowment funds, which includes setting a long-term spending policy that may be less than the overall rate of return for the fund in any single year. This preserves the endowment’s value so funds can continue to be utilized on a consistent basis for their intended purposes in accordance with the donor’s directions. While that means some years we spend less than the full amount of gains realized in a single year, it also ensures we can continue to spend the same amount out of the endowment in years when returns are lower or even negative.
The university did receive federal relief funds from three separate congressional-approved budgets. These dollars provided only partial relief to the disruption caused by the pandemic and must be used as federally prescribed to offset specific revenue loss and additional expenses related to COVID. We are grateful for the support from Congress and have used the money as we are legally able for housing refunds, lost tuition revenue, COVID-19 testing support and, most primarily, for student grants.
The university is now preparing for our next budget process, which starts this spring and integrates priorities and principles from our strategic plan. These include improving our financial sustainability and dedicating resources to align with the plan. Further, our current planning includes a return to the regular cycle of merit increases in October 2022 for faculty and academic staff and the continuation of support staff increases in accordance with newly negotiated collective bargaining agreements.
Next year’s budget also eliminates the legacy 1% annual performance efficiency reduction and does not contemplate further unit budget reductions. We expect the general fund budget to remain challenged over the next several years and to use one-time reserves to allow us to cover the anticipated annual shortfalls. This permits us to create a glide path to budget equilibrium without additional cuts. While unsustainable for the long term, we plan to continue using one-time funds to balance the fiscal 2023 and fiscal 2024 budgets, as the impact of the pandemic will continue to be felt for the next few years.
I appreciate the challenges employees have faced, and I recognize the hardships associated with those sacrifices. This includes staff who were furloughed and laid off as a result of reduced in-person operations that resulted from the pandemic. We continue to appreciate the swift response of our faculty and academic staff in moving instruction online and in moving to remote work. And we are so incredibly appreciative of the dedication of those who remained in person throughout the pandemic. We are grateful for all of our employees and the contributions they make to MSU.
Finally, as the current surge shows, this pandemic and the challenges it poses are far from over. I appreciate the challenges posed by our recent decision to begin classes in a virtual way for the first three weeks of this spring semester. However, the swiftness and intensity of the spread of the Omicron variant have made this approach the most prudent. We will continue to monitor the situation here and throughout Michigan, keeping the safety of all as our guiding principle. We had a successful fall semester and I’m optimistic that, working together, we will have a successful spring semester as well.
On behalf of MSU’s leadership, I greatly thank each and every one of you for your contributions and commitment.
Samuel L. Stanley Jr., M.D. (he/him)