Budget Overview 2017
This paper provides an overview of the university's budget and the budgets of the Schools of Arts and Sciences (A&S) and Engineering as well as the practices in place to ensure the prudent management of the university's finances.
A good place to start is with an analogy that might be helpful for you to keep in mind as you read this document. Running a university budget is, in simple terms, similar to running a household budget. Homeowners typically take a loan to buy or build a house and then pay for their mortgage and for the house's ongoing upkeep out of their income and cash flow. They do their best to plan for expected needs and to save for unexpected circumstances, such as when the roof starts to leak, the refrigerator malfunctions, or income drops because they are laid off. In its simplest terms, this is similar to how a university operates, estimating how much it will earn and need to spend, and budgeting not only for current needs but also trying to anticipate future ones while at the same time setting aside money for the future. We'll return to this analogy as we work our way through the document below.
Similar to our example above, the university and school budgets have two components: an operating budget and a capital budget. In addition, the overall university assets include the university endowment. These components are described below.
The university has nine schools or academic units, and each operates as a separate financial unit (a model that is shared by many research-intensive academic institutions). Certain administrative functions, specifically facilities and administrative services such as information technology and human resources, are managed centrally at a university level. Most of the costs of these services are allocated back to each school and funded with each school's revenues.
Like the other schools at the university, A&S and Engineering are independent academic units that operate as two separate financial units. However, they share financial resources in support of the undergraduate programs, space-related costs, and certain student services functions. Consequently, the combined organization has three budget units: A&S, Engineering, and the AS&E shared budget. Some budget items are controlled by the central administration, some are controlled by individual schools, and some are controlled jointly. Prudent financial management requires the development and execution of a long-term financial plan. This plan must demonstrate Tufts' ability to:
- manage the operating budget (its day-to-day expenses)
- generate a reasonable level of annual surplus or operating margin (more on this later, but it's important because it has to do with the cost of borrowing)
- maintain a robust fundraising operation to develop necessary capital gifts, endowment gifts, and gifts for current use
- properly maintain the physical plant so that it has the necessary facilities to support its educational and student life programs
- invest in ongoing capital renewal to ensure its buildings are safe and properly maintained
- maintain a strong balance sheet so that it can continue to access capital for the development and renewal of its facilities
The operating budget of $390 million comprises all of the revenue and expenses associated with the operations of all the schools at the university. This budget is developed collaboratively as part of a process in which each school and the university evaluate expenses and staffing, particularly in relation to controlling tuition increases. In our homeowner example, this is comparable to estimating how much income you'll earn this year and what your anticipated expenses will be.
Revenues consist of:
- tuition (net of financial aid awards)
Tuition and fees make up 73 percent of AS&E operating revenues.
- grant and contract receipts
- contributions and annual fund gifts
- endowment income
- housing and dining revenues
- salaries, wages, and benefits associated with faculty, staff, and student employees. Compensation and benefit costs represent the majority of our operating expense, as is the case with most educational organizations.
- supplies, equipment, travel, service contracts, etc., and assessments from the university associated with the costs of central services and facility-related costs described below
- Utilities and maintenance costs related to facilities, and routine renovation and renewal of facilities, IT systems, and equipment
- principal and interest payments on outstanding debt and annual depreciation expenses (see below under "Capital Budget")
The major reasons for growth in expenditures are providing competitive compensation and benefits to faculty and staff, financial aid, costs associated with the development and renewal of facilities, financial aid, and the ever-increasing cost of regulatory requirements.
The capital budget consists of expenditures associated with IT systems, equipment acquisition, and the construction and major renovation of facilities. This is similar to a homeowner budgeting for significant and necessary repairs (e.g., a new car, an addition to the house to accommodate a growing family), all of which typically require loans. These expenditures are initially capitalized as an asset rather than as an expense, which is a standard accounting procedure. The asset is then depreciated over the useful life of the facility (typically 30 to 35 years for a new building). Depreciation is a method of writing down the value of an asset over its useful life and recognizing that depreciation as an operating expense each year. Consequently, initial capital expenditures are not represented in the operating budget as an expense in the year they are incurred. Instead, those expenditures are depreciated.
The university has made significant commitments to address the ongoing capital renewal of the physical plant. The core building components (roofs, windows, heating and air conditioning systems, electrical systems) all deteriorate over time, requiring replacement or major renovation. The Schools of Arts and Sciences and Engineering make an annual commitment to fund most of this activity. This is effectively funded from positive cash flow generated by the annual operating budget.
AS&E's five-year capital plan (FY 2018–FY 2022), including new and improved academic buildings and dormitories, equipment, and ongoing capital renewal, totals $450 million.
As of June 30, 2017, the AS&E endowment has a value of $452 million. AS&E derives approximately eight percent of its operating revenue from endowment income.
Endowments are long-term contracts between donors and the university, governed by state regulations. The endowment is made up of individual gifts that are restricted by their donors to be used for a stated purpose. For example, a donor might restrict his or her gift to supporting only financial aid or only faculty or specific programs. Certain endowments are unrestricted and the distribution is used generally to support the operating budget. The gifts in the endowment are to be held in perpetuity and invested, and the purpose for which the endowment was established is funded by distributions from the endowed fund. The original corpus of an endowment gift cannot be expended for current use.
The annual distribution from the endowment is determined by the Endowment Spending Policy, which is established by the Board of Trustees. This policy is designed to maximize the distribution for current operations while also maintaining the purchasing power of the endowment over time due to the effects of inflation. The rate of investment earnings and the rate of inflation will change from year to year. However, the Spending Policy is designed to provide a steadily increasing amount of income to support the operating budget while also growing the value of each endowed fund to ensure that the fund can provide the same support in future years even considering inflation, preserving its purchasing power. Because of an increasingly challenging investment environment, we have chosen to lower the rate of spending from the endowment to ensure that we maintain its value for future generations. This places additional pressure on the AS&E budget.
It is important to note that, relative to peer institutions, Tufts' endowment is lower on a per-student basis. Consequently, the university has fewer dollars to support core academic activities at the university, placing a disproportionate burden on the need to remain efficient and develop new revenues to support its many academic needs.
Borrowing funds is an important strategy to support Tufts' ability to develop and maintain its physical plant. AS&E currently has $161 million in outstanding debt that has been issued over time to support a variety of capital projects, including new buildings and the upkeep of existing facilities. This debt requires annual payments for the repayment of the debt and annual interest costs. In FY 2018 the annual debt service for AS&E totaled $10 million. In the past three years, this debt service obligation has increased by $7 million with the development of the new Collaborative Learning and Innovation Complex (CLIC) and the Science and Engineering Complex (SEC).
It is important that Tufts maintain a strong financial position in order to ensure access to new debt at a low interest rate. Just like a consumer whose credit rating and financial history dictate how much they can borrow and at what rates, the university must demonstrate that it has managed its operating budget well and must generate an annual operating surplus in order to satisfy the rating agencies that measure creditworthiness. Their ratings dictate the cost of borrowing. In addition, Tufts needs to demonstrate that it has sufficient available capital to repay the debt in the event of adverse conditions. The university maintains an AA credit rating, one of the higher ratings available to institutions.
The university's budget process, which is undertaken in collaboration with each of the schools, ensures the university is meeting its many obligations, advancing its priorities, keeping itself financially sound for the future, and serving the needs of its many constituents—most importantly, its students. All of these complex considerations factor into the determination of tuition rates, which the university always attempts to keep as low as possible.