Is PASSHE Trying to Justify Fund Balances Large Enough to Pay Off Future Financial Obligations?
PASSHE appears to be attempting to change the definition of “fund balance” from a modest and prudent fund capable of covering occasional revenue shortfalls, to a foolishly huge fund capable of covering both occasional revenue shortfalls as well as future pension and post-retirement obligations that won’t come due until years in the future—when future annual revenues would be available to pay for them.
The 14 PASSHE universities include Bloomsburg, California, Cheyney, Clarion, East Stroudsburg, Edinboro, Indiana, Kutztown, Lock Haven, Mansfield, Millersville, Shippensburg, Slippery Rock and West Chester.
A Look at the Numbers
To answer the above question, it is necessary to look at the numbers that would be involved if PASSHE were to succeed in its attempt to change the definition of “fund balance” to cover all its future liabilities:
· PASSHE’s Total Fund Balance at the end of FY 2013 was about $600 million ($597,598,844), which was 38.4% of its $1.6 billion E&G operating budget that year.
· According to PASSHE’s “MANAGEMENT DISCUSSION AND ANALYSIS” in its 2015 Audited Statements, the following future liabilities may need to be included under its new definition of “Net Position:”
Ø $114.6 million - Compensated Absences Upon Employment Termination or Retirement (payouts for annual and sick leave balances);
Ø $1.06 billion - Postretirement Benefits (for employees in State System health care plans);
Ø $798.7 million - Net Pension Liability (for employees in the State’s Retirement Systems).
· The above three items alone total nearly $2 billion ($1.97 billion) in current dollars.
· Adding those three items to PASSHE’s FY 2013 fund balance would yield a total of over $2.5 billion.
What Would PASSHE Do with a $2.5 billion Fund Balance—Assuming it Could Amass One?
Let’s start with the dubious assumption that PASSHE could actually amass a $2.5 billion fund balance.
Whether called a “fund balance,” “unrestricted net assets,” or “net position,” PASSHE will never hoard a sum of money sufficient to cover all its future liabilities. It would simply be impossible for many reasons:
· The only sources of money available to go into PASSHE fund balances are the “occasional” surpluses of annual revenue over annual expenses occurring at the fourteen individual universities.
· The entity consisting of the Office of the Chancellor and the Board of Governors (OOC+BOG) generates zero funds, and what it spends comes from the revenues provided by Tuition and State Appropriation.
· While OOC+BOG and some of the PASSHE universities have been able to generate huge fund balances in the past, those funds had to have come from annual surpluses of revenue over annual expenses.
· With its high personnel costs and other mandatory expenses, the ability of PASSHE universities to generate increasingly large fund balances by banking on regular annual surpluses is severely limited.
· PASSHE funding by the State (25% of E&G revenue) has been either stagnant or declining; PASSHE funding by Students, Parents and Alumni Donors (75%) is increasingly limited by tuition sticker-shock.
· These factors weigh against PASSHE universities having a steady supply of future budget surpluses.
· A pattern of ever-increasing fund balances can only mean that one or both of the following two things are happening: 1) That annual revenues are too large for legitimate expenses; or 2) That annual revenues are adequate, even if barely so, but decisions have been made to skimp on those legitimate expenses with the goal of hoarding money for purposes other than legitimate ones.
· This hoarding tactic was openly, if quietly, encouraged to PASSHE presidents by PASSHE financial officers between 1992 and 2012. That is, the encouragement was always verbal but never in writing.
· From my twenty-years of experience as a PASSHE university president I can assert without fear of contradiction that the individual PASSHE universities are not over-funded—provided that they are acting faithfully to deliver the “Pennsylvania Promise” contained in PASSHE’s statutory purpose according to Act 188: “To provide high quality education at the lowest possible cost to the students.”
· There is compelling evidence to show from PASSHE’s official data that at least some of the PASSHE universities must be skimping on legitimate expenses, so much so that on average as a 14-university system, educational quality metrics have steadily eroded since 2002, and the Board of Governors has not provided a PASSHE education at anything like the lowest possible cost to the students in years.
· PASSHE’s large fund balances grew at the expense of PASSHE students, parents and alumni donors—who paid for high quality education at lowest possible cost to students—but haven’t been getting it.
What Would PASSHE Do With a $2.5 Billion Fund Balance, Even if it Could Amass One?
From the numbers presented above, as much as $2 billion of a $2.5 billion fund balance wouldn’t be needed until some number of years into the future, meaning that the money would just be sitting there creating temptations for those for whom resistance to temptation might not be their strongest attribute.
If history teaches anything it is that, generally speaking, politicians cannot be trusted to keep their hands off public money that is not already totally, structurally and irrevocably denied to them.
The U.S. Congress and the Social Security Trust Fund
By way of example, if one Googles the term “Social Security Trust Fund,” one of the top entries is a Wikipedia article which contains the following revealing quotes:
“The Social Security Administration collects payroll taxes and uses the money collected to pay Old-Age, Survivors, and Disability Insurance benefits by way of trust funds. When the program runs a surplus, the excess funds increase the value of the Trust Fund. At the end of 2014, the Trust Fund contained (or alternatively, was owed) $2.79 trillion, up $25 billion from 2013. The Trust Fund is required by law to be invested in non-marketable securities issued and guaranteed by the "full faith and credit" of the federal government. These securities earn a market rate of interest. (Emphasis added.)“Excess funds are used by the government for non-Social Security purposes, creating the obligations to the Social Security Administration and thus program recipients. However, Congress could cut these obligations by altering the law. Trust Fund obligations are considered "intra-governmental" debt, a component of the "public" or "national" debt. As of June 2015, the intragovernmental debt was $5.1 trillion of the $18.2 trillion national debt.” (Emphasis added.)
To be continued.