PASSHE Money-Hoarding Continues Even as More Death Spirals Loom
Two weeks ago, we noted that Board of Governors Policy 2011-01: University Financial Health contained two totally contradictory provisions.
On the one hand, the policy requires each PASSHE university to maintain a “fund balance,” a.k.a., “unrestricted net assets” balance, of between 5% and 10% of annual revenue. In effect, this provision requires universities to maintain what might be called a “savings account,” or what less charitable critics might call a “slush fund.” But in any case, this provision of the policy puts limits on both how small, as well as how large this fund balance should be, with 10% of annual revenue being the policy maximum.
On the other hand, that same policy requires each PASSHE university to maintain an annual “operating margin” of between 2% and 4% of annual revenue, meaning that universities are directed to spend only 96% to 98% of their annual revenue. As a result, universities complying with the “operating margin” provision of the policy will be adding from 2% to 4% of annual revenue to their fund balances each and every year and will soon violate the 10% policy maximum required by the “fund balance” provision.
The first provision limits the maximum amount the universities are permitted to have in their fund balances; but the second provision forces them to put money into their fund balances every year!
Since it is impossible to satisfy both provisions of that BOG policy every year, we posed this question: “In view of the contradictions, one wonders how the PASSHE Board of Governors and the Office of the Chancellor ever intended to administer such a conflicted policy.” We then offered the following answer:
“The data suggest that they avoided all contradictions by simply enforcing only one-half of the policy (operating margins) while ignoring the other half (fund balance limits), thereby encouraging still more and more PASSHE money-hoarding.”
That answer was based on official PASSHE fund balance data that ended with fiscal year 2012, the first year since BOG Policy 2011-01 went into effect. We recently obtained 2013 Right to Know information from PASSHE that confirms PASSHE is enforcing the operating margin requirement while simultaneously ignoring the fund balance requirement, with the predictable result—still more PASSHE money hoarding.
PASSHE Fund Balance and Operating Margin Data for FY 2013
The figures cited below regarding PASSHE fund balances and operating margins are taken from documents provided in response to two recent RTK Requests to PASSHE. ¹ˉ²
PASSHE’s total fund balance is the sum of fifteen (15) different fund balances, including one for each of the 14 universities, plus a fifteenth entity known as “the Board of Governors plus the Office of the Chancellor,” or the (BOG+OOC) fund balance for short. Between 1993 and 2013, PASSHE’s total fund balance grew exponentially³ from a low of $120 million in 1995 to a high of $597 million in 2013, corresponding to an average annual growth rate of 9.32%/year for 18 years, a rate which if continued, would cause PASSHE’s total fund balance to double to $1.2 billion in just seven and one-half more years.
Despite BOG Policy 2011-01 which purportedly restricts individual PASSHE universities to fund balances between 5% and 10% of annual revenue, official PASSHE data show⁴ that not a single PASSHE university in FY 2013 had a fund balance that fell in the required range! One university had a fund balance below the 5% minimum, and 13 other universities had fund balances in excess of the 10% maximum. The data show that the fund balances for those 13 PASSHE universities range from a low of 12.2% to a high of 59.3%, with a PASSHE 14-university average of 36.4%.
The fund balance history for the entity known as (BOG+OOC) is even more telling since, unlike the 14 universities, the maximum annual revenue permitted to that cost center is limited by law (Act 188) to one-half of one percent⁵ of PASSHE’s total operating budget, which is currently about $1.5 billion. One-half of one percent of that figure is about $7.5 million most of which—one would expect—is needed to pay for PASSHE’s many employees in Harrisburg, with little left over each year to put into a fund balance.
But official PASSHE data show⁶ since 1998, the (BOG+OOC) fund balance has routinely reached levels higher than PASSHE’s legally-permitted annual revenue. In fact, in 2005, the (BOG+OOC) fund balance reached the astronomical figure of $68 million. That 2005 fund balance figure is nine times higher, and the 2013 figure is 4.5 times higher, than the maximum permitted annual revenue to (BOG+OOC).
“The future has already arrived. It's just not evenly distributed yet.”William Gibson
PASSHE’s total fund balance now approaches a staggering $600 million, while other recent PASSHE data regarding university operating margins suggest that the very same policy-induced financial death spirals that struck six PASSHE universities in the last two years are now looming over other PASSHE universities.
In particular, operating-margin data for fiscal years 2011, 2012 and 2013 reveal⁷ that something ominous has suddenly begun to occur to a majority of the 14 PASSHE universities. In 2011 and 2012, only one (1) university recorded a negative operating margin, and the average operating margin for all 14 universities in both years was an identical 5.19%, well above the required “maximum” of 4.00%.
But in 2013, eight (8) PASSHE universities recorded negative operating margins, and the 14-university average plunged to 0.55%, well below the minimum of 2.00% required by BOG Policy 2011-01.
This sudden change in the average operating margin for the 14 PASSHE universities—from 5.19 to 0.55 in a year—suggests PASSHE’s money-hoarding stratagem is about to collapse in the face of economic reality. Recall that “the PASSHE system as a whole has been sinking, “financially speaking” since 2002.” And the Board of Governors’ ill-advised policy of controlling tuition rates for political, as opposed to economic, reasons will continue to drive PASSHE universities into death spirals not of their own making.