PASSHE Officials versus PASSHE Students - Part 7

The Proper Relationship between Annual Revenue and Fund Balance

In last week’s blog post we presented information on PASSHE’s “fund balances” on the one hand, and PASSHE’s corresponding “annual revenues” on the other.  We also cited “Bog Policy 11.01 - University Financial Health” - which took effect on July 1, 2011, but was then rescinded by the Board of Governors just three and one-half years later on January 22, 2015.  We will return to that BOG policy issue below.

 
As explained previously, for any given fiscal year (July 1 to June 30), every PASSHE university receives annual revenue and incurs annual expense.  When revenue exceeds expense in a given year, the surplus goes into the institution’s “fund balance.”  But if expense exceeds revenue in a given year, the deficit must be taken out of the fund balance in order to balance the institutional books for that year.
 
Recall that whether one calls such an account a fund balance, unrestricted net assets or net position, the essence of the monies contained in that account is that they are unencumbered and without restriction. 
 
As long as a PASSHE university has a positive fund balance, it is said to be “solvent.”  But should its fund balance ever become zero or negative, that university would be said to be “insolvent,” a.k.a., bankrupt.
 
The 14 PASSHE universities include Bloomsburg, California, Cheyney, Clarion, East Stroudsburg, Edinboro, Indiana, Kutztown, Lock Haven, Mansfield, Millersville, Shippensburg, Slippery Rock and West Chester.

Fund Balance and Operating Margin

 
BOG Policy 11.01 imposed two conditions on the finances of the fourteen PASSHE universities.  The first was that the annual “operating margin” had to fall between 2% and 4% of annual revenue.  Basically, the PASSHE university presidents were forbidden to spend more than 96% to 98% of their annual revenue. 
 
The second condition: Fund balances were required to fall between 5% and 10% of annual revenue.
 
Taken in combination, these two provisions were clearly contradictory in the sense that achieving the first condition would soon violate the second condition, and vice-versa!
 
For example, a university holding a 5% fund balance would violate the maximum of 10% in just three years of a 2% per year operating margin.  And a university with a 0% fund balance would violate the maximum of 10% in just three years of a 4% operating margin.
 
Conversely, any university already at the fund balance maximum of 10% would have no choice but to violate the operating margin requirement by making sure they spent every dollar of their annual revenue so as not to violate the fund balance requirement.

"A camel is a horse designed by a committee."

                                       Anonymous

That the Board of Governors “Policy 11.01 - University Financial Health” was ill-conceived might be the understatement of the year in view of the above examples.  Its shortcomings were so obvious that one wonders what the PASSHE Board of Governors was thinking when they passed it.
 
In view of its profound flaws, it is amazing that it took the PASSHE Board of Governors three and one-half years to rescind its self- contradictory policy.
 
Even more amazing is that in doing away with an admittedly conflicted policy, they also did away with any restrictions on the size of PASSHE university fund balances.
 
Note also, that while the Board of Governors did away with its restrictions on university fund balances shortly after first imposing them, it didn’t have to do away with restrictions on OOC+BOG fund balances—because it never imposed any such restrictions on itself in the first place.
 
And even more troubling, as we will see, even the one-half of one percent restriction on annual revenue to the entity OOC+BOG by Act 188 has been violated by the Board of Governors with impunity for years. 
 
More on that subject next time. 
 

Annual Revenue is to Fund Balance as Annual Salary is to Savings Account

While not every citizen may be aware of the proper relationship between PASSHE’s annual revenue and its Fund Balance, every citizen who works for a living is acutely aware of the limits financial reality imposes on their ability to build a savings account that is anything more than a tiny fraction of their annual salary.
 
By comparison, PASSHE as a system has a “savings account” equal to almost 40% of annual revenue (that is, some $600 million compared to annual revenue of $1.6 billion).
 
For the average working person, the amount of money they might be able to put into a savings account is severely limited because their expenses consume so much of their after-tax take home pay.
 
By comparison, PASSHE’s personnel costs at the 14 universities typically consume 75% to 80% of annual revenue.  And having been a twenty-year PASSHE university president, I know that the universities also have other major expenses such as utilities, supplies and equipment to support 5,000+ faculty and 100,000+ students.  How can some PASSHE universities with their high personnel and other mandatory costs still manage to build such gigantic fund balances?   Official PASSHE data between 2002 and 2013 may reveal the answer.
 

A Plausible Answer

From 2002 to 2013, as seen¹ in Chart 1, PASSHE’s total fund balance grew from $267 million to $598 million, an increase of $331 million or 124%. This more than doubling of PASSHE’s fund balance during that time corresponds to an annual growth rate of 7.6% per year over eleven years.
 
It also corresponds to a loss of $331 million in educational funding that could have gone—but did not go—into protecting the quality of the PASSHE educational experience.
 
Instead those funds were diverted into PASSHE’s fund balance, where little if any good resulted. 

During the 2002 to 2013 time frame, as seen² in Chart 9, total E&G funding per FTE student—the proxy measure that rating magazines use to infer the quality of a total university educational experience—declined by 14%, thereby erasing half of PASSHE’s educational quality gains of the previous 19 years.

 

PASSHE officials may benefit from this money-hoarding, but PASSHE students are paying the price.

 

To be continued.
 
¹ https://www.keepandshare.com/doc/7711028/chart-1-passhe-total-fund-balance-fy-1993-to-fy-2013-pdf-185k.
² https://www.keepandshare.com/doc/6794551/privatization-without-a-plan-chart-9-and-caption-january-23-2014-pdf-387k.