Last Updated: July 27, 2020 at 9:00 a.m.
Knowing that the University’s financial decisions deeply impact all members of our community personally and professionally, we strive to be as transparent as possible. To address ongoing issues of interest about Santa Clara University’s financial decisions shared in Fr. O’Brien’s June 26 letter, please find responses to common questions below. Those who have additional questions about finances may submit them at covid19@scu.edu, and we will post answers here.
Has the University preserved the option to borrow from the endowment if that becomes necessary?
Yes. While the University could borrow money from the endowment, this is not an attractive option. The University could potentially borrow money from a portion of the unrestricted endowment, subject to the approval of the Board of Trustees. If SCU were to do so, the University would lose out on earnings on the borrowed sum, a significant opportunity cost. Also, the borrowed funds would have to be budgeted for and repaid, which would require cost-cutting in future budgets.
Why shouldn't we increase the spending rate on the entire endowment, and not just the unrestricted portion? Wouldn’t that help us address the lost revenues?
The spending rate for the Santa Clara University endowment has been steady at 4.5% since FY 2007. In that time, the fund has generated $425 million of income for numerous beneficiaries at the university. Nearly 85% of that sum has gone toward supporting the causes specified by the donors (for example, endowed chairs, centers of excellence and financial aid). Most of these funds (including the investment returns) cannot be spent at will, nor on causes outside of the donor's explicit intent. Restricted funds represent a binding obligation the University must honor to its donors. Increasing the spending rate only allows us to increase the spending in the designated area, and not for lost revenues.
The spending rate itself is determined based on an in-depth review, including historical and expected future rates of return, quantitative analysis, and peers’ practices, all within the context of the university's unique objectives and constraints. The goal in setting the spending rate is to preserve the purchasing power of the endowment over time (because a dollar today is worth more -- or buys more -- than a dollar tomorrow).
If the spending rate is set too high, and the endowment fails to maintain its purchasing power, future generations of beneficiaries are disadvantaged. The proper level of spending, deemed to be 4.5%, ensures continued, steady support of university operations during uncertain economic times, including funding for student scholarships, faculty salaries and academic programs.
To minimize the impact of the reduction of the University’s contribution to the retirement benefit, why wasn’t a stipend offered to lower-income employees to increase their salaries?
One of our priorities has been to keep as many employees employed for as long as possible. Key elements in our effort to fulfill that priority are the freeze of the merit pool and the reduction of retirement benefits. The faculty and staff assistance fund is intended to help employees with pressing needs. One practical challenge to offer stipends across the board: as we do not know family income, we cannot equate lower-salary with higher-need. Because we don’t know each employee’s situation, the assistance fund helps us address family needs. Employees can make second requests for assistance.
What has been done in recent years to address faculty and staff salaries?
Between 2015 and 2018, a working group, commissioned by the University Coordinating Committee, assisted the Faculty Affairs Committee (FAC) in the development of Implementation Guidelines for Periodic Faculty Salary Studies. Based on this work, the University has allocated and spent $1.66 million in permanent market-based salary increases for faculty over the past five years. Per the FAC, the focus of these market adjustments has been on faculty with lower salaries. The University has also expanded the rental assistance program to include renewable-term faculty, who are eligible for rental assistance for nine years. On the staff side, during the same period the University has also spent approximately $1.66 million in market adjustments.
|
Fiscal Year |
Faculty Market Adjustments |
Staff Market Adjustments |
|
FY 2019-20 |
$650,000 |
$1,116,774 |
|
FY 2018-19 |
$180,000 |
$543,882 |
|
FY 2017-18 |
$ 0 |
$0 |
|
FY 2016-17 |
$130,000 |
$0 |
|
FY 2015-16 |
$700,000 |
$0 |
|
Total |
$1.66M |
$1.66M |
In addition, in 2019 the Provost’s Office worked with the UCC to create the long-requested Faculty Advisory Committee to the Provost on Budget Priorities.
When will a 457 plan be presented to the Benefits Committee?
A 457 plan allows employees who have contributed the annual maximum amount of $19,500 ($25,500 for those 50 or older in this calendar year) to their individual 403(b) account to contribute to a separate retirement plan called a 457 plan. A meeting will be scheduled in August with the Benefits Committee to discuss whether a 457 plan should be added as an additional University benefit.
Do we know the amount of money placed into the endowment by the University after the 2009 recession?
The University placed no operating funds into the endowment after the 2009 recession. The only contributions to the endowment in 2009 and thereafter were from donations designated for the endowment. The endowment also grew by return on the investments.
What actions are the 27 other Jesuit institutions taking to address the financial issues?
Based on an informal survey of the Jesuit institutions (in which not all replied), 14 have eliminated or reduced the University’s contribution to the employee retirement plan and 16 have suspended salary increases. Many have implemented both. A number of these institutions have also resorted to furloughs and layoffs.
Questions from July 10, 2020
What is the deficit for the fiscal year ending June 30, 2020?
We will not have an exact accounting until later in the summer, but we expect a deficit of less than $4 million. As you may know, we are converting to a new financial reporting system in Workday, which when completed next year will allow us to offer more timely and precise projections and reporting than we have now.
What is our projected revenue loss for fiscal year ending June 30, 2021?
As of July 1, we estimate a revenue shortfall for fiscal year 2021 of $35-45 million, compared to what we budgeted for in the spring. This assumes that we are in the hybrid model of teaching and learning, for which we are currently planning. If we experience an online environment as we did in the spring, the losses may be significantly greater.
The primary revenue losses are likely to be in admissions and housing. We anticipate a projected first-year enrollment shortfall of 5-10% and a decline of 3% in graduate admissions. We rely on tuition for 80% of our revenue. Moreover, we anticipate losses in auxiliary services revenue, mostly due to reduced density of students in residence halls (in keeping with public health guidance). As in past recessions, we also expect a decrease in annual giving from donors, some of which supports our annual operating expenses.
Those losses are starting to accrue now, and we cannot delay in responding until the enrollment census in October. We know our first-year enrollment numbers will be lower than budgeted last February. The recent immigration restriction for international students, which we are challenging in different venues, will have a significant impact on enrollment if not postponed by the courts.
How will we make up for the lost revenue?
We will make up the lost revenue in two ways: finding revenue streams and cutting expenses.
In this environment, finding additional revenue streams is challenging but our deans are looking at some creative options and our fundraising team is exploring new relationships with foundations and other partners. The Board of Trustees and other benefactors have contributed over $3 million to a new fund to support financial aid, with a goal of $5 million. The Board of Trustees also approved raising the spending rate on the unrestricted part of the endowment (about 17% of the total endowment) from 4.5% to 5.75%, which amounts to an additional $1 million. (See below for more on the endowment).
We will reduce expenses in a number of ways: suspending the budgeted 3% merit pool (which yields about $7 million savings over the course of the fiscal year); reducing the university retirement contribution from 10% to 5% ($7 million savings); freezing hiring in most positions ($6 million savings); cutting non-essential operating expenses ($18 million savings); and postponing non-critical renovations ($4-5 million savings).
How much is it costing to retrofit/ready the University for return to work?
The cost for technology adjustments for virtual learning is estimated to be about $1 million; protective classroom and office equipment such as shields, about $200,000; and faculty development, $550,000. We are making these investments over the summer so that we will be prepared for the fall.
What are the dollar savings from halting faculty/staff merit increases and halving University contributions for 401(a) retirement benefits?
Holding off on FY 21 merit increases for staff yields a savings of $2.9 million in salary and $1 million in related benefit costs. For faculty, the savings is $2.4 million in salary and $828,000 in related benefit costs. Altogether the savings amount to $7.1 million.
Reducing the University contribution to retirement accounts saves $7 million—$3.85 million from staff, and $3.15 million from faculty.
Why are retirement benefit cuts not progressive in nature? Can SCU move to a tiered, progressive in nature, 401(a) defined contribution plan?
We are grateful to governance committees for so thoughtfully considering the proposal to reduce retirement benefits in some way. We did not make this proposal lightly because of the painful impact the reduction has on members of our community and their families. The Benefits Committee researched other universities that eliminated or cut retirement benefits.
We considered at length making the retirement reduction progressive, or “tiered” (with deeper percentage cuts for those making the most income; lesser for lower-income employees). We consulted outside ERISA counsel who specializes in this area. Generally speaking, the retirement contribution must be a consistent percent of compensation for all individuals. While there may be an acceptable tiered formula, that would result in required Plan testing, and we were advised by ERISA counsel not to utilize a tiered method at this time. Implementing a tiered approach on a temporary basis would entail complexities in administration which we are not equipped to deal with at this time. Mistakes in administration could jeopardize the tax qualified status of the plan.
Is SCU considering the formation of an additional retirement plan (457 plan) so employees could shift some taxable income into a tax-preferred plan?
This suggestion will be presented to the Benefits Committee.
Why was there a reduction of 5% in the university retirement contribution? How was that figure chosen?
Reducing the retirement contribution is one of the mitigation “levers” to offset revenue losses. By reducing the university contribution to the 401(a) retirement plan to 5%, we realize $7 million in savings over the course of the fiscal year, which helps avoid salary cuts, furloughs, and layoffs in the short-term. The University retirement contribution will be reviewed over the next 6 months with the Benefits Committee.
A number of Jesuit higher education institutions (in addition to some private universities) suspended the retirement contributions in full (for example, Georgetown, Holy Cross, Creighton, St. Louis University). Instead of eliminating the retirement benefit, we decided to reduce it by a half, and seek cost savings elsewhere. This preserved at least some of our retirement benefit for our faculty and staff.
Why implement the retirement benefit cut on Aug 16 and not wait until enrollment numbers are more certain?
Rather than reacting after-the-fact, it is more fiscally prudent to be prepared as we await final enrollment numbers in October and understand the impact of state and county public health orders on university operations. The retirement contribution reduction will be reviewed during the next 6 months.
On July 1, we began experiencing significant losses in budgeted revenue. The Staff Affairs Committee requested that any benefit reduction not begin until after August 1. We honored that request, with the benefit reduction beginning on August 16.
How can I update my individual contributions to my 403(b) retirement plan?
The Department of Human Resources has published information regarding the 403 (b) plan.
Why was a decision made to reduce the retirement contribution instead of salaries?
We heard from many in the community, especially at the lower salary grades, that a salary reduction would negatively impact them much more than a reduction in the retirement contribution. In addition, many salaries are subject to contracts, including letters of appointment, and other legal conditions pertaining to salary and its continuation.
Will there be layoffs in the current fiscal year?
In April, we made the commitment to not lay off staff employees during the fiscal year ending June 30, 2020. This provided some clarity and hopefully comfort to our families as we coped with the initial impact of the pandemic.
Unfortunately, given the ongoing uncertainties that we face, we cannot make the same promise for the current fiscal year. Those uncertainties include the path of the pandemic, enrollment numbers for fall and later quarters, and directives from local and state public officials. We will do everything we can to avoid layoffs, but keeping that promise depends on workloads justifying staff positions, which may change as the impacts of the pandemic unfold. If layoffs are necessary, as they have been for many universities, then we will treat our colleagues with compassion and dignity, including giving adequate notice.
Will there be furloughs in the current fiscal year?
We have so far avoided furloughs, but as with layoffs, we cannot make that promise going forward if workloads change significantly or full workloads in some areas do not resume.
Will there be across-the-board salary cuts?
The only pay cuts thus far are those announced for senior administration leaders who have taken voluntary pay cuts of 10-20%. For spring quarter FY 2020, the total of voluntary salary reductions was $310,700. For 7/1/ 2020 to 12/31/2020, $265,000 has been committed to date. (These totals do not include the related benefit costs savings associated with the salary reductions.)
If we need to resort to across-the-board salary cuts, we will do that progressively, as recommended by consensus feedback from faculty and staff. This means that we would limit the impact of these pay cuts on those making less and ask those making more to take a larger cut.
Instead of suspending the entire merit pool, is a progressive form of merit pay reduction possible?
We understand that merit raises are very important at Santa Clara given the high cost of living in the Bay Area and that this type of cut has long-term implications.
Under the university’s merit system, departments receive a merit pool to distribute to employees based on individual performance evaluations and department standards. Central university administration does not determine individual merit awards. (In other words, not everyone gets a 3% merit raise or a raise at all: it all depends on how departments distribute their pool based on performance.) This system makes across-the-board, progressive merit cuts difficult to achieve fairly
Can an employee choose between a reduction in merit or a reduction in retirement benefit?
Under the University’s 401(a) defined contribution plan, this is not legally permitted.
Are there any “triggers” to reinstate merit pay and return to the 10% retirement contribution?
At this point, there is not a particular number or date certain that serves as a “trigger” to reinstate merit pay or the full retirement contribution. There are too many open questions about the economy and the pandemic and the impact of health directives on Santa Clara’s operations.
We will continuously monitor the financial position of the University and conduct a thorough review of our expense reductions in six months. We will provide updates on our financial condition as the year progresses. Any reinstatement depends on the financial results, both for the fall quarter and projected for the year, as well as what is needed to maintain the financial stability of the University going forward.
As Fr. O’Brien wrote in his June letter: “The expense reductions outlined above are temporary measures. We will continuously review our financial status over the next six months to determine if other cost-saving measures are needed. If the economic environment improves substantially, we will also review restoring the merit increases and/or retirement benefits during the second half of FY21.”
Will merit increase or retirement benefits be restored retroactively?
The University Budget Committee will take up this question as they plan future budgets.
Given economic projections for the next few years and the tight budgets that we normally operate under, It is not likely that there will be a retroactive restoration of the merit increase and/or retirement contribution.
How is Santa Clara using its funding under the CARES Act?
Santa Clara applied for federal government grants under the Coronavirus Aid, Relief, and Economic Security Act. We were awarded $3.5 million under the Act’s provisions. Half of the funding is designated for emergency financial assistance for students. We have set up a process for students to apply for this funding, and we are presently distributing funds according to the Act’s requirements.
Under the Act, the other half of the funding can be used for a variety of purposes. While we are permitted to use the second portion of the grant to cover the losses for services (such as housing revenues), we have decided instead to invest in our capacity to offer remote learning when students are not learning in the typical classroom environment. Accordingly, this summer, we are investing in classroom technology and faculty development for online learning. Any excess funds will be made available to students as emergency financial assistance.
Will deans and other unit leaders have discretion in realizing savings from cuts to non-essential operating expenses?
Yes. They will work with finance administrators in discerning how best to realize savings in a way that maintains our investments in our educational mission.
Why isn’t Santa Clara utilizing its substantial endowment to weather this storm?
The purpose of an endowment is to generate income from the principal or corpus of the endowment in perpetuity, to support university operations like financial aid, program costs, and faculty positions. This is achieved by stipulating a “spending rate”— 4.5% in recent years. (This is similar to interest on a savings account or dividends from a mutual fund that a person may own).
For FY2021, we expect the endowment principal to yield $42.5 million, which helps us pay expenses and fund mission-critical programs. Our usual operating budget is about $550 million.
About 83% of our endowment is restricted, meaning the money can only be used for purposes designated by the donor and not to cover losses like we are experiencing.
The remainder (about 17%) is unrestricted. We can use income from this part of the endowment to cover any kind of expenses. Following suggestions from our community, the Board of Trustees increased the spending rate to 5.75% on the unrestricted portion of the endowment, yielding approximately $1 million in additional revenue to offset COVID-19-related losses.
Why doesn’t SCU raise the spending rate further, given these unprecedented times, to cover losses and protect jobs?
We might do that, depending on conditions going forward. The challenge here is to make sure that we do not spend so much that we start to draw down the principal of the endowment. The purpose of the endowment is to provide operational funds in perpetuity. For a university of our size, preserving the corpus is critical to funding our operating expenses every year. If we take too much from the endowment corpus, we will need to find other sources of funding or make additional cuts in future years. This impacts future students, staff, and faculty.
The University could borrow money from the endowment. This is not an attractive option because that amount would need to be returned, along with lost revenue from not investing that amount. However, we will preserve this option if our losses increase more.
What will the University do to prepare for the next time there's a major budget deficit (as we are experiencing now and ten years ago)?
Our management team, collaborative governance bodies, and Board of Trustees are engaging in long-range financial planning. In recent years, we have budgeted only narrow amounts for contingency (like a “rainy day fund”) in the amount of $2-3 million annually because we were trying to devote as many resources as we can to faculty and staff salaries to address cost of living in this area. As we manage the current crisis, we will need to responsibly prepare for a future that will bring more, perhaps different challenges. The University Budget Council will be part of this important conversation.