Budget Message From The President

LEXINGTON, Ky. (Jan. 8, 2010) — As we begin the Spring 2010 semester, our University and our state continue to face substantial budget challenges. They will test our ability to manage our institution effectively and our resolve to remain focused on our top priorities – educating our students, conducting research aimed at solving problems, and providing services to the people of Kentucky. Even as the national economy shows some signs of recovery, we face the very real prospect of at least two more years of very tight finances. And this comes in the wake of the last two years of declines in appropriations from the state. 

In December 2007, the University’s annual operating appropriation from the state was $335 million. Following a series of reductions since then, it is now $310 million. This 7.5 percent reduction has been very difficult to manage. But we are sobered by the fact that it could have been much worse. While most state agencies have been forced to absorb reductions in excess of 20 percent, Governor Beshear and the Kentucky General Assembly have been consistently diligent in their efforts to protect higher education. To put this in context, a 20 percent reduction in our annual appropriation would have cost our University $67 million.

The relatively small reduction in our state appropriation reflects the fact that we are a high priority. It also is a function of state policy makers committing to higher education a substantial part of Kentucky’s share of funds from the American Recovery and Reinvestment Act (better known as the “Federal Stimulus Package”). In UK’s case, $21 million of our current $310 million in appropriations from the state are temporary federal stimulus funds. 

[IMAGE2]Here is a chart that reflects our state appropriations over the last nine years. I use it with policy makers to indicate the financial realities we have faced and how these wild fluctuations make progress toward Top 20 status very difficult.

Last month, the Governor released revenue estimates indicating that a very difficult road lies ahead of us. In the current fiscal year, state government will take in $108 million less than it budgeted. On January 4, 2010 the Governor issued a “Budget Reduction Order” reducing most state agency budgets by an additional three percent. The Governor again shielded higher education from this round of reductions. Over the next two years, however, it is estimated that Kentucky will be an additional $1.4 billion short of the revenue necessary to simply fund existing commitments, including current levels of support to Kentucky’s colleges and universities. 

The Kentucky General Assembly began its 2010 session January 5. Over the next three months, they will construct a budget for 2010-11 and 2011-12. The Governor will make his recommendation January 19. Our understanding is that in exchange for accepting federal stimulus funds, the state agreed to maintain spending for higher education at least at the level we received in 2005-06. In the University of Kentucky’s case, that is $306 million (see chart above). Because the state will likely use federal stimulus funds in 2010-11, the University’s total appropriation will be at least $306 million (or $29 million less than we were receiving in December 2007). But then the federal stimulus funds run out. So 2011-12 holds the prospect of being an extremely difficult year for all of us. Consider that right now, $21 million of the University’s funds from the state are temporary federal stimulus funds. To maintain our current level of support from the state when federal funds are no longer provided, the state will have to find $21 million in new funds for UK.

The state’s fiscal condition will require difficult decisions as we build the University’s General Fund budget for 2010-11 and plan for 2011-12. Our preliminary estimate is that just running the institution at our current level will cost $17.4 million more next year. This includes an additional $8 million to fund the rising costs of health care and other benefits for employees and retirees.

Understanding that the faculty and staff of our University have not had a salary increase in two years, I assure you that we are looking at every possible way to provide some relief. A one percent salary increase would cost the University’s General Fund $3.6 million. But it is very difficult to add a recurring expense of that magnitude given substantial increases in fixed costs and the prospect of no additional support from Frankfort.

Our primary General Fund revenue source beyond state appropriations is, of course, tuition. A one percent net tuition increase yields $1.9 million new dollars. Assuming state funds remain at the current level, tuition rates would have to increase over nine percent to cover fixed operating costs including faculty and staff benefits. To generate sufficient funds for a salary increase would require more than that. In these extremely difficult times for Kentucky’s families, I am very reluctant to recommend to our Board of Trustees that we implement a significant tuition increase.

The other way to generate funds is to reallocate them internally. But we’ve done so much already that there are very few avenues available for further reallocation. Since 2001, we have generated over $100 million in money saved and costs avoided. And as you know, the hiring of new employees has slowed dramatically in the last two years. So the easy decisions have already been made. 

So far, we have not had to implement the massive layoffs and furloughs we are seeing at so many of our sister institutions in other states. My strong opinion continues to be that balancing the budget of the University by reducing substantially the number of people who work here will have dramatic negative short- and long-term effects on the quality of the education our students receive, our ability to conduct essential research aimed at Kentucky’s problems, and our capacity to deliver services to people all across our state. Losing many of the very people responsible for this University’s progress – our faculty and staff - is absolutely a last resort. Laying off a large number of employees so that those who remain can have a salary increase is not in the best interest of this University.

We face very difficult circumstances and there are no easy answers. Everything will have to be on the table for discussion as we build the University’s budget for next year.

Over the next 60 days, we will do our very best to convince Kentucky’s policy makers that their investment in us – even in these most difficult of times - is essential to Kentucky’s long-term success. We have a good story to tell about the progress we’ve made over the last several years. But we will be blunt with them that what we have accomplished is now very much at risk. Just as the boost in funding in support of the Business Plan four years ago is yielding positive results now, reductions today will have long-term negative consequences for an institution we are convinced has an essential role to play in building a better Kentucky. I have attached here the document we will be giving to lawmakers and our supporters (PDF) around the state over the next three months.

No one should question our resolve to continue our progress – Kentucky’s future depends on our willingness to continue to build a better University and a better state. The Provost and I sometimes are asked whether our Top 20 Business Plan is on hold because of current fiscal realities. The answer is “NO!” To prove that point, I also have attached a report on the status of some of our major initiatives in our Top 20 quest and how we are adjusting to current budget realities. 

I appreciate your hard work and dedication to our University and to the people of this state. We will weather this latest storm and we will emerge with our resolve intact. The people of Kentucky are counting on it.

I will keep you posted as the General Assembly works on our budget for the next two years.