Re: Update on Financial Planning During COVID-19 Pandemic

Colleagues, 

For your awareness, the message below will be distributed to the wider campus community tomorrow (Wednesday, June 3) via the Provost’s newsletter and Friday (June 5) in Purdue Today.

Update on financial planning during Covid-19 pandemic. 

Over the past few weeks, we have received questions about our University’s financial preparations for the challenges created by Covid-19.  Many of these questions are along the theme: ‘if we are expecting such strong enrollment in the fall, why are we planning for budget cuts’?  This is a fair question and one that deserves a response.  Below, we will provide an overview of the landscape as we see it today, and a summary of the actions we are undertaking to prudently manage Purdue’s financial resources during the coming year.

As with other visible changes that will define our   campus over the coming weeks and months, the University’s financial plan has adjusted to the impacts from the Covid-19 pandemic.  Financial plans for the 20-21 fiscal year made only ninety days ago have had to be completely revised.  Given how quickly circumstances are changing, even those plans may be entirely outdated in the next ninety days.  We are preparing our financial plan using the best information and data available with a bias toward proactively managing the highly uncertain fiscal landscape ahead. 

While the University has a diverse set of revenue streams to support its daily operations, we believe Covid-19 adversely affects each of those revenue sources for reasons explained below.  Additionally, we are planning for major investments to protect the health and safety of students, faculty, and staff.  For these reasons, last month, the Board of Trustees, after careful consideration, endorsed a series of cost containment measures, positioning the University to exit the pandemic the same way we entered it – from a position of strength, ready to capitalize on new opportunities to grow and expand our missions. 

Tuition and fees are the University’s largest single source of revenue.  Our leading indicators on undergraduate enrollment are positive – but maintaining the record levels of undergraduate enrollment achieved over the past few years is anything but certain.  The pandemic brings its own set of unique considerations as we forecast enrollment and tuition revenue.  In many areas of the world, travel restrictions remain in effect.  Even if international students are allowed to enter the U.S., many may not be able to obtain their needed student visa.  We know that a small percentage of our students have underlying medical conditions.  Despite our efforts to make campus as safe as possible, others may have an uneasiness about being away from family.  While Purdue maintains national prominence in the area of student affordability, the economic challenges created by Covid-19 may – regrettably – mean that many domestic students can no longer afford the college experience they were planning just a few short months ago.  Other universities and colleges competing for our students will try desperate measures in an effort to shore up their own enrollments, which in many cases, were falling before the pandemic.

We remain hopeful that every student who expresses a desire today to be a Boilermaker will be with us in some way in the fall.  To that end, we have created new options, including an online fall semester, to allow students who physically are unable to come to campus to start or continue their academic program.  However, given that many of these students are expected to take fewer credits, tuition revenue from these students will be less than from our on-campus students.  For all of these reasons, prudence dictates a cautious financial plan for tuition revenue until we know final student census with greater certainty. 

As a public institution, Purdue receives substantial support from the State of Indiana.  While the state is in solid fiscal condition with strong reserves, the pace and depth of decline in tax revenues will be unprecedented –e.g. in April alone, state revenues lagged nearly $1 billion below forecast.  The Governor has already indicated state agencies should plan for a 15% budget reduction starting July 1.  Twelve percent (12%) of state revenues support the state’s seven public higher education institutions.  There is no doubt the University will see its state appropriations decline – the only question is how soon and by how much.  At this time, we are estimating a $35 million reduction in state support in the coming fiscal year.  State government leaders are operating under difficult circumstances and we are thankful for the support we continue to receive and, importantly, will adjust our spending plan to available funding.

Thanks to the generous support from donors, gift income, in the form of annual giving and distributions from endowments, contributes more than $100 million annually to fund University operations.  In the month of March alone, U.S. equity markets declined nearly 40% from their peak.  Business owners, large and small, are fighting for survival.  Both deal a severe blow to the ‘wealth effect’ that fuels donations to our University – leading us to conclude that the most likely scenario is a decline in philanthropic support.  Likewise, the University’s own investments in our endowment will likely see a reduction in their market value, resulting in lower payouts.  Near record low interest rates will also place downward pressure on other sources of University investment income. 

External sponsored programs provide significant funding on an annual basis to support the University’s critical research mission.  There are significant risks here – research being curtailed by our private sector industrial partners conserving scarce resources as their businesses respond to the pandemic; and the ability to maintain a steady flow of external funding as research deliverables are impacted by the disruption of activities, among others.  Collectively these factors, in all likelihood, will cause research funding in the short-term, notably cost recovery on grants, to contract.

Many individual colleges rely on specific sources of revenue to fund operations – for example, state and local government tax revenues support Purdue Extension and patient charges from clinical operations partially underwrite the College of Veterinary Medicine’s teaching activities.  While the impact varies by unit, collectively, millions of dollars of reductions are anticipated.  Moreover, as the University hosts fewer events and visitors, many sources of auxiliary revenue will slow or dry up entirely – e.g. fewer conferences, events, and Convocations; and reduced number of visitors lodging and dining on campus. 

With this backdrop, we are anticipating that even under the most optimistic set of circumstances, notably around student enrollment, operating revenues will be negatively impacted in the tens of millions, possibly hundreds of millions, of dollars, over the next twelve to eighteen months. 

Admittedly, this environment is changing rapidly, which has caused some to question the urgency to act.  In our view, confronting this budget challenge head-on is preferable to hoping that it will go away.  By acting early and decisively as outlined below, our hope is that decisions that are more painful can be avoided .  Every week brings news of more colleges and universities announcing layoffs, furloughs, reduced pay, suspension of retirement contributions and other personnel actions for existing faculty and staff.  The list includes Johns Hopkins, Stanford, University of Arizona, and the University of Kentucky, among many others.

One of the first decisions we made was to sacrifice the modest operating surplus we had planned.  Our practice has been to spend slightly less than we bring in – using those operating surpluses for strategic reinvestment into the University.  In recent years nearly half a billion dollars has been reinvested through the Purdue Moves and major capital projects including the STEM labs, the Veterinary Teaching Hospital, Flex Lab and Wang Hall.  Dedicating this surplus to support daily operations – temporarily for one year – lessens the need for additional cost containment actions.

The next set of actions defer planned new spending.  We paused salary increases scheduled for July 1 rather than reducing existing pay.  We stopped new hiring rather than furloughing or eliminating existing faculty and staff positions.  To address areas where work has slowed or stopped, rather than reducing hours for staff, we established a job bank to repurpose employees to areas of need.  Lastly, discretionary non-essential repair and rehabilitation and major capital projects have been put on hold. 

Another set of measures fall in the category of carefully monitoring spending on non-essential activities, irrespective of funding source.  These include restrictions on travel, which preserves scarce resources while also protecting the health and safety of campus.  Our purchasing restrictions are aimed to curb spending on outside consultants, and non-critical supplies and equipment, among other items. 

Protecting our most vulnerable and reopening campus safely will require that the University expend funds for critical health and safety infrastructure.  This of course is a must-do, further evidencing the need to reduce spending in less critical areas.  The University plans to invest in robust virus testing and contact tracing, fund significant amounts of PPE and other safety equipment, provide resources to assist with smaller residential class sizes and enhanced online offerings for students unable to join us on campus, and to ensure we are able to increase our capacity to clean and disinfect physical spaces.  At present, we are forecasting the need to be near $50 million – though it could be more as we will invest what is necessary to protect the health and safety of the Purdue community, including the funds required to meet the instructional needs of our students both on and off campus under the guidance of the Protect Purdue Implementation Team. 

As we work through this challenging time together, we thank you for your individual efforts to help us navigate this uncertain environment.  Through the actions outlined above, which have been incorporated by colleges and administrative units into our campus financial plan , and  will be formally approved by the board on June 11, we will collectively do what is needed to deliver our land-grant missions of teaching, research and engagement while keeping our Purdue community safe and avoiding more drastic cost containment actions to the greatest extent possible.