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Provost’s Update on the Budget

Given the news coverage of last week’s Board of Governor’s meeting, I know there is concern about the financial status of the State University System, as well as about the possibility of layoffs. Layoffs have occurred at one state university, and officials at others have indicated that layoffs could occur if state budgets continue to be cut. UCF is not considering layoffs at this time, but it is important to understand the steps that are being taken to avoid layoffs in the future.

Because of the complexity of the subject, I ask that you bear with me as I try to clarify our current financial challenges and the proactive steps we are taking to address them.

It is important to understand the difference between a budget cut and a reduction in cash disbursements. State universities receive state funds in cash disbursements that arrive every other week. Normally, universities receive 25% of their annual state funding each quarter of the fiscal year. However, university budget allocations are based on annual revenue projections, and the state is required to adjust cash disbursements whenever state revenues fall short of those projections. That is why on July 1, 2007, university cash disbursements were reduced by an amount equivalent to a 4% cut in annual state allocations.

However, only the legislature can implement an actual budget reduction, which is exactly what happened when the legislature met in special session early in October. In doing so, the legislature simply aligned state budget allocations with the already reduced cash disbursements.

Realizing that our cash disbursements had been reduced and anticipating the action that would be taken by the legislature, UCF reduced internal budget allocations by 4% on July 16, 2007. Aware of the growing shortfall in state revenues and anticipating further budget cuts this fiscal year, we also reduced college and division budgets by an additional 2% in order to provide some flexibility in dealing with budget reductions that many felt would occur later in the fiscal year.

However, when the legislature met in special session during the fall, it reduced our annual state budget by 3.6%. The 6% budget reduction we implemented in July yielded $17.5 million in E&G (Education & General) funds, with approximately $9.6 million being used to cover the 3.6% state-mandated budget cut. The remaining almost $8 million was retained to address additional budget cuts anticipated this fiscal year. It now appears that this fiscally conservative, proactive step will make it possible for us to shield colleges and divisions from further budget cuts this fiscal year. It is also one reason why we are not considering layoffs at this time when other institutions are.

Nevertheless, cash disbursements to SUS universities were reduced again on January 4, 2008, just as they were last July. The impact of this reduction equates to an additional 3.8% ($10.4 million) cut in UCF’s state budget allocation for this fiscal year. You may read or hear that our budget has not been cut a second time. While that statement is accurate for now, our cash disbursements have been reduced. And, since the state is facing another $1 billion revenue shortfall this fiscal year, this second reduction in cash disbursements will very likely be followed by a second budget reduction when the legislature convenes in March.

Of course, it is possible that universities could be partially shielded from this second budget reduction, but we cannot count on that. The $8 million that remains from our 6% budget cut in the fall will be used, along with $2.4 million in non-recurring institutional reserves, to cover the $10.4 million budget reduction that appears imminent. Should our portion of the budget reduction be less, we will simply retain the remaining funds in light of what lies ahead since we have been advised that state revenue shortfalls during FY08-09 will likely reach $2 billion, and the situation for FY09-10 could be even worse. Given these projections, it is unlikely that our financial situation will improve anytime soon.

So, what are we doing to prepare for further reductions? If our budget is reduced by 3.8% when the legislature convenes in March, the $8 million recurring E&G funds currently being held in reserve will be depleted, along with an additional $2.4 million in non-recurring reserves. Since all state-mandated budget reductions represent the loss of recurring funds, the non-recurring reserves do not provide a permanent solution to this $2.4 million deficit. In order to replace this non-recurring temporary patch with recurring funds, each college and division will be required to reduce its FY08-09 E&G budget by an amount equal to its share of this $2.4 million deficit.

In addition, each unit’s FY08-09 E&G budget will be reduced by another 2% in order to set aside funds that can be applied toward additional budget cuts that appear likely during FY08-09. College deans and division leaders are already aware of these FY08-09 reductions. Announcing these reductions now gives colleges and divisions time to determine how best to reduce operational costs while, to the extent possible, protecting faculty and staff.

Unfortunately, the projected $2 billion shortfall for next fiscal year suggests we must be prepared for budget reductions that could be much greater than the 2% being withheld. As a general rule-of-thumb, each $1 billion shortfall in state revenues represents a 4% reduction in university budgets. In an effort to provide flexibility in dealing with future budget cuts of this magnitude, the University Budget Planning Committee voted to allow colleges and division to carry forward and retain all unexpended E&G funds at the end of this fiscal year. Given our constantly changing fiscal environment, all colleges and divisions have been encouraged to use these carry forward funds to provide the flexibility and time required to deal with current and future budget reductions. Using reserves for other purposes could lead to some very difficult personnel decisions in the future. Centrally held reserves are minimal and cannot, by themselves, provide this needed flexibility.

College and division leaders are also encouraged to carefully consider the wisdom of filling new or vacant positions. Filling some positions, especially those that directly contribute to the success of our students, may be crucial to the operation of the unit and, thus, must be done. However, filling new or vacant positions must be carefully considered since doing so reduces flexibility in dealing with future budget cuts. Without such flexibility, and in the face of more budget cuts, layoffs may be impossible to avoid.

People are every university’s greatest asset and we must do all that is possible to protect those individuals whose efforts and dedication have fueled the growth and success of the University of Central Florida. The continued efforts of all involved are needed if we are to avoid layoffs as we weather the financial challenges that lie ahead.