Budget at a Glance


Troubled Times

As a result of the COVID-19 pandemic, public higher education institutions are navigating state budget cuts and unstable enrollments in a still evolving economic environment. College affordability has become a heightened concern for many as the coronavirus pandemic disrupts personal finances.


Before 2020, the United States economy experienced 13 recessions since the Great Depression. As shown below, three recessions have occurred in the last thirty years.


The National Bureau of Economic Research (NBER) maintains a chronology of the peaks and troughs of U.S. business cycles. On June 8, 2020, the NBER’s Business Cycle Dating Committee announced that a peak in monthly economic activity occurred in the U.S. economy in February 2020. The peak marks the end of the expansion that began in June 2009 and the beginning of a recession. This expansion lasted 128 months, the longest in the history of U.S. business cycles dating back to 1854.


Will history repeat itself for higher education?


According to the 2019 State Higher Education Finance (SHEF) Report, public funding for higher education has decreased during poor economic times and increased as the economy improved. However, for the last two recessions, the subsequent increases in  appropriations per student have generally been smaller than the declines.


Appropriations to higher education increased in 38 states and Washington, D.C., from 2018 to 2019. Of the twelve states with appropriations decreases from 2018 to 2019, the most sizeable year-over-year decline was 3.6 percent in Kentucky.  Data reported in the latest Grapevine survey indicate that initially-approved state support for higher education in fiscal year 2019-20 totaled approximately $96.6 billion, a 5.0 percent increase nationwide from fiscal year 2018-19. This is the highest annual increase since fiscal year 2014-15.


For fiscal year 2019-20, three states reported reductions in state appropriations to higher education (i.e., Alaska, Hawaii, and New York). Of the remaining 47 states, Kentucky reported the smallest increase at 0.7 percent.  However, state cuts for fiscal year 2019-20 have begun. For Kentucky, a one percent cut is expected to occur in the last month of the fiscal year. A larger reduction is expected for FY 2020-21. 

Given these uncertain times, the University of Kentucky is using five guiding principles to develop responses to the pandemic: 

  • We will preserve the missions held for more than 150 years: education, research and service.
  • We will ensure the health, safety and well-being of our campus community.
  • We will continue to focus on a return to safe and normal operations as soon as possible.
  • We will position UK to thrive when we emerge from this crisis.
  • We will communicate with the campus clearly and transparently.

Consolidated Budget


The President is responsible for the preparation of an annual budget for consideration and approval by the Board of Trustees. The balanced budget is approved in June, preceding the start of each fiscal year (July 1 through June 30). Budget amendments are considered by the Board throughout the fiscal year.


Given the breadth of the University’s challenges, compounded by the economic conditions caused by the Covid-19 pandemic and resulting market forces, the University has faced unique and simultaneous challenges in the development of the FY 2020-21 Operating and Capital Budget such as projected:

  • Decline in student enrollment
  • Change in enrollment patterns by course delivery mode (e.g. online, traditional, hybrid)
  • Loss of income from investment and endowment earnings
  • Anticipated cuts in state appropriations
  • Loss of income from patient care 
  • Rising costs such as benefits for employees, student aid, utilities and maintenance of facilities


Even with these challenges, the FY 2020-21 budget was developed by placing a high value on the budget development principles that have been used for many years to guide decisions:


Enduring Budget Development Principles

  • Student access and affordability 
  • Competitive pay for faculty and staff 
  • Strategically plan to prevent across-the-board cuts and  maintain and enhance academic quality
  • Building a community of belonging

The University’s recommended Fiscal Year (FY) 2020-21 consolidated operating budget totals $4,429,389,500, an increase of  $238,449,900 (5.7 percent) over the prior fiscal year original budget. As the FY 2019-20 budget has been revised to $4,476,175,200, the FY 2020-21 budget reflects a decrease of  $46,785,700 (-1.1 percent) compared to the prior fiscal year revised budget. Over the last ten years, the University’s original operating budget will have increased 79.4 percent from $2.5 billion to $4.4 billion.

 

Revenues


The University’s revenues and fund balances are shown grouped into eight broad categories. Budgeted revenues from patient care, including the Hospital System and Clinical Services, show the greatest percentage change over the past ten years, followed by Fund Balances and Tuition and Fees. These increases are primarily due to more volume (number of patients served and students enrolled) and higher prices.

 

Operating Budget by Fund Group


General Funds
General Funds are unrestricted resources that comprise the majority of the University’s consolidated budget. The activities supported with General Funds constitute the core instructional, service, student support and administrative functions of the University. General Funds are further classified, for management purposes, as either Undesignated General Funds or Designated General Funds.
The University’s executive leadership (President, Provost, Executive Vice President for Finance and Administration, and Executive Vice President for Health Affairs) is responsible for the programmatic and fiscal management of the University, including preparing and executing operating budgets. The budget responsibilities for Designated General Funds, Auxiliary Funds, and Restricted Funds are decentralized to the lowest appropriate level. 


Undesignated General Funds
Undesignated General Fund (UGF) revenues include state appropriations, tuition, investment income and other revenues. These revenues are received and managed centrally and the associated expenditure authority is allocated to the colleges and units as base support for education, research and creative work, and service. The budget decisions related to the University’s educational and general activities are based on the availability of these undesignated funds. UGF comprise 18.2 percent of the University’s FY 2020-21 budget.


Designated General Funds
Designated General Fund (DGF)  revenues are received directly by the colleges and units that generate or earn the funds. The colleges and units use the funds in accordance with their missions  and to maintain self-sustaining activities. DGF comprise 58.7 percent of the FY 2020-21 budget.


 

Auxiliary Funds
Auxiliary Fund revenues are generated from the sale of goods and services to faculty, staff and students. Revenues are expected to cover the operating expenses of each  auxiliary enterprise. Auxiliary Funds comprise 4.8 percent of the FY 2020-21 budget.


Restricted Funds
Restricted Fund revenues include gifts, grants and contracts provided by governmental agencies, corporations, and private donors. The funds are accepted by the University with explicit restrictions imposed by the external entity. The primary sources of Restricted Funds are sponsored projects, such as grants and contracts, gifts that must be spent in support of a specific program, and federal and state student financial aid. As a steward of the funds, the University has a legal obligation to abide by the fund restrictions. Restricted Funds constitute 10.3 percent of the FY 2020-21 budget.


Fund Balances
The University’s operating budget also includes prior-year unspent funds (i.e., fund balances) from the three fund groups. These fund balances are considered non-recurring, or one-time funds. Fund balances comprise 8.0 percent of the University’s FY 2020-21 operating budget.

 

Building the FY 2020-21 Budget

Responding to a Public Health and Economic Crisis


The University begins developing the next year’s detail budget in October each year. The budget calendar often shifts due to the actions of the Kentucky General Assembly and the Kentucky Council on Postsecondary Education. The development of the FY 2020-21 budget was severely impacted by the COVID-19 pandemic. 

 


 

Step 1. Determine Initial Direct Student Impact
The revenue projections changed dramatically after the pandemic halted on-campus instruction and activities in March 2020. By April, the Undesignated General Funds budget depiction reflected a $72.3 million shortfall, or -8.6 percent. From April through May, University leadership designed a multi-step process to address the budget shortfall. 


Step 2. Establish a Contingency Fund
With notice of an impending cut to state appropriations and federal relief woefully short of estimated expenses and revenue losses due to the pandemic, UK leaders saw the need to establish a contingency fund to address the many unknowns. A contingency fund of 15 percent of the shortfall, or $10.8 million, was created, increasing the shortfall to $83.1 million.


Step 3. Add Subsequent Budget Adjustments
As budget strategies materialized, subsequent adjustments to the estimated shortfall were necessary. For example, the projected increase in the institutional scholarship budget was lowered to reflect the anticipated smaller first-time freshman cohort. 


Step 4. Assign a 10 Percent Reduction to Undesignated General Funds
After adding the contingency fund and subsequent budget adjustments, the projected shortfall in Undesignated General Funds totaled $72.1 million. Given the magnitude of the problem, a ten percent reduction of the Undesignated General Fund base was assessed to the five primary areas of the University. A few expense budgets were exempted from the reduction as not being able to be reduced (e.g., debt service and utilities). As a result, the assignment of the 10 percent reduction generated $64.1 million of savings. 


Step 5. Allocate Reductions Within Each Area
Guided by the long-standing budget principle to strategically prevent across-the-board cuts and maintain and enhance academic quality, campus leaders thoughtfully applied the necessary reductions within each area to minimize direct impact on the student academic experience. 
To avoid rash actions, units were given the opportunity to implement up to 30 percent of assigned reductions on a non-recurring basis for FY 2020-21, thereby creating more time to fully implement the reductions by FY 2021-22. As a result, 83.5 percent of the assigned reductions were implemented on a recurring basis for FY 2020-21. The remaining 17.5 percent, or $10.6 million, of the reductions are expected to be implemented on a recurring basis by July 1, 2021. 


Step 6. Reduce the Employer’s 403(b) Retirement Contribution Rate 
Unfortunately, the 10 percent reduction in steps four and five was insufficient to fully address the shortfall. The Board of Trustees subsequently approved a one-year reduction in the 403(b) employer contribution rate by five percent, from 10 percent to 5 percent, for FY 2020-21. This action is estimated to save $19.7 million of Undesignated General Funds. As $7.9 million is needed to offset the shortfall, the remaining $11.8 million is added to the contingency fund.
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As a result of these actions, a contingency fund totaling $22.6 million has been created. During the review of unit plans for implementing the reductions, it became evident that a reduction in force could be avoided by allocating a portion of the contingency fund to select units. In addition, the subsequent budget adjustments in step three included an assumption that the scholarship adjustments could be implemented over time by backfilling with non-recurring funds. Thus, a total of $8.1 million of the contingency fund will be used in FY 2020-21 to avoid reductions in force and phase-in the scholarship reductions, leaving $14.5 million in the contingency fund. This remaining balance is enough to offset the equivalent of a 5.5 percent reduction in state appropriations during FY 2020-21. 

 

Tracing the Significant Changes in This Year's Budget


The FY 2020-21 budget reflects many significant revenue changes compared to the FY 2019-20 revised budget. Six of the changes are discussed in the following pages. The changes to tuition revenue, operating investment income, UK Healthcare’s Hospital System revenue and clinical services revenue are primarily a result of the COVID-19 pandemic. State appropriations and research grants and contracts reflect positive changes as a result of the great work by the University’s faculty, staff and students. 


Undesignated General Funds: State Appropriations
Prior to the start of the coronavirus pandemic, the 2020 Session of the Kentucky General Assembly was  poised to pass a state budget with a modest increase in state appropriations to postsecondary education institutions, the first undesignated increase in over a decade. As the economic realities of the health pandemic took hold, the Kentucky General Assembly ended its session with the passage of a one-year state budget that primarily held state appropriations for postsecondary education institutions flat and retained the state’s performance-based funding model. While this seems a relatively positive result, it should be noted that, at the time of this publication, Kentucky’s public universities are bracing for reductions in state funding in Fiscal Years 2019-20 and 2020-21.

 

Performance Funding


FY 2020-21 is the fourth year the Kentucky General Assembly is using the performance funding model to allocate a portion of state appropriations to the public universities and the Kentucky Community and Technical College System (KCTCS). The model is based on 11 metrics primarily focused on student success including bachelor’s degrees produced, earned student credit hours, and undergraduate student retention and progression.  
Kentucky’s public universities and colleges were required to allocate two percent of their state appropriations, less mandated programs, to the Postsecondary Education Performance Fund. The Fund totaled $14.9 million for FY 2020-21. Based on performance, the University of Kentucky’s allocation of $3.6 million resulted in a net gain of $3 million (a total $6.6 million performance award) in FY 2020-21.


Undesignated General Funds: Operating Investment Income
The target for the federal funds rate has varied widely over the years in response to the prevailing economic conditions. It was set as high as 20 percent in the early 1980s in response to inflation. With the Great Recession of 2007 – 2009, the rate was slashed to a record low target of zero to .25 percent to encourage growth.   The federal funds rate influences short-term interest rates thereby affecting the amount of investment income the University earns on it daily operating cash balances. 
From FY 2016-17 to FY 2019-20, the University’s budget for investment income earned on its daily operating cash increased from $4.0 million to $24.2 million. In response to the pandemic, the federal funds rate has fallen from 2.39 percent as of July 1, 2019, to 1.59 percent as of March 3, 2020, to .05 percent as of June 1, 2020. This change has dramatically reduced the University’s FY 2020-21 projected investment income to $6.7 million, a decrease of $17.5 million, or -72.3 percent, from FY 2019-20.


Designated General Funds: Hospital System and Clinical Services
The UK HealthCare (UKHC) Hospital System includes UK Albert B. Chandler Hospital, Kentucky Children’s Hospital, Eastern State Hospital, UK Good Samaritan Hospital, and UK Pharmacy Services. From FY 2019-20 to FY 2020-21, the Hospital System’s Designated General Funds operating revenues are budgeted to decrease by $76.7 million, or -3.6 percent, to $2,081,083,900. 
UKHC’s FY 2020-21 budget assumptions include: 

  • Patient care volumes are predicted to ramp up to pre-COVID-19 levels by October 2020. 
  • An additional 1,050 discharges are budgeted for process improvement initiatives to be implemented during FY 2020-21 including Advancing Best Care and Electronic Intensive Care Unit and reflects projected faculty recruitment efforts.
  • Incremental operational expenses related to COVID-19 for personal and protective equipment are incorporated.
  • The Electronic Health Record (EHR) non-capitalized expenses of $89.4 million are included in the budget; an additional $65.4 million of capitalized expense will also occur during FY 2020-21 for a total projected cash outlay of $153.9 million.
  • Impact of the University’s reduction in the employer retirement contribution rate is incorporated into the budget.
  • Clinical Services revenue includes patient care services provided by the College of Medicine and the College of Dentistry. Clinical Services revenue is budgeted to increase by 5.7 percent to $459.5 million for FY 2020-21. This increase includes the reimbursement changes related to Federal Directed Payments.

Restricted Funds: Grants and Contracts
Research grant and contract awards exceeded more than $400 million in FY 2018-19. Flanked by the KY HEAL (Helping to End Addiction Long-term) grant, the largest grant award in UK history, the UK Research Foundation’s revenue from grants and contracts is expected to increase by almost 13 percent in FY 2020-21 to $381.2 million. Awarded by the National Institutes of Health, the $87 million KY HEAL study is aimed at reducing opioid overdose deaths by 40 percent in select communities. 
Per the 2018 Higher Education Research and Development (HERD) Survey, conducted by the National Center for Science and Engineering Statistics, UK’s research and development expenditures rank 63rd out of 624 public and private universities and 42nd among 394 public institutions. 

 

Undesignated General Funds: Tuition Revenue


Typically, three drivers influence tuition revenue: enrollment; residency and price. Prior to the health pandemic, the University had identified growth targets across distinct categories as part of the Our Path Forward initiative. In addition to the traditional first-time freshmen pipeline, deliberate strategies were underway to serve more non-traditional students. The economic uncertainty associated with the pandemic has temporarily thwarted those goals. As a result, the budget reflects expected declines in enrollment, including the fall 2020 entering class. With a modest tuition increase for the coming academic year, projected tuition revenue, reflects a decline of $24.4 million, or -4.8 percent, compared to the previous year. 


For fall 2019, nearly 90 percent of the undergraduate, resident full-time students received financial aid – grants or scholarships that did not have to be repaid. For these students, their average net price for tuition and fees was $1,438 — $4,933 less than the sticker price (a 77% discount).


Twenty-five percent of UK’s undergraduate full-time resident students that completed a Free Application for Federal Student Aid (FAFSA) are from families with a median income of $21,992. On average, these students received enough grants or scholarships to cover the full cost of tuition and mandatory fees.


Almost half of the undergraduate resident students that entered in fall 2013 and graduated within six years did so without any student loans. The average debt of the graduates with loans was $33,729. 


As a result of many University initiatives, the institution’s first-to-second fall retention rate has progressed to record levels, reaching 85.0 percent for the fall 2018 cohort (i.e., fall 2018 first-time undergraduate students that returned in fall 2019). Even more impressive is the significant increase in the University’s four-year graduation rate, which has increased from 30.8 percent for the undergraduate students that entered in fall 2006 to 51.0 percent for the undergraduate students that entered in fall 2015.