A Public University With Too Much Money? Surpluses Are More Complicated Than That

Earlier this month, the California State University system’s chancellor, Timothy P. White, found himself in a precarious position: assuring aggravated state lawmakers that Cal State was not in fact hoarding $1.5 billion in a secret slush fund. Testifying alongside him was the California state auditor, Elaine M. Howle, who, in a scathing June report, alleged that CSU had failed to disclose just how much money it had on hand as it sought increases in tuition revenue and state appropriations.

“By failing to disclose this surplus when consulting with students about tuition increases or when projecting CSU’s resources and needs to the Legislature, the chancellor’s office has prevented legislators and students from evaluating CSU’s financial needs in light of its unspent financial resources,” the auditor wrote in her report.

At the hearing, White called such an insinuation “profoundly misleading” and testified that the funds spotlighted by the auditor were being used for expenses like financial-aid advances and construction projects. Nonetheless, at least one assemblywoman remained unconvinced, calling the matter “a shameful moment for California.”

Cal State is hardly the only public higher-education institution to face accusations of surreptitious hoarding or financial subterfuge. Over the past decade, state lawmakers in California, Ohio, Virginia, and Wisconsin have excoriated the presidents and chancellors of their states’ public universities and systems for excessive budget balances. Nearly all the refrains originate from this line of thought: How can an institution ask for deference on matters of tuition increases, employee wages, or state funding when the same institution is sitting on a large pile of cash?

Financial analysts, though, say that without adequate reserves, an institution could actually end up paying more in the long term to service its debts. Sturdy reserve funds provide reassurance to bondholders that an institution can weather both the expected, like an eventual recession, and the unexpected, like an earthquake or hurricane.

Likewise, administrators argue against the insinuation that all unrestricted assets are actually surplus funds. While unrestricted money might not carry the same spending limitations that donations or state appropriations do, much “unrestricted” money is internally allocated with specific expenses in mind. Additionally, robust reserve funds can allow for the financing of projects that might not otherwise receive support.

Where institutions falter, though, is on matters of transparency and messaging about reserve funds and unrestricted assets, observers say. Arcane disclosures in 200-page financial statements aren’t enough. Universities have to be vocal and upfront about the funds with the public, critics argue, lest they suffer a deficit of trust when someone else tells their story.

‘A Favorable Buffer’

What constitutes a reserve fund can differ across states, and, as is evident in Cal State’s case, can even differ within the same state government. That said, when assessing the amount of discretionary funds available to an institution, Moody’s Investors Service uses the sum of all cash and investments held by an institution, and then deducts from that sum the amount of funds permanently restricted by third parties.

Among large public universities, the median amount of spendable cash and investments in 2018 stood at $1.4 billion, compared with $270 million across all public institutions. Moody’s defines large public universities as either enrolling more than 25,000 full-time-equivalent students or relying significantly on revenue from patient care, grants, or contracts. Additionally, Moody’s found the median spendable cash and investments in 2018 among all public institutions could cover nearly two-thirds of their annual operating expenses, a fact that it described as “a favorable buffer for unexpected revenue declines.”

Susan Fitzgerald, an analyst at Moody’s, said that there isn’t a one-size-fits-all reserve amount, and that reserves should be judged alongside the environments their institutions face. “What we are measuring here are degrees of risk,” Fitzgerald said. Still, in general, it’s better in Moody’s eyes to have a greater amount of liquid, spendable assets and investments than a lesser amount.

“The more reserves you have, the more flexibility you have. There is a correlation between reserves and higher rating levels,” Fitzgerald said.

Stephen Sugarman, a law professor at the University of California at Berkeley, said large reserves at universities are in part necessary because of the drop in state financing of higher education over recent decades. When an institution can’t count on the state legislature to adequately fund it, the rational answer is to stockpile funds for whenever state appropriations fall again.

Still, Sugarman said, universities and systems need to do a better job in their messaging on this issue. They should point out that reserve building is the norm in public higher education. Likewise, he said, universities need to reiterate again and again that such reserves are a product of long-term planning.

“University spending arrangements extend past a year in more cases. And so of course a university sets aside money to be used on a more regular basis in the future, just like the state is doing. And they do this to be safe against some unpredictable ups and downs,” Sugarman said.

Other parties in California are less forgiving of how reserves are managed in the state, such as Vicky McLeod, the California State University Employees Union’s legislative committee chair. At the very least, McLeod said, the audit and the subsequent legislative hearing showed a need for greater accountability and oversight of CSU and the chancellor’s office.

“Without proper oversight,” McLeod said, “the CSU executive leadership continues to operate without accountability to its students, staff, or the public.”

Dan Bauman is a reporter who investigates and writes about all things data in higher education. Tweet him at @danbauman77 or email him at dan.bauman@chronicle.com.