Last October, Gov. Scott Walker of Wisconsin, a Republican, patted lawmakers on the back for a $108-million deposit into the state’s budget reserves. The money was meant to be a cushion for the state budget during future economic downturns.
“As we continue our work to build a financially stable Wisconsin for future generations, we have made the largest contribution to the state’s rainy-day fund in Wisconsin history,” the governor said in a news release.
There was no such celebration, however, when an April report to legislators showed that the University of Wisconsin had been accumulating its own cash reserves. Instead, the governor and many legislators called for a freeze on tuition and state appropriations.
“I was stunned at the amount of money they put under the mattress, so to speak,” said State Rep. Stephen L. Nass, a Republican and chairman of the Wisconsin Assembly’s Committee on Colleges and Universities.
Controversies have also cropped up over university reserves in Maine this year, and in Florida last year, as state legislators have begun to examine not only how much money public colleges are receiving from various sources but also how they are spending it.
Last year state lawmakers in Iowa and Virginia even objected to the use of tuition to provide need-based financial aid.
That level of scrutiny has left public colleges in a fiscal Catch-22. Even as state lawmakers are unable or unwilling to increase the amount of tax money they spend on higher education, they are putting the brakes on tuition increases that would be used to preserve the long-term financial viability of public colleges or provide access to low-income students.
Legislators’ reactions to reserve funds also show their unfamiliarity with the commonplace fiscal practices of multibillion-dollar enterprises like the University of Wisconsin system.
More Cushion
The dispute in Wisconsin blew up last month, when the state’s Legislative Fiscal Bureau reported that the university system had accumulated $648-million in cash—an increase of more than $400-million since 2009, mostly from tuition.
That amount is a little more than 25 percent of the system’s $2.5-billion budget, not including federal aid and other money given for specific purposes, including grants and contracts.
The numbers being talked about tell only part of the story, said Sue Menditto, director of accounting policy at the National Association of College and University Business Officers. The legislative analysis also shows that most of the surplus is already committed to building or research projects, leaving $207-million, less than 8 percent of the system’s budget, that is not restricted for other spending.
Even at 25 percent, Wisconsin’s university-system reserves are not out of line with similar entities across the country. Data from Moody’s Investors Service show that the median amount of cash that university systems keep on hand is about 23 percent of their operating budgets.
Dennis M. Gephardt, vice president and senior analyst at Moody’s, said that universities need some extra cash to pay expenses between the times when tuition payments are coming in. “Having some flexible reserves is a credit positive,” he said.
The bond-rating agency issued a warning on the credit risk to Florida’s public universities last year, when lawmakers took away some $300-million that the 11 institutions had put aside for reserves. This year legislators are considering restoring that amount to the university system’s budget.
There may be some misunderstanding about the need for a university to have reserves, Mr. Gephardt said, because most agencies that the state appropriates money to aren’t issuing bonds and trying to earn a low interest rate for repaying their debt.
“If you think of a large public university that gets only a quarter of their funding from the state, their exposure to market-force volatility might encourage greater reserves,” he said.
Daniel J. Hurley, director of state relations and policy analysis at the American Association of State Colleges and Universities, said that the furor over university reserves was ironic, given lawmakers’ calls for public colleges to be fiscally prudent during the most recent economic downturn.
Keeping less than a quarter of their budget in reserve would be considered by many to be fiscally irresponsible, he said: “My first thought when I saw all of this was: No good deed goes unpunished.”
More Accountability
The spreading use of cash reserves is hardly a surprise, given the continuing privatization of public higher education. Stagnant or shrinking state budgets and growing enrollments mean that tuition pays for educational expenses at nearly all public colleges.
In Wisconsin, state appropriations to the university system fell more than 11 percent from the 2008 to the 2012 fiscal years, according to university-system figures, while full-time-equivalent enrollment increased by nearly 5 percent. Tuition at the flagship campus, in Madison, has increased by more than 34 percent over the same period, to $9,665 per year, and students are now paying for 70 percent of their education, the system reports.
Representative Nass said a reserve fund was not necessarily out of the question, but 25 percent was too high. And he isn’t concerned about how the university system’s finances compare with those of other institutions and other states, he said.
What has galled him, he said, is that the system was hiding the reserves from lawmakers at the same time that it was raising tuition and complaining about cuts in state appropriations.
State Sen. Sheila Harsdorf, a Republican who leads that chamber’s Committee on Universities and Technical Colleges, said legislators were responsible for more than just the tax dollars going to the universities.
“We are overseeing not only the state support but also the students who have seen their tuition escalate,” she said. The average amount of student debt for undergraduates at the system’s 13 campuses ranges from about $15,000 to $22,000 according to system figures. That’s less than the national average of $26,000, which includes the two-thirds of graduates who borrowed to attend four-year public and private colleges.
Both lawmakers said they were interested in discussing a limit on the reserves that the university system may keep.
One lesson that colleges should take from this episode is that they will have to be clearer about how they account for their money, Mr. Hurley said. “I would frame it as a need for more proactive transparency by the university system,” he said.
The reaction by the University of Wisconsin system, so far, has been a promise of smaller tuition increases—2 percent instead of the 5.5 percent of recent years—as well as more financial aid from the system and more spending on economic development tied to higher education.
“We must live up to our financial obligations and maintain some fiscal safety net, but we can also identify smart ways to reinvest a portion of our reserves now in ... students and the state,” Kevin P. Reilly, president of the university system, said in a news release.
