discussion document november 21, 2016 - university of akroninternational students hire...

University of AkronDiscussion Document

November 21, 2016

Limitations and Restrictions

This DRAFT report (the “Report”) has been prepared by Ernst & Young LLP (“EY”), from information and material supplied by The University of Akron (“UA”), for the sole purpose of assisting UA and its legal counsel in analyzing its financial situation and its projected deficit.

The nature and scope of our services was determined solely by the Agreement between EY and Management dated 23 August 2016 (the “Agreement”). Our procedures were limited to those described in that Agreement. Our work was performed only for the use and benefit of Management and should not be used or relied on by anyone else. Other persons who read this Report who are not a party to the Agreement do so at their own risk and are not entitled to rely on it for any purpose. We assume no duty, obligation or responsibility whatsoever to any other parties that may obtain access to the Report.

The services we performed were advisory in nature. While EY’s work in connection with this Report was performed under the standards of the American Institute of Certified Public Accountants (the “AICPA”), EY did not render an assurance report or opinion under the Agreement, nor did our services constitute an audit, review, examination, forecast, projection or any otherform of attestation as those terms are defined by the AICPA. None of the services we provided constituted any legal opinion or advice. This Report is not being issued in connection with any issuance of debt or other financing transaction.

In the preparation of this Report, EY relied on information provided by Management, its legal counsel, the Board or publicly available resources, and such information was presumed to be current, accurate and complete. EY has not conducted an independent assessment or verification of the completeness, accuracy or validity of the information obtained. Any assumptions, forecasts or projections contained in this Report are solely those of the Board and its management (“Management”) and any underlying data were produced solely by the Board, its Management, and legal counsel.

Management has the knowledge, experience and ability to form its own conclusions. There will usually be differences between projected and actual results because events and circumstances frequently do not occur as expected and those differences may be material. EY takes no responsibility for the achievement of projected results.

Portions of the “Report” have been prepared at the request of legal counsel to assist legal counsel in rendering legal advice to its client, The University of Akron, and may therefore fall under the attorney-client privilege.

Executive Summary

Enrollment/Revenue Challenges:

► UA has experienced declining enrollment for the last 5 years, placing significant financial pressure on its operations (largest decrease in FY17 of 8% - First Time Full Time Freshman decrease in FY17 was 20%)

► Enrollment decline has placed additional pressure on revenue, which is inherently stagnant given state caps on tuition rates and dependence on SSI

Cost Reductions:

► UA has responded with a variety of cost reduction efforts including wage freezes, outsourcings, reductions-in-force, debt refundings, and spending deferrals

► Actions to date have helped to nearly balance the annual budgets but have not gone far enough to comprehensively address the structural challenges faced. In FY16 alone these resulted in ~$20m of cost savings

FY17 Budget and Deficit:

► UA has budgeted an $18M general fund deficit for FY17, which will be funded by general fund reserve balance (total GF unrestricted reserve balance was ~$66M as of 6/30/2016)

► The FY17 budgeted deficit would have been $30M if not for $12M of personnel savings and debt refunding recently implemented

► If recent trends continue and no action is taken, the annual deficit could grow significantly and create even greater challenges in the near term

► UA will need to take action now to invest in a strategy that will stabilize enrollment and retention, maximize revenue, and align costs with the student population

University Response:► UA is implementing a transformation plan to stabilize, invest, and grow

Prepared solely for UA. Reliance restricted. Does not constitute assurance or legal advice. Please refer to limitations and restrictions on page 1.

Our approach to UA assessmentGeneral Fund & Auxiliary Funds

► Interviews with key university personnel

► 5-year historical financial trends and analysis

► Impact of cost reduction initiatives implemented to date

► Impact of auxiliaries on general fund

► Key takeaways based on latest trends

Normalized FY16 and FY17 budget

Current stateassessment

► Assessment of normalized run-rate for FY16 and FY17

► Analysis of current FY17 budget based on activity to date and historical performance

► Understand key risks and opportunities to FY17 budget

► Develop consolidated financial summaries


EY’s assessmentDevelop unaudited financial summaries using data provided by the University, including auditor’s adjustments and approved budget

End of year (June 30th trial balances)

• University wide ~ 40,000 lines of data per fiscal year

• Started assessment from the same base data used for the annual audit performed by Plante Moran

Au

dit

or’

s ad

just

me

nts

Annual Audit –University Wide

(December)

EY Financial Assessment

Historical focus on GF & Auxiliaries

Normalized FY16 & FY17 Budget

•one-time rev & exp•Reclassifications•Adjust for gross ups

Develop financial summaries

Auditor’s reports for State of Ohio CAFR

(October)

Audit compliance reports

EY assessment

Source of data Reporting

Budget & ReportingDepartmental

budget submission

Management budget

adjustments & updates

Monthly quarterly KPI and financial

reporting


Revenue$359

Expense$342

Expense$80

Transfer in from GF fund balance

$18 Subsidy/ Transfer to

Aux$35

Subsidy / Transfer from GF

$35

General Fund Auxiliary

Revenue

$45

Revenue$404

Expense$422

TOTAL(gross)1

FY17 Budget ($M)

“Deficit/

Transfer”2

$18

FY17 Budget ($M)Consolidated View

General Fund & Auxiliaries FocusThis analysis is focused on a combined view which includes the General Fund as well as the impact of the auxiliary funds and eliminates “transfers/subsidies” between various funds

1 Revenues above are presented consistent with the budget (i.e. gross before scholarships and remissions); All scholarships and remissions are included in expenses2 Deficit is funded by transfer from General Fund reserve balance


Revenue$404

Expense$422

“Deficit/

Transfer”1

$18

FY17 Budget ($M)Consolidated View

Revenue$404

Expense$422

“Savings and deferrals” ~$12M1

FY17 Pro-forma ($M)Consolidated View2

“Normalized Deficit/

Transfer” ~$30M

General Fund & Auxiliaries FocusFY17 budgeted deficit of $18M would have been even greater if not for the recent elimination of open positions and one-time savings from debt refunding

1 Deficit is funded by transfer from General Fund reserve balance2 “Savings and deferrals” include a one-time debt service reduction in FY17 due to FY16 bond refunding (debt service will increase by $7m by FY19) and a

~$5m elimination of open positions which will require management review at the beginning of FY18.


$419 $411 $408 $399 $387

$358

$419 $415 $403 $406

$393 $376

29,699

23,152

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

0

50

100

150

200

250

300

350

400

450

FY12A FY13A FY14A FY15A FY16P FY17B

($ in

mill

ion

s)

Revenue Expense Enrollment

Historical Financial TrendsWithout University action, the negative revenue trend is expected to continue driven primarily by enrollment losses, while contractual obligations will cause expenditure growth beyond FY17

Revenues/Expenditures1

1 Revenues are shown net of undergraduate and athletic scholarships; stipends and remissions are included in expenses

Enro

llmen

t


$(0.2) $(3.6)

$5.0

$(6.6) $(6.0)

$(18.0)

$109 $104 $111 $108

$97

$79

-40

-20

0

20

40

60

80

100

120

FY12A FY13A FY14A FY15A FY16P FY17B

($ in

mill

ion

s)

Annual surplus / (deficit) Unrestricted Cash

Historical Fund and Unrestricted Cash Balance TrendIf no action is taken, the annual deficit could grow significantly over the next couple of years due to declining revenue and expenditure growth. The University is implementing a transformation plan.

Continued pressure on operations and financial performance absent any

actionCost reduction efforts

University response to this pressure will focus on

stabilization and investment for growth

1 Since UA uses cash pooling, the unrestricted cash balance is estimated based on preliminary analysis and subject to further review


Stabilize Invest Grow

► Increase student retention

► Improve graduation rate

► Optimize scholarship strategy and spending

► Pursue early buyout options

► Optimize use of graduate assistantships

► Optimize class schedules and current program portfolio

► Increase fundraising

► Reduce expenses such as utilities/energy, travel, IT, procurement and others

► Invest in retention through additional advising support for students

► Invest in flexible programming options (evening/weekend/online) to attract students

► Hire resources to conduct outreach and attract international students

► Hire transformation leader to oversee implementation of key initiatives

► Focus on fundraising growth

► Invest in reporting and analytics to support management review and decisions

► Grow enrollment

o Freshmen (in-state and out-of-state)

o Adult (“non-traditional”) students

o Transfer students

o International students

► Grow partnerships with employers

► Grow endowment

► Strengthen partnerships with community colleges

1 2 3

University responseThe University is actively executing a transformation plan, focused on stabilization, investment, and growth


Historical highlightsGeneral Fund & Auxiliary Funds


4,611 4,411 4,437

4,030

4,772

2,047

3,440

1,693

3,296 3,285

4,956

2,795

0

1,000

2,000

3,000

4,000

5,000

6,000

First Time FullTime Freshman

Other Freshman Sophomore Junior Senior Other (Unknown,Unclassified, Non-

degree)FY13 FY14 FY15 FY16 FY17

Enrollment trend - UndergraduateEnrollment has been trending downward since FY12, especially at the freshman and sophomore levels making it challenging for UA to replace larger senior classes

Actual Fall Enrollment1 – Undergraduate Only

Decreasing number of incoming freshman

Large senior class relative to freshman in FY17

1 Extract from UA fall enrollment data; categorizations based on preliminary analysis and subject to further review


$240 $236 $227 $221 $211 $187

$94 $95 $96 $99 $106

$107

$60 $58 $61 $61 $45

$46

$25 $22 $24 $19 $24

$19

0

50

100

150

200

250

300

350

400

450

FY12A FY13A FY14A FY15A FY16Prelim

FY17B

Re

ven

ue

($

mill

ion

s)

Net Tuition SSI Auxiliary Other

57% 58% 56% 55% 55% 52%

22% 23% 24% 25% 28% 30%

14% 14% 15% 15% 12% 13%

6% 5% 6% 5% 6% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


FY17B

Re

ven

ue

mix

pe

rce

nta

ge

Tuition SSI Auxiliary revenue Other

Historical Revenue MixRevenue decreases have been concentrated in tuition due to declining enrollment and increases in scholarships

Revenue Components1

1 Tuition revenue is shown net of undergraduate and athletic scholarships; all stipends and remissions are included in expenses


48% 49% 48% 47% 44% 45%

15% 15% 15% 16%17% 17%

8% 8% 9% 9% 10% 8%

21% 20% 19% 18% 19% 19%

5% 5% 5% 6% 6% 6%

3% 4% 4% 4% 4% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


FY17B

Exp

en

se m

ix p

erc

en

tage

Salaries & Wages Pension, OPEB & benefits

Debt Service Supplies, services & other

Graduate Remissions Utilities

$200 $202 $195 $192 $172 $169

$63 $62 $61 $65 $68 $65

$33 $33 $35 $38 $39

$31

$89 $82 $75 $71

$75$72

$21 $21 $22 $23

$22 $22

$14 $15 $15 $17

$16 $17

0

50

100

150

200

250

300

350

400

450


FY17B

Exp

en

se (

$ in

mill

ion

s)

Salaries & Wages Pension, OPEB & benefits

Debt Service Supplies, services & other

Graduate Remissions Utilities

Historical Expenditure MixCost reduction strategies have helped to manage cost growth in recent years but have typically lagged losses in enrollment and revenue

Expense Components1,2

1 Salaries & Wages – includes graduate and undergraduate stipends2 Supplies, Services, & Other – includes travel, IT & communications, equipment (classroom, lab, auxiliary operating supplies), marketing, maintenance, and net transfers3 Pension, OPEB & Benefits – includes pension, health benefits/life - active, OPEB – retiree dependent, and other fringe benefits excluding graduate remissions shown separately


Undergraduate Scholarships & Awards, $38

Undergraduate Student Assistants, $7

Graduate Remissions, $22

Graduate Stipends – teaching, $7

Graduate Stipends – non-teaching, $5

Employee & dependent remissions, $4

Total - $83M2

$-

$10

$20

$30

$40

$50

$60

$70

$80

$90

FY16

($ in

mill

ion

s)Tuition Discounts and StipendsTuition discounts/remissions, assistantship wages, and stipends had an $83M impact on FY16 financial results

FY16 - Scholarships, remissions, and stipends1

Graduate

~$33M per year

Undergraduate

~$45M per year

Employee & dependent remissions ~$4M per year

FY161 Undergraduate scholarships and awards are recorded in revenue netted against tuition; all other discounts, remissions, and stipends are classified as expenses2 Does not take into account impact on SSI, these enrollments may generate SSI revenue

1


Pension & Benefits ExpendituresPension and benefits payments combined are ~15% of revenues and are split about 50/50 between Pension/OPEB and health benefits

$-

$10

$20

$30

$40

$50

$60

FY16

($ in

mill

ion

s)

FY16 Benefits

$ 56M

OPERS

OPEB (UA plan)

SERS

STRS

Medical and

other benefits

ARP

SERS surcharge

Pension/

OPEB

Health Benefits

~$28M per year

~$28M per year

~15% of revenue


Long Term DebtUA has ~$450M of long-term obligations including bonds and capital leases, which ties up $35M-$40M per year of revenues

$-

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

FY16

FY16 Long Term Debt

~$ 450MCapital Lease

OAQDA Bonds

General Receipts

Bonds($ in

mill

ion

s)

~$35M+ per year-or-

~10%+ of revenue


Total Debt Service RequirementsThe debt maturities are gradual over the next 25+ years with annual debt service amounts around ~$35M per year for the next 10 years

$-

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$-

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29 FY30 FY31 FY32 FY33 FY34 FY35 FY36 FY37 FY38 FY39 FY40 FY41 FY42

An

nu

al D

ebt

Serv

ice

($

in m

illio

ns)

Principal Interest Capital Lease Total Debt

Debt Amortization

~$450M

Source – debt amortization schedules provided by management

Total d

ebt ($

in m

illion

s)


AppendixGeneral Fund & Auxiliary Funds


Acronym key

► UA: University of Akron

► SSI: State Share of Instruction

► UG: Undergraduate

► Grad: Graduate

► OPEB: Other post employment benefits

► ARP: Alternative Retirement Plan

► SERS: State Employee Retirement System

► STRS: State Teachers’ Retirement System

► OPERS: Ohio Public Employees Retirement System

► OAQDA: Ohio Air Quality Development Authority

► Auxiliaries: Athletics, Residence Life & Housing, EJ Thomas Performing Arts Hall, Dining, Recreation &Wellness, Student Union, Parking, Telecom, and Wayne Student Union


Actuals Forecast

($ in millions) FY12A FY13A FY14A FY15A

Prelim

FY16 FY17B

Revenue

Gross tuition & fees 269.8$ 269.8$ 261.4$ 257.5$ $ 249.6 $ 233.2

Scholarships (29.9) (33.5) (34.4) (36.8) (38.5) (46.4)

Net tuition & fees 240.0 236.3 227.0 220.7 211.1 186.7

State share of instruction 94.2 94.7 95.9 98.9 106.3 106.5

Other revenue 84.6 79.9 85.1 79.4 69.1 64.4

Total revenues 418.8$ 410.9$ 408.1$ 399.1$ $ 386.5 $ 357.6

Expenses

Salaries & wages (200.1) (202.2) (195.0) (191.7) (172.0) (169.4)

Fringe benefits & remissions (30.0) (30.5) (27.9) (29.0) (27.3) (28.8)

Pension (26.7) (26.9) (27.8) (27.1) (24.9) (27.0)

Medical/life & other active (25.2) (21.6) (24.2) (28.8) (34.8) (27.9)

Supplies & services (57.2) (56.0) (51.6) (53.9) (56.2) (52.0)

Purchased utilities (13.9) (14.5) (15.3) (16.5) (16.4) (16.6)

Other (26.1) (23.1) (20.7) (17.9) (11.2) (16.0)

Operating expenses (379.2) (374.8) (362.3) (364.9) (342.7) (337.6)

OPEB (retiree dependent medical/life) (1.7) (4.3) (3.2) (3.1) (3.1) (3.1)

Debt service (32.5) (32.7) (34.6) (38.1) (38.6) (31.1)

Debt & OPEB expenses (34.3) (37.0) (37.8) (41.3) (41.8) (34.1)

Net transfers in/out (5.5) (2.6) (2.9) 0.6 (8.0) (3.8)

Total expenditures & transfers (419.0)$ (414.5)$ (403.1)$ (405.7)$ $ (392.5) $ (375.6)

Net surplus / (deficit) (0.2)$ (3.6)$ 5.0$ (6.6)$ $ (6.0) $ (18.0)

General Fund + Auxiliary Financial Summary1

1 Revenues and expenses include Auxiliaries; “Accumulated unrestricted fund balance” represents General Fund only. Due to rounding, numbers presented above may not add up precisely to the totals.


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