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Campus budget update: Projected increases in state funding, revenue

By Public Affairs

Chancellor Carol T. Christ, Interim Executive Vice Chancellor and Provost Catherine P. Koshland and Vice Chancellor of Finance and Chief Financial Officer Rosemarie Rae sent the following message to the campus community Friday:

Now that we have greater clarity regarding key elements of our financial situation, we want to provide the campus community with an update on the university’s budget. While serious challenges remain, there is ample reason to conclude that our most difficult days are behind us, and to be cautiously optimistic about our financial recovery over the course of the next few years. We are aware of and regret the extent to which forces beyond our control have created difficulties and constraints for all of you who have worked so hard to maintain our mission. We are grateful for your dedication and resilience, and we want to assure you that we are doing everything in our power to hasten our return to better budgetary days.

Looking back

Last year, COVID-19 had a major impact on our finances, resulting in revenue losses and increased costs across the campus and its constituent colleges, divisions and programs. On the revenue side the impacts included decreases in tuition and fees resulting from lost enrollment; reduced revenues in auxiliary enterprises such as Housing & Dining, Athletics and Cal Performances; and a reduction in state funding. At the same time, we confronted increased costs for remote instruction and operations, COVID-19 testing and contact tracing, and enhanced cleaning of our facilities.

To mitigate the impact of COVID-19 on our academic programs and core administrative functions, we took multiple actions, including a temporary halt on staff merit increases and faculty range adjustments, facilitation of voluntary separations, retirements and pay cuts, a limited number of temporary lay-offs, and a hiring freeze. In addition, there was a successful effort to curb other operating expenses, particularly in the areas of travel and entertainment. We also implemented short-term borrowing and cash management strategies that provided us with the additional resources and flexibility we needed to navigate the pandemic’s impact.

Finally, we greatly benefitted from three rounds of Higher Education Emergency Relief Fund (HEERF) funding from the federal government, which provided approximately $70 million for student support and $85 million for institutional support. The institutional portion was used to compensate for lost tuition and the refunds that were provided to students who had to vacate their housing as a result of the pandemic.

We are relieved that we were able to largely mitigate the pandemic’s impact on jobs, sustain our academic excellence, and preserve our essential administrative functions. Yet, even with these mitigation efforts and extraordinary federal funding, we are still projecting an operating deficit for fiscal year 2021.

Looking ahead

While COVID-19 will continue to have a financial impact on the campus this year, there are several positive factors that will support our recovery. First, state funding has not only been restored to pre-pandemic levels, it has been increased by 5%. Second, enrollment and tuition and fee revenue have recovered. And, for the first time in many years, the UC Regents have approved tuition increases. Beginning in fall 2022, incoming undergraduate students (both freshmen and transfers) will be charged tuition and fees on a cohort basis. Rates will remain constant and predictable during each cohort’s time at Berkeley, with moderate increases for each subsequent, incoming cohort. At the same time, the Regents approved annual increases to graduate tuition and fees based on inflation.

The projected increases in state funding, tuition and fees will certainly facilitate a better financial future for our university. Yet, challenges persist. As you may know, over the next five years, the state legislature expects the UC campuses to reduce their percentage of non-resident undergraduate enrollment to 18%. Berkeley is currently at 24.4% and so this will result in a significant loss of non-resident tuition, unless it is reimbursed by the state, a step that has not yet been taken. In addition, the Office of the President is considering changes to the formulas used to allocate state funding among the UC campuses, a process referred to as “re-benching.” If the new formulas strike a balance that is more heavily weighted toward undergraduate education, as is currently being discussed, then Berkeley could be disadvantaged given the extent of our graduate programs relative to many of the other campuses. More generally, as the campus recovers from the pandemic, costs, such as salary increases (that were largely frozen last year) will almost certainly begin to rise again this year. These increased costs will put continued pressure on campus finances, even as we confront limitations on campus revenue.

Central ledger and finance reform

While we can expect our finances to begin to recover in the coming years, the condition of what is known as the central ledger continues to deteriorate. It is from the central ledger that we provide funds for essential campus operations, faculty salaries, operating and capital expenses, faculty start-up and retention costs, and Temporary Academic Support (TAS). Under our current financial system, the central ledger is being drained by annual expenses that exceed its replenishing revenues. As a result, we project that by the end of FY22, there will be less than $10M of reserves left in the central ledger–a dangerously low level for a campus with a $3 billion annual budget.

This perilous and unsustainable trend means that we now, more than ever, must complete work on our finance reform initiative that was put on hold when the pandemic hit. The initiative entails a comprehensive review and analysis of our system for allocating campus resources in order to establish new policies and practices that will support a more sustainable and equitable system for the future.

The Offices of the Executive Vice Chancellor and Provost and the Vice Chancellor of Finance will lead our effort to rebuild resources in the central ledger and to reconfigure how funds are allocated across campus. Work will begin later this fall after the conclusion of the annual budget process. We look forward to extensive engagement and collaboration with colleges, schools, operating units and programs across the campus. We see this as an essential effort to strengthen our financial position, rationalize our processes, and ensure that Berkeley, and its community of faculty, staff, and students, will be able to flourish in the years to come.

We are, and will always be, grateful for, and proud of, the strength, commitment and resilience of our faculty, students and staff. You have, for the sake of our mission and our community, sacrificed, innovated and persevered over the course of the last 18 months. You have enabled this public university to meet its obligations, advance its mission, and be a responsible, prudent steward of the resources we receive. For that we extend our sincere appreciation.