University of Akron Discussion 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 other form 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. Page 1
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, reductionsin-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 Page 2
Our approach to UA assessment General Fund & Auxiliary Funds Current state assessment Normalized FY16 and FY17 budget Interviews with key university personnel Assessment of normalized run-rate for FY16 and FY17 5-year historical financial trends and analysis Analysis of current FY17 budget based on activity to date and historical performance Impact of cost reduction initiatives implemented to date Understand key risks and opportunities to FY17 budget Impact of auxiliaries on general fund Develop consolidated financial summaries Key takeaways based on latest trends Page 3
Auditor s adjustments EY s assessment Develop unaudited financial summaries using data provided by the University, including auditor s adjustments and approved budget Source of data End of year (June 30 th trial balances) University wide ~ 40,000 lines of data per fiscal year Auditor s reports for State of Ohio CAFR (October) Reporting Audit compliance reports EY assessment Annual Audit University Wide (December) Develop financial summaries Started assessment from the same base data used for the annual audit performed by Plante Moran EY Financial Assessment Historical focus on GF & Auxiliaries Normalized FY16 & FY17 Budget one-time rev & exp Reclassifications Adjust for gross ups Budget & Reporting Departmental budget submission Management budget adjustments & updates Monthly quarterly KPI and financial reporting Page 4
General Fund & Auxiliaries Focus This 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 FY17 Budget ($M) Transfer in from GF fund balance $18 Subsidy/ Transfer to Aux $35 Deficit/ Transfer 2 $18 FY17 Budget ($M) Consolidated View Revenue $359 Expense $342 Revenue $404 Expense $422 General Fund Subsidy / Transfer from GF $35 Revenue $45 Auxiliary Expense $80 TOTAL (gross) 1 1 Revenues above are presented consistent with the budget (i.e. gross before scholarships and remissions); All scholarships and remissions are included in expenses 2 Deficit is funded by transfer from General Fund reserve balance Page 5
General Fund & Auxiliaries Focus FY17 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 Deficit/ Transfer 1 $18 FY17 Budget ($M) Consolidated View Normalized Deficit/ Transfer ~$30M FY17 Pro-forma ($M) Consolidated View 2 Savings and deferrals ~$12M 1 Revenue $404 Expense $422 Revenue $404 Expense $422 1 Deficit is funded by transfer from General Fund reserve balance 2 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 ~$5m elimination of open positions which will require management review at the beginning of FY18. Page 6
($ in millions) Historical Financial Trends Without 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/Expenditures 1 450 400 350 $419 $419 $411 $415 $408 29,699 $403 $399 $406 $387 $393 $358 $376 40,000 35,000 30,000 300 25,000 250 200 150 23,152 20,000 15,000 Enrollment 100 10,000 50 5,000 0 FY12A FY13A FY14A FY15A FY16P FY17B 0 Revenue Expense Enrollment 1 Revenues are shown net of undergraduate and athletic scholarships; stipends and remissions are included in expenses Page 7
($ in millions) Historical Fund and Unrestricted Cash Balance Trend If 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. 120 100 $109 $104 $111 $108 $97 80 60 40 Cost reduction efforts $79 Continued pressure on operations and financial performance absent any action 20 0-20 -40 $5.0 $(0.2) $(3.6) $(6.6) $(6.0) $(18.0) FY12A FY13A FY14A FY15A FY16P FY17B University response to this pressure will focus on stabilization and investment for growth Annual surplus / (deficit) Unrestricted Cash 1 Since UA uses cash pooling, the unrestricted cash balance is estimated based on preliminary analysis and subject to further review Page 8
University response The University is actively executing a transformation plan, focused on stabilization, investment, and growth 1 2 3 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 o o o Freshmen (in-state and out-of-state) Adult ( nontraditional ) students Transfer students International students Grow partnerships with employers Grow endowment Strengthen partnerships with community colleges Page 9
Historical highlights General Fund & Auxiliary Funds Page 10
Enrollment trend - Undergraduate Enrollment 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 Enrollment 1 Undergraduate Only 6,000 Decreasing number of incoming freshman Large senior class relative to freshman in FY17 4,956 5,000 4,611 4,411 4,437 4,772 4,000 3,440 3,296 4,030 3,285 3,000 2,795 2,000 1,693 2,047 1,000 0 First Time Full Time Freshman Other Freshman Sophomore Junior Senior Other (Unknown, Unclassified, Nondegree) FY13 FY14 FY15 FY16 FY17 1 Extract from UA fall enrollment data; categorizations based on preliminary analysis and subject to further review Page 11
Revenue ($ millions) Revenue mix percentage Historical Revenue Mix Revenue decreases have been concentrated in tuition due to declining enrollment and increases in scholarships Revenue Components 1 450 100% 6% 5% 6% 5% 6% 5% 400 350 $25 $22 $24 $19 $60 $58 $61 $61 $24 $45 $19 90% 80% 14% 14% 15% 15% 12% 13% 300 250 $94 $95 $96 $99 $106 $46 $107 70% 60% 50% 22% 23% 24% 25% 28% 30% 200 40% 150 30% 57% 58% 56% 55% 55% 52% 100 $240 $236 $227 $221 $211 $187 20% 50 10% 0 FY12A FY13A FY14A FY15A FY16 Prelim Net Tuition SSI Auxiliary Other FY17B 0% FY12A FY13A FY14A FY15A FY16 Prelim Tuition SSI Auxiliary revenue Other FY17B 1 Tuition revenue is shown net of undergraduate and athletic scholarships; all stipends and remissions are included in expenses Page 12
Expense ($ in millions) Expense mix percentage Historical Expenditure Mix Cost reduction strategies have helped to manage cost growth in recent years but have typically lagged losses in enrollment and revenue Expense Components 1,2 450 400 350 300 250 200 150 100 $14 $15 $21 $15 $17 $21 $22 $23 $89 $82 $75 $71 $33 $33 $35 $38 $63 $62 $61 $65 $200 $202 $195 $192 $16 $22 $17 $22 $75 $72 $39 $31 $68 $65 $172 $169 100% 90% 80% 70% 60% 50% 40% 30% 20% 3% 4% 4% 4% 4% 4% 5% 5% 5% 6% 6% 6% 21% 20% 19% 18% 19% 19% 8% 8% 9% 9% 15% 15% 15% 16% 48% 49% 48% 47% 10% 8% 17% 17% 44% 45% 50 10% 0 FY12A FY13A FY14A FY15A FY16 Prelim FY17B 0% FY12A FY13A FY14A FY15A FY16 Prelim FY17B Salaries & Wages Debt Service Graduate Remissions Pension, OPEB & benefits Supplies, services & other Utilities Salaries & Wages Debt Service Graduate Remissions Pension, OPEB & benefits Supplies, services & other Utilities 1 Salaries & Wages includes graduate and undergraduate stipends 2 Supplies, Services, & Other includes travel, IT & communications, equipment (classroom, lab, auxiliary operating supplies), marketing, maintenance, and net transfers 3 Pension, OPEB & Benefits includes pension, health benefits/life - active, OPEB retiree dependent, and other fringe benefits excluding graduate remissions shown separately Page 13
($ in millions) Tuition Discounts and Stipends Tuition discounts/remissions, assistantship wages, and stipends had an $83M impact on FY16 financial results $90 $80 $70 $60 $50 $40 FY16 - Scholarships, remissions, and stipends 1 FY16 Total - $83M 2 Employee & dependent remissions, $4 Graduate Stipends non-teaching, $5 Graduate Stipends teaching, $7 Graduate Remissions, $22 Undergraduate Student Assistants, $7 Employee & dependent remissions ~$4M per year Graduate ~$33M per year $30 $20 1 Undergraduate Scholarships & Awards, $38 Undergraduate ~$45M per year $10 $- FY16 1 Undergraduate scholarships and awards are recorded in revenue netted against tuition; all other discounts, remissions, and stipends are classified as expenses 2 Does not take into account impact on SSI, these enrollments may generate SSI revenue Page 14
($ in millions) Pension & Benefits Expenditures Pension and benefits payments combined are ~15% of revenues and are split about 50/50 between Pension/OPEB and health benefits FY16 Benefits $60 $ 56M $50 SERS surcharge OPEB (UA plan) ARP $40 OPERS SERS Pension/ OPEB ~$28M per year $30 STRS ~15% of revenue $20 $10 Medical and other benefits Health Benefits ~$28M per year $- FY16 Page 15
($ in millions) Long Term Debt UA has ~$450M of long-term obligations including bonds and capital leases, which ties up $35M- $40M per year of revenues FY16 Long Term Debt $500 $450 $400 Capital Lease ~$ 450M OAQDA Bonds $350 $300 $250 $200 General Receipts Bonds ~$35M+ per year -or- ~10%+ of revenue $150 $100 $50 $- FY16 Page 16
Annual Debt Service ($ in millions) Total Debt Service Requirements The debt maturities are gradual over the next 25+ years with annual debt service amounts around ~$35M per year for the next 10 years Debt Amortization $50 $45 ~$450M $500 $450 $40 $400 $35 $30 $25 $20 $15 $350 $300 $250 $200 $150 Total debt ($ in millions) $10 $100 $5 $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 $- Source debt amortization schedules provided by management Principal Interest Capital Lease Total Debt Page 17
Appendix General Fund & Auxiliary Funds Page 18
Acronym key UA: University of Akron SSI: State Share of Instruction UG: Undergraduate Grad: Graduate OPEB: Other post employment benefits ARP: Alternative Retirement Plan SERS: State Employee Retirement System STRS: State Teachers Retirement System OPERS: Ohio Public Employees Retirement System OAQDA: Ohio Air Quality Development Authority Auxiliaries: Athletics, Residence Life & Housing, EJ Thomas Performing Arts Hall, Dining, Recreation & Wellness, Student Union, Parking, Telecom, and Wayne Student Union Page 19
General Fund + Auxiliary Financial Summary 1 Actuals ($ 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) 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. Page 20
THIS PAGE INTENTIONALLY LEFT BLANK