BRADENTON, Fla. — The Florida Legislature’s fiscal 2013 budget taps reserves of the state’s 11 public universities to help balance the state budget — “a clear credit negative” for the schools, according to Moody’s Investors Service.
“This legislation effectively punishes those universities that built reserves and we view the reduction of these reserves as credit negative,” said analyst Dennis Gephardt.
While tapping the reserves of state universities is a first for Florida, it could become a trend given the ongoing budget pressures in other states, he said.
The budget is still subject to Gov. Rick Scott’s approval, though he is seen as unlikely to veto the use of higher education reserves, and has previously advocated that municipalities spend their reserves to reduce reliance on property taxes.
The annual legislative session ended March 9 with lawmakers passing a $70 billion budget for the upcoming fiscal year.
To close a budget gap, legislators ordered a total of $300 million in reductions at the 11 institutions in the State University System. They also created a controversial 12th university at the behest of a single lawmaker during the final hours of budget negotiations.
Lawmakers imposed across-the-board reductions of 6.9% in state appropriations at each university, a total cut of $100 million, and $50 million in cuts based on anticipated tuition income.
Another $150 million came from universities’ reserves to help balance the state budget — an action that has not occurred since at least the current Board of Governors began overseeing the University System in 2002, according to board spokeswoman Kelly Layman.
The board and its committees were assessing the loss of state funding and reserves, as well as the impact of Moody’s opinion in meetings this week, Layman said.
“While lawmakers cited the cash grab as a non-recurring measure, this policy of taking cash clearly discourages building flexible reserves,” Gephardt said, adding that Moody’s expects the universities to manage the cuts.
Lawmakers began planning for the cuts last fall when they asked each university to project the amount of unrestricted reserves they would have by this coming June 30. They set 5% as the amount of reserves each institution should retain, and took the rest.
Though some had reserves well in excess of 5%, some of the biggest universities suffered the largest cuts.
The reductions in reserves ranged from a high of 24% at Florida State University to 11% at the state flagship, the University of Florida, to a low of 9% at the University of North Florida.
FSU, located in the capital city of Tallahassee, is the state’s second-largest institution by budget size at $418 million. The Legislature trimmed reserves by $161 million at the university, which has nearly 42,000 students. FSU officials could not be reached for comment.
While general reserves typically are not used to secure debt, FSU has $380 million of long-term debt outstanding through 2040.
Its bonds are rated Aa2 by Moody’s, AA by Fitch Ratings and AA-minus by Standard & Poor’s. All three agencies have stable outlooks on the debt.
Moody’s noted that reserves do not include the assets at university support foundations and other direct-support organizations that provide “considerable” financial strength.
At Florida State, 57% of the total financial resources of $1.25 billion in fiscal 2011 were held by support organizations. In addition, 15% of the support organization wealth is free from external restrictions, Moody’s noted.
Under the current structure, the two major funding sources are state appropriations, consisting of general revenue and lottery funds, and student tuition.
With a decline in Florida revenue during the past five years, the universities have seen a decline in state appropriations and a greater reliance on student tuition, to the point where tuition is paying for nearly 50% of the budget, according to a State University System report.
Since fiscal 2008, the University System has experienced more than $730 million in base budget reductions of recurring general revenue and lottery funds.
Over the past 10 years, tuition has increased 58% while enrollment has increased more than 24%.
“Each university has been diligent in developing cost-saving strategies to help offset — but not fully replace — the budget shortfalls,” the report said. “These measures have included reducing enrollments, or increasing enrollments to generate tuition revenue, implementing hiring freezes, utilizing more adjunct professors, evaluating branch campus operations, merging units or departments, and outsourcing additional services.”
In addition to declining state support for university operations, a decline in capital funding is another ongoing problem as a result of the recession and the slow growth in revenues.
The University System currently relies on state Public Education Capital Outlay funding, which comes from a portion of the gross receipts tax on utilities, including electricity, telecommunications and cable.
The PECO program is the primary source for university construction and building maintenance. It also provides similar funding for K-12 schools, usually through Florida’s largest bond program.
Tax receipts have fluctuated widely since the onset of the recession, putting a damper on bonding capacity.
In addition, the governor and other top Republicans, who control the Legislature, are debt-averse and have approved little or no PECO bonding authority in the past two years.
The system needs between $200 million and $400 million a year to maintain and modernize existing buildings and utility infrastructure, officials said. The total appropriation in the current state budget is less than $10 million.
The University System board was expected to appoint a task force on facilities this week to recommend alternative sources of capital funding.
“We will continue the drumbeat on this issue, because it is a three-part challenge that is coming to a head: future construction projects face real uncertainty, universities cannot keep up with the maintenance and renovations of existing taxpayer investment, and the state is issuing fewer bondable projects for the 11 institutions due to continued declining revenues,” said State University System Chancellor Frank Brogan.