Spending cuts signal new direction for Washington State University

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PHOENIX — Washington State University is cutting costs to offset expensive investments the school has made in recent years, a decision analysts said was necessary in the competitive higher education sector.

WSU president Kirk Schulz has made multiple announcements over the past two weeks describing the university’s fiscal condition and the need to eliminate a $30 million annual budget deficit.

The school, based in Pullman near the Idaho border, has overspent by about $25 million a year each of the last four years, Schulz said, significantly slashing its reserves and earning negative reactions from rating agencies in the process. The school has a more than $800 million debt portfolio, including some $668 million of revenue and refunding bonds outstanding as of the close of fiscal year 2016.

“For our current fiscal year, each unit at WSU has been instructed to reduce its spending by 2.5%,” Schulz said in an Oct. 23 email to the university community. WSU has been tapping into its reserves to pay its bills, the president said, and as a result the reserve has dropped 56% from to less than $100 million last year from about $200 million in fiscal year 2013.

“Our goal is to reduce our $30 million annual deficit spending by $10 million in FY2018 and continue these reductions in future fiscal years until the deficit is eliminated and our reserves have returned to healthy levels,” wrote Schulz.

A large chunk of those cost savings are likely to end up resulting from the elimination of faculty and staff positions, added Schulz, who has been WSU’s president since June 2016.

“While we are working hard to minimize the impact of these cuts on students, faculty, staff, and the community, difficult decisions must be made,” the president’s message continued. “And while our personnel are the university’s most valuable resource, salaries and benefits make up approximately 85% of the budget. Thus—while it is a very challenging and agonizing process—it is inevitable that we must eliminate some positions in order to get our budget in balance.”

Analysts from Moody’s Investors Service and S&P Global Ratings, the agencies that rate WSU’s debt, said the budget imbalance resulted from a deliberate decision to make expensive investments viewed as necessary for the school to continue to compete with other large West Coast research universities.

Moody’s, which rates WSU Aa2, last published a report on the school in April 2016 when the school was preparing to come to market with a $91 million of revenue bonds. Moody’s revised WSU’s outlook to negative from stable at that time, citing the reduction in financial flexibility that accompanied the overspending.

Eva Bogaty, the lead Moody’s analyst for WSU, said this week that the situation WSU finds itself in did not surprise her.

“They were eyes wide open going into increasing their expenses,” Bogaty said. “They were making a strategic decision.”

Among those strategic decisions was the 2015 founding of a new medical school in Spokane that welcomed its inaugural class this year. While the state legislature provided some funding in support of the medical school, the cost of educating a medical student far outstrips tuition costs.

“We’re in a very competitive, very challenging operating environment,” Bogaty said, adding that WSU has expressed a need to spend significant amounts of money to remain an attractive destination for students.

“We definitely expected expenses to really pop up,” she said.

Jessica Matsumori, an S&P analyst, said the timing if the cost-cutting push made sense to her on the basis of the end of the fiscal year and based on recent leadership changes at the university. Previous WSU president Elson Floyd, for whom the new medical school is named, died of cancer in June 2015 only about two weeks after taking a leave of absence.

He had been WSU president for eight years. Matsumori said it often takes a year or two for new management to organize and launch a new budgetary endeavor of this kind, and that state restrictions on tuition costs have also hampered WSU. The state’s 2015-2017 budget cut four-year college tuition costs by 15%-20%.

S&P downgraded WSU to A-plus from AA-minus in December 2016, but Matsumori said she was inclined to view Schulz’ cost-cutting announcement in a positive light.

“The fact that they are taking very proactive steps to right-size their budget, that certainly is a very good thing,” Matsumori said.

Despite the budget imbalance, WSU still has advantages that appeal to investors. Moody’s noted the school’s “well-integrated budgeting, capital and strategic planning,” as well as its history of strong state support and “favorable student market position as the state's land grant research university.”

“They are a very large, very important institution in the West,” said Bogaty.

She said that unlike in the corporate world, where programs could simply be eliminated because they are unprofitable, such decisions in the higher education sector require public engagement.

“You really need to make your case for what you’re cutting in higher ed,” she said.

Schulz said in his letter that the performing arts program is one such area where cuts are necessary, citing $1.6 million of reserve funding having been used to support the program. Schulz said the university plans to provide financial updates on a monthly basis going forward throughout the academic year.

“These decisions are painful,” he wrote. “They will disrupt lives, and the consequences of eliminating positions will ripple throughout our community. But as much as I and members of the leadership team regret the necessity of these actions, they must be taken in order to restore the university’s overall fiscal health.”

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