August 7, 2024

OU provides financial update to university community 

As the bargaining teams continue to work with a state-appointed mediator during the ongoing negotiating sessions, OU believes it’s important to share with the university community an update on its financial outlook. While this information has been provided over the past year by OU’s chief financial officer at multiple meetings with University Senate and several of its subcommittees, as well as to OU-AAUP members at the bargaining table, it is just as important for all faculty and community members to understand its priorities and the headwinds the university is facing.

OU’s budget priorities remain the same: taking care of its employees, staying affordable for the students it serves and ensuring long-term fiscal viability. All three priorities must work in concert with one another. To that end, it is important to understand the challenges facing higher education, particularly in Michigan:

• The upcoming enrollment cliff: OU relies primarily on two sources for revenue: tuition dollars and state funding. While state funding is expected to remain modest over the next five years, with projected increases of only 1-2%, the number of high school graduates in the state will decrease dramatically in the coming years. This demographic shift presents a compounded problem for OU, where 96% of undergraduates come from Michigan. This anticipated future loss in tuition revenue must continue to be planned for to avoid budget cuts in the future. It also is imperative that OU plan tuition increases at a modest level to ensure affordability for its students.
• The impact of Michigan’s free community college program: As the state of Michigan rolls out its free community college program this fall, one of the unintended consequences experts are concerned about is the impact that will have on the state’s regional four-year schools, including OU. Many students, particularly those in Oakland and Macomb counties, may choose to attend community college instead, causing a decline in OU’s enrollment and the resulting loss in tuition revenue. Again, keeping tuition reasonable is crucial, as OU does not want to price out students who may choose community college for their first and second years.
• The appropriate use of OU’s reserves: The University’s unrestricted reserves were just more than $200 million as of Fiscal Year 2023. Our reserves have grown over time in concert with the growth of the University. This has been accomplished through prudent fiscal management, favorable market performance, and spending restraint. There are many reasons why it is essential to maintain sufficient reserves, not the least of which is to be able to fund operations during times of economic uncertainty. Maintaining OU’s credit rating and outlook is also key to maintaining appropriate reserve balances. The National Association of College and University Business Officers recommends institutions have reserves sufficient to cover 90-180 days’ worth of operating expenses. Of the $200 million of unrestricted reserve balances, only about $50 million is not already designated or committed for use. Using this figure, the University could cover roughly 45 days of its operating expenses. As mentioned, much of the reserves are already committed to how they can be spent (for example, some donor gifts have directed uses, some of our reserves are invested to fund deferred maintenance and other portions are divisional designated funds that while not “restricted” are earmarked by the department or unit in which they exist). Committing to permanent and ongoing budget allocations (such as salary increases) where the funding source is one-time money (such as reserves) could put OU in the precarious position of having to make further budget cuts considering economic headwinds.

To be sure, these negotiations are occurring as the country continues to face inflationary pressures. OU acknowledges the difficulty this has caused for many of its employees, including faculty. It has caused significant challenges to the institution as well. 

Looking at all these factors, OU remains committed to all its employees, including faculty, who are critical to the institution’s success. OU is eager to find a sustainable economic solution with OU-AAUP that rewards faculty without putting the university into a significant budget deficit by dangerously depleting its reserves or by raising tuition to the detriment of our students and our overall tenuous enrollment trajectory.