UNC’s ‘worst-case scenario’ plans could be just the beginning

Enrollment drops. Employee furloughs and layoffs. Faculty cuts. Shuttered athletic programs.

UNC System schools could see all of these scenarios, according to a new report on campus plans to deal with the financial fallout from the COVID-19 pandemic.

And experts say this could be just the beginning.

“This report is a good starting point,” said Paul Friga, clinical associate professor of Strategy and Entrepreneurship at UNC-Chapel Hill’s Kenan-Flagler Business School. “But it doesn’t get at the full picture.”

Late Friday the UNC System released a 66-page report summarizing how its 17 campuses would react to budget cuts resulting from enrollment drops ranging from 2% up to 50% because of the impact of the ongoing COVID-19 pandemic.

The report came after UNC Board of Governors Chairman Randy Ramsey directed the school’s chancellors to prepare “worst case scenario” planning documents earlier this month.

Policy Watch obtained a copy of the email calling for the plans, was first to report it and has been pursuing the documents since.

Ramsey’s original email to chancellors called for “a plan from each chancellor to reduce their budgets by between 25% and 50%, to account for the reduced revenue resulting from reduced enrollment under various degrees of closure.”

The latest summary report does not call for cuts that severe, but allows for various reductions based almost entirely on enrollment data.

A statement accompanying the report describes seven potential scenarios by which the schools would see enrollment drops as a result of various reactions to the worsening COVID-19 pandemic in North Carolina.

“The seven potential scenarios assume various enrollment decreases, ranging from a minimum of 2% through a maximum of 50%, with an emphasis on the -2% through -10% models,” the statement reads. “Variable decreases in revenue and expenses were also incorporated into each financial model.”

Asking to see 25%to 50% budget reductions — not just enrollment reduction data — was the right move, Friga said — even courageous. He wishes the schools had stuck to that.

“What I think has happened is somebody decided it would be better to frame this as potential decreases in enrollment,” Friga said. “Probably because that would be less worrying to public.”

“They should have stuck with looking at 25% to 50% reductions [in revenue],” Friga said. “That’s what I calculated happened at UNC Chapel Hill during the Great Recession — a 25% hit. And this is going to be worse because of the health part on top of it, the magnitude of unemployment.”

Back in March, Friga conducted strategic scenario planning and concluded the financial hit to universities could be as much as 50%.

There are seven “reaction scenarios” in the UNC System report:

• New normal (status quo)
• Social distancing only
• Online fall 2020 (enrollment down 2% + mandatory fees)
• Online fall 2020 (enrollment decrease of 5%)
• Online fall 2020 (enrollment down 10%)
• Online fall 2020 (enrollment decrease of 25%)
• Online fall 2020 (enrollment down 50%)

The scenarios rely heavily on enrollment data; the schools have those numbers, from which they can then extrapolate.

Other major funding sources are not addressed or not fully factored into the plans. Among those pieces of the financial puzzle are fees and revenues from athletics and state appropriations to the schools.

State lawmakers failed to pass a new state budget this year, so the UNC system and its schools have been operating on and planning based on their last appropriations. System-wide, that funding is nearly $2.7 billion.

“Some of those reports assume state funding is going to stay the same,” Friga said. “No way will state support remains the same. The state is getting crushed on revenue. Higher ed will have to get cut. They have to know that real cuts are coming to higher ed.”

The state does have large potential reserves into which they can and should tap, Friga said.

“But,” he added, “this isn’t going to be over in a year.”

Philanthropic giving to universities is likely also to be significantly lower in the next few years because of pandemic-related stock market losses and unemployment, Friga said.

Athletic programs — and the fees and revenues they generate — are another hazy area.

Most schools noted that they are still waiting on NCAA and ACC decisions about fall sports. It is unclear which sports take place during the pandemic. This summer, student athletes returned early to many UNC campuses for conditioning and practices that were modified to take precautions against infection. Even that resulted in clusters of infections among student athletes and athletics staff  — 37 at UNC-Chapel Hill and 27 at Eastern Carolina University  — that prompted schools to halt activity in the athletics programs.

NC State University noted athletics-related student fees represent only 7% of total revenues; however, the school relies heavily on TV revenue, ticket sales and its ACC distribution to support the athletics program. Football and men’s basketball account for most of that money.

“Based on our initial scenarios — scenarios in which we meet our current employment contract terms and remain committed to scholarship obligations — we will not be able to rely on available fund balance, personnel and operating reductions to totally cover the shortfall in Athletics,” the school wrote in its report to the system. “Cancellation of fall sports will require additional fund raising and debt refinancing to address the balance of such a shortfall.”

Concentrating primarily on loss of revenues, most of the plans also do not factor in significant new expenses faced by the universities because of the pandemic.

“As the University prepares to reopen in fall 2020, we anticipate significant additional expenses to ensure the on-campus safety and health of the campus-community,” UNC-Chapel Hill wrote in its memo to the UNC System office. “The need for financial aid will also likely increase due to significant losses in income for many of our students and their families. Federal and state relief funds have only partially offset incurred revenue losses and estimated reopening expenses to date.”

The UNC System is also, so far, failing account for the massive potential costs of reopening campuses only to have close them again due to infections, Friga said.

Among those costs, he said, the system should figure that tuition and fees will at some point have to be reimbursed and/or lowered, despite announcements by the UNC Board of Governors that no tuition or fees will be refunded or prorated in the coming semester.

There is also the potentially enormous cost of litigation related to students, faculty and university employees getting sick and dying, Friga said. Although Congress has been discussing legislation to indemnify universities, Friga said he doubts that will hold up in court.

Reopening now, with the infection and hospitalization levels where they are, is a dangerous and expensive experiment that didn’t have to happen, Friga said.

The university system has an opportunity to rethink how it offers education in a way that could benefit students, faculty and North Carolina as a whole, Friga said. But it will mean being realistic about budget cuts, realistic funding levels, and fulfilling its educational mission in a post COVID-19 environment.

Most systems schools emphasize that they do not anticipate the dramatic enrollment drops and spending cuts included in the “worst case scenario” plans to be necessary in the coming year, the report said.

Under the highest-impact scenarios, most schools anticipated extreme measures, like the furlough of all non-essential employees, elimination of positions, salary reductions for those who remain, increased teaching loads for faculty, the closing of residence halls to all students except those with nowhere else to live, and the spending down of university fund balances to pay debt service.

N.C. State University is the UNC school with the largest enrollment.

In a memo on the school’s budget reduction scenarios Charles Maimone, vice chancellor for Finance and Administration, addressed the cuts that would be necessary under the worst case drops in enrollment of 25% and 50%.

“Both scenarios require a significant reduction in operating expenditures (65% for 6 months) and depletion of cash balances (90% of all available funds),” Maimone wrote. “While this short term strategy addresses the immediate deficit, reductions of this magnitude would have long term effects on the units delaying critical maintenance of facilities, equipment replacement and increased risk of not meeting future debt service obligations.”

“Both scenarios require reductions in personnel,” Maimone wrote. “For the 50% scenario Athletics will need to reduce personnel costs by 86.6% for the next 6 months, Dining by 18.4% Housing by 15.8%, and the student fee units would need to reduce personnel expenses by 83%.”

“In developing reduction strategies, all efforts were made to protect instructional positions and core academic services,” Maimone wrote. “However, some critical academic support roles, such as advising, likely would need to be reduced.”

Several of the school’s chancellors were blunt in their assessments of the damage under the worst-case scenarios now being gamed out at the UNC System level.

“This scenario planning exercise reveals impacts that could potentially range from significant to catastrophic for UNCG,” wrote UNC Greensboro Chancellor Franklin Gilliam. “In several of the scenarios, the result would jeopardize the moment we’ve generated since my arrival five years ago (i.e. record enrollment, number one ranking in the state on social mobility, record research and fundraising, $1B economic impact in the Piedmont Triad region, meeting all of the UNC System’s strategic performance metrics).”

“In the most extreme scenarios, the budget reduction would do damage with significant lasting negative impacts,” Gilliam wrote. “UNCG would be less able, or potentially unable, to effectively prepare thousands of students for productive careers in the North Carolina workforce, creating a long-term negative impact on our economy.”

“More immediately, the livelihoods of hundreds and perhaps thousands of employees would be adversely affected — particularly given that public higher education is such a labor and capital-intensive industry,” Gilliam wrote, noting that 65% of UNCG’s expenses are related to salary and benefits for personnel.”

“Put another way,” Gilliam wrote. “Given the makeup of our student population, we will no longer be able to take such a vast array of students and enable them to transform their lives and those of their families, in some cases for generations. With 80% of our alums living in our state, the results of such actions would severely hamper the development of the middle class in North Carolina.”

The “worst case scenario” planning is disheartening to faculty already overworked and stressed as they try to plan for the uncertainty of the coming semester.

“UNC System’s budget scenarios have left our faculty and staff severely demoralized,” said Deb Aikat, an associate professor in UNC-Chapel Hill’s school of Journalism and Media. “Over spring and summer, faculty and staff have been working harder by devoting long hours to prepare for reopening in Fall 2020. Instead of rewards for hard work, we are facing the doom of furloughs and budget cuts.”

Defunding higher education just when the state needs it most must be avoided, Aikat said.

“With teaching, research and public service, UNC System schools greatly contribute to North Carolina’s economic engine,” Aikat said. “The UNC System’s budget scenarios should enable North Carolina to seek federal assistance to tide over this crisis.”

“The financial impact of the pandemic will be severe,” Aikat said. “These budget scenarios should impel UNC System leaders to convince our legislators to support higher education to help North Carolina move beyond this crisis.”

Michael Palm, director of graduate studies in UNC’s Department of Communication, agreed.

“This campus has been operating in a crisis mode financially for a decade,” Palm said. “I don’t think anybody is under the illusion that’s not going to get worse.”

The only real solution, he said, is for the General Assembly to see the pandemic for the crisis it is and help the UNC System cope with it appropriately.

Palm points to a recent letter from Prof. Mimi Chapman, chair of the UNC-Chapel Hill faculty, to the UNC Board of Governors.

“As she said, we have this massive ‘rainy day fund,’” Palm said. “If this isn’t a rainy day, I don’t know what is.”

But in the end, Palm said, conversations about whether UNC will be able to play football this year and the financial impact of dips in enrollment are not as important as public health. Repeated petitions and protests by students, faculty and university employees over the danger of returning to on-campus instruction during a worsening pandemic have been all but ignored for months, he said.

“For me, the devil is not in the details here,” Palm said. “I wish they were paying more attention to the health and safety of people on campus. We are talking about life and death consequences for people who teach and go to school here, who live on next to these campuses. That’s the most important thing.”

Click below for a closer look at the estimated revenue impact scenarios: