Ohio State continues belt-tightening measures

COLUMBUS -- In an effort to protect the university’s resources in a time of continued uncertainty in the state and national economies, The Ohio State University Board of Trustees today (12/5) approved several measures recommended by the administration to rein in spending and control borrowing. These plans -- which include decreasing the payout from the university’s endowment and setting more stringent guidelines on how and when the university takes on debt for capital projects -- are designed to continue Ohio State’s efforts to tighten its belt and improve its fiscal stewardship during this period of economic uncertainty.

“These actions are necessary to preserve two of the university’s most valuable financial assets: its endowment and its good credit rating,”William J. Shkurti, vice president for business and finance, told trustees.

The university’s endowment -- which ended the last fiscal year with a value of $956 million -- is funded by gifts from donors and grows largely on the strength of its investments. Recent declines in the stock market have adversely affected the endowment’s growth, he said.

A continuation of the current distribution policy could have undesirable consequences, Shkurti said. For example, assuming a payout of 5 percent, plus expenses, and an inflation rate of 2.5 percent, the endowment must grow 9.13 percent annually to preserve the value of a donor’s original gift.

“Maintaining the confidence and trust of our donors is extremely important to us,”said James C. Schroeder, vice president for development. “These actions will allow us to assure them that the value of their original gift will be preserved even in a period of market decline.”

Important steps the university will take to counteract these declines include reducing the payout rate on funds currently in the endowment and additional gifts to those funds from 5 percent this year to 4.75 percent in fiscal year 2005 and 4.5 percent in FY 2006. For new funds beginning in fiscal year 2005, the payout rate will be 4 percent. The university will report back to the trustees regarding proposed payout rates for FY 2007 and FY 2008, but any payout will be limited to a 3 percent increase or a 1 percent reduction.

The university will also now calculate payout amounts based on a five-year rolling average rather than a three-year average. This will give the university a more predictable picture of the endowment’s value and will help the university better address the peaks and valleys in the stock market.

“Adopting a predictable range for future endowment distributions will help us assure the colleges and other units of a predictable stream of income while at the same time protecting the value of the endowment,”said James L. Nichols, university treasurer.

Reducing the payout to academic and support units will cost colleges nearly $12 million in lost revenue during the next four years, Shkurti said. Particularly hard hit will be the College of Engineering, which will lose nearly $2 million of revenue from the endowment; the Fisher College of Business, which will lose $1.6 million; the College of Food, Agriculture and Environmental Sciences, $1.5 million; the College of Medicine and Public Health, $2.7 million; and the Moritz College of Law, nearly $1 million.

“Although these actions will present challenges to our academic units, we are working to minimize the effects on our academic units so that we can continue to work toward the goals of the Academic Plan,”said Barbara R. Snyder, interim vice president and provost. “As these decisions have been made, we have communicated broadly with deans and chairs, and we will continue to keep the campus informed as we seek ways to help colleges absorb these losses.”

In addition, the university will decrease the amount it takes from the endowment to support development efforts from 1.33 percent this year to 1 percent in FY 2007. This means the university will have to find other sources for approximately $3 million in continuing funds over the next four years to replace the operating funds lost by the Office of University Development. Officials will report back to the board early next year with their proposals.

Policies address use of debt and internal credit for capital projects

The university, which in the past has aggressively used university-backed debt to help finance capital projects, also set guidelines that limit the amount of new debt it will take on and capped at $400 million the amount of capital projects the university will fund in its next bond issue. The university also will freeze for 12 months bonding for new projects that have not already been identified and approved.

Current capital projects that will continue as planned are renovations of the Main Library, Student Recreation Center, Robinson Lab, Smith Lab and Brown Hall, as well as a new building for the Department of Psychology and the expansion of the Comprehensive Cancer Center.

“Using university-backed debt has not been a problem in the past because our debt ratios were very low,”Shkurti said. “But over the last 10 years, we’ve issued a substantial amount of new debt to finance needed facilities, and now we need to be concerned that we are approaching our capacity at our current credit rating.

“Addressing the issue now will allow us to meet our current commitments, as well as retain enough capacity to meet a limited number of new commitments consistent with our Academic Plan,”he said. “Failure to address this issue could result in a rating downgrade, which would cost the university higher interest rates on future projects.”

A similar set of guidelines defining when internal lines of credit will be granted to academic and support units also was approved.

Annual audit shows university finances sound

Trustees approved an annual audit by Deloitte and Touche of the university’s financial statements for 2002-03 that shows the university’s overall financial health remains sound. The firm reviewed university accounts and records and found them to be satisfactory, Shkurti said. The firm also made some constructive comments, which the trustees reviewed.