Due to the operational impacts of the pandemic, the campus requires mitigation strategies to address the immediate financial losses and risks.
Updated April 16, 2021
In March of 2020 as the COVID-19 pandemic unfolded, UC Davis began to experience lost net revenues and increased operating expenses. Due to the impact of the pandemic on our operations since March, a state budget reduction of $45 million in fiscal year 2021. We anticipate additional one-time costs in fiscal year 2022 to support the safe reopening of campus. Estimates of these costs are not yet available and will depend on specific reopening needs and the status of the pandemic. Mitigation actions and external funds received will be applied to needs across both fiscal years.
– Mary S. Croughan, Provost and Executive Vice Chancellor
Potential financial risks and uncertainties
While many of the financial challenges are expected to be limited-term in nature, financial impacts will grow and additional risks will be identified as the pandemic continues. Potential risks and uncertainties include:
- Significant new operating expenses to ensure a safe campus
- Financial losses for auxiliary operations such as housing, dining and parking
- Impact on research through reduced ability to conduct in-person research and/or reductions in federal research funding
- Enrollment shortfalls
- The potential for additional federal aid
At the beginning of the pandemic, UC Davis and the UC system quickly took action to:
- Ensure liquidity through working capital borrowing
- Access market gains from our investments
- Access available federal funding sources
- Pause faculty ranges and merit programs for non-represented employees, reducing expected cost increases for fiscal year 2020-21
- Adjust retirement system funding to reduce costs for fiscal year 2020-21
Strategies to address immediate needs
While there will continue to be uncertainty and changes in the coming months, the campus can address the immediate financial losses and risks with identified one-time funds and mitigation strategies while, in parallel, continuing to implement and adjust the budget framework to align our structural budget over time. The mitigation strategies will provide critical short-term resources to address immediate short-term needs and smooth the structural adjustments that will be needed over a longer time period. These strategies will be adapted as additional opportunities and needs arise.
The following principles guide our mitigation strategies and supplement the budget framework principles.
- Protect, to the greatest extent possible, against COVID-related indefinite layoffs.
- Defer new permanent or one-time cuts in fall 2020 and winter 2021 quarters.
- Recognize the need for shared sacrifice, including central campus and units.
- Deliver working capital options that partially and temporarily mitigate budget impacts, recognizing that repayment strategies are needed and will result in long-term tradeoffs.
- Investments to support the reopening of campus to meet public health guidelines are a high priority.
Highlights: One-time funding sources
A number of one-time funding sources have been identified to address critical limited-term uses. Estimates included below are a range based on the known information and planning underway at this time. These estimates will be refined and the range of options will be narrowed in the coming months. Central budget actions will be managed to best fit solutions to needs.
- Working Capital Loan and Internal Borrowing (up to $200 million one-time)
- his plan proposes internal borrowing of up to $200 million backed by aggregate cash balances repaid over time. Available cash balances were bolstered by a working capital bond sold by the University of California in July. These bonds were to support working capital needs, including backstopping operational shortfalls resulting from extraordinary losses in auxiliaries, uncertain enrollment results, and increased COVID response costs. It should be noted that the bond will require regular debt service payments, including interest. A strategy to support payment of the debt service obligation is built into this internal borrowing strategy.
The campus established a loan program for units with extraordinary needs and the ability to repay. To date the campus has approved $70.2 million in internal loans that will be repaid over 10-20 years. These loans are primarily for auxiliaries and revenue generating units and allow these units more time to recover losses and mitigate what would otherwise be significant rate increases to users.
In addition, the campus anticipates the need to bridge general operational costs that do not have a natural repayment source. In order to create a repayment stream for those central investments that does not create a further strain on the ongoing operational budget, we propose taking a portion of one-time investment gains discussed below and creating a Fund Functioning as an Endowment (FFE) that will mature sufficiently to pay off this debt in up to 20 years.
- Federal CARES Act Institutional Funding and Other Future Federal Stimulus ($17 million one-time)
- UC Davis received $17 million in institutional support from the federal CARES Act in Spring 2020. The federal Department of Education guidance evolved and primarily allows support for lost revenues linked to refunds to students. For our campus, those costs were related to study abroad fees and housing and dining contract refunds and we have applied these funds to these programs, representing a fraction of expected losses.
- Higher Education Emergency Relief Fund (HEERF) and Other Future Federal Stimulus ($34 million one-time)
- In December 2020, we learned that the federal stimulus would include additional federal aid for higher education. UC Davis will receive $34 million for institutional support. These funds will be applied where they most benefit the campus as a whole and are aligned with the federal funding guidelines. We are awaiting final federal guidelines to determine the allocation of these funds. To the extent that there is additional federal stimulus approved, either directly to higher education or to the state, those funds will be incorporated into these mitigation strategies and allocated based on the applicable guidelines.
- Federal Emergency Management Agency (FEMA) Reimbursement ($1 to $3 million one-time)
- Current guidance for FEMA reimbursement limits funding to only those expenditures that are required to directly respond to the public health crisis to protect health and life. Along with other UC campuses, we have engaged a consultant to help us maximize and support our claim. We anticipate that although funding for this may be limited, we will successfully recoup some of our costs. FEMA recently changed their reimbursement rate from 75 percent of approved claims to 100 percent of approved claims. Reimbursement will offset the eligible expenditures claimed. We are estimating $1-3 million in FEMA funds at this time.
- Accessing Extraordinary Payouts from the Campus Enhancement Fund FFEs ($7 to $21 million)
- University investment policies permit campuses to request up to an additional 5 percent payout on Funds Functioning as an Endowment (FFE) with the chancellor's approval. UC Davis has the Campus Enhancement Fund (CEF), a FFE which was established to generate additional investment income to support critical capital investments. If necessary, this strategy proposes taking an additional 2 percent payout annually from the CEF for 1-3 years, yielding approximately $7 million annually. By limiting the extraordinary payout to 2 percent, this strategy maintains the FFE corpus, with some potential growth, to sustain the annual payout income.
- Accessing Investment Gains ($120 to $135 million one-time)
- At the end of FY 2019-20, campus sold Total Return Investment Pool (TRIP) funds to be able to recognize a sizeable appreciation in market value. In January of 2021, campus made another similar transaction to recognize additional market appreciation. We may use $15-$30 million to fund an FFE associated with the central campus portion of the internal borrowing strategy discussed above. The balance of approximately $120-$135 million is available for other mitigation or investment needs.
- Unit Sources ($50 to $80 million one-time)
- There is an expectation that units will use internal resources to cover a portion of COVID-19 losses incurred. Potential mitigation funds in units include, but are not limited to:
> Operational savings resulting from the curtailment of operations
· Reduced travel, entertainment, and meeting expenses
· Employee vacancy savings
· New one-time expense savings including delayed faculty start-ups
> Carryforward balances
> Extraordinary payout from unit-managed FFEs
> Revenue from increased 2020 Summer Session enrollment
> Resources from a one-time rebate of the UCOP Tax Assessment
> Net revenue from increasing revenue generating activities.
It is recognized that within units these savings and potential revenue sources may be distributed across operational units, faculty accounts, and held in various fund sources. However, given these unprecedented times, it may be necessary for unit leaders to leverage and redistribute these resources to address COVID losses.
In December 2020, units submitted mitigation plans to address pandemic-related losses from March to December 2020 that are not otherwise being addressed through campus programs. Units reported local mitigation actions totaling over $50 million. These plans were reviewed by the Budget Framework Advisory Committee, and Provost Croughan sent a message to unit leaders asking for these plans to be implemented. A revised plan will be requested in the spring that addresses losses through June 2021 and updates the prior plan, as needed. These plans help identify unit capacity to address mitigation needs within unit sources as well as inform other budget decisions.
Highlights: One-time funding uses
The primary use for centrally-identified revenues will be to mitigate known shortfalls to defer additional budget reductions in 2020-21 and support strategic, well-informed decisions. We will avoid short-term, draconian cuts. The budget framework had already envisioned reductions over the next five years, but the additional strain on core revenues an adjustment and acceleration of the framework.
- State Budget Reductions and Enrollment (Tuition) Shortfalls ($58 million)
- The primary source for core fund support is state appropriations and student tuition. The state has reduced the appropriation for UC Davis by $45 million in the 2020-21 budget. Although we now know that the state will restore this funding for 2021-22, we must still mitigate the lost funding in 2020-2021. Total Fall undergraduate enrollment was almost 500 students below our target, of which, about 330 were national/international students. This results in a revenue loss of approximately $13 million compared to the budget.
- COVID 19-Related Losses (>$130 million one-time)
- COVID-19 revenue losses and increased expenditures have not been evenly distributed across units. Auxiliary and other self-supporting units, along with certain research cores have experienced the greatest net losses and, in most cases, those losses are expected to grow. As noted in the principles above, any set of solutions requires a shared approach with both central and unit actions that will likely occur over multiple years for the units with the most significant impacts.
Solutions to the specific needs of units will need to be tailored to their individual mission, business model and fund types. For example, solutions identified for auxiliaries or units that rely on internal recharge or self-supporting funds are likely to be different from those identified for academic units that rely largely on core funds and contracts and grants.
- Campus Ready Operational Expenses ($20 to $50 million)
- COVID-19 screening (testing), contact tracing, isolation and quarantine, cleaning and disinfection, and other campus responses are substantial and will likely continue throughout the academic year.
- Supplemental Funding to Support Remote Instruction ($1.5 million)
- The Provost authorized an investment of up to $500,000 per quarter in additional instructional support for undergraduate courses to provide the best possible remote experience during Fall quarter. These funds are expected to largely be used for additional TA and Reader support.
- COVID-Impacted Research Program (up to $1 million)
- The Provost approved a COVID-Impacted Research Program that provides grants to early-career faculty to hire up to two quarters of GSR support to address lost research productivity. Program details are available from the Office of Research.
- Scientific Recharge Mitigation ($5 to $10 million)
- Although research activity was curtailed in early response to state and county directives, much of the expense associated with research infrastructure provided through research cores, vivaria, and similar operations that recharge extramural contracts and grants, continued. While some of the revenue may be recaptured as research continues to ramp up, certain revenue will be foregone. The estimated funding need for these facilities range from $5-$10 million. Campus issued a call for applications to this program and applications are currently under review.
- Capital, Deferred Maintenance and IT Infrastructure Investments ($75 to $150 million over two to three years)
- Despite the emergent budget shortfalls, one of the greatest risks that continues for UC Davis is underinvestment in infrastructure and capital needs. This lack of state investment has been made up in recent years through campus funding actions, including bonding to support investment. Capital and deferred maintenance investments must continue with non-state sources. Similarly, a number of critical enterprise systems are reaching the end of their useful life and investments must be maintained.
- Net Losses from Course Materials and Service Fee Waivers ($0.6 to $1.2 million)
- Campus leadership decided to waive Course Materials and Service Fees for students during the quarters when instruction is primarily remote. However, in some cases departments provided materials to students that would have been funded with these fees, or will incur losses from materials bought prior to the quarter that expire (e.g. chemicals or biological materials). Funding has been set aside to cover net expenditures that would typically have been covered by course material fees, as well as shipping of materials beginning in the fall quarter. BIA is collecting data on these expenses from units.
- Unit Losses and Increased Expenditures Due to COVID-19 (varies by unit)
- As noted above, under "One-time Funding Source Highlights," central actions will not address all losses for all units. Units will be expected to address some losses and increased costs with internal savings, reserves, and revenue generation.