Troubled national economy impacts St. Thomas

As is the case with many other colleges and universities, a troubled national economy characterized by a horrific stock market decline, credit crisis, inflation and fears of an impending recession or depression is having an impact this fall at St. Thomas.

Despite a strong financial performance in the fiscal year that ended June 30 and record undergraduate enrollment this semester (see fall enrollment story), St. Thomas will face challenges in balancing this fiscal year’s budget because of higher costs for health care, food, materials, energy and financial aid.

Early projections indicate St. Thomas will pay up to $3.2 million more for those items in the $187 million operating budget, which the administration developed last fall and the Board of Trustees approved in February. The administration has developed a list of actions to address the budget issues, said Mark Vangsgard, vice president for business affairs and chief financial officer.

“St. Thomas is doing very well on one hand, thanks to strong enrollment across the board,” he said. “We set records this fall for credit hours (up 1.5 percent to 122,916) and undergraduate enrollment (6,164 students), we had our fourth consecutive freshman class of 1,300 students and our retention rate remains over 87 percent on the undergraduate level.

“Inflation, however, is hurting us, and short-term signs are that costs will continue to increase due to factors that are almost entirely beyond our control.”

Administrators look at expense reductions

Vangsgard has reviewed the issue with the Academic and Administrative Leadership Group, which includes vice presidents, deans and other senior administrators, and has received its support for the following actions to address the increase in expenses over budgeted levels:

  • A hiring moratorium until Feb. 15 on all new budgeted positions that have not been filled for this fiscal year.
  • A more stringent review and approval of replacement positions and delays in hiring approved replacements by at least two weeks.
  • Deferring all maintenance spending with the exception of essential buildings and grounds projects and repairs.
  • Identifying the savings that would be realized by a potential 10 percent reduction in noncompensation expenses.
  • Consider a reduction in the work schedule of building service workers from three shifts to two shifts. There would be no layoffs, positions would be eliminated only through attrition, and overnight employees would be reassigned to day or evening shifts.

These cost-saving measures will be put into place now and modified as needed after the next annual projection of the university’s financial position in mid-February, Vangsgard said. At that point, depending on the outlook for the year, additional noncompensation spending cuts could be imposed.

“Things change with the university’s budgets on a weekly basis,” he said. “We will manage what we can, delay what we need to and cancel what we must in order to balance the budget.”

Vangsgard encouraged faculty and staff to contact him if they have cost-saving ideas. Under St. Thomas’ Employee Suggestion Awards Policy, approved cost-saving suggestions can result in an employee receiving an award of up to $1,000 or up to 40 hours of paid leave time.

Energy cost-savings measures encouraged

In addition to reductions identified so far, St. Thomas will examine its energy consumption and make appropriate changes to existing operating practices. Many items have been considered, and the following will be implemented after final review:

  • Change the temperature settings in buildings from 72 degrees in the summer and winter to 68 degrees in the winter and 75 degrees in the summer.
  • Reduce the temperature in the swimming pools from 82 degrees to 78 degrees.
  • Reduce all hot water settings from 135 degrees to 115 degrees.
  • Reduce the building temperatures to 60 degrees between 11 p.m. and 6 a.m. in buildings with night-setback capability. This will vary greatly among buildings, the oldest of which (Cretin and Loras Halls) were constructed in 1894 and the newest (McNeely Hall) in 2006.
  • Close minimally occupied buildings to save energy during Christmas break, January Term and the summer.

Economy affects fundraising, pocketbooks

As if inflation weren’t causing enough problems, the sluggish stock market has reduced the amount of operating income the university derives from some of its investments and endowments, said Mark Dienhart, executive vice president and chief administrative officer.

Giving to the Opening Doors capital campaign has slowed as benefactors pause to assess the uncertain economy, he said, but the campaign remains on target to achieve its $500 million goal by 2012. About $348 million has been raised, and Dienhart said one reason that campaigns last several years is to allow organizations to ride out harder times.

“Each day adds a new variable that we need to think about and deal with,” Vangsgard said. “Interest rates and the associated payments on the university’s debt are increasing, our endowment portfolio is declining and new bonds to support future building projects are going to be harder to sell.”

Inflation, obviously, also affects the pocketbooks of employees. The annual Consumer Price Index for Midwest urban areas was at 3.7 percent in May, and it seemed the scheduled Sept. 1 salary pool increase of 3.5 percent would be appropriate, Vangsgard said.

Inflation since has risen – to 4.5 percent between September 2007 and September 2008. The administration has discussed the possibility of a second salary increase in February, Dienhart and Vangsgard said, but they don’t believe at this time that an increase would be feasible because of the inflationary pressures on the operating budget.

Professor expects modest growth under new president

Dr. David Vang, chair of the Finance Department in the Opus College of Business, closely tracks economic indicators and frequently is asked by the media what might happen to the economy in 2009 and after a new president takes office.

In a story that will be published this month in B, the semiannual College of Business magazine, Vang writes that “the overall macro economy today is not all that dire.” He points out that the official definition of a recession is two consecutive quarters of negative economic growth – and we have not had even one such quarter yet this year; that unemployment today is historically lower than during other difficult times; and that productivity rose 2.6 percent in the first quarter.

The difficulty in forecasting the impact of a McCain or Obama presidency on the economy “is that neither camp is being overly speci
fic on policy details,” Vang writes. The winner likely will have to deal with a Democratic Congress, and thus he expects an end to the 2001 tax cuts and that there will be continued substantial government spending, including military spending because of geopolitical realities.

“A historical perspective is necessary when looking at the problems in our financial and real estate sectors,” Vang writes. “Few people seem to realize that more than 2,000 financial institutions had to be closed during the 1980s and substantial economic growth occurred anyway.

“While people may be worried by the recent fall in real estate prices, before the decline the value of typical residential homes had increased over 80 percent from 2000, so most homeowners still have considerable equity. Additionally, subprime loans may have made up a substantial amount of newly created mortgages, but they are still a very, very small fraction of the total existing mortgages

Vang’s bottom line: He expects a period of flat economic activity after the election and economic growth between 0 and 1 percent in 2009, thanks to currently low interest rates and lower gasoline prices.