Carry-Forwards and Smart Cuts

Universities are often struggling financially, dreading budget cuts and facing difficult decisions. Yet, at the same time, they often have significant carry-forward - unspent money from one budget year that gets moved into the next. How can this be? This is especially true for academic affairs – the sum of all colleges – that have to explain other units why they keep all these money, but want all others to take on larger cuts.

Take the CSU system, for example. For the next fiscal year (which starts on July 1), it estimates having $2.5 billion in total core reserves, with $714 million in uncommitted funds. While this may seem like a substantial amount, it's crucial to have a financial safety net and development agenda in place when dealing with multiple priorities and navigating the intricacies of higher education funding.

There are three major reasons for carry-forward in university budgets:

1. The Multicolored Budget: University budgets are complex, with different types of money and spending restrictions. Picture a rainbow, where each color represents a different type of funding. A LOT of carry-forward money is restricted, with only specific ways of spending it. Not all money can be spent instantly due to multi-year commitments. In other words, if we promise a newly hired faculty members certain startup funds for two years, we need to make sure the money is there. And then, there are emergencies – some of them may not be seen by others by emergencies, but sometimes we have to react to changing circumstances with a quick program or an event.
2. Investing in the Future: To thrive, a university needs to focus on more than just maintaining its current state. It must invest in development, which requires accumulating funds. Carry-forward money allows universities to support new projects, research, and initiatives that will help them grow and evolve. The paradox here is that in order to invest in the future, universities must save money today.
3. The disproportional impact of small cuts: Operating Expense (OE) budgets for university's academic units, which tend to be the largest chunk of the budget, usually account for below 5% of the total. 95% or more is in personnel, salaries and benefits. Cutting from personnel is difficult, because we rarely lay off staff. Furloughs are incredibly demotivating and frustrating. So the small cut for the overall budget is actually a huge cut that tend to fall on operating expenses. That's why universities need decentralized reserves, like carry-forward, to maintain stability and keep their promises. By having a sizable carry-forward, academic units can respond to challenges without causing chaos in their operations.

A simple question, like “how much money do we have?” is actually not easy to answer. We always have some kind of money but are short on other kinds of money. We have reserves but cannot spend them. This is not to say that here is how it is supposed to be. I cannot say we figure it out perfectly: there are plenty of inefficiencies and candidates for cost reductions. They are just very hard to implement when state cuts its subsidy. Ideally, a university must engage in smart cuts, which include slow, non-disruptive quest to increase revenues and reduce expenses. Instead, we tend to wait till the next budget crisis and implement dumb cuts instead – hiring freezes, travel bans, cutting student support programs, layouts and furloughs. The dumb cuts do not teach us (the organization) anything. As soon as the budget improves, we go right back to where we were. Smart cuts are slow, more gradual, less disruptive, but more consequential. And of course, the focus should be not on cuts, but on growth, on extending into other markets. But I have written about it already.