2023 Budget Address to the University Senate

Jonathan Holloway
President, Rutgers, The State University of New Jersey

February 17, 2023

Good afternoon and thank you for this opportunity. I promised to come before the Senate each year with an update on university finances. I made that promise knowing that I would keep it in good times and in bad, always with the commitment to be honest about our situation.

Rarely is the news all good or all bad. This year we find ourselves somewhere in between. We are at a moment of great promise and opportunity, with a jump in our U.S. News rankings on all campuses, a more than 25% rise in our research revenue since 2020, nine more faculty named fellows of the American Association for the Advancement of Science, and a new cohort of brilliant students winning prestigious academic and research awards. But as I will explain, these are also challenging times as we face a combination of financial headwinds over the next few years.

Let me start by talking about some of the fundamentals of our current $5.1 billion annual budget, where the money comes from, and where it goes.

As I’ve discussed in the past, our primary sources of revenue are: tuition and fees; patient care services; state appropriations; sponsored research; and then about 15% from miscellaneous sources, from parking revenues, facility rentals, and ticket sales to donor gifts and endowment income. Funds from tuition and fees account for the largest percentage of our revenue sources.

Our chief areas of expenditure are on Rutgers’ core missions of instruction, academic support, research, patient care, and public service—making up more than three-quarters of our total expenses. Other expenditures are 15.2% for administration as well as operations and maintenance for all of the university’s bulidings, 4.8% for auxiliary enterprise (such as dorms and dining), and about 2.7% for athletics. Within those expenditures are expressions of our priorities: for example, a commitment of nearly $14 million for faculty hiring in our ongoing diversity hiring initiative, another $3 million for faculty and graduate student fellowships, funding for the Office of Climate Action, and continued support of the Rutgers Future Scholars program in each of our host communities. These are commitments that will continue next year.

With that shared understanding of the fundamentals, let me talk about the forces we face.

Our already approved budget for the current year anticipates a gap between recurring expenses and recurring revenues of approximately $125 million at the end of the fiscal year. This amounts to a little less than two-and-a-half percent of the total budget. As I will discuss today, we will work to eliminate this deficit which has, thus far, been bridged with one-time, non-recurring reserves. We will eliminate this deficit over the next three years by taking prudent steps to control administrative costs and increase revenues in various ways. But first I want to give you a sense of how we arrived at this moment. And, yes, I recognize that it can be surprising to hear me talk about a deficit within the same fiscal year that we received a generous state appropriation.

Let me speak to that first and then talk about the other significant factors affecting our bottom line.

In many ways we have had enormous success with our state partners. But that assistance has been largely related to discrete programs like the funding for a center or institute or other prescribed purpose. This is not funding that can be used for general operational purposes, and it is not recurring funding.

Some of that money has been for one-time capital construction or investment. Take for example the $300 million in capital funding that was added to the state budget for this year. Every penny of that money will be used to support the construction or expansion of academic and research facilities. That $300 million will be entirely used to build the translational research facility and other space at the Innovation Hub, as well as to build the new medical school building in New Brunswick, to outfit lab space at the Life Sciences Center in Newark, and to provide incubator and other academic space at the Cooper Street Gateway being planned in Camden. These are significant projects that speak to our commitment to advancing the common good as a public research university.

There was early talk about that money being used for athletic facilities. Let me be clear: every penny will go to facilities related to our academic and research mission. It is my priority. And that is what the law requires.

We are eternally grateful to Speaker Coughlin, Senate President Scutari, and Governor Murphy for adding this important one-time capital money to the state budget. Governor Murphy in particular has been a strong advocate, and I can’t imagine a more supportive champion of Rutgers. But please understand, this is one-time money, for specific capital construction purposes. It is not operational support and it will not be part of the next state budget.

Now let me turn to other factors affecting this year’s budget. There are many, but I want to focus on four significant areas:

1. One-time COVID relief money
2. Cost of benefits
3. Enrollment
4. Inflation

First, one-time money. Rutgers was the beneficiary of generous and much-needed COVID relief funds from both the federal and state governments, starting in 2020. Over the course of two years, we received approximately $370 million directly from the federal and state governments to shore up many areas of the university hit hardest by the pandemic.

Much of that funding went directly to students and their families to help ensure those students could continue to attend Rutgers. The rest of the money went toward standing up our testing program, covering gaps in our housing and auxiliary revenue, enabling technology for remote instruction and clinical care, setting up student success programs for the return to campus, and helping cover operational costs, including physical and mental health support programs for our students.

These essential funds minimized disruption during one of the most difficult periods this institution and so many others have faced. And they are gone. We deployed them judiciously over the time we were allotted, but we no longer have access to the one-time money that closed what otherwise would have been budget gaps in our last two budget cycles.

Second, I want to talk about the cost of health benefits, which has grown by 20 percent in the past year for many plans, and which some of you have seen in your paycheck deductions. When the State Health Benefits Commission raised the premiums for your health insurance coverage, our rates climbed as well.

It’s important to remember that the university contributes to employee health coverage, too. In total, the State raised the cost of our employee health care coverage by 24 percent, which amounts to around $29 million. Like you, our finances were affected overnight—although in the university’s case, those costs were actually retroactive to last July. That, too, goes to the bottom line … and the deficit grows.

The cost of retirement and health benefits continues to increase and has, in fact, for retirement benefits, almost doubled over the past five years. We can’t control those benefits, but we do pay for them … and those costs, too, go right to our bottom line.

All of these increases also have an impact on the overall fringe rate. I know this is an issue many of you care deeply about, and with good reason. We are looking to the state to help us with the fringe rate issue that looms over our applications for research grant funding. Our fringe rate, which reflects the actual cost of state health and retirement benefits as well as social security and other smaller components, is more than double that of our Big Ten peers and is the very highest in the nation. This 68-cents-on-the-dollar fringe rate threatens our research prowess and, indeed, challenges New Jersey’s ability to compete in the innovation economy that defines the 21st Century.

I am proud to say that we do more research at Rutgers than all of the other institutions in New Jersey – public and private – combined. Our research is more than double that of Princeton. Our research and our researchers—because, indeed, this is all about people—are the absolute finest in New Jersey and among the finest in the world. They are the foundation upon which New Jersey’s innovation economy is built. We cannot allow the fringe rate to destroy that foundation and bring New Jersey’s innovation prowess into question.

Rutgers led the efforts to build some fringe relief in the state budget. In the current state budget, $35 million was included for the research institutions to effectively negotiate a lower fringe rate with our federal partners. Please know that I and others will continue to advocate on your behalf to address the fringe issue.

Third, let me speak to the issue of enrollment. As you may remember, our first-year enrollment at Rutgers–New Brunswick hit an all-time high of 7,780 students last fall. However, the broader picture, like on campuses across the country, is that overall enrollment is down by 2.8% across the university, which of course affects our revenues. A significant factor is a 14% drop in transfer students, especially those coming to Rutgers from New Jersey county colleges. County college transfers have in fact dropped by nearly 30% since 2018. Again, this is a phenomenon not only in our state but also across the nation as prospective students chose to take jobs in a low-unemployment time instead of taking classes.

We also know that there are opportunities to better coordinate our enrollment processes across the university, so that every qualified student who wants to attend Rutgers has a spot at one of our campuses. We are already working with our chancellors and enrollment leads on a recruitment and retention strategy to help ensure we work first with those who already express an interest even as we work to recruit more. At this point in the current cycle, application numbers are holding steady or improving over last year, which is heartening. I hope that these numbers and the intentional move to a universitywide approach on enrollment will put to bed the accusations at the start of the academic year that the administration was deliberately boosting enrollment in New Brunswick at the expense of Newark’s and Camden’s numbers.

Lastly, a quick word about inflation. We face financial pressures, like every other institution in America, and frankly like every household in America, with respect to inflation. When the cost of food grows but our dining charges are fixed, our deficit grows. The same holds true for utilities, for electricity and gas, and for every product we buy. We set room, board, and tuition rates once a year, and can’t adjust them as we go along even if we wanted to. So when the cost of goods, services, and commodities grows, so does our deficit.

Our financial challenges are real. What about the opportunities?

The most immediate opportunity is to have some honest discussions with ourselves.

I do not expect every program at Rutgers to turn a profit or even cover their costs. That’s not who we are, it’s not what we do. Some academic departments add tremendously to our bottom line, others add to the deficit. Most of what we do costs more than the revenue generated. The vast majority of our schools, in fact, would not be able to balance their books if not for the money we receive from the state each year. While we should never accept financial deficits without rationale, the fact is that, done properly, teaching and research are expensive propositions. Furthermore, this is the model one finds throughout higher education.

Let’s consider our libraries, for example. They generate very little revenue from users but perform one of the most vital tasks at any university. In the current year, total available resources for the Libraries is $47.3 million, and while they will share in cost reductions next year, I am committed in the long term to increasing our investment in the Libraries, knowing that this enterprise is at the core of our mission as a research university.

Athletics is another example. As I stated plainly last year, I do not expect that Athletics will break even or turn a profit, but that unit knows that it must work diligently to shrink the differential between revenues and expenses, which came down by $20 million in fiscal 2022.

We are not abandoning our commitment to teaching and research; we are not closing our libraries; and we are not abandoning athletics. But we must do things smarter, better, and more efficiently.

Some cans and can’ts: We cannot support the unaffordable luxury of duplication and inefficiency. We can no longer afford to have competing academic programs in different schools on the same campus. We can’t have entirely duplicative administrative structures.

We can’t close this deficit by papering over it with our surplus or our endowment. Using one-time withdrawls from our endowment or surplus to bridge a structural gap would be reckless and would not address the simple reality that recurring expenses and recurring revenues are $125 million out of alignment. Other universities here in New Jersey have tried that approach and they have gone to fiscal ruin.

We also can’t afford to compete with ourselves for students. As I noted earlier, we need to have a rational, student-focused enrollment process that gets as many qualified students applying to Rutgers and going to Rutgers as feasible.

Tied to enrollment, of course, is tuition. We need to make sober and honest decisions about the cost of attendance. It is unrealistic to expect that, in the face of 6, 7, or 8 percent annual inflation, that we can keep tuition increases below 3 percent, year after year.

We need multi-year solutions and structural reforms. While I am focused on the current budget, I will not endorse a plan that requires draconian cuts so that we can close a budget hole in a single year. I’ve seen some universities take deeply aggressive action in order to solve fiscal challenges—anything from sweeping positive fund balances at the end of the year regardless of use to freezing retirement contributions for six months—but I won’t inflict that on this community. I want to be clear on this issue: we will cut back on expenditures but not to the point that the cuts compromise our values, our mission, or the commitments that define us.

This effort will require shared sacrifice. For the next budget year, I have ordered almost all central administrative units to trim their budgets by as much as 9.5%. That percentage is a reduction of their budgets both to help address the current shortfall and to absorb anticipated wage increases that we expect related to the contracts we are negotiating. These reductions are also an acknowledgement that I am not prepared to balance the budget entirely on a higher tuition and fee structure, despite the gap that the current model creates. The Chancellors have been doing their part, reducing their administrative costs in a similar fashion.

Let me give a few examples of some of the cuts being made. For one, we are eliminating Rutgers Magazine. That change will save more than a million dollars per year. At the same time we are fully committed to maintaining regular digital contact with our vast alumni base through an expansion of Rutgers Today and other digital platforms.

The Office of Information Technology, meanwhile, will generate savings from reconciling contracts for network and communications services, from internal consolidation efforts, and by reducing expenses for travel, training, and supplies. In addition, some vacant positions will be eliminated. In total, these actions will reduce expenditures by 9% or $5.4 million.

And while a great proportion of Athletics’ expenditures are hard to move, whether they are contractual, game expenses, or direct support of our student athletes, that unit will continue to find real savings in its budget by reducing administrative travel, revisiting vendor contracts, and other cost-containment measures.

Other steps will be taken by units across the central administration.

Although we are not setting targets for academic units, they will share in the university-wide sacrifice, helping to close the deficit where possible, by either increasing revenues, paring back costs, or both.

Just as we have a measured plan to get back into structural balance, we are also thinking strategically about revenues.

One of the chief priorities for the university is to develop more coordinated approaches and strategic initiatives to improve our financial stability while staying true to our academic mission.

As we think about fiscal stability in connection with our mission, our priorities for the coming years include striving to reach our potential in the online space, improving our recruitment and admissions practices, increasing gifts and contributions, and increasing our lobbying efforts to strengthen the university’s operating foundation. We must also develop practices to review our academic and administrative activities to know where to invest and where to pull back. Last year, we developed a coordinated practice for regularly reviewing academic programs. This year, we are developing such practices for administrative program review. These are common tactics across higher education for supporting continuous improvement and for aligning resources and activities, and we need to employ them here at Rutgers.

As we explore opportunities for growth, our guiding principle must be that we serve the State of New Jersey. For example, as we seek to bolster our coordination around enrollment, we must strengthen our pipelines from the county colleges and our home communities, while also attracting students from other states and countries. Serving the state also means meeting people where they are, whether it is a business person seeking executive education, a wage earner hoping to complete a degree online, or a lifelong learner looking to keep their mind active.

These efforts are all in their early stages. We have tremendous potential as a university; whether or not we realize that potential depends on the degree to which we can come together around our shared challenges.

We also need to be strategic as we plot our path forward. It may be confusing to see job postings for some positions at the same time we may have to make reductions in other areas. But we need to make strategic hiring decisions, in some cases to fill mission-critical positions where vacancies have already been disruptive to our day-to-day operations.

I have shared some difficult information because I think it is important that everyone understands what our budget future holds. I know some people and areas will be more affected than others, and I am committed—along with my leadership team—to minimizing the impact and the length of those effects. There are many people advocating for you, and we will do our best to balance the needs of all of the members of the university community.

There is more information behind the high-level overview I’ve just shared, and CFO Mike Gower and his team have already started doing presentations to different units to walk through some specifics of how all of these pieces fit together. Some of the information is already available on the budget webpage, but there will be additional opportunities to share more details as well.

I am clear-eyed about our challenges, and I have confidence that the Rutgers community can continue to deliver on our mission, calling on the curiosity and enthusiasm of our students, the brilliance and commitment of our faculty members, and the excellence and steadfastness of our talented staff and clinicians, so many of whom have persisted in providing outstanding service throughout the pandemic.

I know it feels like we are just emerging from a really hard period, and now I’m sharing additional challenging information. But I wouldn’t be here if I didn’t believe so deeply in our ability to rise to those challenges and continue to serve the state of New Jersey, the nation and the world.

Thank you for your attention and for all that you do for Rutgers.