Why We Do Not Trust The Administration's Projected Deficit Numbers
June 23, 2017
As the summer goes on, we know that you are worried about what will happen on September 1. We will all need to stand together to save our union and the conditions of employment that have made Rider the place you chose to make your academic home. We will be communicating with you (our members) on a regular basis this summer, not only to let you know what has occurred at each negotiating session but also to share with you our analysis and concerns. One of the areas of greatest concern is the financial condition of the University. We have requested and reviewed a great deal of information from the administration and will continue to do so. It is our view (and that of our outside consultants) that, while we face some difficult years ahead, the administration’s projections are consistently overstated.
The finance office’s latest projection predicts combined deficits for the next three years (FY17-FY19) of over $32 million in the unrestricted fund. Actual deficits of that magnitude would certainly put the future of Rider in serious jeopardy. These are the projections the outside consultant used at the so-called open forum, and the accuracy of that presentation is completely dependent on the accuracy of those projections. As PwC (Price Waterhouse Cooper, the administration's primary consulting firm) said in the notes to its presentation: “PwC has not sought to establish the reliability of those sources nor has PwC verified such information. Accordingly, no representation or warranty of any kind (whether express or implied) is given by PwC as to the accuracy, completeness or fitness for any purpose of this document.” We believe that we must follow PwC’s advice when it states in those notes that, “Recipients of this document must conduct their own appraisal and due diligence procedures before acting or refraining from acting in reliance on this document.”
As your AAUP representatives, we have taken this very advice to heart. We have come to the conclusion that these projections are unreliable and are consistent with a long-standing pattern on the part of the administration of systematically overstating the size of potential deficits. We base our conclusion on the following factors:
1. Historical overstating of potential expenditures and deficits
The administration and specifically Chief Financial Officer Julie Karns has, over many years, claimed that the University faced operating deficits that never materialized until FY15. And even then the deficits were significantly below the overstated figures CFO Karns had presented. In August 2015, CFO Karns provided the AAUP a projection for the FY16 "core" expenditure budget of $158,029,000. The FY16 actual "core" expenditure turned out to be $151,269,000. The difference between August 2015 forecast for FY16 and the actual FY16: $6.76M. To provide you with the most recent, egregious example: In early June 2016, the administration contacted the AAUP to inform us that the University faced a serious fiscal deficit for the year ending June 30, 2016. This deficit was so serious, CFO Karns told us that, “Given Current and Projected Financial Situation, Rider will (emphasis added) receive a ‘Going Concern Footnote’ in this year’s audit.” For those unfamiliar with this terminology, a “going concern footnote” is placed in an audit when, as the Financial Accounting Standard Board defines it, “there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time not to exceed one year beyond the date of the financial statements being audited.”
Please keep in mind that the fiscal year was all but over at this point and the financial situation should have been reasonably clear. The final outcome, as the AAUP predicted, was that there was no “Going Concern Footnote.” While there was an operating deficit, as we understood that there would be, the final accounting by the administration showed that the size of the deficit predicted by the administration had been overstated by 55%. This failure occurred in predicting an outcome that was literally only weeks in the future and at a point when, effectively, all of the information was in hand. If CFO Karns was off by over 50% when predicating financial outcomes for the year that had already nearly ended, why would we rely upon her for projections concerning events years in the future?
2. Counting “contingency” as an expenditure item
All of the administration’s deficit projections include a $2 million-a-year item for “contingency.” Obviously a “contingency” is not a projection of an actual expense, nor is it a functional category. It is nothing more or less than a way to pad the size of the projected deficits. The 2015-16 deficit projection provided us had a $500k "contingency" which was not needed and only made the size of the projected deficit appear larger then it actually was.
3. Large swings in the size of projected deficits over short periods of time
In June 2016, the finance office was predicting that the FY 2017 unrestricted fund deficit was going to be $14.7 million; four months later that number had changed to $11 million. (The unrestricted fund is one of three categories of funds the University has available; the other two are temporarily restricted [restricted for self-imposed or various legal restrictions] and permanently restricted funds [true endowment].) Over the same four-month period the cumulative three-year projected unrestricted fund deficit declined from $43.4 million to $32.5 million. It is hard to imagine that such a wide swing in such a short period was due to any external event. Rather, we propose that is was due to fundamental flaws in the methodology used to project future revenues and expenses or, perhaps, a conscious effort aimed at creating an exaggerated sense of crisis. Such a conclusion is supported, in particular, in light of the June 2016 meeting, when CFO Karns claimed that the administration had already made all possible cuts in administrative and operational spending. If all possible cuts had already been made, how could the new projections show such dramatic decreases? The only rational conclusions are that either the original projections were inflated or the administration intentionally was misleading us when telling us that all possible cuts to non-faculty expenses had already been made.
4. Projections of non-personnel expenses are out of sync with trend analysis
Between 2014-2016 non-personnel expenses across the University have decreased at an annual rate of $1,217,612.00, a three-year decrease of 4.2%. The finance office’s deficit projection for 2017-2019 includes a planned increase of $1,087,000.00 per year, a three-year increase of 4.2%. While there is no guarantee that a decreasing trend will continue, there is, at the same time, no reason to believe that this trend will reverse itself. The difference between a continuation of the trend and the administration’s projection is a swing of $2.3 million per year.
5. Projections of future faculty salary expenses are substantially overstated
While it is difficult for us to predict many areas of future expenses, we do have all of the information necessary to predict faculty salaries. We know present salaries; we know by name, salary, and cost to the university those faculty members committed to retire between now and June 2019; we know the administration's hiring plan, we know the administration's projection of salary costs; and we can make reasonable projections concerning promotions and across-the-board salary increases. The difference between the administration's projections of salary costs and the actual calculation of those costs over the next three years is $6.5 million and $13 million over the next five years. Given that benefits costs are, to a large degree, driven by salary, we would also expect to find an equivalent error in the benefit portion of the administration's deficit projections.
Given all of the above factors, the real question is not why we do not trust the finance office’s projections but why the Board of Trustees does.
Your Negotiating Team,
Mike Brogan
Dave Dewberry
Herb Gishlick
Jeff Halpern
Joel Phillips
Elizabeth Scheiber
Arthur Taylor
June 23, 2017
As the summer goes on, we know that you are worried about what will happen on September 1. We will all need to stand together to save our union and the conditions of employment that have made Rider the place you chose to make your academic home. We will be communicating with you (our members) on a regular basis this summer, not only to let you know what has occurred at each negotiating session but also to share with you our analysis and concerns. One of the areas of greatest concern is the financial condition of the University. We have requested and reviewed a great deal of information from the administration and will continue to do so. It is our view (and that of our outside consultants) that, while we face some difficult years ahead, the administration’s projections are consistently overstated.
The finance office’s latest projection predicts combined deficits for the next three years (FY17-FY19) of over $32 million in the unrestricted fund. Actual deficits of that magnitude would certainly put the future of Rider in serious jeopardy. These are the projections the outside consultant used at the so-called open forum, and the accuracy of that presentation is completely dependent on the accuracy of those projections. As PwC (Price Waterhouse Cooper, the administration's primary consulting firm) said in the notes to its presentation: “PwC has not sought to establish the reliability of those sources nor has PwC verified such information. Accordingly, no representation or warranty of any kind (whether express or implied) is given by PwC as to the accuracy, completeness or fitness for any purpose of this document.” We believe that we must follow PwC’s advice when it states in those notes that, “Recipients of this document must conduct their own appraisal and due diligence procedures before acting or refraining from acting in reliance on this document.”
As your AAUP representatives, we have taken this very advice to heart. We have come to the conclusion that these projections are unreliable and are consistent with a long-standing pattern on the part of the administration of systematically overstating the size of potential deficits. We base our conclusion on the following factors:
1. Historical overstating of potential expenditures and deficits
The administration and specifically Chief Financial Officer Julie Karns has, over many years, claimed that the University faced operating deficits that never materialized until FY15. And even then the deficits were significantly below the overstated figures CFO Karns had presented. In August 2015, CFO Karns provided the AAUP a projection for the FY16 "core" expenditure budget of $158,029,000. The FY16 actual "core" expenditure turned out to be $151,269,000. The difference between August 2015 forecast for FY16 and the actual FY16: $6.76M. To provide you with the most recent, egregious example: In early June 2016, the administration contacted the AAUP to inform us that the University faced a serious fiscal deficit for the year ending June 30, 2016. This deficit was so serious, CFO Karns told us that, “Given Current and Projected Financial Situation, Rider will (emphasis added) receive a ‘Going Concern Footnote’ in this year’s audit.” For those unfamiliar with this terminology, a “going concern footnote” is placed in an audit when, as the Financial Accounting Standard Board defines it, “there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time not to exceed one year beyond the date of the financial statements being audited.”
Please keep in mind that the fiscal year was all but over at this point and the financial situation should have been reasonably clear. The final outcome, as the AAUP predicted, was that there was no “Going Concern Footnote.” While there was an operating deficit, as we understood that there would be, the final accounting by the administration showed that the size of the deficit predicted by the administration had been overstated by 55%. This failure occurred in predicting an outcome that was literally only weeks in the future and at a point when, effectively, all of the information was in hand. If CFO Karns was off by over 50% when predicating financial outcomes for the year that had already nearly ended, why would we rely upon her for projections concerning events years in the future?
2. Counting “contingency” as an expenditure item
All of the administration’s deficit projections include a $2 million-a-year item for “contingency.” Obviously a “contingency” is not a projection of an actual expense, nor is it a functional category. It is nothing more or less than a way to pad the size of the projected deficits. The 2015-16 deficit projection provided us had a $500k "contingency" which was not needed and only made the size of the projected deficit appear larger then it actually was.
3. Large swings in the size of projected deficits over short periods of time
In June 2016, the finance office was predicting that the FY 2017 unrestricted fund deficit was going to be $14.7 million; four months later that number had changed to $11 million. (The unrestricted fund is one of three categories of funds the University has available; the other two are temporarily restricted [restricted for self-imposed or various legal restrictions] and permanently restricted funds [true endowment].) Over the same four-month period the cumulative three-year projected unrestricted fund deficit declined from $43.4 million to $32.5 million. It is hard to imagine that such a wide swing in such a short period was due to any external event. Rather, we propose that is was due to fundamental flaws in the methodology used to project future revenues and expenses or, perhaps, a conscious effort aimed at creating an exaggerated sense of crisis. Such a conclusion is supported, in particular, in light of the June 2016 meeting, when CFO Karns claimed that the administration had already made all possible cuts in administrative and operational spending. If all possible cuts had already been made, how could the new projections show such dramatic decreases? The only rational conclusions are that either the original projections were inflated or the administration intentionally was misleading us when telling us that all possible cuts to non-faculty expenses had already been made.
4. Projections of non-personnel expenses are out of sync with trend analysis
Between 2014-2016 non-personnel expenses across the University have decreased at an annual rate of $1,217,612.00, a three-year decrease of 4.2%. The finance office’s deficit projection for 2017-2019 includes a planned increase of $1,087,000.00 per year, a three-year increase of 4.2%. While there is no guarantee that a decreasing trend will continue, there is, at the same time, no reason to believe that this trend will reverse itself. The difference between a continuation of the trend and the administration’s projection is a swing of $2.3 million per year.
5. Projections of future faculty salary expenses are substantially overstated
While it is difficult for us to predict many areas of future expenses, we do have all of the information necessary to predict faculty salaries. We know present salaries; we know by name, salary, and cost to the university those faculty members committed to retire between now and June 2019; we know the administration's hiring plan, we know the administration's projection of salary costs; and we can make reasonable projections concerning promotions and across-the-board salary increases. The difference between the administration's projections of salary costs and the actual calculation of those costs over the next three years is $6.5 million and $13 million over the next five years. Given that benefits costs are, to a large degree, driven by salary, we would also expect to find an equivalent error in the benefit portion of the administration's deficit projections.
Given all of the above factors, the real question is not why we do not trust the finance office’s projections but why the Board of Trustees does.
Your Negotiating Team,
Mike Brogan
Dave Dewberry
Herb Gishlick
Jeff Halpern
Joel Phillips
Elizabeth Scheiber
Arthur Taylor