[CED/CD/EAT] FW: Eller College Budget Shortfall Plan

Wed Jul 22 15:49:01 MST 2020

FYI... I encourage your review of this plan from Eller.

Jeffrey C. Silvertooth, Ph.D.
Associate Dean
Director for Extension & Economic Development
Division of Agriculture, Life, & Veterinary Sciences, and Cooperative Extension
Forbes 301, Bldg. #36
University of Arizona
Tucson, AZ       85721-0036
520-621-7205

From: Hingle, Melanie D - (hinglem) <hinglem at arizona.edu>
Sent: Wednesday, July 22, 2020 6:37 AM
To: Staten, Michael E - (statenm) <statenm at arizona.edu>; Burgess, Shane C - (shaneburgess) <sburgess at cals.arizona.edu>; Chorover, Jon - (chorover) <chorover at arizona.edu>; Curry, Joan E - (jecurry) <Curry at ag.arizona.edu>; Farrell-Poe, Kathryn L - (kittfp) <kittfp at arizona.edu>; Going, Scott B - (going) <going at arizona.edu>; Jenks, Matthew - (jenksm) <jenksm at arizona.edu>; Rutledge, Bethany S - (rutledge) <rutledge at cals.arizona.edu>; Scaramella, Laura V - (scaramella) <scaramella at arizona.edu>; Koprowski, John L - (5quirre1) <5quirre1 at ag.arizona.edu>; Stock, S. Patricia - (spstock) <spstock at arizona.edu>; Tabashnik, Bruce E - (tabashnb) <BruceT at cals.arizona.edu>; Thompson, Gary D - (gdthomps) <GaryT at ag.arizona.edu>; Torres, Robert M - (rtorres1) <rtorres1 at arizona.edu>; Do, Hanh Thi Minh - (htdo) <htdo at arizona.edu>; Krogsgaard, Bethina - (bethinak) <bethinak at arizona.edu>; Oden, Belinda K - (belindaoden) <belindaoden at arizona.edu>; Shevchuk, Darren S - (shevchuk) <shevchuk at arizona.edu>; Sowerby, Samantha Blair - (sbsowerby) <sbsowerby at arizona.edu>; Stevens, Amanda M - (amanda84) <amanda84 at arizona.edu>; Teres, Kevin K - (kteres) <kteres at arizona.edu>; Antin, Parker B - (pba) <pba at arizona.edu>; Baltrus, David A - (baltrus) <baltrus at arizona.edu>; Brierley, Paul E - (paulbrierley) <paulbrierley at arizona.edu>; Davis, James M - (jdavis1) <JDavis at ag.arizona.edu>; Mclain, Jean - (mclainj) <mclainj at arizona.edu>; Silvertooth, Jeffrey C - (silverto) <Silver at ag.arizona.edu>; Limesand, Kirsten H - (limesank) <limesank at arizona.edu>; McCarthy, Fiona M - (fionamcc) <fionamcc at arizona.edu>; Mcclaran, Mitchel P - (mcclaran) <mcclaran at arizona.edu>; Rahr, Matt - (rahr) <rahr at ag.arizona.edu>; Ratje, Jeffrey M - (jmratje) <jmratje at arizona.edu>; Rutherford, Janis KM - (jmathias) <jmathias at arizona.edu>
Subject: Eller College Budget Shortfall Plan

Dear Colleagues
In case you haven't yet seen this correspondence between Eller and senior leadership, I thought you might be interested.
See below and attached.
Melanie

Melanie Hingle, PhD, MPH, RDN
Associate Professor | Department of Nutritional Sciences<http://nutrition.cals.arizona.edu/> | College of Agriculture & Life Sciences
Vice Chair of the Faculty, 2020-22 | https://facultygovernance.arizona.edu/
The University of Arizona
hinglem at arizona.edu<mailto:hinglem at arizona.edu>
+1.520.621.3087
1177 E. 4th Street | Shantz Building, Room 328 | Tucson, Arizona | 85721
Twitter: @hinglem

From: ugrad_staff-request at list.arizona.edu<mailto:ugrad_staff-request at list.arizona.edu> <ugrad_staff-request at list.arizona.edu<mailto:ugrad_staff-request at list.arizona.edu>> On Behalf Of Mergenthaler, Rick - (rmergenthaler)
Sent: Friday, July 17, 2020 1:12 PM
To: ELLER-Contact-eller_faculty <eller_faculty at list.arizona.edu<mailto:eller_faculty at list.arizona.edu>>; ELLER-Contact-eller_staff <eller_staff at list.arizona.edu<mailto:eller_staff at list.arizona.edu>>
Subject: [ugrad_staff] [eller_staff] Eller Budget Shortfall Plan

Dear Colleagues,

After consulting with Paulo, we've decided to disclose all correspondence between our college and central administration regarding furloughs over the past few months. Most notably, we are disclosing the Eller Budget Shortfall Plan that Paulo submitted to Central Administration on Friday, July 19, 2020. This document is titled "EllerBudgetShortfallPlan.pdf" and is attached to this email.

As you will notice, the email you received Monday from the CFO, Lisa Rulney, was in direct response to the Eller Plan that we submitted on Friday. To set the record straight, we maintain that a combination of issuing debt and the use of cash and investment reserves remains not only feasible, but also the best path forward. Furthermore, we would like to explain further why central administration should consider the Eller Plan. Below we challenge the arguments made in the email sent by the CFO, Lisa Rulney. Specifically, we hope to illustrate two points.
1.   Issuing a bond is an appropriate avenue to pursue
2.   The Use of some operating cash is a feasible means to offset some of the COVID-19 losses

Issuing a Bond is an Appropriate Avenue to Pursue

First, as noted by the CFO, Lisa Rulney, debt issuances must be approved by "the Board and, if necessary pursuant to statute, from the Arizona State Legisilature." On this point, we completely agree. The University of Arizona's debt issuance guidance  can be found at https://www.fso.arizona.edu/sites/fso/files/2018-01/debt_management_guidelines.pdf. This document clearly states that the University of Arizona has the "flexibility" to pursue a debt issuance in the following paragraph.

 "While adherence to these Guidelines is required in applicable circumstances, UA recognizes that changes in the capital markets, University programs and other unforeseen circumstances may produce situations that are not covered by these Guidelines or require modifications or exceptions to achieve the Guideline goals. In these cases, management flexibility is appropriate provided that any required specific authorization is obtained from the Board and, if necessary pursuant to statute, from the Arizona State Legislature."

Given this, we cannot think of a more appropriate time than a once in a century pandemic to exercise this provision and pursue a debt issuance given these "unforeseen" and rare circumstances associated with the COVID pandemic. Furthermore, given the current low bond market rates, we cannot think of a better time to access the bond markets for such an "unforeseen" circumstance. To add credence to this idea, over 43 universities have pursued bond issuances since May 1, 2020. Furthermore, we don't expect the University Arizona to experience a credit rating downgrade because of its size and stable outlook. In short, we believe the best solution to the financial implications of the COVID-19 pandemic is to issue debt. Hence, we fully agree with central administrations efforts to work with ABOR to make an exception due to "unforeseen circumstances." In fact, we believe this is the first best solution.

Ms. Rulney also cites two Arizona Statutes she used to reach the conclusion that "We cannot use the funds previously obtained for capital projects and borrow against them." It is not entirely clear what she means by "the funds previously obtained." If she means debt financing that has already been obtained against a project, she is accurate in stating we cannot use new bond issuance funds for the same project. That would clearly be 'double dipping.' However, if she means previously obtained cash, there does not seem to be anything, anywhere in the Statutes she cites to support her position that obtaining new debt funding based on an already undertaken capital improvement project is prohibited. We have reviewed these Statutes in detail and find her statement to be inconsistent with both for the following reasons:
a.     The State of Arizona Revised Statue 15-1683 states, "All bonds issued under this article shall be sold as the board shall determine." This is strong wording indicating ABOR possesses the power to allow the University of Arizona to issue bonds as outlined in the Eller Plan using existing capital improvement projects to do so, absent a part of either of the Statutes that specifically prohibits this.
b.    Nothing in Statute 15-1683 actively prohibits ABOR from issuing bonds as outlined in the Eller Plan using existing capital improvement projects that are not already financed using other debt. In fact, the statutes seem to be flexible enough to also allow for debt financing to provide cash for a myriad of things like repairs to any building on campus, furniture and equipment for any building, and remodels and renovations to any building.
c.     Nothing in Statute 15-1696 actively prohibits ABOR from issuing commercial paper as outlined in the Eller Plan using existing capital improvement projects that are not already financed using other debt. In fact, the statutes seem to be flexible enough to also allow for commercial paper financing for any costs or expenses related to any building on campus (not just new buildings or large projects).

Using Some Operating Cash is feasible

The use of cash reserves is also appropriate, though may not be sufficient to offset all of the losses associated with COVID 19. First, continuing with the CFOs bank analogy, the University of Arizona is akin to a bank with colleges, departments, museums, centers, institutes, and support units across campus acting as depositors that each have a "bank account." To ensure the bank has enough funds to satisfy its depositors, the bank must keep enough cash on hand to remit cash to depositors that request a disbursement from their account. Hence, the university must do two things, first keep enough cash on hand to meet the average cash withdrawals made by its customers. Given that many of the banks customers use the bank as a savings account, the average cash withdrawals will be much smaller than the collective amount of cash deposited at the bank. Hence, the bank has some cash flows to "invest" if it chooses to do so. That said, the university is further constrained by two factors: (1) the lumpiness of cash inflows and (2) the ABOR days cash on hand requirement.

As the CFO has noted, the University receives most of its cash inflows in August and January. Hence, the university then spends down its cash balance between these months. As of June 26, 2020, near the low point of the University's cash balance, the University had $598.68 Million in Cash and investments. As the CFO has noted, the university must maintain enough cash until it receives its next cash flow in August. Using the $165 million dollars as the average monthly outflow (though this will arguably be much smaller in summer months) one would not want the Universities' cash and investment balance as of June 26, 2020 to be below $165 Million as the university would not be able to meet its obligations. Further, one may not want the balance to dip below a certain amount to ensure we have an appropriate buffer. Hence, some reserve is necessary to withstand the lumpiness of cash flows that the university experiences-though we would argue this amount is smaller than the $598.68 million dollar balance.

Second, as the CFO has also noted, in an effort to ensure the University's cash balance does not dip into dangerously low levels, ABOR requires the University hold a certain amount of days cash on hand-specifically within 25% of the Moody's median days cash on hand of other universities. Currently, the lower bound of cash days on hand per the ABOR requirement is 116 days cash on hand--as noted by Lisa Rulney in a presentation made to the Strategic Planning and Budget Advisory Committee on July 1, 2020. Assuming our average monthly expenditures are $165 Million as noted by the CFO, we would need $638 Million in reserves to meet the ABOR requirement today. However, this calculation ignores the fact that most universities will spend down their cash and investments in FY21 to offset the losses associated with COVID-at least universities that don't take out debt. As an example, in FY20, the University of Arizona's cash days on hand went from 151 to 109-a 41 day decreases. Given the COVID losses are mostly expected to occur in FY21, you would expect other universities to experience more than a 41 days decrease in the cash days on hand. To put this in perspective, if the lower bound set by ABOR goes down 41 days from 116 to 75, then the university could spend an additional $225 million in cash and investments and still be in compliance with the ABOR requirement at the end of FY21. Hence, it seems reasonable to assume that the University will be able to use some of its cash and investments to offset the losses associated with COVID 19 and still be in compliance with the ABOR requirement and have enough cash to meet its obligations.

In summary, we disagree with central administration's portrayal that the Eller Plan is not feasible. Rather, we maintain that the Eller Plan is feasible and is the best course of action for the University to take during this unprecedented time. We are grateful that central administration is engaging with us to discuss these issues with individuals at Eller, and we look forward to ongoing conversations with central administration to clarify and further discuss the Eller plan.

Sincerely,

College Advisory Committee
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