UI officials taking steps to pay off 5-year deficit
URBANA – The University of Illinois is refinancing debt and exploring other cost-saving measures to plug a $117.6 million hole in its utility budget.
It's also adding staff and reshuffling duties to improve oversight of utility finances, as recommended by state auditors.
A recent audit said "ineffective" oversight of utility costs – and of internal borrowing used to cover growing deficits – kept senior UI administrators and trustees from seeing the extent of the problem.
"We concur with the recommendations and are implementing a plan that addresses paying down the deficit, replenishing those savings that we used to pay the utility bills, and making changes in our financial administration to ensure that this kind of thing doesn't happen again," UI spokesman Tom Hardy said.
The deficit – slightly more than a year's worth of utility expenses – built up over five years as energy prices jumped by double digits and state appropriations failed to provide extra money for the UI to heat, light and cool its ever-expanding campuses, officials say.
"We had a budget for utility costs based on projections and recent history, and those utility costs soared well beyond what the expectations and projections were," Hardy said. "So we had to tap into various university reserves or savings to be able to pay our utility bills."
Cyclical spikes in energy costs are common, and prices tend to average out over time, he said. The UI used internal borrowing in the past, repaying other funds as the prices of natural gas, coal or oil dropped.
But natural gas prices spiked in 2004 and never came down. Coal prices rose as worldwide demand increased, particularly from China and India. And oil eventually topped $100 a barrel.
"Our people were accustomed to commodity prices being volatile, going up and down. For five years in a row, we hadn't budgeted enough to pay our utility bills," UI President B. Joseph White said.
The deficit peaked in 2005 and 2006 at about $30 million annually, said Vice President Walter Knorr, the UI's chief financial officer.
To pay bills, the UI had to borrow from its reserves, mostly money set aside from federal research grants to cover overhead costs. The government provides $58 for every $100 worth of grant funding to cover heat, water, lab renovations, building repairs and support staff not included in the grants. It's known as "indirect cost recovery," or ICR.
"Over time, when you do hundreds of millions of dollars of research, those funds add up to a substantial amount of money," White said.
The money is typically spent on small remodeling projects for research needs, though "there's no shortage of uses," Knorr said. It's the UI's biggest pool of non-state discretionary funding, White said.
In fiscal 2005, the university's budget showed $218 million of reserves available. The total has been shrinking because of the utility borrowing and is now about $152 million, said Doug Beckmann, senior associate vice president for business and finance.
The true effect can be seen another way: Usually, the university can carry over $50 million to $100 million of ICR money each year, Beckmann said. This year, the fund was in the red by $39 million. Other administrative reserves (for services charged to auxiliary facilities like the Assembly Hall) boosted the overall total, he said.
Those two funds are the UI's "reserve buckets," he said.
"This is an issue we do need to get on top of," he said. "We're very anxious to get those reserves restored."
So far no projects have had to be postponed, but that's the concern if the money isn't repaid, Knorr said.
"We don't have much ability to set aside funds for a rainy day," he said.
The university in January restructured about $200 million in debt from various utility projects, essentially stretching out its loan payments and cutting annual costs by about $10 million over the next six years. That $60 million savings will be applied to the utility deficit, Knorr said.
The restructuring will end up costing the UI more in the long run, Beckmann said.
But it will create a "window" to cut energy consumption and costs in the meantime through conservation measures and efficiency improvements spearheaded by a new Energy Task Force, he said.
The university has adjusted its budget for the current year, and utility costs for the first six months of fiscal 2008 are on track, Hardy said. They total about $100 million, compared to $60 million to $70 million five years ago, he said. The UI's overall budget is close to $3.9 billion.
Stresses on the utilities budget are numerous, officials say. Since 2003, the university has physically expanded by 12 percent, with roughly 2 million more square feet of building space to power. But in that same period it's received nothing from the state to help pay that cost, or to cover rising energy prices.
Direct state appropriations to the university dropped from $803.6 million in fiscal 2002 to $722 million this year, and legislators moved another $25 million out of the UI's general funding to pay benefits, said Randall Kangas, assistant vice president for planning and budgeting. Small funding increases of 1.5 percent to 1.8 percent the past two years went straight to faculty salary increases, he said.
The university created its own student fee to help pay for a backlog of about $800 million in deferred maintenance. The fee is generating $18.7 million this year, but that's a drop in the bucket, officials say.
Meanwhile, the UI had to do a major upgrade of the Abbott power plant and build a $45 million central campus chiller at Urbana to replace aging individual cooling units, Kangas said. State funding for the chiller never materialized.
"Utilities costs are eating us alive," White said. "The less money we can spend on utilities the more we can spend on people."