photo by: Contributed

The roof on Wescoe Hall has an 80-foot "KU" in this file photo from 2021.

After more than $40 million in budget cuts in recent years, administrators at the University of Kansas have pledged to take a different approach to budgeting.

KU leaders last week provided the most in-depth look yet at the budget for fiscal year 2024, which begins in July. The highlights stand out: For the second year in a row, KU is not proposing a budget cut, and also for the second straight year KU plans to provide a general wage increase for employees — although the 2024 total is expected to be about 2.5% for most employees instead of the approximately 5% increases that were granted this year.

Those are signs of a change in budgeting philosophy, but so too was a phrase that probably has never been uttered before in a KU budget discussion: University leaders do not believe in a coming zombie apocalypse.

KU Chief Financial Officer Jeff DeWitt made that sentiment clear during a recent online video presentation with Chancellor Douglas Girod and Provost Barbara Bichelmeyer. DeWitt was recalling a speech he heard at a recent conference for university leaders in the region. The expert at the front of the room was discussing the coming “demographic cliff,” which is when the number of residents in the U.S. who are in the traditional age group for college students drops significantly.

In the Midwest region, the cliff — which is largely the result of low birth rates during the Great Recession of 2007-2008 — is expected to hit universities in 2027. That’s when many universities are expected to face significantly greater challenges in growing — or even maintaining — their enrollments than they do today.

About 500 university leaders were in the room, and the speaker wasn’t impressed with what many of them were doing to navigate for the cliff.

“I think about half of you think the zombie apocalypse is coming in 2025 because you are not doing anything,” DeWitt recalls the speaker saying of universities’ efforts to prepare for the cliff. “In 2027 a third of you won’t be in this room because you won’t exist anymore. You have to do something.”

DeWitt said KU certainly believes 2027 will come and that the demographic cliff is real.

“We are definitely doing something,” DeWitt said.

While there are no zombies involved, what KU is doing may end up frightening in its own right.

A key aspect of KU’s budgeting strategy is to spend large amounts of cash reserves, which by 2025 is projected to leave KU with a very low amount of cash for an organization its size. The projections that university leaders shared last week have KU with just $9.4 million in cash reserves by July 2025.

How low is that? In fiscal year 2025, KU is projecting that its general operating budget for the Lawrence/Edwards campus will total about $476 million. In other words, KU will spend about $1.3 million a day in general operations. That means KU will have a cash cushion of about seven days.

DeWitt is quick to add that the number is slightly deceiving. KU has a “contingency fund” that is separate from the cash reserves and is available for unexpected events. That contingency fund has enough money in it to pay for the equivalent of two months of university wages and about six months of university debt payments.

photo by: Contributed Photo

Jeff DeWitt serves as the University of Kansas’ chief financial officer and executive vice chancellor for finance.

So, there are hidden cushions in the budget, but DeWitt really doesn’t mince words about what KU is doing with its latest budget strategy. At multiple points in the budget presentation, he says KU is “burning through cash.” He also acknowledges as a longtime financial professional — before coming to KU he managed financial turnarounds for the governments of Phoenix and Washington, D.C. — the strategy is nerve-wracking.

“The plan does use considerable cash reserves and it does make me kind of nervous to see our cash chart go down that steep,” DeWitt said. “But we have a plan to put it in place. We will monitor it, and we will pull the yoke up quickly. We will do whatever we have to do to not crash in 2025.”

Sounds frightening, but KU leaders have determined that the alternative is even more so. If KU doesn’t spend down its cash reserves, tens of millions of dollars in additional budget cuts would be required, pay raises would be off the board, and there would be a general fear that the university has entered a downward spiral just as dangerous demographics are about to smack it in the face.

The latest numbers from KU estimate that the university would have to make $36.6 million in budget cuts between 2023 and 2025 if it did not spend down cash reserves. In other words, KU is spending nearly $40 million in cash reserves to avoid those cuts, which is why KU’s main cash balance is projected to drop from $45.9 million in July 2022 to $9.4 million in July 2025.

When you spend that much of your cash cushion, what you are spending it on becomes important. If you spend one-time cash reserves for ongoing expenses, you quickly will find yourself in a budget mess.

On the one hand, KU is spending some cash reserves for ongoing expenses, but KU also is spending some of those reserves on start-up costs for a trio of initiatives. They are betting those initiatives will produce enough savings and new revenues in future years to pay for general operating expenses without dipping into cash reserves.

The initiatives focus on: strategic enrollment management to help KU attract more online students, more nontraditional students, and to decrease the dropout rate of existing students; a convention and conference strategy that aims to use existing university buildings plus new space at a renovated football stadium complex to attract events to the university; and a “continuous improvement” process that is designed to introduce a host of efficiencies in how KU does its purchasing and manages a wide range of expenses and processes.

“It is a good plan. It is a viable plan,” Girod said of the three-pronged approach the university is staking its future on.

photo by: Chad Lawhorn/Journal-World

University of Kansas Chancellor Douglas Girod, pictured on July 7, 2022.

But it also is a plan that requires a philosophy that has made both billionaires and fools: You have to spend money to make money.

KU has several start-up costs related to the trio of initiatives, and thus far, the start-up costs are greater than the amount of revenue or savings they are producing, according to KU’s own figures. In the current budget year, KU estimates the start-up costs of the initiatives are about $500,000 greater than any savings or revenues they will produce. In the 2024 budget year, it estimates the start-up costs will be about $200,000 greater than any benefits.

Those numbers aren’t necessarily surprising. It is the numbers in years 2025 through 2027 that show just how big of a bet KU is making on these initiatives. In fiscal year 2025, KU expects the initiatives to go from slightly losing money to generating $7.4 million in benefits. Then in 2026, the efforts are expected to hit overdrive, growing nearly threefold to produce $21.9 million of benefits. In 2027, they grow by another 40% to $30.5 million.

If those projections are off, KU is going to have to adjust its budget, and this time it won’t have significant cash reserves to dip into. Big, painful cuts would be the more likely path. That’s why KU leaders are working to rally support among KU’s rank-and-file to embrace the initiatives.

“But we know that our strategies, while we have been investing in them and getting them going, they have to work for us to get to where we need to go,” Girod said. “That is where we are going to need everyone’s help to make sure we stay on track and execute on the plan that we have.”

DeWitt said he is confident in the soundness of the strategies, but he worries whether they will be embraced by the university community enough to be successful. Academics, for instance, will have to get comfortable with some of their facilities being used by outside groups for conventions and conference. Faculty will have to do more to design classes for online learners. Enrollment officials will have to learn how to better recruit students outside of the traditional 18-to-21-year-old range, among other changes.

“I don’t think they will underperform,” DeWitt said. “My concern is, are they going to be embraced? We need everybody to participate in them.”

The truth is, the initiatives could work fine, but KU may still find itself in a budget crunch anyway. DeWitt acknowledged there are several assumptions KU’s budget plan is built upon. If some of them go wrong, it would spell trouble.

Inflation staying at current levels is one such risk. Another is the Kansas Legislature. The budget assumes that the state will increase general operating funds for the university by at least 2%. That has happened in recent years, but hasn’t always happened. Another risk is tuition. KU is building its budget on a proposed 5% increase in tuition for the next school year, which has been proposed but not yet approved by the Kansas Board of Regents. There have been preliminary signs that this year’s increase — the first since the 2018-2019 school year — will win approval.

But KU also is assuming that the Regents will approve 2.5% tuition increases in 2025, 2026 and 2027. It has been rare lately for the Regents to approve tuition increases year after year, and sometimes state lawmakers threaten to withhold additional state funding for higher education if schools increase their tuition.

So, there are challenges, DeWitt said. But, at least, they aren’t zombies.

“This is all doable. It is all doable,” DeWitt said. “We can come out of this one of the best universities in the country because we have a strategy and plan. … All of this is possible, but not if we keep doing what we are doing. We have to change what we are doing, and this plan lays out what we need to do.”