Carry-over budget balances for the coming year (a much more interesting topic than anyone would have predicted a year ago)

While in many years, the issue of carry-over budget balances is something that only the accountants care about, it became a very hot topic in this state over the past spring and sparked controversy during the recent state budget process.  A number of state officials charged that the UW System and its institutions had not been fully transparent about these reserves to legislators and the public.

Transparency is one of my top priorities as chancellor. To demonstrate our commitment at UW-Madison to an open budget process, today I forwarded a memo from Vice Chancellor for Finance and Administration Darrell Bazzell to key legislators that updates our balance situation. You may recall that UW System brought the then current balance numbers to the Board of Regents for public discussion at its July meeting. Darrell’s memo, crafted in follow-up, details the current balance situation at UW-Madison.

As the memo shows, our reserve balance is expected to be approximately $130 million for the 2012-13 fiscal year. At the end of the 2011-12 fiscal year, the balance was about $102 million.

Account balances tend to fluctuate as revenue flows through and obligations are met, so it’s not necessarily a surprise that these balances are higher in the coming year. These numbers move up and down from year to year.

The increase in fiscal year 2013 is mainly driven by three factors – additional revenue due to growth in our undergraduate enrollment, additional revenue from several new self-supporting programs targeted at non-traditional students, and fund transfers from the UW System due to utility savings.

We expect the balances to be much lower in 2014. About $45 million of the reserves will be spent to cover the budget reductions that were enacted this past spring for the next biennium. Also, a decline in federal funding will force us to shift a significant amount of the balances to cover ongoing costs for research infrastructure, costs that have been covered by indirect research dollars in the past.  In addition, as we determine that our tuition revenue is at a stably higher level, we will be hiring staff and paying expenses to serve these new students, but these new expenditures tend to lag behind the receipt of new tuition dollars.

It is reasonable for an institution of this size and complexity to keep some amount of capital in reserves. Such balances are a safeguard against revenue fluctuations caused by enrollment shifts or state budget cuts. Keeping some funds in reserve is also a prudent practice to cover or sudden cost increases for obligations like utilities or fringe benefits or as contingency for emergencies.

The question that was raised this spring is how much is appropriate to keep in reserve. I look forward to discussing the answer with our campus, the Board of Regents, the governor, and legislators. We all need to agree on the prudent level of reserves that UW-Madison should be expected to carry over from one year to the next.