The continuing fallout over the University of Arizona’s (UA) mismanagement of its finances has been hitting the press over the last couple of weeks. It is a story at once both infuriating and depressing. Infuriating because it was predictable. Depressing because of the impact that this will have on students and the community.
There are two reasons why this issue is important to us. First, there is an EdTech angle in that the University of Arizona Global Campus (UAGC) and IT centralization occasionally surface as issues in the crisis but are never fully explained. Second, and more importantly, the way the financial crisis unfolded and was handled tells us a lot about how the controversial decision to go forward with UAGC was made, how it has unfolded thus far, and what its prospects are for the future.
Some background on the crisis
The crisis emerged in early November when administrators at the UA announced that, thanks to some faulty financial models, they had miscalculated the available cash on hand to the tune of $225 million (in some news coverage it had been incorrectly reported as $240 million). This news would be important on its own, but it is especially significant in Arizona where the Arizona Board of Regents (ABOR) requires its universities to have 140 days cash on hand and to report these numbers to the Board on a regular basis. The UA announced that their faulty models had led them to believe they had 156 days, but they possessed a mere 97 days of reserves. Last week, the Chronicle of Higher Education had an excellent piece on the crisis that goes into some detail about the financial crisis and how the university arrived at that point. One key point to keep in mind from the article:
The guidelines require each institution to annually derive a liquidity-to-operating-expenses ratio by dividing the cash and certain liquid assets on its books (come end-of-day every June 30) by its aggregate operating expenditures across the entirety of that just-ended fiscal year.
Multiply that ratio by 365 days, and you get “days’ cash on hand.” Despite the name, here’s what it does not represent: the days until bankruptcy or until the organization runs out of liquidity. The use of the term “days” is simply a means of conceptualizing the ratio. And don’t let the word “cash” in “days’ cash on hand” confuse you. What “days’ cash on hand” really stands for is “days’ liquidity on hand.”
The UA’s response, same as usual
In the past when things have gone wrong at the university, for example with the tragic killing of a faculty member in 2022, the university President Robert Robbins let others take the fall. Two senior women leaders resigned, in this case Provost Liesl Folks and campus police chief, Paula Balafas.
In the face of this most recent crisis, Robbins told the Board that he:
..promised all of you that I would dig in, and I’ve dug in, and I don’t like everything that I’ve discovered.
As a consequence of the crisis, long-time CFO Lisa Rulney resigned, and the university announced a financial action plan to address the crisis. These included budget reductions, hiring freezes and deferring capital projects, summarized in the graphic above.
How did they get to this point?
As the financial problems emerged, Rulney explained them as a consequence of several factors, including unpaid loans to the Athletics department of $87 million and overly generous financial aid to attract the best students to the institution.
But Robbins blamed the crisis on two more fundamental, structural issues: an ongoing budget deficit and a decentralized budgeting process, both of which are instructive and worth digging into.
On the budget deficit there are signs that risks and warning signs were ignored. The College of Agriculture, for example, had done well for several years, growing research output and majors. But the college was repeatedly told by UA officials to spend down their internal reserves, even though the internal budget models the college used were telling them that doing so would result in a deficit.
The college amped up its spending and was also “taxed” by the central administration for what it didn’t spend. The result is that the college now has a structural budget deficit and will be forced to cut departments and grow revenue by 7% annually just to break even.
The overspending on financial aid is another example of risks being ignored. The UA increased its spending on financial aid in order to attract high quality students to the institution, and it turns out the university spent more than it could afford. Although this situation is now being cited as one of the reasons behind the immediate financial crisis, the university has known about the problem for quite some time. I distinctly remember before the pandemic having conversations with university faculty (and have confirmed these) about what they had heard from the administration regarding the financial stress and the overspending on financial aid that move had caused. Why the university took so long to act is unknown.
The decentralized activity-based budgeting process that President Robbins cited as another of the structural causes for the crisis is a relatively new one at the UA. The current UA Strategic Plan describes this change to how budgeting is done in the Institutional Excellence pillar of the current Strategic Plan.
The Office of Budget and Planning is realigning resources to support a variety of campus planning challenges, which represents a shift from a traditional resource allocation and reporting role toward a strategic decision-support role. Adoption of a common budget and planning platform will empower units by simplifying their planning processes and by allowing flexibility to capitalize on strategic opportunities as they emerge, including linking budgets to the university’s overall Strategic Plan. The selected software platform will also facilitate the bi-directional nature of planning between central administration and Responsibility Center Units (RCUs) of the university and allow for timely and informative insight and decision-making support by all levels of university leadership.
This approach is described in the Plan as being “up and running.” In 2022, ABOR awarded President Robbins a $25,000 bonus for implementing this change. It seems that neither UA nor ABOR officials did adequate due diligence about the implications of the move or some of the dangers inherent in the way it was implemented.
UAGC and its impact on finances
The Chronicle piece goes into substantial detail about the finances but also asks the critical question about what role the UA’s controversial acquisition of Ashford University and the transition to the University of Arizona Global Campus (UAGC) has played in the crisis.
While UAGC did not contribute to the current “financial crisis” bedeviling the University of Arizona, the venture — at least in the near term — will be a drag on the institution as it attempts to restore its liquidity reserves.
The size of that fiscal drag for this year is in the region of $18.5 million. As the Chronicle so delicately put it:
Rulney, the now-former chief financial officer, said the primary contributors to the overruns would be infrastructure investments and increased spending on wages and benefits to bring employee compensation at UAGC in line with the university’s levels.
So UAGC has contributed to the spending overruns and affecting the new financial calculations. In 2022, ABOR awarded President Robbins an additional $75,000 bonus linked to his making UAGC a university affiliate and increasing student performance.
In all the discussions of the financial crisis the university has made, there has been no mention of the fact that the US Department of Education is looking to recover $72 million in loans given to students who it claims were defrauded by Ashford University (which became UAGC). It is unclear whether the UA will be responsible for repayment of those funds.
More intriguingly, Paul Pastorek, the President of UAGC, resigned from his position at the beginning of December and was replaced by someone else effective immediately. UA spokespeople did not respond to press requests for information about his resignation. This certainly feels like another administrator fell on his sword in addition to the CFO.
IT Centralization and the financial crisis
For a few years now the UA has been promoting IT centralization as one of its goals to reduce costs. It was included as a separate goal in President Robbins performance package announced in 2021.
President Robert Robbins is set to earn an additional $50,000 if he completes one-year and long-term performance goals associated with information technology, per a contract approved by the state’s board of regents last week.
Robbins will look to reduce college and department overhead costs by about $10 million through “appropriate” centralization in multiple university service areas, including IT, within the next year to earn $25,000, according to the contract. To earn another $25,000, he would need to update the university’s IT security operations, including revising the strategic plan and a system for evaluating security practices by 2024.
These bonuses were part of a broader package of bonuses linked to a set of eight goals. If he met those goals (set in 2021), Robbins would see a $195,000 bump in salary. In response to a question from me this week, an Arizona Board of Regents (ABOR) spokesman clarified that the bonus which was awarded to Robbins was actually to develop a “plan” to centralize services. The long-term goal is not due to be completed till 2024.
At the December 13th ABOR meeting, ABOR Executive Director John Arnold (who will take over the CFO role from Rulney) described a range of changes that will be made to bring more financial discipline and oversight to the management of the budget at UA. These measures include a more centralized budgeting process and more frequent budget communications.
The measures also include centralized management and control of IT. It is not clear, however, what role the lack of IT centralization played in the financial crisis, and having listened to the ABOR meetings and faculty Senate meetings, it appears the question was never addressed. It is a curious addition and one which I plan to continue to follow.
How the Board has handled the crisis
At the December 13th ABOR meeting, over a month after the crisis was first announced, Robbins told ABOR that he still did not know the full scope of the issue.
33 days prior to learning that the university was in a financial crisis, ABOR had awardedRobbins a $132,000 bonus. During the meetings about the crisis, the Board members appear not to have had a change of heart, treating him with deference and warmth, in stark contrast to the views directed at Robbins and the Board by students, one of whom asked:
How does a team of people make a $240 million dollar mistake and still manage to be employed?
What this tells us about the decision making on UAGC
Ever since the announcement that the UA was going to buy the former Ashford University, Phil and I have questioned the wisdom of that decision. Studying the unfolding of the financial crisis at the UA has helped us understand a lot more about how that happened and what the future is likely to look like unless some significant changes are made.
The Board of Regents exerts little real oversight and does not hold the President accountable. Little due diligence appears to be done on the impact of changes, and instead, the President is incentivized to make moves where risks are ignored. Leaders down the organizational structure are the ones to take the fall when problems inevitably arise.
Parting thoughts
A few weeks ago, I used a heading that was a little flippant in one of my Interesting Reads posts. I asked the question: How do you kill a university? Gradually and then suddenly.
The UA will survive, but at a cost. A cost that will be borne by students, staff, and faculty. It is gut wrenching to watch it happen in real time, and it gives insight into what we can expect from UAGC moving forward.
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