Four years ago, when the University of Maine System was cutting programs to save money, officials were criticized for not, instead, making up the shortfall by taking money from reserves.

At the time, UM System officials said they needed all of the $88 million in the reserve account as a contingency for the unexpected and other expenses.

Now, the system says it is again under financial pressure: Gov. Paul LePage’s budget proposal for the two years starting July 1 calls for no funding increase for the university system.

The first campus to feel the pinch is the University of Southern Maine, based in Portland and Gorham, which plans to cut expenses by $5 million, mostly from faculty and staff reductions.

Meanwhile, reserves have doubled in the past four years — to $177 million.

And, over a 12-year period, the reserves are up more than 300 percent. During the same period, the cost of running the university system has gone up only 41 percent.

Experts on university finance, faculty and students are saying that the university system — which oversees the seven state universities — would be better served by using some of that growth in reserves to offset the cuts.

But the response from UMaine System officials is the same: All of that money — termed “unrestricted net assets” —  is needed for emergencies, capital projects and unexpected expenses.

System Chancellor James Page said the term “doesn’t mean that there’s a giant bank account with $177 million in it … the overwhelming amount of that money is allocated now toward a whole host of functions and services.”

But Page acknowledged that the government accounting standards the university system follows would allow the trustees to switch part of the reserve fund to other uses.

At the end of each fiscal year, budgeted funds that are not spent accumulate in the reserve fund, which also increases (or decreases) from investment results. Most of that money came, originally, from taxpayers through the state’s annual allocation and from tuition and fees paid by students and their parents.

Page gave an example of where a portion of the reserve fund is allocated. About $18 million is in a “benefits carryover pool” that ensures the university system could meet a run in medical claims (the system is self-insured).

“One can argue, in certain instances, ‘Are they properly allocated?’” Page said.

They’re not, said Ed Collom, a USM sociology professor and president of the union that represents faculty.

“The $5 million budget cut could be easily absorbed by the system reserves,” Collom said. “They’re essentially decimating the university,” where 22 positions will be eliminated or discontinued and 25 courses canceled.

All of the system’s approximately 1,200 full-time faculty are working under the provisions of their previous contract, which expired on June 30, 2011. Faculty at USM, Farmington, Presque Isle and Machias have instituted “work to rule” provisions to put pressure on the UMaine System to get a new contract and a pay increase, according to public statements by Collom.

Two scholars in university finance who have reviewed the system’s financial reports agree with that view.

Rudy Fichtenbaum, a professor of economics at Wright State University in Dayton, Ohio, is the author of “Understanding College and University Financial Statements.”

Fichtenbaum, who is active in the national union that represents college professors, said the university system is “in very good financial condition and could use some of those reserves to deal with any budget shortfalls.”

Has a ‘rainy day’ arrived?

Howard Bunsis, a professor of accounting at Eastern Michigan University, said, “The reserves are there for a rainy day. When things aren’t going so well, instead of laying people off, you use the reserves … so you don’t hurt the mission of the university.”

Fichtenbaum said a formula used by Moody’s credit-rating service measures university finances on a scale of one to five, five being the top rating.

“Maine,” he said, “would be closer to five than four.”

He said there are two reserve accounts the university system could dip into, in the short term at least, to reduce the effects of budget cuts on academics.

One is the $177 million unrestricted fund and the other is the “expendable restricted assets” of $92 million — that’s a combined $269 million in what is called “primary reserves.”

One of the key measures of a university’s fiscal health is the ratio of the primary reserves to the annual cost of running a university or university system. In Maine, the ratio is just shy of 0.4, meaning that if the system were suddenly out of money, the reserves could keep the campuses running for 40 percent of the year, based on its annual operating expenses of $680 million, including interest payments, according to both professors.

The UMaine System’s own budget document supports that number, stating that the university system “has a little less than 4½ months worth of operating expense held in reserve. The benchmark for public institutions of higher education is 5 months. This ratio also varies by campus, leaving some of our institutions extremely vulnerable when State appropriation is reduced or enrollment declines occur.”

Bunsis said that level of reserves “certainly puts them at the top of nonprofit organizations … if they dipped into them to preserve their mission, they would still have plenty left” to meet unexpected expenses.

Need ‘haywire’ money

Chancellor Page countered that, saying except for $10 million allocated “in case something goes haywire,” the balance of the $177 million unrestricted reserves is earmarked for “ongoing and critical functions.”

Ryan Low, the System’s lobbyist and formerly chief financial officer at the University of Maine at Farmington, said that campuses use some of their share of the reserves to build up a capital fund for new construction projects.

“The reality is, 75 percent of (the reserves) are at the campus,” said Low, who was the state’s chief budget officer under Gov. John Baldacci. “When you’re trying to run a campus and the physical plant, there have not been a lot of state bonds to address campus facilities.”

Page said while the trustees could change how the reserves are allocated, “that would require undoing some things …  you would either have to stop or undo capital projects central to campus activities.”

Fichtenbaum characterized this explanation as “a ruse.”

“If circumstances have changed,” he said, “there is no legal reason why the administration or the board cannot redesignate the use of unrestricted net assets to support the core mission of the institution: teaching and research.”

Echoes of 2009

The debate over the use of the UMaine System’s reserves echoes a public disagreement from 2009 — when state support was cut, salaries were frozen and tuition increased.

The reserve fund that year stood at $88 million, double what it had been in 2001.

The apparent discrepancy between a growing reserve and budget cuts prompted the Student Senate at the University of Southern Maine to commission a study of UMaine System finances.

Bunsis, the Michigan accounting professor hired for the study, concluded that the $88 million in reserves indicated the university system was financially healthy and could use some of the reserves to offset cuts.

But students and faculty lost that fight; the cuts were made.

Molly Dolby was a USM Student Senate chairwoman and one of the leaders of that fight. The Hallowell native now works for a venture capital fund in Colorado. The doubling of the reserves in the few years since she graduated make her “absolutely” more convinced that her alma mater is being unnecessarily damaged by budget cuts.

“I know a few people who are losing their jobs and knowing they are integral to the student body is incredibly alarming, beyond infuriating,” she said.

Susan Feiner has been on the USM faculty since 1995 as professor of women and gender studies and economics, and holds a doctorate in economics.

“As a professor close to the effects of budget cuts at USM and the University of Maine System,” she said, “I’m reminded of what passed for logic in Vietnam: ‘We had to destroy the village in order to save it.’ Given the many outside confirmations of the UMaine System’s financial health, there is no rational explanation for the ruthless, ill-timed, destructive gutting of the core academic mission. I guess they have to destroy the university in order to save it.”

Page disputed that view. “We take any change in academic programs very seriously,” he said, explaining that the budget reviews include “looking at savings in administration.”

“In general,” he said, “we’re going to be reallocating from both sides to make sure we have the best programs for the students and the most affordability.”

The Maine Center for Public Interest Reporting is a nonpartisan, nonprofit news service based in Hallowell. Email: [email protected] Web: pinetreewatchdog.org.


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