Below is an analysis of Rider’s finances by AAUP. Following the analysis is a response sent by Greg Dell’Omo, Rider’s President.
The last sentence in Mr. Dell’Omo’s email is very alarming and we would like to know what contingency plans is he referring to should negotiations fail and how will it impact the students.
Serious Discrepancies in CFO Karns’ Budget Projections
In September of 2016, Rider’s Chief Financial Officer (CFO) Julie Karns began circulating a “Three Year Unrestricted Fund Projection” which projected annual cash deficits in excess of $10 million through 2019. On the basis of these projections, Rider’s CFO concluded that Rider would run out of cash in its unrestricted fund in three years unless rash actions were taken to control costs. Note that the rationale for the closing of Westminster Choir College and the sharp reductions in faculty pay and benefits which administration is now insisting upon in negotiations are based entirely upon these budget projections. We have had numerous concerns about the validity of the “Three Year Unrestricted Fund Projection” and have evaluated various aspects of the budget over the past year.
As part of our evaluation of this budget, we assessed the actual cash spent by Rider for the 2017 fiscal year. In late 2016, the Rider accounting department began providing a “Cash Activities Report” to the AAUP which provides an account of all cash spent by the University. The evaluation of these periodic reports has ultimately led to a startling revelation. The “Three Year Unrestricted Fund Projection” developed by CFO Karns has been presented as a cash basis accounting budget. This means that expenses and revenues on the report represent actual cash spent or received by the institution in a period of time. This is logical, given that the ostensible purpose of the three-year unrestricted fund budget projection is to determine the solvency of one of Rider’s cash funds. An alternative to cash basis accounting is the accrual method which does not examine cash flows and would not be appropriate for this type of analysis. It is improper to mix both of these methods in accounting.
However, based on information provided by Rider’s financial office, it appears that what has been presented as a cash basis budget in the “Three Year Unrestricted Fund Projection” is neither cash basis nor accrual method accounting but is instead a hybrid of the two. The AAUP met with Jennifer Potter (Associate Vice President/Controller) from Rider’s finance office on July 8th and questioned her specifically about this accounting inconsistency. In this meeting she confirmed that the “Three Year Unrestricted Fund Projection” used both accrual and cash basis accounting methods. This failure of consistent accounting renders the University’s projections useless in trying to determine actual cash flow in the unrestricted fund.
The current “Cash Activities Report” provided by the administration identifies actual cash spent by the university. This report indicates that Rider will have spent approximately $92 million for salary and fringe benefits in the 2017 fiscal year. CFO Karns, however, had indicated in her “Three Year Unrestricted Fund Projection” that the University would spend $99 million in cash for salary and fringe benefits in fiscal year 2017. This is a significant $7 million difference between the actual cash spent by the university and what CFO Karns had predicted would be spent. We asked the administration for an explanation of this variance and were provided with the response contained in the attached document.
After careful parsing of this explanation, we believe the most likely outcome for fiscal year 2017 is that the actual cash spent for salary and fringe benefits will be in the range of $93 to $95 million. This is $4 to $6 million less than what CFO Karns projected in her widely circulated budgets. This discrepancy is significant because when this variance is applied to the “Three Year Unrestricted Fund Projection” the cash deficit is dramatically reduced. While the administration may either ignore this significant discrepancy in their budget, or try to explain it with vague claims of “difficult non-faculty cost-cutting” on their part, the reality is that the budget projections used by CFO Karns in 2016 were, in our view, simply incorrect. Furthermore, it is our carefully considered conclusion that the use of these budget projections amounts to a serious misrepresentation of Rider’s finances by CFO Karns.
Our interactions with the administration concerning the variance between their budgets and actual spending are consistent with past patterns of administration responses to our inquiries: We point out serious variances; the administration provides an “explanation”; we indicate that their explanation is flawed; and they provide an equally flawed explanation of their explanation and so on. We have come to the conclusion, therefore, that the administration’s projections are unreliable.
We have attached the original email from administration concerning this alarmingly significant discrepancy. Administration responses are in normal font, the AAUP comments, based on our careful review of all details are indented and in italics. Documents providing more details on the specifics are provided on the AAUP website.
** ** **
** Email Attachment to the Message **
Differences between Salaries and Fringe Benefits (FY2017 October 2016 $99,363) per the September 29, 2016 – Financial Forecast and Actual Cash Activity thru May 2017 (Salary and fringe of $74,215 and $9,453, respectively, plus an estimate for June of $7,601 for salary and $1,000 for healthcare – for a total of $92,269), a difference of approximately 7.1 million dollars:
The three year unrestricted fund budget projections shown to the AAUP and presented to the Board of Trustees are represented as cash-basis accounting, not accrual basis. However the explanation provided by finance clearly counts non-cash items. In addition, several of the items below involve double counting.
Self-Funded Healthcare Deductions (100/80, 90/70 and Rx premium deductions withheld but not paid out until the time of claims) – $1,891,687 (1)
If this is referring to payouts that will occur after the fiscal year ends for the previous year, it is an accrual and not a cash payment in the fiscal year.
This year’s actual cash payment includes such monies from the previous fiscal year. By counting these funds in this year, the monies are effectively counted twice, once when actually paid, and again when incurred.
Payroll related items withheld from pay and paid from through AP (AAUP/AFSCME Dues, Dental Premiums, Garnishments, etc.) – $638,187 (1)
Internal transfers – $86,647 (1)
Internal Transfers are not cash expenses.
Internal tuition remission (internal transfer) – $2,000,000 (1)
Internal Transfers are not cash expenses. While this may be treated as employee income for tax purposes, the university did not spend $2 million in cash for faculty and/or staff members’ students to attend Rider in FY 2017, so this should not be part of a cash budget projection.
External tuition remission (paid through AP) – $950,000 (1).
Compensated absences (noncash) – $123,600 (1)
Not a cash expense. It is not clear how this is any type of an expense.
Early retirement (expense is incurred at the time an individual commits to participation, cash is paid out over time) – $1,069,540 (1)
This is another example of double counting. The projections claim to be based on cash accounting. The cash activities would include the monies paid out to previous year’s recipients of cash buyouts. While the liability is accrued in the year that a faculty member elects a buyout, no cash is expended until future years. Since the projections claim to be on a cash basis, liabilities should not be included as they are not cash expenses.
Post retirement adjustment (noncash) – $273,182 (1)
Again, non-cash adjustments do not belong in a projection on a cash basis.
Certain of the items above have prior year counterparts, such as portions of prior years’ ERI [Early Retirement Incentive] charges paid in cash this year or medical claims activity. They are in prior year expense but require cash this year. Those are offset by significant fiscal 2017 salary savings versus the budget due to staff turnover – for example, the University is down 53 positions since January. (emphasis added)
Since the reduction of non-faculty labor by 53 positions would obviously have an impact on salary and fringe benefits expenses, why was this information not provided as part of an updated budget projections?
In our view, the sum total of these errors leads to a serious misrepresentation of Rider’s financial status.
** ** Greg Dell’Omo Response ** **
I have seen a number of AAUP communications challenging the University’s financial reporting, and questioning the honesty and capability of Rider’s financial leadership. Frankly, I believe this is a distraction that takes away from our goal of finding a solution. I have full confidence in Rider’s financial leadership team and I know that the independent external financial professionals who work closely with the University to assess the quality of their work agree. Rather than personal attacks, I look to the professionals on both sides to pursue the difficult task of resolving these issues at the bargaining table.
Higher education accounting, including Rider’s, is complex, and that is reflected in our financial accounting and reporting. The University has made substantial and repeated efforts to clarify these reports for the AAUP Executive Committee and explain how Rider’s operating budget forecast, audited financial statements, and cash forecasting are related. It is disappointing that the AAUP leadership chose not to be part of the open financial forum in the spring, however they continue to question financial practices and motives in this manner.
This bargaining process is taking place at a critical juncture in the University’s history and it therefore brings pressures and challenges to all involved parties. We will have a deficit for the 2017 year that will weaken the University’s finances and there is no manipulation or exaggeration of that problem. As I have said in my meetings and conversations throughout the year, everyone at the University is working together to resolve our deficits, and the AAUP’s contributions to deficit reduction is essential to reaching this goal.
The University is committed to continuing the bargaining process in good faith and in a spirit of mutual respect, with the goal of finding common ground to solve these complex issues. It is my hope that moving forward, the parties can put these personal feelings aside and focus on the realities of the situation. As we do so, given the concerns that are raised by the recent communications, we will also continue to take the necessary steps to assure that our contingency plans are in place so there is limited interruption for the campus community this fall, should the need arise.
** ** **