Feb 9, 2010, speech to Civic Fdn
Fiscal Sustainability: Our State and its Flagship University
Thank you for the invitation to join you. I welcome it. The Civic Federation has a rich history of well over a century. We share a heritage in Jane Addams of Illinois Hull-House fame who was also one of your founding trustees. The Federation is widely recognized for your long-standing advocacy of social and fiscal responsibility in government, including your recent “Fiscal Sustainability” initiative. Never in history have we needed you more.
So again, thank you for this opportunity.
It’s nice to back at the helm at the University of Illinois. Having been rescued from the archives, dusted off in Rip Van Winkle fashion and reinstalled in the Illinois presidency I am struck by how much things have changed and how much they remain the same. The students seem younger and the days seem longer, but the rhythm of the University continues much the same, except for ubiquitous cell phones and electronic messaging that now seem to control the quad.
The other thing I am struck by, however, is how fragile our societal well being can be and how daunting the search for solutions to problems can become. We face one such problem in Illinois and it is threatening the University. As Illinois citizens we must search for consensus around a solution that will deal with our problems or we will risk compounding the threat and risking our future.
The mounting problem is the financial nightmare that holds the State of Illinois in its grip. Already it has inflicted real damage and absent a solution the consequences will become more deadly.
While I will be talking primarily about the consequences for the University of Illinois, the same story can be told for nearly every other public university in Illinois, for Illinois community colleges and public schools, for our hospitals and health care providers, and for the many vendors who do business with and depend on timely payment from the State.
What is fueling the crisis? In a nutshell, it is a pattern of overspending by Illinois State government compounded by inadequate tax revenues. The daily cash balances of the State have declined for a number of years. This past December 31st, the State of Illinois had over $5 billion in unpaid vouchers.
Next year is even more worrisome. The $2 billion in federal stimulus funds will be gone. The false comfort of this year’s $3.5 billion in pension obligation notes may not return but the obligation to fund pensions will remain. Interest payments on borrowing will go up. This year’s FY '10 deficit will carry forward.
In short, as serious as things are now, FY '11 will be much worse. Our University of Illinois economists estimate we could be looking at a nearly $13 billion hole going into FY '11, a gap almost half of the entire State general fund budget.
Much of this you know. The short, medium and long run state budget situation is dire. Some believe the State may have the ability to finish this year. Let’s hope that is the case. But what happens next year? Day by day we are drifting closer to a California condition. At some point, we don’t know precisely when, Illinois too will face a meltdown.
The Civic Federation is celebrating your 116th anniversary. We are roughly your age, an older brother if you will, at 143. The University of Illinois has over 600,000 living alumni. Roughly half live and work and contribute in a myriad of ways to the cultural, intellectual and economic fabric of our State. We enroll over 75,000 students, employ nearly 6,000 faculty, grant some 18,000 degrees annually and bring to this State over $700 million federal and other sponsored program dollars, 80 percent of which are for research that fuels innovation and economic competitiveness in our State.
Many would consider us to be one of the great universities in the world. We educate the physicians, nurses, pharmacists, public health officials, dentists and veterinarians who populate our communities. One in every six physicians in this state is an Illinois graduate. Our faculties are recognized around the world for strength in virtually every field of science and engineering, the arts and humanities, architecture, accounting, business and finance, agriculture, urban planning and a host of other fields that have become the centerpiece of modern life and economic well being.
We are a major force in this City – in the banks and law firms, the schools, businesses, neighborhoods, hospitals and in every corner of civic life. Our fingerprints can be found on farms and communities across the entire state through extension services and public outreach. We have a direct and indirect economic impact on the Illinois economy of more than $13 billion, including the creation of an estimated 150,000 jobs. Arguably we are the largest and single most important economic engine in the State of Illinois.
In spite of all of that we are in trouble.
I may be stating the obvious, but my point is, we matter. If the University of Illinois and the rest of higher education in this state are disrupted, if we are no longer high quality and dependable, if our operations are damaged or disrupted, the harm to individuals, communities, job creation, innovation, quality of life and future prospects in this State will be incalculable.
On January 5th I sent a letter to faculty and staff in Urbana-Champaign, Chicago, Springfield and elsewhere telling them we were taking a number of drastic steps in order to finish the academic year. As of December 31st we had an unimaginable and unprecedented $436 million in unpaid state invoices. We were, and still are, draining cash balances at an alarming rate. Our immediate concern was to be able to finish this academic year.
In response we cut faculty and staff pay by roughly 5 percent for the balance of the academic year through four furlough days. We cut the pay of senior administrators by about 10 percent for the balance of the fiscal year. We directed units to hold back 6 percent of their State budget. We froze hiring, including academic hires we really should be making. We have provided retirement incentives to trim the payroll. We have cut and will cut again administrative costs and are sending out letters of non-reappointment to staff.
Still, no amount of furloughs and budget cuts can make up for the absence of more than $760 million in direct State support.
Given a budget of more than $4 billion in which the State portion accounts for about 18 percent it is reasonable to ask why the delay and uncertainty in State payments is so damaging? The answer is simple if you understand our cost structure.
Think of the University of Illinois as having essentially four lines of business: sizable research programs (considerably larger than those of Northwestern and the University of Chicago) paid for largely from restricted federal funds, corporations and foundations; an equally large hospital and clinics operation, funded primarily from patient and other fees; and sizable student housing and other auxiliary enterprises paid for by students and others. Those are three of the four.
Our fourth line of business, however, is at the heart of the enterprise: the undergraduate, graduate and professional education of more than 75,000 students. When funding for this core mission is disrupted, the entire system is threatened. Along with student tuition, the State of Illinois funds teaching and learning, the operation and maintenance of our academic buildings, our books and libraries and the support staff. This is the heart of the enterprise and it is kept alive in large part by students, their families and the people of Illinois through State government. At the moment, our students and families are standing alone.
When the State delays its payments, now in excess of $400 million and mounting, the impact of the delay ripples through the entire enterprise. We worry, how long can this go on? Southern Illinois University has spoken openly and repeatedly about the fear it may not be able to meet payroll. Another president has wondered precisely how one would go about closing down? In all, Illinois public universities await payment of roughly three quarters of a billion dollars in unpaid invoices.
This year’s crisis did not come without warning. The fiscal health of the State has been in decline for at least half-dozen years. General Fund revenues from income and sales taxes, adjusted for inflation, have been flat to down for more than ten years. In FY '09, despite substantial federal stimulus funds, the State’s general fund payment backlog increased by almost $2.5 billion. In the current year, even with another $2 billion of federal stimulus funds and more than $3 billion of borrowing, the State’s payment backlog is likely to increase another $2.5 billion.
The University’s receivables began to mount two years ago. This accelerated last year and we ended FY ‘09 with an alarming $120 million in unpaid bills from the State. Receivables continued to escalate through the fall, to the $436 million number I noted earlier. Following the actions I announced in early January, we received additional payments from the State, but even now our State receivables remain essentially unchanged at $431 million.
What does the future hold? Will State payments return to normal any time soon? How bad could it get?
When the University closes the books for this year we are almost certain to be above last year’s $120 million in delayed payments, and conceivably three or four times that amount. This year the State’s budget deficit will exceed $5 billion. In that environment, unpaid bills to the University of Illinois and others will escalate. Every additional billion dollars in the backlog of state payments adds an additional 15 to 20 business days to the payment cycle. The State is already roughly five months behind in its payments to the University and we are not aware of any plan to remedy the past due payments.
What is the impact of these escalating delays?
- The most worrisome consequence of the State’s financial crisis is the erosion of confidence and trust. Uncertainty and ambiguity breed apprehension and fear and that’s not healthy. We have asked the Governor and Comptroller to at least give us a clear indication of when payments will be received.
- We are in a weakened position to attract and retain top faculty. Even now we are beginning to lose people who otherwise would not be tempted by competitive offers -- a business dean in Chicago and a top engineering professor in Urbana during the last week alone.
- Students and their parents are worried. Will their classes be interrupted? What is going to happen to tuition?
- We are draining cash balances which affect the facility and deferred maintenance program as well as operating budgets to support students through scholarships and academic programs. If, God forbid, the full appropriation is not received, the University’s limited reserves will be decimated.
- As the State’s credit rating is threatened, the impact spills over on the University and forces up the cost of borrowing for us as well. Rating agencies have placed a negative outlook on all Illinois public higher education institutions. We are doing our best to retain the current ratings but it is a very difficult environment.
My big worry is, where will things stand a year from now? It is possible the University will have nearly an entire year’s appropriation waiting to be paid? Instead of $431 million, for example, think $760 million. Such prospects are unthinkable, but we worry.
Many observers believe no action will be taken by the Governor and General Assembly this session. They do not see consensus emerging until after the general election. But, in fact, there is no assurance of any action even then.
In the meantime, the State of Illinois and its universities, hospitals, schools and other programs and services on which the long term welfare of this State depends will drift closer to a meltdown that could come more quickly than we think.
Illinois needs to address the financial crisis now. What is needed is no great mystery:
- Any meaningful solution will require belt-tightening; spending cuts that will reduce the long-term rate of growth in State spending.
- Moreover, it will require new revenues. Tax increases are not popular and they are never easy, but no meaningful solution to the State’s fiscal crisis will be found without action on the revenue front.
- And finally, any meaningful solution will require bipartisan participation and cooperation.
The longer the delay, the more intractable and painful the solution will be.
One thing I know: it takes several generations to build a Great University, but a great university and a great state can be quickly lost. A sense of pride can save us: pride in the State of Illinois; a pride in fiscal discipline; a pride in public officials who risk their careers to do what is right; pride in the quality of life in our communities; pride in the health of our economy; pride in the quality of our schools and universities; and pride in our determination to build a strong future for our children and grandchildren.
One final story: During my earlier presidency, in partnership with the State of Illinois and the National Science Foundation, we established the National Center for Supercomputing Applications. Beginning with ILLIAC over 50 years ago, Illinois had been at the world’s cutting edge in computing. The founding of NCSA in the 80s built on that tradition and over the years it became the leading center for high speed computing in the United States.
Next year, NCSA will launch the Blue Waters project, a third leap forward. Blue Waters will be the most powerful supercomputer in the world for open scientific research. It will be the first system of its kind to sustain one petaflop performance on a range of science and engineering applications. The machine is the largest ever built by IBM. With help from NSF and the State, we constructed a new building to house it (although monies from the State have yet to arrive).
Students and scholars and scientists from universities, governments and corporations from around the world are coming to learn how to use it. They understand there is an opportunity to model the polio virus, complex biological systems, hurricanes and tornadoes, power grids, you name it. Blue Waters is the largest project ever funded by the National Science Foundation. It illustrates precisely the kind of future the state of Illinois must be prepared to explore and pursue.
To go on that journey, however, we must be able to attract great students and faculty, we need to be able to forge cooperative agreements with businesses and corporations in Illinois, and we must be seen as a strong and reliable partner.
All we do for students, all we contribute to the cultural and economic well being of this State, depends on having a reliable partnership with the people of Illinois, and that includes Illinois State government.
You can help. Now is the time for all of us to speak out and help Illinois face its challenges and build consensus around constructive solutions. You can help the people of Illinois be aware of what is at stake. And you can support policy makers who are willing to face up to the difficult challenges and lead Illinois forward.
If there is anything I can do to support you in that process I am eager to help. Thank you again for this invitation and thank you for all you do for the University of Illinois.
Stanley O. Ikenberry
President, University of Illinois
The Civic Federation, Chicago
February 9, 2010