The University of Alaska Board of Regents has approved a financial exigency declaration allowing administrators to lay off tenured faculty, shutter academic programs and close entire campuses.
The regents were forced to take Monday's drastic step after Gov. Mike Dunleavy, a Republican, employed line item vetoes on June 28 to slash $130 million from the university system funding allocated by the Legislature’s budget.
Moody’s Investors Service downgraded $270 million in University of Alaska debt to Baa1 from A1 July 17 after Dunleavy slashed 40% of the university system’s state funding for the current fiscal year. It also dropped $23 million of lease-revenue bonds issued through Community Properties Alaska, Inc. to Baa3 from A2.
The governor, who took office in December, used the line item veto to make $440 million in cuts to higher education, health care and other major social programs in order to restore the full annual Permanent Fund dividend that Alaska pays to nearly every state resident. Lawmakers tried, and failed, to achieve the three-quarters vote needed on July 10 to override Dunleavy’s budget vetoes.
The three- and four-notch rating cuts reflect "the severity and magnitude of the financial challenges confronting UA,” Moody’s analyst Diane Viacava wrote in the ratings report.
“We have a negative outlook reflecting the execution risk, because what they have to do is so substantial,” Viacava said in an interview.
UA operates campuses throughout the state including Fairbanks, Anchorage and Juneau, and also runs the state’s community colleges serving 35,000 students.
The 10-to-1 vote to declare financial exigency “will give them the opportunity to make the programmatic cuts they need to make to bring their expenses in line with their now drastically reduced revenue base,” Viacava said.
S&P Global Ratings on July 9 placed its AA-minus long-term rating on the university’s general revenue bonds and the A-plus rating on its lease revenue bonds on CreditWatch with negative implications.
Fitch Ratings doesn’t rate the university’s bonds, but its analysts in a Tuesday report called the reduction in state funding to Alaska's state university a landmark development that demonstrates the risk to public universities in an era of shrinking state budgets.
“Colleges and universities overall are seeing state support become a less reliable source of revenue, but a reduction of over 40% from a state with historically stronger support of higher education would represent an unprecedented event that highlights the risks of state funding volatility,” Emily Wadhwani, a Fitch Ratings director said.
As many as 2,000 employees could lose their jobs, Alaska President Jim Johnsen said during a presentation to the regents during a meeting that stretched several hours.
“It’s one of the few situations in which tenured faculty can be released, that is why there are very serious implications to declaring financial exigency,” Viacava said. “It’s not something the board takes lightly.”
The regents originally planned to delay the exigency vote until July 30, but determined with the system’s burn rate and diminished hopes that funding would be restored that they needed to take action immediately.
“I think we are in the position of planning for the worst and hoping for the best,” John Davies, the regents chairman, said. “If anything changes with the Legislature, we could make a mid-course correction. This is a devastating schedule, but if we go any later it just gets worse.”
Many of the Regents voices cracked as they discussed having to set in motion the draconian cuts needed to save the university system.
Prior to the vote, Regent Mary Hughes said she was “going to vote for exigency to insure there would be a University of Alaska in the future.”
She pointed to concerns they were hearing about the University’s burn rate, or level of spending even during summer term.
“I think of the amounts of money we are spending every day,” Hughes said. “We can’t have that — we need to figure out how to make a smaller budget work. It’s a difficult decision, and obviously no board of regents ever wants to make that decision, but we must make it.”
Davies disagreed with the governor's assertion that such draconian cuts were needed.
“I don’t think the state of Alaska is in fiscal crisis, I think it’s a political crisis,” Davies said. “It’s a choice that has been made by the governor and a minority in the Legislature.”
Following the vote, Johnsen outlined three options the university could take that included closing some campuses or reducing administration by moving to a more centralized system.
Davies emphasized that exigency was a tool, not a plan, and that the regents will be deciding on what actions to take and what the university will look like in months to come. Johnsen will flesh out the options discussed in more detail to present to the regents next week.
The university will then present the options to the community and come back for further discussion on more detailed plans in mid-September and expects to pull the trigger on layoffs and other changes by Dec. 31. Even under exigency, the university has to give employees 60-days notice prior to layoffs.
“That is the budget handed to us,” Davies said. “I am hopeful it will change. I would celebrate to the stars if it were changed, but I don’t think it’s likely.”
If circumstances change, the tool can be modified, restricted in scope or it can be withdrawn, Davies said.
The cuts could have spillover impacts on the regions, affecting the bond debt of rural areas where the university is a major employer.
“They are still receiving funding and are still critical to the state,” Viacava said. “They are the community college system. They are the primary workforce educator in the state for all degrees, whether it’s a four-year degree, certificate or graduate degree. They are needed for adult training. They are critical to the state and will always have an important role there. The question is: “What will they look like?'”
Among factors that enabled the university to retain an investment grade rating given the uncertainty is the debt relative to the balance sheet and cash flow is quite manageable.
“In the past, they did receive generous funding from the state that allowed them to make investments,” Viacava said. “They don’t have a high debt burden at all. They have specific pools of revenues and very generous coverage. That is one advantage, that they don’t have high leverage.”
