In the second part of The Well’s Behind the Numbers series of stories, we look at how the University is funded, the restrictions on those funds and how the University spends its money. The numbers used in this story are from the fiscal year 2019 Comprehensive Annual Financial Report, which reflects activities in previous years and includes longer-term financial obligations.
It takes money to run a University. How much? At Carolina, more than $3 billion a year.
Any for-profit or non-profit business needs revenue to operate. The fact is, by any financial definition, UNC-Chapel Hill is a major business enterprise supported by a complex revenue portfolio.
While Carolina had revenue of nearly $3.5 billion in fiscal year 2019, it took $3.1 billion in operating expenses to run a top-tier global public research university focused on solving the world’s great challenges and serving the people of North Carolina.
Given the recent news about projected budget deficits and cost-cutting measures to address them, there is renewed interest in Carolina’s finances. The Well’s Behind the Numbers series sheds light on the University’s financial situation, how various financial buckets fit together and what policies guide decision-making. For an overview of Carolina’s finances, read part 1 of our series.
The University gets its funding from a variety of places: research grants, tuition and fees, state appropriations, gifts, investment returns and income generated through housing, dining and other services. Most of this revenue comes with restrictions on how the funds can be spent, based on the source of income.
The University spends its money paying salaries and benefits for its employees, and for services, supplies and materials, among other costs.
To better understand the University’s finances, The Well is focusing on fiscal year 2019, which ran from July 1, 2018, to June 30, 2019, since that year reflects the most recent year with baseline operations. The impact of the pandemic can be seen in the last four months of fiscal year 2020 (July 1, 2019, to June 30, 2020). While the fiscal year 2020 annual report is available, for this story, we used numbers from the fiscal year 2019 annual report.
The University’s top five revenue sources comprise 82% of the total revenue, with the remaining 18% coming from several sources, based on information in the annual report for fiscal year 2019.
In fiscal year 2019, the University spent 82% of its money on several large categories, primarily salaries, benefits and services to run all the activities on campus.
Where the funds come from determines how they can be spent.
Where does the money come from?
- Research (25%)
Across the state and nation, Carolina is best known for providing students a world-class education with unparalleled access and affordability. However, the largest portion of the University’s revenue, about 25%, doesn’t come from tuition: It comes from research grants.
Carolina’s research enterprise has grown to be among the top universities in the world, ranking fifth in federal funding. While most of this money comes from the federal government (specifically the National Institutes of Health), these funds also include grants from private foundations and the state. In fiscal year 2019, sponsored research funding totaled $941 million.
Money generated from research grants can only be spent on research activities; it cannot be shifted to cover other expenses. However, the University takes a small portion of each grant to pay facilities and administration costs related to research, such as utilities, debt service on buildings, administrative costs and infrastructure like servers and computers. These funds, sometimes called F&A, totaled $190 million for fiscal year 2019.
- State support (16%)
It is often said that the University’s largest contributor isn’t an individual or corporation: It’s the state. About 16% of Carolina’s revenue comes from appropriations from the state of North Carolina. This money is approved each year by the General Assembly. State funding to Carolina remains consistent — totaling about $543 million in fiscal year 2019 — putting Carolina in the top 5% in per-student appropriations nationally. While state appropriation as a share of overall revenue has declined over time, the difference is due more to the tremendous growth and success in Carolina’s research enterprise and health care funding.
“Money from state appropriations and tuition goes into a general fund,” said Nate Knuffman, interim vice chancellor for finance and operations. “Those funds are heavily regulated and can only be used to support the teaching mission of the University.”
- Patient services (15%)
Carolina’s third-largest revenue source — about 15% — comes from patient services at the UNC School of Medicine and the UNC Adams School of Dentistry. This number totaled more than $506 million in fiscal year 2019 but is projected to decrease significantly during fiscal year 2021 as many clinical procedures, such as elective surgeries, were canceled or postponed due to the COVID-19 pandemic.
Most money generated in the health care units must stay in the departments where it originated but can be moved at the department’s discretion.
- Auxiliaries and net sales and services (14%)
A significant portion of funds comes from Carolina’s auxiliary units — departments at the University that support business functions, such as transportation and parking, utilities, housing, dining, athletics and others. These units are expected to be self-sustaining, covering their expenses as well as generating revenue for the University. Combined, these units typically bring in about 14% of the University’s total revenue, about $488 million in fiscal year 2019. Like patient services, the University’s auxiliary units have experienced a significant decline since the outbreak of the pandemic, as the transition to mostly remote operations has meant substantially fewer people are eating, living and parking on campus.
- Tuition and fees (12%)
Net tuition and fees made up about 12% of revenue. In fiscal year 2019, this totaled $424 million, with $246 million in net tuition and $178 million in fees.
In fiscal year 2019, the University also increased its financial aid awards, leading net tuition revenue to decline slightly from fiscal year 2018 to fiscal year 2019. While overall enrollment demand remains strong, caps on the number of out-of-state students that Carolina can enroll, as well as caps on how much the University can increase tuition year to year, mean that this revenue stream will likely stay relatively stable over the next several years.
Other sources of revenue
The remaining revenue reported comes from investment income, non-capital grants and gifts, pledges, accounting adjustments and other one-time transactions.
Where does Carolina spend its money?
- Personnel (56%)
In fiscal year 2019, nearly half of expenses — more than 56% or $1.7 billion — went to pay salaries and benefits for the University’s more than 12,700 permanent employees. This includes Carolina’s renowned faculty and leading researchers, along with expert staff.
“Our employees are our biggest asset,” Becci Menghini, vice chancellor for human resources and equal opportunity and compliance, said at an Employee Forum meeting last fall. They are also the University’s greatest expense.
Maintaining employee salaries and benefits has gotten more costly in recent years. Since fiscal year 2016 the number of employees at Carolina has increased by 4.5%, but the University’s personnel costs have increased by nearly 12%.
- University services (26%)
The University’s second largest expense is categorized as services. While many expenses fall into this bucket, most are for research and campus operations, including contracts for dining services, online education, bookstore operations and other services. This category also includes research partnerships with medical entities and other universities that enable scientific innovation to support the University’s top-ranked research enterprise. Together, these costs accounted for 26% of the University’s expenses, or about $796 million.
The remaining 18% of expenses goes toward supplies and materials, scholarships and fellowships, depreciation, debt service and utilities.
In terms of financial aid, Carolina is known for its unparalleled affordability. It is one of only two public universities (along with the University of Virginia) that offer need-blind admissions and promise to meet 100% of demonstrated need, and about 47% of students receive some type of financial aid.
This access comes with a cost: In fiscal year 2019, the University spent $88 million funding financial aid, scholarships and fellowships, or 3% of its total expenditures.
How this relates to the current situation
It’s important to note that the annual report is a look back at financial information. It is not a budgetary presentation.
Today’s operating expenses have increased from fiscal year 2019, and the University is managing a budget shortfall due to a roughly $100 million structural deficit and an estimated $200 million deficit in the current fiscal year directly due to the pandemic.
At the beginning of the pandemic, Carolina placed a pause on most hiring and is reviewing spending requests closely. As a result, non-personnel spending was down $70 million in the first quarter of fiscal year 2021. Unfilled personnel vacancies have also saved the University substantially since last March, when the pandemic began.
To tackle the structural deficit, the University announced plans in January to implement a 1.5% reduction in personnel funds and a 7.5% reduction to operating funds across schools and units for fiscal year 2021, followed by another 1.5% reduction to personnel funds and a 7.5% reduction to operating funds in fiscal year 2022. Implementing these intentional and strategic budget reductions will enable the University to balance its budget in 18 months.
Carolina’s financial challenges come from a decentralized and fragmented operating environment. The University has not had a central budget to outline the use of revenue and planned expenses. To remedy this out-of-date financial environment, leaders are working to create a centralized budget.
“This is why an annual centralized budget is critical,” Knuffman said. “By creating a spending plan that understands how all of the units work together, we create better flexibility and predictability to our operational and personnel needs moving forward.”
The Well’s Behind the Numbers series will continue in the coming weeks.