JUNE 2020 FBAC Meeting Summary

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Johns Hopkins University

Faculty Budget Advisory Committee

Summary of June 3, 2020 Meeting

Provost Kumar opened the meeting by responding to concerns expressed by the Faculty Budget Advisory Committee in their letter of June 2, 2020, particularly regarding financial planning decisions around COVID-19 and FBAC communication to faculty colleagues. The Provost shared a number of comments, updates and recommendations in response to the questions raised by Committee members.  Specifically, Provost Kumar:

• Reported that the first phase of financial mitigation, as explained in the April 21^st communication from President Daniels, consisted of university-wide broad-based mitigation actions that immediately reduce losses in the upcoming year to provide some budget relief while divisions plan for additional actions to be taken to ensure financial sustainability.
• Acknowledged the four members of the FBAC’s “rapid response team” who worked quickly to provide feedback and reaction on the various financial mitigation options considered. The “rapid response team” had been formed after the March FBAC meeting.
• Clarified that these initial mitigation actions are included in the budget presented to the Trustee Finance Committee for approval in May (and to be presented to full Board of Trustees in June).
• Shared that the next phase of the budget planning cycle will focus on decision making at the school level.
• Recommended that an additional special meeting of the FBAC be added in July to update committee members on the status of COVID-19 financial impacts and work by divisions to revise their FY21 budgets and five-year plans.
• Announced that a university-wide faculty committee is being formed to ensure that faculty have a voice in the planning and decision-making on COVID-related issues. The FBAC chair, faculty senate chairs, and faculty representatives will be invited to participate on the Committee, which will also include the President, Provost and Deans.  Engagement and communication to the faculty will be a key focus of the committee.
• Reported that a separate student advisory committee has also been set up to provide feedback on COVID issues specific to the student population.
• Committed that his office will work to launch an FBAC website under the Provost’s Office website as soon as possible.

Additionally, in addressing the status of planning for the fall semester, the Provost explained that the level of uncertainty from the COVID-19 pandemic is still high.  The university is planning for a phased approach to resuming on-campus activities.  Phase one resumption will be limited to low density operations, focused around on-site research activities.  Phase two on-campus activities will include medium density instruction with social distancing as well as online instruction.  While options for fall program delivery are still being evaluated, the goal is to allow for maximum engagement with students, subject to public health and safety constraints.  A more concrete plan is expected to be finalized in July.

COMMENTS FROM THE SENIOR VICE PRESIDENT FOR FINANCE & ADMINISTRATION

Also responding to questions from Committee members, Mr. Ennis framed the challenges of navigating the crisis with highly uncertain and imperfect information and how the outlook evolved throughout March and April.  The university was well-positioned to absorb reasonable liquidity shocks and disruptions, but over time and with a great deal of consultation, leadership converged on the view that the crisis was likely to be far more structural and longer term in character.  The decision was made to address the crisis at an early stage and with a very structured and systematic planning process.  The plan involves recalibrating revenues and expenses to position the university on a path to consistent, positive operating results over the next three to five years.  The university has historically posted relatively thin but consistent positive operating margins in the 1.5% to 2.5% range, and it is important to chart a path to return to those levels.

Mr. Ennis explained the framework that guided university leadership with regard to university-wide expense mitigation planning, which consisted of three key priorities: (1) protecting employee salaries from reductions; (2) protecting jobs to the greatest extent possible; and (3) protecting employees’ health care benefits.  After extensive consultation and engagement with divisional leadership and trustees as well as the “rapid response team” under the FBAC, and in light of the significant losses the university faced for FY21, the difficult decision was made to suspend retirement benefits for one year.

Mr. Ennis explained why it is not feasible for the university to turn to endowment or other gift funds for capital investment to cover the projected losses for FY21.

CONSIDERATIONS FOR FIRST PHASE MITIGATION

Ms. Grady provided an overview of several expense reduction options analyzed and discussed with leadership, in addition to reductions in executive compensation and some deferral of capital investments:

• Salary reductions for all faculty and staff ranging from 5-10% with tiered reductions – not adopted
• Suspension of FY21 retirement plan contributions – adopted
• Staff hiring freeze for FY21 – adopted
• Faculty and staff salary freeze at FY20 levels for FY21 – adopted
• Furlough of remote, under-employed staff – not adopted
• Increase employee cost share for health and pharmacy benefits – not adopted
• Widespread Reduction in Force – not adopted in phase 1, but Schools may need to pursue at some level as part of phase 2 planning
• Early retirement incentive programs for staff and faculty – not adopted

FY20 Q3 FINANCE UPDATE

Ms. Grady reviewed the division-level Q3 FY20 projection as of the end of March, which reflected a deficit of $51M for the year, with APL contributing a $53M positive impact to the university result.  As of the end of Q3, the SOM was projecting a deficit of $183M, largely driven by reductions in clinical revenues, sponsored activity and philanthropy revenues related to COVID.  University Student Services is projecting a $10M deficit, largely related to student housing and dining refunds.  These projections for FY20 as of the end of March reflect improvement over the original projected impacts from COVID for FY20, with some improvement in the projected impacts to clinical revenue and net tuition revenue, as well as the receipt of $12M in federal provider relief funds to offset in part the COVID impacts for the School of Medicine.

FY21 CAPITAL AND OPERATING BUDGET AND FIVE-YEAR PLAN

Ms. Grady reported that the Trustee Finance Committee recommended approved of the five-year plan on May 14^th with the caveat that a restatement will be brought forth for approval in the fall due to the uncertainty around the depth and duration of likely financial impacts from COVID and the significant losses still reflected at this stage of the planning for FY21 as well as projected operating results that are too low relative to required, ongoing investments in year FY22 through FY25.

Ms. Grady reported that the FY21 budget reflects anticipated FY21 COVID impacts as well as the impact of the phase one mitigation actions and projects an operating loss or deficit of $156M (-2.5% operating margin).  The phase two division-specific mitigation actions will be incorporated into the restated plans to be reviewed with Trustees in the fall.   The budget reflects some improvement to the projected impact from COVID for clinical revenue, net tuition revenue, and philanthropy revenue compared to the early projections reported in April.  However, the budget and plan also contains a number of significant risks related to resumption of activities in full by fall and the potential long-term impacts from the pandemic on key revenues.

Ms. Grady and Mr. McLean also reviewed the university’s FY21-25 capital plan, which totals $2.8B, with significant capital investment reflected for the Applied Physics Lab (31% of the plan) and for significant donor-supported projects such as the 555 Penn project as well as important deferred maintenance/life safety investments.  Still, approximately $80M in capital expense for FY21 has been deferred due to concerns regarding the financial impacts of COVID.

FBAC members expressed appreciation that leadership shared the details around the decision making process related to the COVID-19 crisis and encouraged the administration to convey the same information to the faculty community more broadly.