The University of Virginia has spent the past decade building an investment fund that now totals $2.2 billion, a pile of money so large that officials say it could finance the entire school and medical center for nine months.
As the balance grew, the university sought to protect the annual funding it gets from Virginia taxpayers and raised its tuition significantly, with the price for in-state freshmen rising 30 percent since 2013.
On Friday, lawmakers in Richmond plan to ask the school to justify stockpiling so much money, outside of its endowment, to generate discretionary revenue for selected projects. Their questions come as the state confronts a possible shortfall of about $1.5 billion in its current two-year budget.
Many public universities across the country have pursued similar financial strategies, sometimes stirring controversy, as they manage pools of funds termed surpluses, “working capital” or simply “reserves.” U-Va. is one of the leaders.
“Most of us think if you run the government, if you run a surplus, you cut taxes,” said state Sen. Scott A. Surovell (D-Fairfax). “Apparently, not U-Va. You just raise tuition some more.”
Such criticism underscores a debate about U-Va.’s mission that has flared repeatedly in recent years: Should Thomas Jefferson’s university raise its national and global profile as high as possible, striving to compete head-to-head with top private institutions? Or should it concentrate more on the traditional public flagship function of serving the students of the commonwealth?
University officials say they can do both.
They say they remain strongly committed to affordability and financial aid for families in need. They say the fund was assembled through sound financial management, using investment returns, health-system revenue, donations, operating cash and other sources. And they say the $2.2 billion does not include tuition revenue or state general funds and is not intended to fund ongoing operations. Instead, they see it as a way to seed “strategic investments” that can propel the school to the top of public higher education.
U-Va. believes that the fund could generate up to $100 million a year. Among the proposals that have emerged for the money — none approved yet — are modernizing laboratories, improving library resources and bolstering faculty in business and other fields.
The governing board “wants the efforts to result in U-Va. again gaining the number one ranking for public universities,” Rector William H. Goodwin Jr., the leader of the Board of Visitors, wrote in an email April 17 to senior university officials.
Many other prestigious public schools have amassed hundreds of millions or even billions of dollars in an effort to keep pace with elite private schools and to weather political and economic volatility. Some have increased tuition in recent years, while others have frozen it. Nearly all call the reserves essential in an era of dwindling state funding. Reserves are much more flexible than endowments, which usually carry significant donor restrictions.
An analysis by Moody’s Investors Service found that some public universities have enough cash and ready-access funds to operate for several months or even a year.
As of June 30, 2015, the University of Pittsburgh had enough cash — $2.3 billion — accessible within a month to run for 473 days. This metric, known as “monthly days of cash on hand,” showed Purdue at 450 days, Penn State at 406 days and U-Va. at 314, according to Moody’s. Among other schools and systems analyzed, the University of Michigan stood at 239 days of cash on hand, the University of North Carolina at Chapel Hill at 174 days, the University System of Maryland at 172, the University of Washington at 129 and Virginia Tech at 115.
Purdue said its “strong financial stability” has enabled the Indiana university to freeze tuition for several years and lower its total cost of attendance while investing in engineering, computer science and other programs.
Seeking to put its reserves to use, the U-Va. board in February quietly authorized what it named a Strategic Investment Fund.
The $2.2 billion fund, about two-thirds the size of the university’s $3.2 billion annual operating budget, stands apart from U-Va.’s $6 billion endowment. Its origins trace to a starting pool of $120 million in 2007.
The fund first drew substantial notice in early July, when a former board leader, Helen E. Dragas, criticized it as a “slush fund” in an opinion piece for The Washington Post. Her accusation, and the university’s response, stirred outrage among some parents and lawmakers.
Francois DiFolco, of Fairfax County, said he was upset that U-Va. was holding such large operating reserves while it was raising tuition and his daughter was taking out student loans. She graduated in 2015, he said, about $28,000 in debt.
“We were in an economy where everyone was scraping, and they were making money,” DiFolco said. “I don’t think a state university is supposed to do that. . . . These 18-, 19-, 20-year-old kids took out loans to go to a school, and they took out more money than they had to. That’s not right.”
U-Va.’s in-state tuition for freshmen is now about $13,000, not counting fees, meals and housing. Three years ago, it was about $10,000. Tuition for out-of-state students is about $41,700 a year.
For many years, public universities have been forced to rely less on state funding and more on tuition, philanthropy and a variety of moneymaking strategies, including savvy investment management. The fiscal pressure is especially intense at major flagships as they seek to compete with wealthy private universities for star faculty and students while providing a substantial home-state price discount.
Strong reserves at U-Va. and several of its peers “provide a margin of protection against volatility and financial stress in their operating environment,” said Susan I. Fitzgerald, a senior vice president at Moody’s. High reserves contribute to a high credit rating, which reduces borrowing costs. U-Va.’s rating is AAA.
University officials say reserves also provide peace of mind.
“The baseline reserve in the modern university is another cost of doing business,” said University of Washington spokesman Norman Arkans. “You cannot function without it.” In the event of a natural disaster or a major system failure or an economic crisis, “you have to be able to continue to operate your educational program uninterrupted,” Arkans said.
Reserves helped the University of Illinois system make it through a recent budget battle that had led to major layoffs, program reductions and credit downgrades at other public colleges and universities across the state. The system, with three campuses, has an annual operating budget of $5.6 billion. In fiscal 2015, it held about $2.4 billion in “operating cash,” according to spokesman Thomas Hardy. The system tapped those reserves this year to cover a deficit of about $300 million that arose during the budget stalemate.
In 2013, Wisconsin legislators questioned why the University of Wisconsin system held $648 million in what was termed an “unrestricted surplus” after several years of tuition increases. The Republican speaker of the state Assembly, Robin Vos, said at the time that he had concerns about “so much money lying around.” Wisconsin system leaders replied that the reserves were in line with the practice at other public universities. But eventually, the system whittled its reserves in response to a state budget cut and tuition freeze.
That is a scenario U-Va. hopes to avoid.
The university’s state appropriation is about $150 million, slightly less than 10 percent of its academic division budget and about 5 percent of its total budget, counting the U-Va. medical center.
University officials say the strategic fund will enable the 23,900-student school to improve yet still remain affordable. Using reserves to generate income for high-priority projects will reduce the pressure for tuition increases, they say.
“We’re doing a very good job balancing both affordability and excellence,” said Patrick Hogan, U-Va.’s chief operating officer and executive vice president. If the university were to spend all of the fund on a big tuition cut, he said, that would leave no money to spend on investments needed “to maintain the excellence we have.”
Hogan said the sources of the fund were reported on the university’s balance sheets for years. “Nobody can allege we had this money hidden,” he said.
The Board of Visitors discussed the fund in a closed session in June that some have claimed was a potential violation of the state’s open-meetings law. U-Va. says it followed the law, but it acknowledged seeking to keep news about the fund under wraps until it could consult with key legislators.
Some legislators contend that the fund indicates that U-Va. has been playing a game with Richmond, stashing money in little-noticed accounts while claiming it had to enroll a large number of out-of-state students to stay afloat.
Del. David B. Albo (R-Fairfax) said that for years, lawmakers have pleaded with the university to expand the number of seats for Virginia students. About two-thirds of U-Va.’s 16,700 undergraduates come from within the state. The university has grown in-state enrollment somewhat, but lawmakers wish it would do far more.
“For the last 10 years, they told us: ‘We can’t, because we’re really broke. We need the money from the out-of-state students,’ ” Albo said. The lawmaker, a U-Va. alumnus, said he had long been sympathetic to that response because he knew state funding had decreased.
“Now I find out that was all a bunch of bull,” he said. “They’ve got the money. They just don’t want to do it.”