Information Item Agenda Item 3 May 12, 2020 Page 1 of 5 COMMITTEE ON FINANCE California State University Fiscal Status Report Presentation By Steve Relyea Executive Vice Chancellor and Chief Financial Officer Ryan Storm Assistant Vice Chancellor Budget Robert Eaton Assistant Vice Chancellor Financing, Treasury, and Risk Management Summary The Coronavirus (COVID-19) pandemic has adversely impacted the state and the California State University in many areas and ways. This information item and presentation will focus primarily on the financial impacts of COVID-19 on the CSU. Due to the rapidly changing circumstances, an updated report from several business and finance subject matter experts will be presented at the May 2020 meeting. The presentation will include information on: campus impact and actions, federal stimulus and relief programs, the state budget, financial markets and investments, and cash position. Background Campus Fiscal Impact and Actions Since the start of COVID-19, a number of intentional actions and unintentional impacts have affected the 23 campuses in these three general areas: CSU operations (e.g. academic programs, student services, and central plant), CSU enterprise programs (e.g. housing, parking, and professional and continuing education) and non-profit auxiliary organizations (e.g. associated students, foundations, bookstores and other business services). Each area has been affected differently. Beginning with CSU operations, campuses report $50 million of adverse negative impact with much of that in the form of unanticipated costs. Concerns over the virus itself have created additional cleaning and overtime costs. There has also been a shift to virtual/distance instruction and work at home arrangements, which has increased technology needs for hardware, software, Finance Agenda Item 3 May 12, 2020 Page 2 of 5 and licenses. While the $50 million represents less than one percent of the annual operating budget, there is significant risk to operations in the future. State tax revenue will suffer and support of the university could be reduced later this year while at the same time costs will be increasing. This is creating tremendous fiscal and enrollment planning challenges for system and campus leaders. CSU enterprise programs losses reported by campuses total $173 million resulting from very significant, negative impacts. Revenue loss is the primary challenge. For example, most students have vacated on-campus housing and few students and employees are utilizing on-campus parking. CSU enterprise programs like student housing and parking are self-supported by user fee revenue. Employees who work in enterprise programs are state employees and many are covered by collective bargaining agreements. If existing conditions persist into the summer and fall, one of the many challenges the CSU could face is the potential for additional, significant, and precipitous revenue drops. It would be challenging for campuses to reduce costs because of the adverse impact it would have on the employees of those enterprise programs. Auxiliary organizations, which are separate 501(c)(3) non-profit organizations, have also suffered significant revenue losses totaling $114 million. Auxiliary organizations have been especially affected by the loss of “foot traffic” and in-person gatherings on campuses, resulting in steep revenue losses, reduced hours, and in some cases layoffs. Like CSU operation and self-support enterprise programs, auxiliary organization operations confront significant risks if existing conditions persist. As a result of COVID-19, campuses and auxiliary organizations estimate a total of $337 million of new costs and revenue losses for the 2020 Spring term. Campuses are taking steps to mitigate these impacts. They are analyzing their operations, their liquidity, and adjusting their costs to the best respond to the effects of the virus. State Budget COVID-19 and its effect on the U.S. and California economies will have negative ripple effects on the state budget and the CSU. One effect is on proposed expenditures. In March, the governor’s administration shared that the severe drop in economic activity could have an immediate impact on tax revenues affecting the 2019-2020 fiscal year, and will impact the 2020-2021 fiscal year and beyond. As a result, the governor’s administration reports that it will reevaluate all budget proposals included in the governor’s January budget, which included the proposed $199 million recurring for the CSU in 2020-2021. This is a striking development since Fall 2019 when the trustees requested a $563.8 million recurring state funding increase. The state’s economy and tax revenues had been climbing steadily since 2012-2013 and the prospects for continued economic growth for 2020-2021 were good at the time the trustees finalized their request and when the governor proposed his 2020-2021 budget plan in January 2020. Finance Agenda Item 3 May 12, 2020 Page 3 of 5 Another effect is on the timing of the state budget. The typical state budget timeline has been delayed by a minimum of three months. The federal Internal Revenue Service and the state Franchise Tax Board extended the tax filing date from April 15 to July 15. At the time of this writing, it appears that the state will adopt a two-phase approach to the 2020-2021 state budget. Phase 1 will include the typical governor’s May Revision and the likely adoption of an interim, baseline state budget in June. Phase 2 would be an amendment to the June baseline budget that will likely include a governor’s “August Revision” and, presumably, a final, amended budget sometime in Fall 2020. There are several key questions that will not be answered for several months: (1) How severe will the effects of COVID-19 be on the current and future state budget, and what will that mean for state investments in the CSU? (2) To what extent will the state’s multi-billion dollar reserve mitigate the need for budget reductions? (3) How will a final Fall 2020 state budget—effectively a mid-year budget—disrupt CSU campuses in budget planning and immediate operations? Federal Stimulus and Relief Programs To combat the effects of COVID-19, House Resolution 748, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, became law on March 27, 2020. The law provided approximately two trillion dollars of nationwide financial relief and made many changes to federal law to address the crisis. Specific to federal financial assistance available to the CSU, two items stand out. First, the U.S. Department of Education is providing grants directly to CSU campuses. Overall, the CARES Act provided approximately $12.6 billion to all institutions of higher education. CSU campuses will receive $525.3 million of this one-time funding. Of this total amount, $262.7 million of CARES Act funds (or 50 percent) must be used for campus COVID-19-related expenses, which is 2.5 percent of the CSU’s annual total budget (i.e. operations and enterprises). Campuses are to use these funds to cover lost revenue and reimburse expenses already incurred. Additionally, the other half of the CARES Act funds are for emergency grants for students whose lives have been disrupted by COVID-19. On this latter 50 percent, federal guidance precludes federal funds being provided to undocumented and international students. To ensure that all students are eligible for emergency grants—including undocumented and international students – and receive the financial assistance they need, the chancellor and presidents have elected to augment the federal funds with campus resources to create a “CSU CARES” program. Campuses have applied for these federal funds, are developing or have developed their implementation plans, and some campuses have drawn the funding from their federal accounts. Second, some CSU auxiliaries have secured loans through the federal Small Business Administration’s Paycheck Protection Program, which offers emergency loans for eligible nonprofit organizations and small businesses permitting them to cover costs of payroll, operations, and debt service, and providing that the loans will be forgiven under certain circumstances. CSU Finance Agenda Item 3 May 12, 2020 Page 4 of 5 auxiliaries are nonprofit organizations that provide supplemental services and support to campuses such as student bookstores, dining, some student housing, institutes and recreation centers. Many auxiliary organizations applied for this federal program, but only some received an award. The program was first-come, first serve with limited funding available. As of the publication date of this agenda, auxiliaries have been awarded $34.8 million. This federal funding certainly is helpful to some auxiliaries, but of no help to many others. Further, as reported above, the scope of reported costs and revenue losses to auxiliaries is very large compared to total amount of federal awards. There are other CARES Act provisions that would have a much smaller direct or indirect impact on the CSU. Financial Markets As a result of COVID-19 and its impact on the global and US economy, the financial markets suffered severe disruption, particularly in March of this year. Equity values plunged dramatically, and the debt markets saw significant dislocation with very little ability for corporate and public entities to issue debt. Short term debt markets effectively froze with paper being placed for very short periods of time at very high interest rates. However, efforts by the federal government to pump money into the economy and liquidity into the financial markets have helped open up the financial markets and improve investor confidence. Since April, financial market conditions have improved with equity market values recovering some of their losses and debt issuance activity increasing, albeit at levels lower than pre-COVID-19 conditions. With respect to accessing the debt markets, the CSU has not been materially impacted by these developments in the financial markets. The CSU issued long term bonds in February, when the financial markets were still operating normally and when long term rates were at record lows. Our next long-term bond sale has been targeted for July 2020 and staff will continue to monitor market conditions, as well as the readiness of projects, to determine if a bond sale at that time is warranted or should be postponed until conditions are better. The CSU also issued commercial paper prior to COVID-19 and the financial market dislocation. As of the publication date of this agenda item, the commercial paper was scheduled to come due on May 6 and given the improvement in financial market conditions, staff expected that the commercial paper would be remarketed without any issues. With respect to our investments, initially, the overall value of our investments was adversely impacted with the disruption in the financial markets, but as of the publication date of this agenda, CSU investments had improved and the total $4.7 billion market value of CSU investments included an unrealized gain of approximately $17 million. An update on further developments in the financial markets and their impact on the CSU’s access to the capital markets and investments since the time of the agenda publication will be provided at the meeting. Finance Agenda Item 3 May 12, 2020 Page 5 of 5 Operational Liquidity In response to COVID-19, the CSU has made a number of key decisions in the interest of serving the educational needs of students, while also protecting the health and safety of students, faculty, and staff. As noted above, some of these decisions have resulted in adverse financial impacts on the CSU and its operations for the fiscal year 2019-2020. Over a number of years, the CSU has prudently grown reserves to meet certain strategic goals, one of which has been preparation for possible economic uncertainty. The CSU has drawn upon these reserves to maintain operations in programs impacted by COVID-19. The use of reserves cannot be a permanent solution, but they are a valuable asset that can be utilized until such time as other resources become available—for example, CARES Act funding—or until we have a clearer picture of our operational future and can make financial adjustments accordingly. The CSU has been able to utilize reserves to meet these needs due to the liquidity of our investments. Because of the financial impact of COVID-19 on CSU operations, staff has positioned our investments for greater liquidity than normal in order to meet ongoing operations as needed. As new funds move into the portfolio or as existing securities mature, the funds are invested for much shorter maturities, building cash and liquid assets to meet expected cash outflows in the face of reduced revenues or increased expenditures. In addition, in April 2020, the CSU Investment Advisory Committee decided to reduce the previously planned transfer of $150 million from the liquidity portfolio into the Total Return Portfolio for the final fiscal quarter of 2019-2020, and instead approved a much more modest transfer plan of $5 million per month through August 2020 in order to preserve liquidity in the liquidity portfolio. Staff has also postponed the implementation of the new Intermediate Duration Portfolio to preserve liquidity in the liquidity portfolio.