The governing board for the University of Connecticut adopted a $1.1 billion budget Wednesday that officials say already has millions of dollars in red ink that will quickly need to be erased.
The projected deficit became apparent earlier this week after the state’s comptroller informed UConn and other state agencies that they will need to contribute more than they did this fiscal year to cover current and retired employees’ health and pension benefits.
In the fiscal year ending June 30, UConn was required to put aside 46 percent of its payroll to cover these costs. Next year, the university must set aside 54.7 percent. This means for each $1,000 in salary and wages, UConn currently pays another $460 for fringes, and this will rise to $547 in the next budget.
This increase is primarily the result of a long history of the state’s underfunding its pension obligations. Union employees are slated to get a 5 percent pay raise and non-union staff 3 percent next year, which will also contribute to increases in required pension contributions.
“This will create a budget problem very early on,” Lysa Teal, the university’s vice president of finance and budget, told the Board of Trustees.
UConn was already slated to spend almost $200 million to pick up the fringe benefits for the employees the state does not pay for, which is about one out of every six dollars spent by UConn.
“All the assumptions we made were way wrong” about pension costs, Teal said after the meeting. “I don’t know how we are going to resolve it.”
So just how much of a deficit does this create for UConn?
Teal said she will have that figure early next week, but it is easily in the millions.
And with UConn having already tapped $18.7 million from its reserves just to balance its budget for this year, officials say that’s an approach they hope to avoid using again.
“We certainly don’t want to add to that,” Teal said. “There were plans for some of this money… It’s like taking out of our savings account.”
The Storrs rainy-day fund currently has $71.8 million, enough to keep the system operating for 27 days.
The Office of the State Comptroller reports the higher contribution rate was necessary after it totaled costs for the coming year — $1.4 billion statewide for regular employees on the traditional pension system — divided by the amount in salaries that would be paid out. The rate UConn officials were notified of Monday is the highest rate in at least the last seven years.
An official at the comptroller’s office said the high rates are partially the result of Gov. Dannel P. Malloy entering into an agreement with the employees’ unions for the state to contribute more to the pension fund to compensate for years of underfunding. The most recent actuarial report on the health of the fund shows this change added 3.67 percent to the annual required contribution for UConn for the fiscal year that begins July 1.
The fund has also returned lower than expected returns on its investments and the state must also pay this year for the fringe costs that went $82.4 million over projections in fiscal 2012.
UConn’s adopted budget also contemplates hundreds of additional freshman who are unexpectedly enrolling this year.
When asked by a trustee if there is available housing for this influx, President Susan Herbst said, “We have no housing problem.”
As an accommodation for the larger number of students, the university plans to invest an additional $3 million to expand the number of courses offered.