Kentucky State University faces $15M shortfall; Board of Regents missed warnings
Kentucky State University faces a $15 million budget shortfall due to a stack of unpaid bills and other mounting debts, a ballooning payroll and several years of spending that outpaced revenue, the school’s new chief financial officer told its Board of Regents on Wednesday.
The Board of Regents missed a number of warning signs in recent years, including a sharp decline in KSU’s cash reserves and a worsening solvency ratio that shows the school’s liabilities are now roughly twice the size of its assets, according to the budget presentation.
“The point is, this has to change and this has to change immediately,” chief financial officer Greg Rush warned the board at a specially called meeting.
KSU is under state oversight following the sudden resignation July 20 of its president, M. Christopher Brown II. Gov. Andy Beshear issued an executive order instructing the Kentucky Council of Postsecondary Education to investigate the school’s finances and recommend management changes and new goals.
Rush, who worked at CPE as a senior fellow for policy development, was sent to KSU to take charge of its finances three weeks ago.
KSU is an historically Black college in the state capital. Its budget this year is $49.9 million. Of that, $27.1 million comes from the state’s General Fund and $16.3 million comes from tuition and fees from its student body of about 2,200, according to KSU budget documents.
KSU might need to borrow $2.5 million from Fifth Third Bank to cover employee paychecks in the near future, Rush said. The board voted Wednesday to authorize that loan, which would have to be repaid with interest by June 30, 2022.
“Additional state aid” above and beyond the usual General Fund appropriation likely will be necessary, Rush said. KSU already is borrowing ahead on $5.4 million of its Fiscal Year 2022 state funds just to pay for current operations, he said.
A hiring and salary freeze has been enacted, Rush said. Some spending cuts might be coming to the campus as positions and programs are being reviewed, he added, but “we can’t cut our way out of this.”
“Without some kind of assistance, we can improve this a little bit, but it’s scrambling every month to pay payroll, to pay the bills,” Rush said. “I’m seeing nothing right now that leads me to believe that we have the resources to deal with this.”
The Board of Regents — which on Wednesday re-elected its previous officers — bears no responsibility for KSU’s predicament because it was not aware of the financial problems until Rush informed board members, said board chairwoman Elaine Farris, a former Shelby County school superintendent.
When Brown was president, the governing board never saw the relevant financial reports, such as cash reserve statements, that would have indicated the school was in trouble, Farris told reporters after the meeting.
“None of this information — we did not receive it from the president. We did not receive those reports,” Farris said.
Records show that less than two months before Brown resigned this summer, the Board of Regents awarded him a new four-year employment contract, extending his roughly $425,000-a-year position through June 30, 2025. The board regularly gave Brown bonus pay and retention incentives to keep him on the job, including a $43,200 bonus earlier this year.
However, in July, KSU and KeyBanc Capital Markets issued $49.19 million in “certificates of participation,” a form of private financing that gives investors a chance to buy shares in the lease revenue from a 400-bed dorm and dining hall project that is expected to be built on campus by CRM Companies of Lexington.
As part of this process, from May through July, KSU’s financial books were reviewed by financiers and ratings agencies, according to an internal email obtained by the Herald-Leader. The school’s chief financial officer, Douglas Allen, resigned in June after a four-year stint to take a job elsewhere, and Brown departed not long afterward.
Among the problems that Rush identified for the KSU board on Wednesday:
▪ The day after Brown resigned, KSU had $2.8 million in cash on hand. It had $2 million due for payroll and $3 million in outstanding bills, more than half of which had been owed for more than 121 days. Some people in Frankfort won’t do business with KSU anymore because the school has earned a reputation for stiffing its vendors, Rush said.
“Failing to pay our vendors is not a valid cash-management strategy, ever,” Rush said.
▪ $5.5 million is owed to the state of Kentucky, dating back to 2019, for reimbursement to accounts that manage the school’s construction projects.
▪ $1.43 million is owed to the federal government over the next 16 months for U.S. payroll tax withholding, such as Social Security contributions, that KSU did not make for its employees’ paychecks for much of last year. The federal government allowed cash-strapped employers to delay such withholding as part of its COVID-19 relief efforts, but the money comes due in two installments in the near future, Rush said.
Speaking of payroll, Rush said personnel spending has increased “significantly” at KSU over the last few years, but after only 18 days in his new position, he can’t explain why. He said his office will create a master list of budgeted positions at KSU so jobs and salaries can be tracked. Rush said he’s also reviewing the school’s outside contracts, some of which seem to duplicate each other.
▪ KSU is holding $18.5 million in federal CARES Act funds, but that money can’t be used to balance the school’s budget, Rush said. In fact, he said, the school already should have distributed much of it to students as financial assistance or to cover pandemic-related costs, such as deep cleaning or improved Internet connections.
The expiration date on the funds is May 2022, Rush said.
“I’ll be perfectly honest, this has not happened the way it was supposed to happen, this has not happened quickly enough,” Rush said. “Folks have needed that money desperately over the last year. I’ve said this to many people, that is not the university’s money. We are a conduit.”
This story was originally published August 18, 2021 at 4:03 PM.
