State Oversight Lacking As SCSU Collapses Financially

February 16, 2015

Investigative Reports

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S.C. State UniversityBy the end of fiscal 2009, S.C. State University was running a deficit of nearly $5.7 million – an astronomical drop of 1,379 percent from the previous year – in its “unrestricted net assets,” or reserve funds that could be used by the 119-year-old school for any purpose.

“The University found itself having to exhaust unrestricted cash to operate amidst the appropriation cuts mandated by the South Carolina Legislature,” according to the university’s 2009 annual financial report.

The Nerve‘s review of SCSU’s annual financial reports and state budgets over the past 10 years, however, found that the school began draining its unrestricted reserves in fiscal 2007 before the Great Recession offically hit the Palmetto State, while receiving a 21 percent hike that fiscal year in its total ratified budget passed by state lawmakers.

From fiscal 2009 through last fiscal year, which ended June 30, the university ran mostly multimillion-dollar deficits in its unrestricted reserves in all but one fiscal year, financial reports with the Office of the State Auditor show. As of June 30, the school had a $17 million deficit in that category.

Yet no one in state government in Columbia apparently was paying much attention in the earlier years to the slow-unfolding financial crisis at the Orangeburg university, which has about 3,000 full-time students.

The Nerve on Friday sent written questions to the Governor’s Office about when Gov. Nikki Haley first became aware of SCSU’s financial troubles and what action she initially took. No response was given.

Since Haley became governor in 2011, state funding for the school has increased by a total of about 7 percent, according to The Nerve’s review of Office of State Budget documents.

The Nerve also received no reply to written questions Friday sent to Richard Sutton, executive director of the S.C. Commission on Higher Education (CHE); and Julie Carullo, the commission’s deputy executive director. By law, the governor appoints the commission’s 15-member governing board.

Under state law (Section 59-103-20 of the S.C. Code of Laws), the CHE is “charged with examining the state’s institutions of higher learning relative to both short and long-range programs and missions which include: … business management practices, accounting methods, operating results and needs, and capital fund requirements.”

In its annual accountability reports filed with the state Budget and Control Board, SCSU noted that state lawmakers “provide oversight of the SC State Board of Trustees.” The Nerve on Friday left a phone message for Rep. Rita Allison, R-Spartanburg, and chairwoman of the House Education and Public Works Committee, seeking comment on SCSU’s financial problems, but received no response. Allison is a former CHE spokeswoman.

Contacted Friday, Sen. John Courson, R-Richland and the Senate Education Committee chairman, toldThe Nerve that oversight by his committee of SCSU has been difficult in recent years because of high turnover in university presidents, which he attributed in part to what he described as micromanagement by the school’s board of trustees. By law, the board has 13 members, 12 of whom are appointed by the Legislature; the remaining member is the governor or her designee.

“Their trustees should not be micromanaging the president,” Courson said. “They’ve had multiple presidents, and you can’t have any stability when you have that many presidents.”

Last week, angry state lawmakers went on the offensive against SCSU. The House floated proposals ranging from shutting down the university for two years to keeping it open but firing the board of trustees and president, while the Senate passed a resolution requiring that all university employees be furloughed by up to 20 working days by June 30.

On top of that, the Legislative Black Caucus last week issued a vote of no confidence against SCSU President Thomas Elzey, a former vice president for finance and operations at The Citadel in Charleston who came to the Orangeburg school in 2013, though the SCSU board the next day said it would continue to stand by him.

Troubling Numbers

As of 2013, the university’s four-year graduation rate for students seeking bachelor’s degrees was only 13.7 percent, according to Scholarships.com, citing federal data. The Nerve in 2012 reported that SCSU’s four-year graduation rate was 14 percent, based on a CHE study that tracked freshmen entering college in 2005.

As with other state agencies during the Great Recession and its aftermath, SCSU saw its state funding slashed: From fiscal 2009 to 2012, ratified state funding was cut  nearly in half, to about $11.2 million from $23 million, legislative budget records show. But the school’s total ratified budget, which includes federal funds and tuition and fees, classified as “other” funds, grew by 32 percent from fiscal 2009 to 2010 to nearly $156 million, though it decreased to $145.1 million by fiscal 2013, those records show.

Haley has proposed a $146.7 million total budget for the school for fiscal 2015-16, including nearly $13 million in state funding, $54.5 million in federal funds and $79.2 million in other funds.

Since fiscal 2009, the university has raised tuition and required fees for full-time, in-state undergraduates by a collective 29 percent to $10,089, CHE records show. “Other” funds to the school have dropped by more than $4 million, or about 5 percent, since Haley has been governor, state budget records show, which officials have attributed mainly to a drop in student enrollment.

The Nerve’s review of SCSU’s annual financial reports over the past 10 years found that the university began draining its cash reserves starting after July 1, 2006, when unrestricted net assets dropped nearly 80 percent over that fiscal year to $1 million from nearly $5.2 million. Those reserves dropped again in fiscal 2008 to about $450,000, then showed deficits of $5.7 million and $1.3 million in fiscal 2009 and 2010, respectively. Those deficits grew to nearly $6.4 million and $9.3 million in fiscal 2012 and 2013, respectively, before skyrocketing to $17 million last fiscal year, records show.

To put the school’s financial woes in some perspective, The Citadel, which has roughly the same number of full-time students as SCSU, recorded unrestricted net assets of $36.2 million as of June 30, while the much-larger University of South Carolina and Clemson University posted $336.4 million and $114.9 million, respectively, in those reserves. (The Nerve previously has reported on USC’s and Clemson’s large unrestricted reserves.)

Too Little, Too Late?

In April last year, the state Budget and Control Board, whose five members include Haley, the board chair; and Senate Finance Committee Chairman Hugh Leatherman, R-Florence and who assembled a special panel made up of current and former university presidents to assist SCSU, approved a $6 million loan to the school. In August, the BCB voted 3-1, with Haley refusing to vote in protest, to give SCSU another $12 million over three years.

Last June, SCSU’s regional accrediting group – the Southern Association of Colleges and Schools’ Commission on Colleges – placed the school on probation, which was noted in the university’s 2013-14 accountability report.

“Throughout the year, SC State University has employed several strategies to address the financial challenges it faces, including: layoffs, hiring freezes, reductions in discretionary spending – strategies that remain as the University continues to focus on its priorities of providing excellence in education and maintaining fiscal accountability,” the report stated.

But the previous fiscal year’s accountability report didn’t get into specifics about the school’s ongoing financial problems, raising questions about the reliability of that report.

In a letter last April to the Budget and Control Board, S.C. Inspector General Patrick Maley said the university from 2007 to 2014 diverted a total of nearly $6.5 million in unused annual state Public Service Activities (PSA) funds to “inappropriately subsidize SCSU’s cash flow and deficits problems.”

Maley said while his office “did not identify any fraud” in the transfers, it found a “pattern of mismanagement allowing this inappropriate subsidizing practice to escalate out of control masking of SCSU’s financial difficulties for a number of years.” He noted that according to an external auditor’s report for fiscal 2013, the university’s “Composite Financial Index” was a minus-1.64 on a scale of 0 (low) to 10 (high).

Maley recommended that the “solution to this complex business problem … is to build a seamless partnership between SCSU and state government,” adding, “Such a mechanism is needed to provide assurances to taxpayers that the underlying structural business issues causing the recurring deficits are addressed.”

Meanwhile, Courson, chairman of the Senate Finance Committee’s higher education subcommittee, toldThe Nerve on Friday he expects SCSU President Elzey to face “very tough questioning” next month when college and university presidents make their annual budget presentations to the subcommittee.

“I think he’s got a shot to get it straight, but he’s got to get it straight,” Courson said.

Reach Brundrett at (803) 254-4411 or rick@thenerve.org Follow him on Twitter @thenerve_rick. Follow The Nerve on Facebook and Twitter @thenervesc.