My predecessor, Candace Corvey sent a memorandum to each of you last April summarizing the University's financial challenges as we look ahead to the future. I feel that this type of periodic communication is useful for providing the community information about the fiscal health of UNH.

In my short time here I have been truly impressed by the thoughtfulness and creativity exhibited by the UNH community.
UNH has certainly achieved more than what could be reasonably expected given its level of funding. It is doing this by managing its available resources as effectively and efficiently as possible with tools such as Responsibility Center Management (RCM) and leveraging external sources of funding such as grants and gifts.

We have faced a structural deficit in recent years that has required dipping into our collective savings account (reserves), but this year we have made progress on addressing this unhealthy fiscal condition. In the fiscal year we are about to conclude we have experienced higher than anticipated enrollment, a slight moderation in financial aid and higher than budgeted indirect cost recovery. However, these gains were significantly offset by a $3,500,000 increase in the cost of energy. Still, the net tuition increase and positive returns in indirect cost recovery may allow us to end the year with no draw down of our reserves. A final conclusion awaits our external financial audit in August.

In Fiscal Year 2007, it is likely we will enroll a larger freshman class than planned. We are taking steps to accommodate up to an additional 300 students. While ordinarily we would expect a significant gain in net tuition under these circumstances, the financial aid costs are trending up again due to need based financial aid obligations. The increase from $.23 per every tuition dollar in FY 2006 to over $.25 expected in FY 2007 equates to over $2.6 million in "lost" tuition revenue that could have been invested in other areas. Further, we anticipate significant incremental expenses to maintain the quality of the educational experience and expenses associated with housing the additional students. If we can find an economically balanced approach to provide housing for these students, we should be able to achieve a budget that avoids use of reserves.

Year to year budget balancing can obscure the longer range goals of UNH that need strong fiscal support and continued investments in our future as spelled out in our Academic Plan. With the Academic Plan as our primary focus, we must address the financial pressures that we face while finding ways to invest in the future. The major revenue and expense challenges include:

• State appropriation funding continues to grow only slightly and becomes an ever decreasing part of our funding stream. Today the State appropriation is less than 15% of our total budget.
• Financial aid costs as a percentage of our undergraduate tuition revenues continue to rise due to need based financial aid obligations as noted previously in this memo.
• The cost of medical insurance is increasing sharply even with our efforts to mitigate those costs by increased cost sharing and efforts to work with insurance carriers. Very high rates of inflation in medical costs have been the main factor in driving our fringe rate from 35% of every benefits eligible salary dollar in FY 2000 to over 43% in FY2007. If medical care inflation continues at the current rate, the fringe rate could rise to 50% in FY 2009.
• Energy costs continue to increase significantly despite
  aggressive conservation efforts.
• We are increasing our Repair and Renovation budget at a rate much higher than the rest of our expenses but are still well behind where we need to be to keep up with a deteriorating physical plant.

We need to actively manage these areas by strong advocacy in Concord for needed support through the State appropriation, seeking new gifts and endowment to reduce the need to discount tuition to provide financial aid, aggressive negotiation with health plans to contain medical cost inflation and creative management of energy through new approaches to conservation and projects such as accessing methane gas from the Turnkey Landfill in Rochester to power our co-generation plant.

We need to create new financial capacity and continue critical investments in our future while working around significant constraints. Examples are:

• Consistent with the goals of the Academic Plan, strategic investments are needed to fund the implementation of the Discovery Program, to provide sustained funding for Engagement and Outreach and to stimulate faculty research and scholarship. Such investments are necessary in order to recruit the quality and number of new faculty and graduate students consistent with our mission as a research university.
• We need to continue to find ways to recruit and retain high quality members of our community at all levels.
• Upgrading our physical plant in accordance with our campus master plan. We have limited opportunities for funding and recent construction cost inflation has been in the double digits. These cost increases will put severe pressure on the budgets of all planned capital projects and could limit our ability to invest in other areas.
• We are planning to gear up for another major capital campaign and must increase our staffing and enhance our information technology infrastructure. This comes at a time where increased regulatory pressure is limiting our ability to fund administrative costs from endowment payouts.
• We do not have sufficient general fund reserves for a budget of our size. We should have financial reserves on the order of 8% to 10% of our general fund expenses. We currently have a reserve level of 6% of general fund expenses. We would need to increase our reserves by an additional $6 million to get to 8%. Building reserves and increasing our net assets base is critical to maintaining our bond ratings with Moody's and Standard and Poors that will preserve the option to borrow in the future at reasonable rates to renew and expand the campus.
• Despite the efficiencies that we have achieved, we will still need to consider prudent investments to protect UNH's ability to function and sustain critical services. Two examples highlight the need for centralized investments. First, we need to increase our investment in disaster preparedness. We have made some progress in this area with limited funds, but are not where we need to be to handle a major disaster or pandemic. Similarly, we need to increase our investment in information technology security. Because we are so dependent on information technology for everything we do, we must ensure that our information continues to be protected.

• As we aspire toward a greater, more integrated research focus, we will need to address the funding of the related front end and infrastructure costs.
• We have increased pressures from the state and local municipalities to restructure or eliminate certain revenue generating activities that are perceived as competing with private enterprises. Any adjustment leading to lost revenue will increase stress on other funding sources.
• National and regional studies predict a prolonged decline of NH and New England high school graduates beginning in 2010. We will need to make strategic investments to remain competitive and continue to recruit quality students without suffering an enrollment decline. This will be particularly critical with our non resident students due to our high reliance on their enrollment.

This memo is meant to highlight the financial realities and challenges at UNH. The challenges are balanced by many bright spots such as our growth in undergraduate and graduate enrollments, the new facilities we have brought on line over the past 10 years, the meteoric rise in sponsored program funding and the increase in our endowment to name a few. It is, however, my responsibility to make you aware of the significant financial challenges that we face at UNH now and in the future so that we can work together on solutions. I am confident that we will make progress and come up with some creative solutions to these challenges. I look forward to working with you on this effort.