Financial Planning for Sustainable Excellence

Dear Trojan community,

We write to provide details about our university’s budget and our plans for sustainable excellence in the face of rapidly rising costs of higher education. Like universities across the country, USC needs to adjust to this changing reality. To excel, we need durable budgets that not only cover today’s costs but also provide resources to seize promising opportunities.

Background and Current State

Last year, the Board of Trustees, President Folt, and her leadership team launched the Financial Planning and Resilience initiative to ensure a sustainable financial future for USC. Our goals are to continue investing in our people, creating flexibility in our operating budget to support and sustain excellence, and driving innovation to tackle the greatest challenges and opportunities of our times.

USC remains in an enviable position. We continue to have high student demand, increasing revenues from research and philanthropy, positive returns from our endowment, and strong Aa2 and AA bond ratings. Our nearly $500 million investment in faculty and staff compensation over the past four years has improved our competitive position. We have invested in the university’s long-term strategic growth, including academic and capital projects, advances in research, efforts to transform the future of health, critical legal compliance structures, and more. Through these efforts, we are poised to thrive as we enter one of the most exciting periods in our history as a preeminent global research university with top researchers, passionate faculty, remarkable students, and dedicated staff.

However, rising costs require that we make budgetary adjustments. This year, USC’s audited financial statement shows a deficit of $158 million for the 2023-2024 fiscal year (roughly 2 percent of the total budget). Over the past six years, our deficit has ranged from $586 million during legal cost repayments and COVID, to a modest positive level of $36 million in 2023. Similar deficits are being reported at many peer institutions due to rising costs that outpace revenues across all of higher education.

So, while USC remains financially stable, we are operating with a structural deficit, meaning our normal operating expenses exceed our typical revenues. There are multiple reasons for this deficit, including: inflation, dramatic increases in external costs (e.g. annual insurance costs associated with running the university have increased by more than $70 million since 2017), softening of graduate student enrollment, increased competition in online education, growing compliance costs, financial aid growth, investment in compensation, the rising cost of college athletics, investment in critical infrastructure (e.g. cybersecurity), and some significant overruns in unit-level budgets. Like other institutions with a structural deficit, we know that prompt action is the best way to deal with this challenge.

Goals and Guiding Principles

Looking ahead, we’ve been tasked by the president and the board to assess the sustainability of USC’s financial models, analyze future costs and revenues, take actions to eliminate the structural deficit, rebuild university reserves, and explore all financial opportunities for revenue growth. Our goal is to build a sustainable financial operating model that keeps USC at the forefront of the world’s great academic and research universities.

Eliminating this deficit is attainable over the next few years and is necessary to ensure USC’s long-term financial resiliency. We have identified a way forward that we are confident is achievable and prudent. By acting now and reviewing our financial structures, we can fulfill our obligations to current and future Trojans – so long as we all focus on our end goal.

Principles to guide our path forward:

• We are committed to the delivery of our mission for many years into the future. 
• We continue to invest in the students, staff, and faculty who are currently at USC.
• We seek to preserve the heartland of programs, benefits, and services most used by our students, staff, and faculty, and that remain key drivers of their wellbeing and success.
• We acknowledge that achieving resiliency will require difficult decisions and significant change that will affect everyone. 
• We build upon our existing financial strength in a manner that can withstand an unforeseeable future.

Our Efforts Thus Far

We have charted a path of short-term savings and long-term changes. Over the past two years, we have pared down the costs of central administrative units and the health system, including keeping central administrative budgets flat except for merit increases. This year, we asked all schools and central administrative units to reduce their spending. Schools were, collectively, asked for a reduction of $46 million (equivalent to 1-2 percent of budgets). Administrative units were asked for cumulative reductions of $81 million (about 9-10 percent of budgets). We are also undertaking additional reductions and adjustments at the center to further improve our situation.

To ensure sustainable excellence, we need to continue implementing cost containment measures, increasing administrative efficiency, growing revenues, and rebuilding our reserves. All universities, including USC, rely upon reserves to cover various future needs, expenses, or financial challenges. Reserves provide stability in the face of unexpected events and generate returns that support annual expenses. For USC specifically, $2.5 billion was used to cover COVID-related and legal expenses. One of our goals is to replenish our reserves so that we have the flexibility to invest in future needs.

Starting with FY25 and continuing into the future, we’ve asked all schools and administrative units to identify additional opportunities to streamline work, services, and operations. We have empowered the leaders of each school and administrative unit to determine what measures they will take, so that those with the greatest local information are making key decisions.

You are also familiar with some changes we have already implemented, including recent changes to health incentives and Tuition Assistance Benefits (TAB). These are part of a robust set of benefits for which the university invests almost $1 billion annually. Looking ahead, while there is too much uncertainty to offer any guarantees, we recognize the central importance of compensation and benefits for our faculty and staff and the importance of our above-mentioned guiding principles as we make decisions.

Communication

We know many of you have questions about USC’s finances and the path forward. A single message is not enough to share all the information about the financial state of the university or the measures taken to ensure its future health and resiliency. Though this is a large and complex undertaking with many dynamic variables, we will continue to keep you informed regarding our work. We commit to providing an update early in 2025 that will take the form of a website with FAQs and/or a webinar. This timing will allow us to have a clearer picture of our FY26 budget and future plans, as well as financial implications of various state and federal changes being discussed.

We also want to take a moment to recognize and thank each of you for your hard work and dedication. Your contributions have been invaluable in making USC the strong and competitive institution it is today. We understand that changes like these can be difficult and affect people in substantial and different ways. Please know that we are committed to giving our full time and attention to getting this right. We are confident that USC will continue to excel as we take the actions needed to build an even brighter and more sustainable future for our university.

No dynamic institution has ever moved forward by standing still. We are at a moment when it is necessary to address our financial challenges so that we can continue to thrive. As we have throughout our 144-year history, we will rise to meet this challenge together and ensure USC’s excellence both today and in the future.

Sincerely,